The Gas 2025 Project Close Out Report and Review

M. O'Sullivan
Bord Gais Eireann

T. McManus
Dept. of Public Enterprise

Ireland's rapid economic growth which began in the late 80s and accelerated in 1994 has overtaken the gas demand forecast that underlay the design of the Scotland - Ireland Interconnector built in 1993. That pipeline was sized to deliver 17 MCM/day. According to forecasts made in 1991 this was seen to be adequate to meet all of Ireland's needs until 2015. By 1997 it was clear the demand for gas had been significantly underestimated. Advancing the installation of additional compressors on the Interconnector by up to ten years will enable most demands to be met until the winter of 2003 - 2004. Additional gas supplies must be made available by then. The consequences of failing to provide this gas are serious. Gas is vital to the energy needs of the growing Irish economy and shortages could lead to serious economic dislocation. It also makes a major contribution to enabling Ireland meet its obligations under a number of international environmental treaties and air pollution protocols.

2. The Gas 2025 Steering Group

To address this problem the Department of Public Enterprise and Bord Gais Eireann established a committee named the Gas 2025 Steering Group. The committee had its first meeting on 10 October, 1997. Three sub-committees were set up:

· A Demand Group, to update gas demand forecasts to 2025.

· A Technical Group, to identify and evaluate alternative gas supply options.

· A Finance Group, to examine the impact of the necessary investment on BGE and national economics.

Details of the Gas 2025 Steering Group membership and of the three sub-committees are set out in Appendix 1 together with its Terms of Reference. From 10 July 1988 the Steering Group included a representative from the Department of Economic Development in Northern Ireland as an observer. The Economic and Social Research Institute (ESRI) participated in the work of the Demand Group. The Technical Group employed a joint venture of French, British and Irish engineering consultants to assist it in its work.

The Demand Group engaged ESRI to assist it in developing its forecasts and estimates. ESB provided information on anticipated growth in the power generation sector. Four alternative economic growth scenarios were defined. These covered continued high growth rates (Gas World A) a recession (Battlefield) and a middle course (Conventional Wisdom). The impact on gas demand of high growth and the enforcement of the Kyoto greenhouse gas agreement was covered in the fourth scenario - Gas World B. Further details of these demand scenarios can be found in the report of DKM Economic Consultants.

The Demand Group submitted its report to the Steering Group in May 1998. (Document SG/009). The critical dates for providing additional gas supplies are given in the following table:

* Assuming Poolbeg steam generating plant is interruptible

To meet the anticipated gas demand in 2025 the following peak supplies would be required in addition to the volume provided by the existing Interconnector:

The basic conclusion of the Demand Group was that much more gas was needed and needed soon.

The Technical Group engaged a consortium led by the French consultants Sofregaz in joint venture with Penspen of the UK and M.C. O'Sullivan of Ireland to identify and evaluate the optimum means of providing Ireland with the extra gas it needed under each of the four demand scenarios considered. Sofregaz examined five alternative pipeline supply routes from the United Kingdom and France. LNG import terminals in Cork and the Shannon estuary were assessed. The contribution of using part of the Kinsale Field for gas storage was also evaluated. During the preliminary phase of this work and following inter-government talks with the U.K the scope of the consultancy was extended to include Northern Ireland's projected gas needs to 2025.

Sofregaz submitted their report to the Technical Group in September 1998 (reference: SG/017). Its main conclusions were:

· Existing supply infrastructure would be unable to meet peak demand by 2003 or even sooner.

· The storage option was ruled out because the valuations placed by Marathon and BGE on Kinsale storage differed widely. (No agreement could be reached between the parties and Kinsale was the only realistic storage possibility. Sofregaz examined the feasibility of gas storage in salt caverns near Larne but concluded that this facility was too far from the Dublin market to be of practical value).

· Future peak demands would therefore need to be met by imports, in the absence of further discoveries of indigenous gas.

· The most economic way of meeting these future demands was by interconnector pipeline rather than by importing liquid natural gas (LNG).

