THE UK MARKET FOR NORWEGIAN GAS: AN ENERGY SECURITY ISSUE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00558R000200110003-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 21, 2016
• Document Release Date: January 11, 2008
• Sequence Number: 3
• Publication Date: March 1, 1983
• Content Type: REPORT

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Intelligence
The UK Market
for Norwegian Gas:
An Energy Security Issue
Confidential
GI 83-10074
March 1983
Copy 313
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Directorate of
Intelligence
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The UK Market
for Norwegian Gas:
An Energy Security Issue
Issues Branch, OGI,
welcome and may be directed to the Chief, Energy
This assessment was prepared by
Confidential
GI 83-10074
March 1983
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The UK Market
for Norwegian Gas:
An Energy Security Issue
Key Judgments Despite sharp reductions in industry forecasts of the United Kingdom's gas
Information available requirements, the UK will need additional Norwegian gas in the early
as of 1 March 1983 1990s, and we expect London to compete aggressively with continental
was used in this report.
European purchasers for gas from Norway's Sleipner field. The UK and
continental gas markets are physically separate, and gas industry econom-
ics dictate that a successful bid by either would cause the bulk of Sleipner
gas to be available to that market only.
If the British win the bidding-as we now expect-and pursue a more
aggressive domestic gas development policy, we estimate that they could
have a small surplus of natural gas available for export to the Continent by
the mid-1990s. The existence of a surplus raises the possibility of a pipeline
link to export gas to the Continent. such a 25X1
link would increase energy security in the West European gas market by
reducing the Continent's reliance on Soviet supplies
A number of political constraints must be overcome, however, before a link
to the Continent can occur:
? The British fear that UK gas reserves would be rapidly depleted by the
Continent.
? There is still much concern about balances of supply and demand at the
turn of the century, when-according to official estimates-currently
identified reserves could be inadequate to meet domestic requirements.
? The Norwegians oppose an integrated West European gas market, which
would lessen competition for their gas exports. The British appear
reluctant to antagonize the Norwegians on the issue of a pipeline link be-
cause of the uncertainty about future Norwegian gas sales to the UK.
Confidential
GI 83-10074
March 1983
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North Sea Gasfields and Pipelines
40 Natural gas field
- Existing gas pipeline
o Terminal
0 75 Kilometers
0 75 Nautical Miles
Statfjord
Frigg
*Heimdall
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Sleipner
Alternative routes
for Sleipner as
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The UK Market
for Norwegian Gas:
An Energy Security Issue
The West European gas market is separated into two
distinct segments, the United Kingdom and the Conti-
nent. Even though the two are geographically close,
the absence of an interconnecting pipeline makes
them separate. As a result, the two markets compete
for Norwegian gas, and both expect Norway to
provide additional secure, stable gas supplies in the
Norway has two large gasfields that it plans to
develop after 1990:
? The Sleipner field
will produce about 330,000 barrels per day oil
equivalent (bdoe) in the early 1990s-one-half
the capacity of the Soviet pipeline now under
construction.
? The much larger Troll field, which will be ca able
of producing about 650,000 bdoe after 1995.
Economics of the gas industry dictate that virtually
all of the Sleipner field be delivered to only one
market.' As a result, if the UK bids successfully for
Sleipner gas, little if any gas would be available for
the Continent to enhance its overall energy security.
With the acquisition of Sleipner gas, however, the
United Kingdom might wind up with an excess. This
would reduce UK needs for Troll gas and could
encourage London to consider a pipeline link with the
Continent to export some of the surplus. Such a link
would enhance the gas supply flexibility of both
European gas markets.
' The high capital costs associated with the construction of a gas
transmission system and the cost of transporting the gas over long
distances require that a high flow rate be maintained in the pipeline
if the gas is to be.delivered at a competitive, price. The reserves in
the Sleipner field are not large enough to support construction of
Figure 1
United Kingdom: Energy Consumption
by Type of Fuel
I I I I I I I I I I I
1972 73 74 75 76 77 78 79 80 81 82
Consumption
Recent sluggish economic growth and the impact of
conservation resulting from higher energy prices have
led to sharp reductions in energy consumption in the
United Kingdom. Total energy consumption declined
by about 3 percent annually from 1978 to 1981,
falling from 4.3 to 3.9 million bdoe. Natural gas 25X1
demand over this period, however, continued a trend
evident since the 1960s and increased nearly 4 percent
per year. Consumption rose from 750,000 bdoe in
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Table 1
Residential Energy Prices
(US $ per million Btu)
1978
13.61 3.96
3.35
1979
14.78 5.02
3.47
1980
18.80 6.72
4.13
1981
22.60 8.21
5.10
1982
23.94 8.80
6.12
1978 to 835,000 bdoe 2 in 1981, when the share of
natural gas in total energy consumption reached 21
percent.
