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1 Natural Gas in the new Market Environment
The incoming Conservative Government in 1979 inherited a gas market situation where prices to consumers were well below the levels sustainable in a free market. As noted in Chapter 11 of Volume I it was decided to increase domestic prices dramatically by 10% per annum for three years in real terms from 1980. On the supply side exploration in the Southern North Sea had dwindled to negligible levels with BGC being satisfactorily supplied from existing contracts plus the very large Frigg contract. There was also the expectation of large volumes to come from the Brent field.
The gas Gathering Scheme
The Government was interested in a fresh examination of the market outlook and depletion policy in the context of the possible reduction of BGC’s monopoly powers. An immediate issue which had to be addressed was a possible gas gathering pipeline, studies on which had been taking place ever since September 1975 when Mr Benn commissioned Williams-Herz to see whether there was a prima facie case for it. The study examined the prospects based on commercial fields and other significant discoveries in Central and Northern waters. Estimates developed were of the likely gas reserves from these fields (most of which involved associated gas), and considered four different pipeline schemes with different combinations of the use of the Brent (FLAGS) and Frigg pipelines plus new ones, all ending up at St. Fergus. The favoured option was one where the fields in the Northern North Sea would feed into the FLAGS line, with the Frigg line being used solely for Frigg gas, and new central and southern systems being built. The southern system would go as far south as Block 30/2, and the long Central system would go as far north as the Brent area. From the fields considered (excluding Brent and Frigg) some 1–1.5 bcf/d of methane could be delivered over twelve years plus 6–9 million tonnes per year of heavy gases. The study was only a preliminary one but the results were regarded as sufficiently promising to warrant more detailed work.
Strategy Towards Petrochemicals
An issue which received attention and which became closely related to the gas gathering scheme was the strategy towards petrochemicals. It had become clear that substantial amounts of heavier natural gases would become available from the Brent field, and the Williams-Herz study indicated that there could be more from other fields. The potential for ethane-based petrochemical developments was thus studied by officials from DEN, the Scottish Office, and the Department of Industry, and a report was produced in May 1976. This acknowledged the finding of a study commissioned from Chem Systems that ethane would be an attractive feedstock for ethylene production while propane and butane would be more valuable in other uses (including exports.) Officials noted that ICI and BP were currently building an ethylene cracker at Teesside (based on naphtha), while Shell were planning one at Carrington based on gas oil. ICI and BP were also considering a further cracker at Grangemouth. Dow Chemicals had expressed interest in building an export-related cracker based on ethane from the Brent field at Peterhead. Other companies had expressed interest in petrochemical developments based on North Sea gases and the inter-departmental group was examining possible sites. These included the Nigg/Cromarty area (where an oil refinery had already been proposed), Peterhead (where existing plans for landing and processing gas and harbour constraints would restrict the potential), and Grangemouth (where BP owned the land which could deter other companies from making proposals.)
The paper by officials concluded that priority should be given to bringing about ethane-based petrochemical developments, that Shell and BP/ICI should be encouraged to go ahead with their respective plans, and that a gas gathering scheme was essential to encourage additional schemes. But further studies were required on the whole subject. Mr Benn submitted the paper to the Prime Minister who expressed interest in seeing the results of the further studies before committing the Government. Other Ministers, particularly the Chief Secretary to the Treasury, also sounded a note of caution, warning against over-enthusiastic public statements before the various subjects had been fully studied. Mr Millan, the Secretary of State for Scotland, suggested that maximum use should be made of ethane from the UKCS as a feedstock, and that plans to use other feedstocks should be discouraged. The Secretary of State for Industry did not feel that this was justified, with other feedstocks sometimes being appropriate.
