Oil and natural gas account for approximately 55% of global energy consumption, but it can be difficult to tell the difference between the two. These fossil fuels are the by-product of decaying plant and animal remains buried within layers of the earth that have been subjected to heat and pressure over the course of millions of years. Almost all technological advancements have been the direct result of our ability to harness these finite sources of power.
Unfortunately, they’re also the primary sources of greenhouse gas (GHG) emissions. Despite the rapid uptake of renewable energy, oil and gas will remain integral to society for the foreseeable future. That's why it's imperative that we minimise the risk of climate change with more efficient transmission and distribution networks to reduce anthropogenic carbon emissions to pre-Industrial Revolution levels.
Oil and gas are so closely linked because they’re generally found together in nature. Production is divided into three primary operational sectors: upstream, midstream, and downstream. The upstream sector is responsible for the extraction of crude oil and natural gas reserves, while midstream operations account for the transportation and storage of extracted products. The downstream sector comprises of facilities that process, refine, distribute, and sell to the end customer. These products include natural gas, liquified petroleum gas (LPG), petrol, diesel fuel, jet fuel, heating oil, kerosene, asphalt, and other petrochemicals.
How is gas measured?
Gas is measured in both therms and kWh. Therms are non-SI units of heat energy and equate to burning 100 cubic feet or 1CCF (2,83 cubic metres) of natural gas. One therm is equal to approximately 105.5 megajoules, 25200 kilocalories, or 29.3 kilowatt-hours (kWh) in SI units.
Because natural gas meters measure volume, not energy content, companies use the "therm factor" to convert the volume of gas to its heat equivalent and calculate actual energy use. The therm factor is expressed in units of therms per CCF (cubic feet) but can vary depending on hydrocarbon content. Natural gas with higher concentrations of ethane, butane, or propane have a higher therm factor. Impurities, such as carbon dioxide (CO2) and nitrogen, lower the therm factor.
According to the EPA, burning one therm of natural gas emits an average of 5.3 kg (11.7 lb) of carbon dioxide (CO2).
Why is natural gas so important?
Much of the UK’s gas transmission and distribution network was built in the 1950s and 1960s. While almost half of our electricity came from renewable or low-carbon sources last year, emissions from our gas-reliant heating network and petrol-reliant transport network aren’t falling fast enough. In fact, home heating alone makes up around 18% of current greenhouse gas (GHG) emissions. In 2019, approximately one-fifth of an average household energy bill (£1,184 - dual fuel, typical consumption) went towards running and maintaining the network.
Unlike other finite fossil fuels, natural gas is often referred to as our “bridge” to a low carbon future as it burns somewhat cleaner than standard oil or coal. Natural gas emits 50% to 60% less carbon dioxide (CO2) when combusted in new, more efficient natural gas power plants compared to older coal plants.
Recent advancements in carbon capture, utilisation, and storage (CCUS) technologies have also played an integral role in offsetting emissions, but we have a long way to go before such facilities can remove enough CO2 from the atmosphere to reverse the effects of climate change and meet our Net Zero by 2050 commitments. That said, CCUS remains one of the most promising paths toward decarbonisation.
How does the gas market work?
Natural gas is an internationally traded commodity transported by pipelines and Liquified Natural Gas (LNG) tankers. Our global trading system is influenced by innumerable factors, from geopolitics to weather. Like all commodities, the price of gas boils down to the fundamental principles of supply and demand.
In the UK, the National Balancing Point (NBP) is a virtual trading location responsible for the sale and purchase of natural gas and sets wholesale prices regardless of origins. It’s the second most liquid gas trading point in Europe and remains one of leading forces in the market. The NBP trades gas in pence per therm and is similar to the Henry Hub in the US.
Unlike other continental European trading hubs such as Zeebrugge and TTF, the NBP does not require balanced trades and there is no fixed penalty for imbalances. Instead, shippers are automatically balanced through a “cash-out” procedure. The cash-out process forces shippers to automatically buy or sell the required volume of gas to balance their position at the marginal system by buying or selling at the price on any given day. This system does not penalise shippers like those in the US as cash-out prices are generally similar to the original spot price.
Where does the National Grid come in?
The National Grid is the UK’s network operator responsible for physically transporting gas and influences price balance. Shippers are only required to disclose the amount of gas they import or export from the network, not the actual transport route that they follow. If supplies fall short, the National Grid uses the cash-out system to force prices at the NBP up. When the system is long, gas prices are forced down. This allows for flexible flow contracts.
NBP trades are settled by the On-the-Day Commodity Market (OCM), an anonymous trading system managed by the ICE ENDEX. The minimum amount of gas that can be traded on the OCM is 4,000 therms. If a shipper’s position is long or short by less than 4,000 therms, they are forced to cash out.
What is the UK's gas and fuel mix?
Between 2019 and 2020, primary oil (crude oil and Natural Gas Liquids) accounted for 44% of total production, natural gas 29%, primary electricity (nuclear, wind, solar and natural flow hydro) 16%, and bioenergy and waste 11%. Coal accounted for the remaining 1%.
The production of oil and gas in the UK is approximately 56% lower than its peak in 1999. Since 2000, the rate of production has fallen by an average of 4.9% each year, leading to the closure of the country’s last oil-fired power station in 2015.
How does the UK produce and import gas?
Like all countries, the UK has always been heavily reliant on fossil fuels. According to research, the planet’s finite supply of fossil fuels will only last another 50 years – and coal another 120. Just 40% of the UK’s gas is produced by domestic suppliers in the North Sea, but it’s estimated that this supply will run out in just five years.