Growth in gas demand was strongest in the residential
and commercial sector, which accounted for more
than 60 percent of gas consumed in the United
Kingdom. According to official UK statistics, gas
consumption in this sector increased from 415,000 to
495,000 bdoe during the 1978-81 period, an increase
of more than 6 percent per year. Consumption of all
other fuels in this sector declined. Use of natural gas
in the UK industrial sector also increased over this
period. Gas consumption rose about 1 percent per
year to 285,000 bdoe in 1981, and gas's share of the
industrial market jumped from 23 to 32 percent.
Prices
The rapid rise in the demand for gas was due
primarily to the low price of gas relative to alternative
fuels, especially in the residential sector. The price of
natural gas to residential users in 1978-81 averaged
about 65 percent of the price of light fuel oil, the .
closest substitute (table 1). Further, given the relative
efficiencies of gas versus competing fuels in space
conditioning uses, gas prices were even more advanta-
geous.' According to engineering studies, the cost of
bdoe
' Engineering studies have shown that the heating efficiency of a
new gas furnace is about 20 percent higher than that of a new oil
Table 2
Residential Heating Costs a
1978
13.61
7.92
5.58
1979
14.78
10.04
5.78
1980
18.80
13.44
6.88
1981
22.60
16.42
8.50
1982
23.94
17.60
10.20
a Assuming efficiencies of 1 for electric furnaces, 0.6 for gas
furnaces, and 0.5 for oil furnaces.
heating with natural gas is about half the cost of
heating with light fuel oil, and the heating advantage
of natural gas over electricity is substantially greater
(table 2). Because gas prices during the 1978-81
period rose only 52 percent, compared to a 107-
percent rise in heating oil prices and a 66-percent
increase in electricity prices, natural gas increased its
significant advantage in the residential sector over all
alternative fuels.
The relative price advantage of gas to industrial users
was substantially less, according to official UK price
data. Residual fuel oil, the main competitor with
natural gas because many large users maintain fuel-
switching capability, was priced at roughly 85 percent
of natural gas. Gas, however, requires no storage or
handling costs and was still the choice of many large
consumers. Growth in gas demand in the industrial
sector was also fostered by the environmental and
efficiency advantages of gas over coal or oil products.
Some industrial users in the United Kingdom have
recently claimed that natural gas and residual fuel oil
prices are now comparable in terms of total cost and
other factors (table 3).
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Figure 2 Figure 3
United Kingdom: Residential Energy Prices
United Kingdom: Residental Heating Costs"
Oil
Gas
I I I I
Jan Jun Jan Jun
1981 1982
I I I I I I I I I
Jan Jun Jan Jun Jan Jun Jan Jun Jan Jun 0
1978 1979 1980 1981 1982
Production and Import Trends
UK gas production peaked at 705,000 bdoe in 1977,
then declined steadily to about 607,000 bdoe in 1981.
Most of the growth in UK gas consumption was
accommodated by increased production from the
Frigg field in the northern North Sea. Frigg is 40-
percent British and 60-percent Norwegian. Its total
production increased rapidly from an initial 33,000
bdoe in 1977 to 295,000 bdoe in 1981. London had
previously negotiated with Norway to purchase all of
the Norwegian share of Frigg gas, and UK imports of
gas from Norway increased rapidly, growing from
about 20,000 bdoe in 1977 to 197,000 bdoe in 1981,
nearly one-fourth of total UK consumption. The
British Gas Corporation paid substantially more for
Norwegian imports than they had been willing to give
domestic producers. Continental buyers, however,
were paying even higher prices for other Norwegian
gas supplies
Gas
6
I I I I I I
Jan Jun Jan Jun Jan Jun
1978 1979 1980
Government Price Policy
Gas prices in the United Kingdom have remained low
relative to other fuels because of government policies.
UK regulations implemented when North Sea gas
production began in the 1960s required that all gas
produced on the UK continental shelf be landed in
Britain. A single buyer, the British Gas Corporation
(BGC), had first refusal on all available supplies. The
BGC owns the entire domestic gas distribution net-
work and was empowered by the government to act as
the sole supplier to all UK gas users. Producers were
prohibited from using the gas themselves or selling to
any but industrial customers should the BGC opt not
to purchase all available supplies. These regulations
severely limited marketing opportunities for producers
and effectively guaranteed the BGC long-term access
to low-cost gas supplies because prices were set by the
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Table 3 (US $ per million Btu) Figure 4
Electricity
Natural Gas Residual
Fuel Oil
Coal
1978
11.14
2.73
2.19
1.75
1979
12.33
3.18
2.77
2.04
1980
14.31
4.54
3.90
2.52
1981
16.34
5.55
4.63
2.84
1982
18.00
5.93
4.70
3.35
United Kingdom: Industrial Energy Prices
BGC. As a result, the BGC was paying an average
price of less than $2 per million British thermal unit
(Btu) for UK gas in 1982, while continental buyers
were paying about $4 per million Btu for Norwegian
and other gas supplies.