Gas Gathering Pipelines Established to Undertake Detailed Study
With these issues still unresolved but the importance of petrochemical developments clearly established, the DEN pressed ahead with plans for a more detailed examination of a gas gathering scheme with emphasis on the potential reserves, costings, the optimal routes, markets for the heavy gases, and methods of financing the scheme. DEN officials held discussions with BNOC and BGC and it was decided that a study company be established to be named Gas Gathering Pipelines (North Sea) Ltd (GGP) to undertake the work. BNOC and BGC would together hold 66.67% of the capital in the company and the rest would be offered to the private sector with each participant being encouraged to subscribe an indicative sum of £0.25 million.
Mr Benn announced the above arrangements in the House of Commons on 9th December 1976. His announcement was accompanied by the release of a document which discussed the thinking behind the proposed study. A gas gathering scheme was an appropriate mechanism to minimise gas flaring which could become very serious in the 1980s. It was recognised that the volumes of gas from the proven fields did not justify a gathering scheme and reserves from as yet unproven fields would be necessary to make it viable. The document also drew attention to the opportunities for petrochemical developments and these would be investigated in the new study. Its remit would also include examination of onshore requirements such as at terminals. The total costs of the study could be around £3 million, but would exceed that if a well had to be drilled.
The GGP company and its subsidiary British Marine Pipelines Ltd (BMP) set to work immediately. Four private sector companies namely, BP, ICI, RTZ and Total/Elf joined the GGP company in March 1977, between them holding in equal proportions one third of the shares. Mr Benn announced this on 31st March, along with the appointment of Mr Ernest Mills of BGC as chairman and chief executive, and Mr Alistair Morton of BNOC as deputy chairman.
DEN Conducts Market Studies
The DEN continued with its own studies on the subject and in March 1977 produced an interesting paper on the markets for heavy natural gases from the North Sea. This confirmed that ethane would be far more valuable as a UK petrochemical feedstock than as a fuel. Even if it were priced well above its fuel value, there would be an incentive for a chemical company to supply the EEC ethylene market by building an ethane cracker in the UK rather than on the EEC mainland. Transportation costs of ethane were very high, and the yield of ethylene from ethane was about three times that from naphtha and the capital cost lower. Propane and butane could also be used as petrochemical feedstocks but their most profitable use was probably in export markets. With respect to market developments for cracking plants the Secretary of State for Energy, Mr Varley, had announced in November 1976 that an objective of industrial strategy would be to construct five new ones by 1985, and perhaps more thereafter. In reviewing the position at March 1977 it was noted that of these five, two, and possibly a third, were already committed, namely ICI/BP at Wilton using naphtha and LPG as feedstocks, Shell at Carrington using gas oil as a feedstock, and Esso at Mossmorran in Fife where planning permission was now sought. The feedstock would be ethane from the Brent field. The paper concluded that GGP should consider (1) whether further work was needed on the economics of the (optimal) use of the heavy natural gases, and (2) the likely development of the whole petrochemicals market.
Importance of Statfjord gas for Proposed UK System
DEN officials were well aware that the Norwegians were also studying the subject with respect to their own fields. Cooperation was desirable and perhaps even a joint study. It was felt that there was an urgent need to assess the availability of gas from the Norwegian part of the very large Statfjord field for the proposed UK system. The UK/Norwegian Coordinating Committee had been established, and DEN officials considered to what extent data on gas availabilities could be exchanged. The extent to which cooperation would take effect was unclear. From the UK’s viewpoint it was felt to be most advantageous that no Norwegian gathering scheme was built, and the gas could be taken through the UK system at a time when the UK required the supplies. A second possibility was that Norwegian gas could be brought through a UK system in the relatively near future. This would entail either cutting back UK production or exporting UK gas to the Continent. The third possibility was that the Norwegians would build their own system and no Norwegian gas would be available to the UK.
EEC Interest in gas Gathering Scheme
Meanwhile other parties were showing interest in the subject. These included the EEC Commission and in late February 1977 Commissioner Bremmer wrote to Mr Benn indicating interest in the gas gathering scheme, inquired whether the EEC could participate in the GGP work, and offered to make a financial contribution towards the costs. Mr Benn was cautious on the subject of EEC involvement, while the Treasury found some attractions in the financial contribution. With private oil sector equity contributions in the offing it was decided that EEC involvement was not required at this stage.