· For the two Gas World scenarios and for Conventional Wisdom the least costly solution was to duplicate the existing Scotland - Ireland interconnector and the on-shore Scottish pipelines serving both Ireland and Northern Ireland. The lower demands of the Battlefield scenario could be met by adding intermediate compression to the existing interconnector by way of an offshore platform or station located on the Isle of Man.

· In NPV terms and $(1998) the combined capital and operating costs of this least costly solution were:

A detailed appraisal of the initial Sofregaz report by Bord Gais Eireann and the Technical Group led to the identification of a number of new and modified gas supply scenarios. In particular :-

• A more detailed examination was needed of the impact of the investment phasing associated with the two supply options most favoured, namely the duplication of the existing interconnector and the supply route via Northern Ireland.
• The provision of gas to the west and to Galway should be evaluated.
• The impact on the timing of new infrastructural investment of continuing to supply gas to the Poolbeg power station on an interruptible basis.
• The effect on all of the foregoing of additional indigenous gas production from (a) the southwest lobe of the Kinsale Field, and (b) the Corrib Field.

The consultants reported their conclusions in June 1999. These were:

• Re-examination of the two main supply options narrowed the difference between them when demand build-up was slower but confirmed the direct supply route as more attractive than the Northern Ireland supply route.
• A ring built in stages north from Goat Island (south of Limerick) is the best option for supplying gas to the west of Ireland in the absence of a supply from the Corrib field. In this case a compressor station is required at Springhill (Co. Carlow) to maintain gas supply to the Cork area.
• Interruptibility of gas supplies to the Poolbeg steam plant at peak periods should continue until new supply infrastructure is in place.
• The additional gas from the southwest lobe of Kinsale has no material effect on the timing of future supply infrastructure.
• The impact of a commercial discovery at the Corrib Field depends on the size of the field, its rate of depletion and the gas demand scenario considered. A supply from Corrib of 4.8 mscmd (170 mmscfd) would permit a deferral of investment by one year under Gas World B (from 2004 to 2005) and by three years for Conventional Wisdom (from 2005 to 2008).
• A further positive result of commercial development of the Corrib Field would be to reduce the infrastructural costs of supplying gas to Galway and the west of Ireland and make the Galway ring option more viable.

During the course of the Technical Group's work in 1998, BGE received a submission from a joint venture comprising BG plc (the parent company of Transco - the owners of the UK gas pipeline network) and Keyspan (formerly Brooklyn Union - a major gas distribution company in the New York area).

In their proposal BG plc/Keyspan contended that a superior solution to meeting all-Ireland's gas needs could be found in duplicating the Scotland - Northern Ireland sub-sea pipeline and supplying all the additional gas needs of Ireland through a Belfast - Dublin interconnector. Sofregaz in their consultancy for the Technical Group had examined this possibility, but had ranked it third in order of cost after the preferred option (the duplication of the Scotland - Ireland interconnector) and the next best option (a sub-sea pipeline from North Wales). Efforts to resolve the conflicting results were made by BGE and Sofregaz in a number of meetings with BG plc during the second half of 1998. These were to no avail and both sides held strongly to their original conclusions.

The construction of a Belfast - Dublin interconnector which was the key element of the BG plc/ Keyspan proposal holds many attractions at a political level on both sides of the border. An all-Ireland approach to the provision of energy infrastructure for the whole island has much to commend it. A Belfast - Dublin interconnector would facilitate the development of gas markets in Northern Ireland outside the Belfast area. Furthermore, such a project could possibly attract EU funds in the context of EU support for the proposed Northern Ireland peace initiative. It was clearly important to make a further effort to resolve or at least quantify the cost differences between the two alternative 'optimum' solutions. This led to the joint report discussed in the following chapter.

At a meeting held in Belfast on 20 October 1998 between the Permanent Secretaries of the Department of Public Enterprise and the Department of Economic Development it was decided to appoint two experts to make an appraisal of the alternative schemes being proposed. The two experts appointed were Dr. T McManus, Chief Technical Adviser at the Department of Public Enterprise and Professor Ernest Shannon, former Technical Director at British Gas plc.

