UK 2Q Oil, Gas Production Declines, Imports Rise -Govt

LONDON (Dow Jones Newswires), Sep. 29, 2011

Shipments of liquefied natural gas made up the bulk of U.K. gas imports for the first time in the second quarter as indigenous production saw its steepest ever decline, data from the Department of Energy and Climate Change showed Thursday.

The data show that, as some analysts predict LNG prices will revisit previous highs next year, there is little prospect for the U.K. to gain any respite from rising domestic energy bills.

Indigenous U.K. natural gas production fell by a record 24.8%, to 131.2 terawatt-hours, in the second quarter, the DECC said in its quarterly energy statistics. Net imports of gas were up 5.0% at 74.2 TWh, despite demand falling 17.3% on the previous year because of warmer weather and lower use of gas in power generation, it said.

Shipments of LNG made up two-thirds of total imports in the second quarter, the first time they has exceeded pipeline shipments, the DECC said.

Prices of LNG are expected to rise further because, since the Fukushima nuclear disaster, Japan has had to rapidly increase its gas imports for use in alternative power generation.

Prices on the spot market for LNG could revisit the highs of 2008 if around 80% of Japan's nuclear capacity remains offline, Bank of America Merrill Lynch said earlier this month.

"Government-mandated stress tests have stalled the return of all but one nuclear reactor" in Japan, it said. If the restarts aren't approved, "we estimate LNG demand growth in 2012 could reach 8.0 million tons."

"Should this occur, we see spot LNG prices next year rise to $25 per million Btu, similar levels as those seen in 2008, from $17 per MMBtu currently," it said.

The price of natural gas is closely related to domestic energy costs in the U.K. because it is widely used for home heating in the U.K. and fired power plants that generated 46% of the country's electricity in the second quarter, according to DECC data.

Rising energy prices in the U.K. have been a hot political issue in recent months, with gas and electricity market regulator Ofgem pushing for a Compeition Commission inquiry into the business practices of the main utilities.

Total indigenous U.K. production of oil in the second quarter was 15.9% lower than the same period of 2010, at 13.4 million metric tons, DECC said. Net imports of oil products rose 28.6% to 3.6 million tons, despite demand falling 2.1% to 17.3 million tons.

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