Associated gas Liquids Pipeline Corridor?
The Highland Area branch of the Scottish Council (Development and Industry) also wrote to Mr Benn in the summer of 1977 enclosing a report suggesting that there should be an associated gas liquids pipeline corridor. This would take the substantial gas liquids expected to land at Sullom Voe through Shetland to Orkney where more gas liquids would be collected, then transported to Caithness and subsequently to the Cromarty Firth, where there would be a separation plant. A methane line would then be built to St. Fergus where the gas would enter the BGC grid. The Cromarty Firth had suitable facilities for LPG tankers but could also become the centre for a large petrochemical complex. The report was passed to GGP for consideration.
Interim Report of GGP
The interim report of GGP was submitted to the DEN in December 1977. It concentrated on the area north of latitude 56°N. The discovered fields in this area could produce around 1 bcf/d of methane plus large amounts of NGLs for ten years. The report concentrated on the immediate problem of the gas likely to be flared in the Northern North Sea. If no action were taken flaring could reach 180 mmcf/d by 1985. The study found that, given the modest amounts of extra gas likely to become available in the Brent area (excluding Brent itself), an independent gas pipeline would not be economically viable, though there was disagreement about the likely costs. The most economic route would be through the Brent FLAGS pipeline. There were several candidate fields under development, namely Heather, Cormorant, Dunlin, and Murchison, with other future ones such as Magnus, Thistle, and North West Hutton. But a potential problem was foreseen, namely that if the expected volumes were to be transported, there might not be enough ullage in the FLAGS line given the potential volumes from Brent. The idea that Brent gas might be deferred was mooted. The conclusion was that BGC and/or Shell/Esso should examine a gas collection scheme for the Brent area. The idea of Government financial support for a collection system deserved study. GGP had not finished their studies of the part of the Northern North Sea to the south of the Brent and Ninian fields, but had already established that collection of gas currently being flared from Montrose and Forties would be uneconomic.
Study by Shell/Esso
Shell/Esso had been undertaking their own independent study of the subject in the Brent area and in December 1977 wrote to Mr Benn with a proposal. This contained more fields within their proposed system and lower capital costs compared to the GGP scheme. It also considered the supply of gas to fields which would be gas-deficient for fuel purposes. DEN officials indicated to their Ministers that the Shell/Esso scheme had clear advantages, and, pending further discussion with GGP and further studies, should be supported.
Discussions with Norwegian Government
The Scottish Office reviewed the interim GGP report and indicated that the final report could be enhanced if it examined further the subject of the volumes of NGLs which could become available and the breakdown among ethane, butane and propane. The issue of the relative valuation of ethane for use as a petrochemical feedstock or fuel also deserved more attention. The question of the possible availability of gas from the Norwegian part of the Statfjord field should also be examined. This latter subject was being pursued and a meeting between DEN and Norwegian Oil and Energy Ministry officials was held in February 1978. The Norwegian representatives indicated that they were envisaging a pipeline beginning at Statfjord and running to Sleipner via Odin and Heimdal. From Sleipner it could go either to the UK or Germany. At present there was insufficient gas, and no decisions could be made until drilling had taken place on sixteen blocks shortly to be licensed. This delay meant that Norway and the UK could be out of step in considering gas gathering developments. From Norway’s viewpoint it was necessary that a joint study would have to be sufficiently flexible for both the UK and the Continent to be considered as possible markets, including not only Germany but Denmark and the Netherlands. A trunkline to the UK should also be studied with a line to the Continent. The British representatives outlined the position in the UK, indicating the issue with the fields around Brent, and emphasising the point that with any joint gathering scheme the UK Government would not allow net exports of UK gas unless much larger discoveries were made. This could involve some swap arrangements. The British side preferred the collaborative study to commence in the near future as they would soon lose the GGP team. It was agreed that this should be clarified in the near future.