To ensure a realistic comparison of the supply options under consideration the approach adopted by the experts was first to agree a common set of assumptions and parameters to be used in the evaluations. A Data Book was prepared which provided information on such matters as:

· Existing pipelines

· Maximum and minimum permissible operating pressures in the various pipeline networks at gas off-take points

· Pipeline friction and efficiency

· Compressor projects currently underway

· Natural gas properties

· Projected gas demands in Northern Ireland and the Republic of Ireland from 1998 to 2025 (Annual and peak day demands)

· Projected diurnal variations in gas demand on peak days

· Unit costs for the construction and operation of pipelines in different environments and locations

· Unit costs for the installation and operation of compressor stations

· Costs of building new or expanding existing gas off-take and gas reception stations

· Financial assumptions concerning exchange rates and discount rates

Following a series of discussions with BG plc and Bord Gais Eireann the contents of the Data Book were agreed and issued to the two companies in January 1999. Both organisations agreed to independently optimise pipeline systems for each of three supply options on the basis of the information contained in the Data Book. Due to certain time and financial constraints it was only possible to consider a single gas demand scenario and the one selected was Gas World B.

The three supply options to be evaluated were:

BG plc and Sofregaz (working for Bord Gas Eireann) came to similar conclusions: Option 3 was cheapest and Option 1 the most costly. The NPV data for capital and operating costs in $(1998) million were:

It should be noted that the cost data given in this table do not include any allowance for investment in reinforcing the existing gas transmission network in Ireland and are therefore not strictly comparable with the Technical Group costs given earlier.

4.5 The Corrib Discovery

The 1992 review of licensing and fiscal terms by the then Department of Transport, Energy and Communications stimulated renewed interest in offshore exploration. In 1996 an exploration well in block 18/20 leased to Enterprise Oil discovered gas within the Corrib North structure, about 60 km due west from Erris Head, Co. Mayo. In the summer of 1998 an appraisal well tested gas at a rate of 63 million cubic feet per day. A second appraisal well was completed during July 1999 and a similar flow rate was reported in August (64 million cubic feet per day). There are three key questions in relation to Corrib and its possible role in mitigating the supply shortages anticipated in 2003 and 2004 in the event that no new import supply infrastructure is put in place. The three questions are:

· How much gas is in the Corrib field?

· How soon could it be brought ashore?

· At what flow rate can it be produced?

Accurate answers to those questions cannot be given at this time. Possible answers are hedged in ifs:

· If the second appraisal well 18/20 - 2 delivered as much gas as 18/20 -1, which it now has, it was estimated that the field could contain 1 trillion to 1.2 trillion cubic feet of gas - about two-thirds of the Kinsale field.

· If submarine tie-ins can be successfully engineered and the gas contains a minimum of hydrocarbon liquids (which would otherwise require floating gas processing facilities off-shore), then it would be technically feasible to bring the gas on-shore by late 2002 or during 2003.

· The rate at which gas can be drawn from a field depends on the number of production wells drilled, maintaining gas velocities within the field structure at levels which do not scour the containment rock, and building a large enough pipeline to bring the gas on-shore. A 1 trillion cubic foot reservoir could realistically deliver 250 million cubic feet per day over the first 5-6 years. Larger flows would be possible but would require more wells and a greater investment.

4.6 The Canatxx Project

In February 1999 Canatxx Ltd submitted a proposal to the Dept. of Public Enterprise to construct a 24-inch gas pipeline from North Wales to Co. Dublin. The pipeline would have a potential capacity of 200-250 million standard cubic feet per day. It is understood that negotiations between Canatxx and prospective gas suppliers, gas customers and financial partners are progressing, but that it could be six months before the Department of Public Enterprise will know for certain that the project is going ahead.

