Iran tensions highlight UK energy supply risk

Iran’s alleged attempt to disrupt the passage of a UK crude tanker through the Persian Gulf has added to fears in oil markets, boosted prices and raised insurance costs for shippers.

But for the UK itself oil is not the issue or a particular vulnerability. The country imports hardly any crude from the Middle East to the point where it spent more on olive oil imports last year than it did on petroleum from the Gulf. Higher oil prices stemming from tensions in the region may hurt at the margin, but that applies to every country that relies on buying its crude from international markets.

However, the recent tensions with Iran highlight one longer term risk the UK faces to its energy supplies: its growing reliance on imports of liquefied natural gas.

The UK gas market is regularly topped up with LNG cargoes from Qatar and other countries and is expected to become more reliant on shipments of the supercooled fuel as North Sea output declines in the coming years. So far this year the UK has imported an average of five Qatari cargoes a month.

The good news, for now, is that the UK’s LNG imports this year are largely due to a current glut of supplies of the fuel, as rising output from the US and Australia has outstripped demand in Asia.

But while importing LNG is a choice for the UK, over time it is expected to become less of an option, and more of a necessity. Compared with other big gas consumers, the UK would be less well equipped if a future supply threat did one day affect LNG cargoes.

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Gas storage capacity in the UK is less than 2 per cent of annual demand compared with more than 20 per cent in France and Germany. The UK government has said this is not an issue, putting its faith in a purely market-based strategy to secure short-term gas supplies.

But parts of the industry disagree.

Industry veteran Niall Trimble at The Energy Contract Company has warned that at a minimum UK gas prices will become more volatile because buyers will need to compete with customers in Asia for cargoes of LNG.

“There’s going to be more uncertainty,” said Mr Trimble.

The fear is that a “perfect storm” could one day leave the UK short. A cold winter in Asia and Europe would raise competition for cargoes. Throw in a pipeline outage or a threat to LNG shipping and it is not hard to see a scenario where the UK could struggle to meet its needs.

“There’s always a risk that if you depend on LNG there will be shortages,” Mr Trimble said.

The UK is lucky for now that gas supplies are ample and so far Iran has shown little interest in targeting non-oil tankers.

But becoming too reliant on LNG is a risk worth considering for the future.



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