'£18bn needed' to secure UK energy supply

Britain will become dependent on imported gas as early as next year as North Sea reserves decline, a study has concluded. At the same time, up to £18.1bn needs to be spent on new infrastructure projects to ensure the country's energy demands are met.

Britain will become dependent on imported gas as early as next year as North Sea reserves decline, a study has concluded. At the same time, up to £18.1bn needs to be spent on new infrastructure projects to ensure the country's energy demands are met.

The report, commissioned by Centrica, which owns British Gas, saidthe UK energy system is facing a set of "radically different challenges", with a dependency on gas imports emerging as the most important, alongside concerns over global warming.

To meet energy demands, as the country's own reserves start to dwindle, a huge investment programme is required in gas pipelines, storage facilities and offshore fields, combined with new electricity generation projects, the study by the consultancy firm Oxera concluded. Depending on how quickly gas reserves run down and demand grows, the amount of money the energy industry needs to spend will be about £10bn to £18.1bn between 2005 and 2010.

Companies such as Centrica have already started investing in new liquefied natural gas terminals, for instance, to handle higher volumes of imports. The company is also expected to spend £300m on a new pipeline that will import gas from Turkmenistan to Western Europe via the Ukraine.

The pipeline is expected to cost about £3bn and is being operated by a Russian-Austrian joint venture involving Gazprom of Russia, Naftogas of the Ukraine and Raiffeisenbank of Austria. A spokesman for Centrica said: "We are going to be talking to people in places such as the former Soviet Union but I cannot comment on specific countries."

The report said that while demand for gas grows, industry figures suggest that import dependence will emerge as early as next year, with imports representing 46 to 72 per cent of total demand by 2009-10. "To enable this transition, the underlying infrastructure of the gas delivery system will need to be overhauled to ensure that the volume and diversity of import sources can be realised," it said.

There has to be a shift away from investment in the North Sea gas fields - known as UK Continental Shelf reserves - to investment in import infrastructure. But as well as importing fuel, the report warns that there will have to be investment in power generation as the crop of nuclear power stations are gradually closed along with older, coal-fired stations.

One positive knock-on effect of investing in greater importation infrastructure may well be to eventually lower wholesale gas prices, according to the report, which should benefit consumers. Rising gas prices through increased demand have been encouraging investment in gas infrastructure, although electricity prices have not been as strong. "In the longer term, as these projects enter the market, the volumes they deliver can be expected to exert a dampening effect on market prices as the immediate supply-demand constraint is relaxed," the report said.

The UK became a net exporter of gas thanks to the North Sea boom, which began as the gas fields were opened in the 1970s-80s. However, as North Sea reserves start to run down, economists have warned about the impact this may have on the strength of sterling, which could weaken as we increase our fuel imports and rely increasingly on energy sources from abroad.

Security is also a concern. The report stressed the country needs to ensure a diversity of supply sources - both pipelines and liquefied natural gas shipments - and entry points into the UK.