Section 1: Introduction & Executive Summary
Demand growth has been strong for natural gas in Ireland in recent years, and it is likely that virtually all new electricity generating plants will be gas-fired.
But supply infrastructure is constrained. The production rate at the Kinsale Head field off Cork has begun to slow down, and the field will be depleted in a few years time, or very nearly so. The sole gas import pipeline from Scotland will then have to carry much greater loads, and to cater for growth, unless there are new domestic discoveries.
This pipeline has capacity which is constrained. It could be inadequate to meet national demands in due course, and given the time lags in the construction of new capacity, it is necessary to consider the options now.
The Department of Public Enterprise and the State-owned natural gas company, Bord Gáis Éireann (BGE), have been studying the problem for some time, and a number of technical studies and reports have been prepared.
Oil and gas exploration offshore Ireland has been proceeding, with what appears to be a potential commercial gas find off County Mayo, made by a group led by the UK company, Enterprise Oil.
Should this find prove commercial, it would of course change radically the supply scenario, and it clearly needs to be taken into account in any decisions about the expansion of gas import capacity.
Regarding the latter, the existing direct line from Scotland to County Dublin could be replicated; a line could be routed via Northern Ireland, and there are other options.
The Department of Public Enterprise has commissioned this report from DKM Economic Consultants as part of its joint Gas 2025 Project studies with Bord Gáis Éireann. The focus of the report is on the economics of various technical options available in the long-term supply of gas.
Section 2 of the report considers the alternative scenarios for demand growth, including demand in Northern Ireland. This section considers gas scenarios from the "2025 Study", a document prepared by BGE and their consultants Sofregaz. There are three principal scenarios, with variants and modifications which we analyse. These are called
Gas World, which features a rapid growth in gas demand.
Battlefield, where all the elements that would cause slow growth are combined, and
Conventional Wisdom, which is an intermediate scenario.
To give an indication of the demand outlook which is foreseen, the annual rate of growth in peak demand from 1999 to the year 2010 is expected to be about 6.5% under Conventional Wisdom. The rate of growth is lower under the Battlefield scenario, and of course higher under Gas World.
Other conclusions from this section are
Long-range forecasts for energy demand are difficult, and sensitivity questions are considered in Section 7.
The demand growth pattern is one of strong expansion in the years immediately ahead, with lower growth from 2010 onwards, reflecting the ESRI forecasts. What happens from 2010 onwards is quite uncertain, but also less important, in that adjustments to the capacity of supply systems are ongoing.
The assumed contribution of renewables to power generation would be a difficult target to achieve unless fossil fuels become relatively more expensive.
Price developments are not explicitly modelled. Either a global demand-management strategy, depressing demand towards the Battlefield scenario, or price freedom in the market, could have strong impacts. Price freedom could impact the shape of the load curve in the long term and we consider this issue in Section 8.
The next section of the report considers further aspects of the BGE Sofregaz study, in particular the alternative infrastructure options for increasing import capacity. The three most important options are
UK1, which would build a "twin" of the existing interconnector between Scotland and North County Dublin.
UK2, which would build extra capacity from Scotland to Northern Ireland, with a new pipeline flowing south to Dublin, and
UK1-SN, which would link Scotland to Dublin, but with a new line flowing North from Dublin.
This section reviews the cost estimates for these options and the time profile of expenditure. It also considers the Enterprise Oil discovery off County Mayo. Should this find prove commercial, construction of additional import capacity from Scotland would be deferred, the extent of deferral depending on the scale of the new field and on the demand scenario employed.
There are other exploration plays offshore Ireland, including the Shannon field due to be drilled by Enterprise this year. Should any of these prove successful, the potential for deferral of new import capacity is clearly enhanced.
As to the timetable for decisions, it would appear that the latest date for commitment to major capital spend would be. This is after allowing for BGEs decision to proceed with preliminary engineering studies. Thus funds are being spent on preliminary works on a possible interconnector now, but the project could be shelved if gas is discovered, or if there were reasons for a downward revision to demand forecasts.
If an import interconnector must be built, this section concludes that the UK1 option (a "twinning" of the existing line between Scotland and North County Dublin), appears to be the cheapest.
In Section 4, we consider proposals from British Gas/Keyspan, which dispute this conclusion arguing that a new link suppplying gas to the market of the Republic would be cheaper if routed through Northern Ireland.
The BG/Keyspan document seeks to demonstrate that bringing gas to Ireland via Northern Ireland is a better option than bringing it through a second interconnector from Scotland.
Their report is succinct, and lacks much of the detail contained in the Sofregaz report. This limits the degree of analysis that can be carried out.