Final Report of GGP
GGP submitted their final report to the DEN in April 1978. It found that a gas gathering network could collect between 7.5 and 10.6 tcf. Including Brent and Frigg there could also be 48–59 million tonnes of ethane and 61–70 million tonnes of other NGLs. There was not enough gas to justify a full new pipeline to shore. The gas could be accommodated either in the FLAGS line by deferring production of Brent gas or in the Frigg pipelines with some boosting. If further Norwegian gas were to come there would be insufficient capacity in the Frigg pipeline. BGC could absorb the methane, but the additional ethane would be insufficient to support another ethylene plant in addition to that proposed at Mossmorran.
Two strategies for gas collection were discussed. In the first, gas which was uneconomic by itself, would still be collected in the expectation that the returns would improve when further fields came along. This would ensure that gas flaring was minimised. The second strategy was to wait until further fields were ready before investing in the gathering scheme. GGP suggested that Shell/Esso and/or BGC develop and operate a scheme for the Brent area fields, with consideration given by the Government to assist in the collection of gas from fields such as Heather, Cormorant, Dunlin and Murchison.
For some fields in the vicinity of Frigg and in the Central North Sea collection of gas was uneconomic (including Forties.) Piper and Tartan were to be connected to the Frigg pipeline at the booster platform (MCPO1) and Beryl gas might also go down the Frigg line. The most economic option for Fulmar gas would be to connect it into the Ekofisk line going to Emden. A further 8.8 tcf of gas could become available in the whole Frigg/Central North Sea area and GGP again considered two strategies. In the first all fields would be connected to the Frigg pipelines. In the second strategy the Alwyn, Beryl and Bruce fields would be connected to the Frigg lines, and a new trunk line would be constructed based on Brae, Thelma, and Andrew. This could be connected to MCPO1. The additional gas differed substantially in composition from Frigg gas, and additional facilities at St. Fergus might be needed. GGP concluded by saying that as no new major scheme would be required for several years there was no immediate need to establish an organisation to finance and construct a gas gathering network, though further studies should be conducted.
DEN Views on GGP Report
The DEN did not have serious problems with the GGP report, but felt that its conclusions were fragile in relation to (1) the potential reserves and (2) the ullage in the Frigg pipeline. Thus there could be more gas than envisaged by GGP in the vicinity of the Brae, Alwyn, Beryl, and Toni/Thelma fields, and earlier gas availability from condensate fields. There was also a concern that any joint action with the Norwegians could fill so much of the Frigg capacity that not enough was left for UK associated gas. There were also doubts regarding the ability of the Frigg line to take the quality of gas likely to be on offer.
Accordingly, while steps were taken to publish the final report of GGP in July 1978 the related announcement also indicated that further studies of the evolving issue would be undertaken by the inter-departmental Working Party on Gas Gathering. The Scottish Office was in emphatic agreement that further studies should be undertaken emphasising the need to pay closer attention to developments in the Norwegian sector where there were signs that a faster pace of field development might be felt appropriate. The Scottish Office continued to have a particular interest in petrochemical developments, and suggested that the question of the compatibility of gas depletion policy for fuel purposes and availability and absorption of NGLs for petrochemical purposes should be studied further. In fact DEN officials had been continuously monitoring offshore pipeline developments for oil and gas for some time, and both DEN and Inland Revenue officials were wrestling with the complex tax problems relating to gas banking schemes which had been developed by licensees (see Chapter 11 of Volume I.)
BGC’s Desire for Further gas Supplies
Another factor in the debate was BGC’s desire to contract for further gas supplies. The Corporation informed DEN officials in April 1979 that its policy was to attempt to procure any gas that could be landed in the UK at an acceptable price. Within this framework BGC would prefer to have control over new pipelines, and would like to pre-empt construction of a Norwegian spine line ...
