£13bn crisis looming for gas supplies

GAS prices have soared to a three-year peak in recent weeks, raising the spectre of higher bills this winter.

But with North Sea reserves running out, the big worry for suppliers is how they will cope over the next few years.

Thanks to the North Sea, the UK is self-sufficient in gas, and we have been selling to the Continent. But from 2005, Britain will become a net importer, with expensive consequences.

The UK will be forced into the hands of overseas producers such as Russia, Algeria and Norway, whose gas will be piped in or brought by sea in liquid form.

With fears of volatile prices and a demand for continuity of supply, massive storage facilities are being developed by the likes of Centrica, which owns British Gas, power firm Scottish & Southern and pipeline operator National Grid Transco.

The UK has storage for about 14 days' supply, ranging from liquefied gas terminals to former North Sea fields into which gas can be pumped. But that is much less than most Continental countries. Germany and Italy, for example, have several months' storage. Without large storage facilities, the industry is unable to hold extra supplies and must pay the price with costly short-term contracts.

UK gas has joined the ranks of the most expensive in the world recently, and with 40% of our electricity generated by gas-fired stations, the knock-on effect is likely to be higher power prices.

Prompted by the Energy Intensive Users Group, which represents industrial gas consumers, regulator Ofgem on Friday announced a probe into the recent gas price surge.

Richard Frape is marketing director at Spectron Group, which runs the UK's largest wholesale gas market. He said Spectron's measure of annual prices - year-long contracts for gas to be delivered from next April - has risen 15% in the past two months, while the price for immediate delivery has tripled.

Prices have been driven up by production problems, strong gas exports and more expensive oil and coal, which boosts demand for cheaper gas-generated electricity. Frape said prices were also responding to global fears about blackouts and the need to secure fuel for electricity.

Professor Ian Fells, a Government adviser on energy policy, shares Frape's concerns. 'If this winter is severe, there is a good chance of power cuts,' he said.

Fells, from Newcastle University's energy conservation department, has a habit of being right. His first predictions about major cuts came two years ago when Britain had an oversupply of North Sea gas, but he foresaw it falling.

As the principal author of a study by the Royal Academy of Engineering into Britain's gas supplies, Fells believes that the Government will have to spend up to £13bn on infrastructure by 2020 to cope with energy imports.

New gas pipelines are planned, billions of pounds is being set aside to upgrade and build new interconnector links to the Continent, and liquefied gas terminals are being built in South Wales and on the Thames Estuary.

But these investments are unlikely to come on stream before 2006. And they all rely on a ready supply of power engineers. Fells said: 'The skill shortages in this field are acute.'

North Sea oil and gas producers urged the Government last week to develop relationships with gas exporters and secure investment to protect supplies.

If these are neglected, supply failure could cost the country billions, warned the UK Offshore Operators Association.