Mirroring the long-term trend of declining gas production since the turn of the century, gas production continued to fall in 2019 and is now at 65% less than its peak in 2000 - but the UK and the Netherlands remain the two major gas-producing nations "in" the EU. At 439 TWh, production between 2019 and 2018 decreased by 2.9%. This is partially due to the closures of the Theddlethorpe gas terminal and the Rough Facility, a former long-term storage site.
Demand has similarly fallen since the mid-2000s. This is primarily a result of reduced industrial consumption. Despite this, there has been a growth in net imports with pipelines from Norway, the Netherlands and Belgium. Imports of Liquefied Natural Gas (LNG) generally terminate at Milford Haven (South Hook and Dragon) and the Isle of Grain. Much of this infrastructure was built relatively recently, with the completion of the pipeline between the UK and the Netherlands in 2006 and two new LNG terminals in 2009.
By the end of 2020, the demand for natural gas in the UK increased by 3.1% to 140 TWh. Both Norway and Qatar continue to export the most natural gas to the UK, accounting for roughly two-thirds of imports. More specifically, the import of gas from Norway rose to 46TWh by the end of 2020. Liquefied Natural Gas (LNG) imports were up by 28% and comprised just over one-third of the total, down from the record high of 62% seen in Q2 2020.
Interestingly, Russia remains the largest exporter of coal to the UK. Between 2019 and 2020, its share increased from 50% to 54%. The USA comes in at a close second – with Venezuela in third at a surprising 13%.
How is gas transmitted throughout the UK?
The National Transmission System (NTS) is a high-pressure gas network that transports gas from entry terminals to gas distribution networks or directly to power stations and other large industrial users. It is owned and operated by the National Grid plc, and both are regulated by the Office of Gas and Electricity Markets (Ofgem).
The NTS is comprised of a network of gas pipelines that supply gas to approximately 40 power stations and large industrial users from natural gas terminals mostly located along the coast and is responsible for the distribution of supply for commercial and domestic users in England, Wales, and Scotland.
The NTS has three types of connection: entry, exit, and storage. The Gas Contract Management Team manages the entire connections process for new and existing customers that require connections and diversions to the NTS. The system also supports gas shippers who wish to engage with the NTS or reserve capacity through the Planning and Advanced Reservation of Capacity Agreement (PARCA) and Capacity Allocation Mechanism for IPs (CAM) processes.
NTS Regulations, Price Controls, Tariff Caps, and RIIO-2
Energy networks are privately owned and funded by energy bills. Customers can’t choose their local network as only one tends to run the pipes and wires within any given area. This, of course, means they’re natural monopolies that must be regulated. Without competition, there’s no incentive to improve services or invest in more sustainable infrastructure.
This is why Ofgem sets network prices controls using the RIIO-2 model and tariff caps. The NTS operates under specific price controls as it is both a Transmission Owner (TO) and System Operator (SO). In addition to these price controls, a tariff cap price also applies to specific metering activities.
In contrast, – excluding the energy price caps on default and pre-payment meter tariffs – Ofgem does not regulate the prices charged by generators or suppliers. This is because they're part of a competitive market. A customer can choose a supplier and suppliers can choose where they buy their energy.
The National Grid’s current regulatory framework is called RIIO-2 (Revenue = Incentives + Innovation + Outputs). The RIIO model incentivises networks to pursue innovation and secure investment to develop more cost-effective and sustainable energy networks. It rewards utility companies for delivering outputs that meet society's ever-evolving expectations and demands. RIIO is often compared to the US’ Cost-of-Service Regulations (COSR) but is widely regarded as one of the most comprehensive performance-based regulatory systems.
In addition to financial incentives, Ofgem sets targets to improve covering customer service, network reliability and environmental performance. The amount of money network operators are allowed to make depends on performance and the quality of service they provide. Thanks to Ofgem, the UK has developed one of the safest and most reliable energy systems in the world with power cuts at roughly half the EU average.
How is gas distributed throughout the UK?
Britain has eight Gas Distribution Networks (GDNs). These companies are licensed by Ofgem to transport gas in the UK and each one covers a separate geographical region.
There are four companies that own and operate these eight networks:
There are also smaller networks owned and operated by Independent Gas Transporters (IGTs) located within the regions covered by GDNs.
What is green gas?
Green gas is a fully renewable and virtually carbon neutral source of energy, meaning it doesn’t negatively impact our environment or contribute to climate change. Green gas is primarily made by the anaerobic digestion of organic matter such as plant, vegetables or animal waste. Bacteria break down this biodegradable material in an oxygen free environment to produce biomethane. The gas produced is then “scrubbed” to remove CO2 before being mixed with fossil fuels from the grid and distributed. This reduces the overall carbon impact of the gas grid.
What else does the future hold?
To meet our Net Zero decarbonisation goals by 2050, the UK has a considerable way to go before it can produce enough renewable energy and implement more carbon offsetting technology (such as CCUS) to entirely replace our reliance on fossil fuels. Fortunately, our prime geographic location and weather patterns render this small island an ideal hotspot for hydro and wind power generation.
Ofgem’s introduction of financial incentives and climate change levies has played a large role in expediting this process. These include Renewal Obligation (RO) certificates, the Renewable Heat Incentive (RHI), Renewable Energy Guarantees of Origin (REGO), the Climate Change Levy (CCL), the Energy Savings Opportunities Scheme (ESOS), Streamlined Energy and Carbon Reporting (SECR), Contracts for Difference (CfD), and Feed-In Tariffs (FITs). There is also an increasing interest in meeting the strict – but voluntary – Carbon Trust, Carbon Disclosure Project, and ISO standards.
These levies and green initiatives provide businesses of all sizes a variety of opportunities to revaluate operational efficiency, reduce reliance on fossil fuels, and install more onsite generators to both power their own properties and feed energy back to the grid.