Intent on increasing domestic and industrial market
shares and encouraging substitution from oil to gas,
the BGC consistently maintained domestic consumer
gas prices far below market rates, a feat possible only
because of the BGC's extremely low acquisition cost.
According to the International Energy Agency (IEA),
industrial gas prices in the UK in 1981 were 80
percent of prices paid by industrial users on the
Continent, and UK residential gas prices were about
half those paid by other European consumers. UK gas
producers argued vigorously that such low prices
could not provide the additional investment required
to increase or even to maintain domestic gas produc-
tion. Still, as sole purchaser, the BGC was able to
maintain its "cost plus reasonable profit" pricing
policies until 1981. Frigg gas production, however,
peaked in 1981, and the BGC has recently been
forced to renegotiate producer price agreements to
spur the additional production needed to help meet
projected increases in gas demand.
A number of additional UK North Sea projects have
recently been undertaken because of these price in-
creases. They will not, however, nearly match the
projected growth in gas consumption. As a result, the
BGC has developed a new sense of urgency about
assuring additional gas supplies. The UK Government
has also reacted to this changing environment by
I I I I I I I I I I
Jan Jun Jan Jun Jan Jun Jan Jun Jan Jun
1978 1979 1980 1981 1982
implementing policies designed to moderate growth in
gas demand; in 1981, for example, London instructed
the BGC to raise real residential gas prices by 10
percent per year from 1981 to 1983. As a result of this
change and the slippage in crude oil prices, the large
price difference between the two fuels in the residen-
tial and commercial sector has narrowed.
Projections
Industry forecasts prepared in the first half of 1982
projected growth in UK gas demand to 1995 at 2 to 3
percent per year. These forecasts for 1985 range from
870,000 to 900,000 bdoe, and as high as 1.1 mbdoe by
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stronger economic growth could spur gas consump-
tion, the higher cost of bringing new gas reserves into
production would raise prices and have a dampening
effect on demand growth
Changes
in those factors-that in earlier years favored rapid
growth in gas demand-low relative prices, security of
supply, and government policies-will slow gas de-
mand growth in the 1980s:
? Declining real oil prices, expected until 1985, will
increase the price of gas relative to oil.
? North Sea gas supplies will be subject to increasing
cost and competition from continental users.
? Government policies no longer encourage artificially
low gas prices.
? Projections indicating only moderate UK economic
growth do not support forecasts of continued high
growth in gas consumption.
If nominal oil prices decline, as we now expect, the
relative price advantage of gas will erode rapidly,
virtually ending growth in gas consumption in the
industrial sector and moderating consumption growth
in the residential and commercial sectors. Although
Gas Reserves and Production
The 1982 Brown Book, the official UK report on the 25X1
development of British oil and gas resources, esti-
mates remaining proved and probable gas reserves at
about 6 billion barrels of oil equivalent (boe), almost 25X1
half of which lie in the southern sector of the North
Sea. In addition, the official UK estimate for poten-
tial undiscovered (possible) reserves ranges from 40
million to 4 billion boe for a total of 6.4 to 10 billion
4 Maximum recoverable (potential) reserves include proved, proba-
ble, and possible reserves.
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judgment, official statistics underestimate remaining
recoverable gas reserves on the UK continental shelf,
and London will make concessions on tax and pricing
policies that will allow domestic production to rise
well above official estimates.
has been disappointing, companies have concentrat-
ed their bids on the possible gas-producing conces-
sions.
? The Oil and Gas Bill of 1982 will end the BGC's
monopoly as sole supplier to the industrial sector
and large commercial users, allowing them to con-
tract directly with alternative gas suppliers.
830,000 to 900,000 bdoe in 1995.
These moves probably will increase domestic gas
production to about 820,000 bdoe by 1990 and to
Balancing Gas Needs: The 1980s
On the basis of our assessment of gas availability and
potential production, we believe that the United King-
dom will need to import between 165,000 and 240,000
bdoe of natural gas through 1990. Most of this
requirement will be met from the Norwegian share of
Frigg. The British, however, might require small
incremental amounts of gas to meet peak-load
demand:
? Any incremental requirement probably will be met
with liquid natural gas (LNG) imports from Algeria.
The BGC has imported Algerian LNG in the past
and has the necessary import infrastructure.
? Additional peak production capacity may be devel-
oped in the Morecambe field. Plans are in place to
expand gas storage capacity in the Rough field.
? The BGC is also trying to conserve gas from
domestic fields by discontinuing service to "nonpre-
mium" industrial users, who were formerly served
on an interruptible basis.
We believe the UK will be able, with these measures,
to meet domestic gas demand until the end of the
decade without additional imports, and may even
have a small volume of excess gas in the late 1980s.