The initial appraisal of the first UK-Ireland gas interconnector project was contained in a feasibility study prepared in 1990 and in the subsequent grant submission to the EU Commission for assistance under the REGEN initiative. A further review and re-evaluation of this project was undertaken during 1998 in the light of actual developments in the gas industry since 1990 and the latest detailed sectoral forecasts prepared by the Gas 2025 Demand Group. The report (reference SG/012A) was submitted to the Gas 2025 steering group on 1st November 1998.

The report showed that :-

• the first interconnector project was completed under budget;

• the demand for gas is growing at twice the rate of that forecast in the feasibility study;

• due to the growing demand, the planned expenditure on compressor stations had been accelerated;

• the forecast overall returns to the State and to BGE are broadly in line with those originally forecast.

In 1998 the Department of Public Enterprise published a draft Directive covering access to, and the cost of, transport within the BGE transmission system. The Directive proposed a postalised system of pricing for the BGE system and published an indicative tariff based on forecasts at that time.

Bord Gais Eireann conducted an analysis, on behalf of the Finance Group, of the impact on the transmission system tariffs of the various demand scenarios and infrastructural solutions.

• The analysis showed that the lower NPV and cost solutions within each demand scenario produced the lower tariffs.
• The lowest NPV/cost infrastructure for a demand scenario produced broadly similar transmission tariffs irrespective of the demand scenario under consideration. This is because expenditure is matched to the growth in demand.
• The analysis also showed that the lowest NPV/cost solutions within each demand scenario produced tariffs which were within 5% of the published indicative Draft Directive tariffs.

In July 1999, the Department of Public Enterprise, in light of comments received on the draft Directive requested BGE to conduct a fundamental review of the form of the tariff. The outcome of the review will be assessed independently by the Department and the views of interested parties will be sought.

5.3 Impact on BGE's Financial Position

BGE, on behalf of the Finance Group, carried out an analysis of the impact of the various Gas 2025 expenditures on BGE's overall financial position with reference to its Corporate Plan.

The analysis showed that the construction of the new infrastructure would place high borrowing requirements on BGE in the short term (up to 5 - 7 years) under all demand scenarios. This investment would adversely affect interest cover and debt/equity ratios in the short term. In the event of demand being less than anticipated significant over-investment could arise, particularly if development addressed the higher demand scenarios. Therefore, the high demand scenarios expose BGE to more risk than the low demand scenarios.

Over the longer term, it is anticipated that BGE would return to a more secure position. Notwithstanding the adverse impact on its Balance Sheet in the short term, the analysis showed that BGE was able to fund the required infrastructure. BGE is considering alternative methods of financing its future capital investment in the network including Bank Borrowings, Public-Private Partnerships, Joint Ventures, Project Finance and EU Grants.

As 1998 gave way to 1999 the Department of Public Enterprise faced an increasingly complex situation concerning gas. Demand was increasing at a rate matching economic growth. Several power company consortia were looking for natural gas to fire the CCGT stations they each sought to build. At least two such stations were needed if electricity supplies were not be at risk by 2002 - 2003. Bord Gais Eireann were investing heavily in additional gas compression in Scotland to squeeze maximum capacity out of the Scotland - Ireland interconnector. The 'safe' solution being proposed was to build a second interconnector and to start the project soon. However BG plc were saying that Sofregaz while right about an interconnector were wrong about the route. Enterprise Oil were saying there was plenty of gas in Corrib and no need for a second interconnector. Dr. McManus and Professor Shannon were in deep technical discussions with BG plc and Bord Gais Eireann. An entrepreneurial company called Canatxx had submitted proposals to build a gas pipeline from North Wales to Dublin. Another company - Questar Corporation - was proposing a link into a Corrib pipeline, yet to be built, in order to supply markets in Northern Ireland. How was the Department to make sense of all this?

DKM Economic Consultants Ltd. had been appointed in October 1998 to undertake an independent economic evaluation of the three most favoured gas supply options and their impact on national economics. In order to evaluate the various policy options and identify a strategy of least regret the Department of Public Enterprise decided to extend the remit of DKM.

