UK in ‘difficult’ position for Brexit negotiations on gas

The UK’s lack of long-term storage and dependence on imports during winter will put it in a “difficult” position when negotiating gas supply arrangements as it exits the European Union.

The EU could impose fees, taxes and “severe and costly regulation” on the pipelines used to import gas from the continent with “little risk of retaliation”, a new report by the Oxford Institute for Energy Studies has concluded.

“Brexit is coming at a time when UK North Sea gas production is in terminal decline and the main UK storage facility is facing technical issues that will reduce its capacity with a possible extreme outcome, namely total decommissioning,” the report said.

“These specific issues will make the Brexit negotiations even more difficult for the UK as far as gas is concerned.”

In a world “awash” with liquefied natural gas (LNG) security of supply is not currently a key priority for the UK. However, as LNG supplies “tighten” during the 2020s this will become a growing concern.

The report continued to say that the UK has an “obvious” interest in maintaining integrated energy markets in order to limit the de-coupling of Britain’s gas trading hub, the National Balancing Point (NBP), from its continental equivalent, the Dutch-based TTF.

However, it questioned why the EU would want to provide a level playing field to the UK when it is “not part of the same club any longer”.

“Some countries in Europe could be tempted to impose severe and costly regulation on EU-UK pipelines to push up energy prices in the UK allowing de facto the EU to be slightly more competitive.

“It is possible that the EU could add some fees or taxes when piped gas is exported, with little risk of retaliation as the UK is now an energy importer.”

Britain’s departure from the EU will leave Ireland cut off the from the rest of the bloc as well as its solidarity mechanism for ensuring secure gas supplies. The report said this issue could be used as leverage by the UK to preserve the status quo.

In terms of maintaining security of supply, one option would be to make use of both LNG and the ample storage facilities in the rest of the EU which can be accessed via interconnectors. As the EU is “very long in storage” it would still have an economic interest in making them accessible.

The UK could alternatively build new long-term storage itself, but the report said this would require government intervention, as the EU’s storage surplus means winter-summer spreads are too low to encourage investment.

Another possibility is that the Russian gas supplier Gazprom could “offer to go back to its original plan” and change Nord Stream 2 gas pipeline to “Brexit Stream”. Channelling gas straight to the UK would give Russia security of demand and the UK security of supply.