London has already taken steps to spur additional
production:
? Prices paid by the BGC to domestic gas producers
are increasing. Last October the BGC signed a
contract with operators of the North Alwyn gasfield
to pay $4 per million Btu, the highest price ever paid
for domestic gas.
Looking Into the 1990s
According to official government projections, howev-
er, Norwegian Frigg production will decline rapidly
after 1990, falling from about 200,000 bdoe in 1990
to zero in 1993. Since UK gas consumption will
continue to grow, reaching 930,000 to 1 million bdoe
? The eighth licensing round, currently under way,
includes 38 southern-sector fields with gas potential.
Although overall response to the 184 blocks on offer
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by 1995, we believe the UK will bid aggressively for
gas from Norway's Sleipner field to meet its projected
import requirement. Sleipner contains an estimated
2 billion boe of recoverable gas reserves and Statoil,
the Norwegian national oil company, has decided on a
The Norwegians are negotiat-
ing with the British and also with other European
buyers for the sale of Sleipner gas.
Because of the location of the field, economics dictate
that virtually all of the gas from Sleipner be landed
either in the UK or on the Continent. Several factors
favor the UK:
? Sleipner gas contains a high amount of carbon
dioxide, which requires special processing and possi-
bly separate receiving facilities. London has experi-
ence with this problem, and several smaller UK gas-
fields containing carbon dioxide could be linked to a
Sleipner system.
? The location of Sleipner is ideal for linkage to the
existing Frigg pipeline system, which will have spare
capacity of about 330,000 bdoe by 1993. This
method of landing Sleipner gas would be about one-
fourth as costly as a separate pipeline link to the
Continent.
? The United Kingdom imports about 197,000 bdoe
of Norwegian gas and considers Norway a desirable
and secure supplier. There are now no other viable
suppliers to meet projected UK gas demand in the
1990s.
? European buyers are not expected to bid as aggres-
sively as London for Sleipner gas in view of their
projected lower gas demand and alternative sources
of supply.
The decisive factor in choosing where Sleipner gas is
landed will be price. Statoil, operator of Sleipner,
probably will demand a price comparable to that
received for Statfjord gas (about $3.50 per million Btu
at the wellhead), which is substantially higher than
the BGC has been paying for most other gas supplies.
We believe, however, that the BGC is willing to pay a
competitive price for Norwegian gas, since there are
now no other viable suppliers and the BGC has not
balked at paying competitive prices for Norwegian
gas in the past.
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If the UK gets Sleipner gas, as we now expect, and 25X1
implements policies in the 1980s to encourage new gas
development, the need for additional imports in the 25X1
late 1990s will be minimized. Such policies-includ-
ing tax concessions for marginal fields, allowing do-
mestic natural gas prices to rise to market levels, and
official support for gas exploration and develop-
ment-will allow domestic production to reach
830,000 to 900,000 bdoe in 1995. If gas demand in
1995 is also in line with current estimates, the UK
could then have a small annual gas surplus of about
80,000 to 160,000 bdoe. This, in turn, would reduce
UK needs for additional Norwegian gas from new
fields under development and raise the possibility of
the export of natural gas from the UK to the Conti-
nent.
Several major oil companies have indicated that
increased UK production would encourage a pipeline
link between southern offshore fields in the United
Kingdom and the Continent. A pipeline link to the
Continent has several attractions:
? Swapping southern UK gas for Norwegian gas
imports would lower delivery costs and leadtimes in
developing northerly Norwegian fields.
? An integrated gas market would enhance buyers'
negotiating leverage with Norway and increase sup-
ply flexibility and energy security in the West
European gas market.
? A link would allow the United Kingdom to tap gas
supplies on the Continent once UK reserves begin to
run out.
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? Sales of surplus gas to the Continent could net the
United Kingdom additional revenues in the 1990s,
when we expect UK petroleum revenues to fall
sharply.
However, there has been considerable resistance by
the BGC and the Energy Ministry to the idea of any
gas pipeline link with.the Continent. Principal among
British concerns is the possibility that UK gas reserves
would be depleted rapidly by buyers on the Continent
in the event of a gas supply disruption or a surge in
continental demand. Domestic opposition to any ex-
port of British gas apparently remains strong. Last
December, for example, London decided to land the
British share of Statfjord gas in the United Kingdom
even though it will be far more costly than allowing
the gas to flow through the Norwegian pipeline to
Emden, West Germany. Additionally, even if domes-
tic production is increased substantially, much uncer-
tainty still remains regarding future gas availability.
London is keenly aware of Norwegian opposition to an
integration of the continental and UK markets and
would be reluctant to jeopardize any potential future
supply arrangements with Oslo. Unless these political
constraints can be overcome, we do not believe that
London will permit a linkage with the continental gas
market in the foreseeable future.
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