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Will-Trumps-America-Help-or-Hinder-Post-Brexit-Britain

Published: 10 May 2017
Sector: Energy
Area of Law: Brexit

Will Trump’s “America First” energy plan help or hinder the UK in a post Brexit world?

I had the pleasure of a few days in Berlin last week, speaking at a conference on emerging US energy policy and in particular its likely impact on Europe. I was able to share my thoughts on what President Trump’s “America First” energy plan might mean for us here in the UK, and also to say a few words about how Brexit might play out in that context.

The issue, in the main, concerns gas; shipped over as LNG (liquefied natural gas) on giant tankers from a new generation of US export terminals.

As a country, we’re heavily dependent on imports of gas. And because of our historic reliance on our own gas from the North Sea, we have relatively low gas storage capacity – just 6% of overall demand, far lower than many other EU countries. That makes our security of supply increasingly vulnerable, not least when you consider that 70% of our storage capacity is delivered by a single long range storage facility at Rough, under the North Sea, which is 40 years old, and currently on a partial indefinite outage.

Also bear in mind that the UK is the second biggest gas consumer in the EU, just below Germany. Whilst around 45% of our gas comes from our own production, North Sea reserves are depleting rapidly. Approximately 38% comes from European pipelines – connected to Belgium and the Netherlands and the Norwegian fields – from which we get Norwegian and Russian gas. On these numbers that leaves 17%, which comes from LNG imports.  

So, with or without Brexit, these European pipelines, and our three main LNG terminals, are going to become critical to our security of supply.

Perhaps no wonder then that some pin their hopes on the prospect of UK shale gas.  It’s reckoned that, in the North of England, the Bowland-Hodder shale alone could hold 1300 trillion cubic feet of gas; if only 10% of that could be recovered, that would meet the UK’s domestic gas needs for 50 years.

But the truth is we don’t really know what there is out there that we can recover economically. What we do know, is that the UK has a more complicated geology than the US, with more faults, and that makes it harder to know where to drill. So, we’re still in an exploratory test phase right now. After some initial drilling back in 2011, which caused a small earthquake, there was a moratorium on drilling to allow for more research and consultation, which was lifted in 2012. Since then, the UK government has been doing what it can to get the developers drilling again.  In 2013 the government announced tax breaks to encourage investment, followed in 2015 by new legislation to simplify the procedures for underground access, and to introduce added protections such as environmental impact assessments, groundwater monitoring, community benefits and protected areas. Finally, after a licensing round launched in 2014, 93 new onshore exploration licences were granted in 2016.

So, after a five or six year gap, drilling is now expected to resume this summer, despite continued opposition from environmental groups.   

So, back to the US; why are we excited by the prospect of a “virtual transatlantic pipeline” of LNG?

Well, as I say, our North Sea reserves are depleting fast, we have low gas storage capacity, our LNG terminals have plenty of spare capacity, and UK shale reserve are not yet proven, and controversial. 

But also, the UK is weaning itself of coal. The government has said it wants all coal stations closed by 2025, which will be quite an achievement when you consider that 40% of our electricity was being generated from coal as recently as 2012. However, that decline may be even quicker.  Last month, we had the first complete 24 hour period when no coal power stations were running. That was the first time since the world’s first coal power station was opened, in London, in 1882. So, the first country in the world to open a coal power station will become one of the first to close them all down.   

Without coal, the UK will have even more need for gas. And with Brexit creating uncertainty over the terms upon which the European pipelines might continue to send us Russian gas, many see the idea of a chain of LNG tankers regularly coming in from the US as a very good thing for UK security of supply. 

However, the reality is that we’ve had only one tanker coming in to the UK with US shale gas so far, and ironically that came into Scotland, which is opposed to fracking. Also, that was ethane coming into a petrochemical plant; it was not LNG destined for grid injection.

There are a number of factors at play here, not least the geopolitics. If Gazprom could afford to, it could probably keep US LNG out of Europe by reducing its prices. Furthermore, the UK is competing with the rest of Europe, and Asia, for LNG imports; we’re not the only country with under-utilised import terminals. Finally, it’s not clear yet how and whether President Trump might want to use the US’s new position as a gas exporter, and likely swing producer, for geo-political purposes.

The other side of the coin to all of this is, of course, renewables. President Trump’s climate change scepticism is well documented. It’s hard to see how the US can meet its Paris climate commitments if President Obama’s policies are reversed - assuming of course the President Trump is (politically, as well as legally) able to do that. There must be a danger that, if the US becomes (or is perceived as becoming) a “free rider” on climate change and pulls back its efforts, others might do the same, and the result will be a negative impact on the UK’s green economy, and of course globally.

In any event, we might see similar damage if we have a prolonged world-wide gas glut, and reduced prices. That wouldn’t simply harm renewables developments, which would have to compete with cheaper fossil fuel alternatives; it would also hinder UK shale developments, as the economics would begin to fail.

Even if we don’t see a relaxing of climate efforts by the likes of China, India and the EU, we should hope and expect that we won’t see the beginnings of a trade war, with new or increased tariffs on US exports to counter the perceived unfairness of a more relaxed regulatory regime for US coal and gas, and a more favourable environment for US industry.

This point about global trade, and a possible trade war, should be particularly worrying for the UK, and UK business. As we know, post Brexit, we’re hoping for and expecting a decent US trade deal. But at the moment, it’s very hard to know whether or not TTIP (the proposed EU/US trade deal) is dead in the water or capable of being resuscitation, and that must surely have an impact on the prospects of a quick UK/US trade deal. 

In short, the impacts on the UK of US energy policy could be profound. But, like much else presently, uncertainty reigns.

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