However, a number of observations can be made:
The capital cost of BG/Keyspans preferred option is higher than that of the Scotland-Ireland interconnector. However, BG/Keyspans estimateof NPV indicated that, in contrast, their preferred option cost less in NPV terms. The extent to which the NPV was lower could be due to the postponement of expenditure or to BG/Keyspans aggregation of capital expenditure in five-year tranches. BG/Keyspan use a rate of 8 per cent, which is higher than that normally used in Ireland for projects of this type. At a discount rate of just below 6 per cent, the cost advantage of the BG/Keyspan option disappears, on the timing assumptions we have made.
The advantage of the BG/Keyspan option is not robust with respect to demand scenarios. In the high demand scenario, the Scotland-Ireland interconnector is cheaper. If we attach equal probabilities to the three scenarios examined, and calculate a weighted average NPV for the two routing options, then both options cost the same, using BG/Keyspan assumptions.
The differences between the NPVs of the various options, on BG/Keyspan assumptions, are in any event small for projects of this size, and are within the margin of error for an exercise such as this.
There are sources of difference between the BG/Keyspan and the BGE/Sofregaz study other than the discount rate used. Unit cost assumptions are slightly different but more important differences arise due to differing technical assumptions about gas flow rates and related matters.
Section 5 summarises and discusses a report prepared by Professor RWE Shannon and Dr. T. McManus, at the request of the Dept. of Public Enterprise in Dublin and the Dept. of Economic Development, Belfast.
The two departments were anxious to reconcile in so far as possible, the conflict between the Sofregaz recommendations and the proposals from BG/Keyspan. The two authors agreed a set of common assumptions concerning such matters as standard unit costs for capital works, demand levels and discount rate.
The authors then asked British Gas and Sofregaz to re-estimate the costs of the alternative supply options, using the common assumptions.
The results support the conclusions of the Sofregaz report, that the cheapest way to supply gas to Ireland from overseas is via a second interconnector from Scotland to Dublin, and compression on the Scotland-Northern Ireland interconnector.
However, there are two important assumptions underlying the analysis:
There is only one demand scenario Gas World B, and
There is no new indigenous gas find.
If gas demand is low, this would reduce the gap between the alternatives. A new gas discovery changes the picture even more, since the need for a new interconnector would be postponed, possibly by a considerable period of time.
Section 6 of our report reviews supply options, other than expanded interconnection capacity from Scotland. This includes domestic discoveries in particular the Enterprise field off County Mayo, mentioned earlier. It is concluded that, should this field prove commercial, it could be linked in to the grid in time to defer the need for interconnector capacity. There are other exploration activities which may eventually yield more gas supplies offshore Ireland, but we judge that they are not likely to happen soon enough to have any effect on immediate decisions regarding infrastructure provision.
This section also discusses briefly a proposal from Questar for a North-South pipeline, from Canatxx for a Wales-Dublin pipeline as well as options involving gas storage or winter only depletion of the Kinsale Head reservoirs. We conclude that the latter two possibilities are not promising.
The next section of our report deals with demand sensitivities. Pipelines must be constructed on a long view to cater for predicted levels of peak demand, and it is important to know how sensitive the capacity requirements are to upward or downward variations in the demand scenarios.
The IFI fertiliser plant in Cork is a major consumer of natural gas. We have felt it prudent to undertake a sensitivity analysis where this plant no longer consumes gas from the beginning of 2002. The calculations show that provided the Poolbeg power station continues on interruptible supplies, a cessation of gas demand at IFI would make a difference to interconnector timing.
The IFI issue is considered further in Section 8, which also discusses a range of gas policy issues.
If international, in particular EU, policy moves in the direction of higher energy taxes, this will tend to dampen demand levels. In Ireland, energy demand, and associated emissions, have been rising rapidly. Various measures would be needed to meet Irelands targets under the Kyoto protocol, and these could impact on gas demand. This impact could be negative, but could also be positive if, for example, powergen switched from more polluting fuels to gas.
This section also considers the risks of building capacity too early, for example by constructing an interconnector only to find domestic gas: or by waiting too long and facing capacity shortfalls. The section goes on to consider some issues of pricing for gas transportation and some regulatory issues. It is noted that the pattern of peak loads for gas and electricity historically have not been greatly affected by aggressive tariff policies designed to shave peaks.
This sections concludes with a consideration of the shadow cost which should be apportioned to grant funds from the EU, should any such be available for gas infrastructure projects.
Section 9 deals with the sensitivity of the calculations to the rate of discount used, while the final section contains our conclusions and recommendations.
To Section 2