DKM Economic Consultants Ltd were asked to factor into their evaluation a number of "what if's?" These included:

· What if actual gas demands were higher or lower than those forecast in the Demand Group report? What impact would this have on investment? To what extent would we create stranded assets? To what extent would we make sub-optimal investments?

· What if Irish FertiIizer Industries (IFI) were to close in 2002? (The continuing depressed prices of fertilizer products made this unwelcome possibility a factor that had to be considered by DKM).

· What if we did get an EU grant for a Belfast - Dublin interconnector? How should this influence our decision making?

· What if we used discount rates lower than the 7% to 8% rates that had been employed in all the studies (Sofregaz, BG plc/Keyspan, McManus/Shannon) ? What would a lower discount rate do to the relative merits of the alternative gas supply options?

· What if the Corrib field proves commercial? Here DKM had to assess the impact of a commercial gas find in the Corrib field. How would the size of such a find and the speed with which it could be brought on-shore affect the timing or indeed the need for a decision on additional gas supply infrastructure?

· Finally, and critically, DKM were to advise the Department of Public Enterprise on the best policy decisions to be made at this time in our present state of knowledge.

Dealing briefly with DKM's assessment of each of the above questions provides a broad-brush summary of some of the main conclusions of the report.

Changing the forecast gas demands downwards in the case of Gas World B has little effect on the year by when more gas must be provided. A 25% reduction in the Gas World B demand is required before the critical date for new gas moves back one year from 1 January 2004 to 1 January 2005. In the case of the Conventional Wisdom scenario a 27% reduction in gas demand must occur before one can defer the requirement for new capacity by one year from 1 January 2005 to 1 January 2006.

The hypothetical closure of IFI on 1 January 2002 has no effect on the timing of new capacity unless the Poolbeg power station can be kept firing on fuel oil beyond 1 January 2004. Only by keeping the gas supply to Poolbeg interruptible is it possible for the existing infrastructure to meet peak gas demands in 2002 and 2003. If Poolbeg can continue to be supplied with gas on an interruptible basis beyond January 2004 then the provision of new gas supply capacity can be deferred by one year (to 2005 for Gas World B and to 2006 for Conventional Wisdom) in the event of an IFI closure.

Concerning the question of EU funds, DKM considered that in the light of the procedures actually used to allocate EU funds in Member States, it appeared that such funds were rarely offered on the basis that a specific project should be undertaken. Otherwise the funds would not be available at all. If this is the case DKM considered that economic comparisons of alternative gas interconnectors should ignore EU funds availability.

The test discount rate used by the Department of Finance is 5 percent for non-commercial projects. This compares with the discount rates used in the reports and proposals considered by DKM, where Bord Gais Eireann and Sofregaz used 7 percent, McManus/Shannon used 7½ percent and BG plc/Keyspan 8 percent. DKM therefore investigated the sensitivity of the various gas supply options to changes in the discount rates used.

In the analyses undertaken by Sofregaz and McManus/Shannon, changing the discount rates down to 5 percent and up to 8 percent had no effect on the ranking of the interconnector options. Separate supplies to Ireland and Northern Ireland without a Belfast - Dublin pipeline remained the most economic option, and of the options involving the construction of a Belfast - Dublin pipeline the one where the existing Scotland - Ireland interconnector was duplicated remained the better. However an examination of the BG plc/Keyspan proposal indicated it was more sensitive to the discount rate employed. A reduction in the discount rate from 8% to just below 6% was enough to favour the second Scotland - Ireland interconnector option over the Northern supply route favoured by BG plc/Keyspan.

DKM undertook a risk analysis to quantify the potential costs of making the 'wrong' decision concerning the Corrib field. Put simply the situation is that if there are no commercial discoveries of domestic off-shore gas then we must have additional supply infrastructure in place by 1 January 2004 (Gas World B scenario) or by 1 January 2005 (Conventional Wisdom scenario). However if we build this infrastructure and then discover gas we have an under-utilised investment and a potential for stranded assets.

DKM identified two decision strategies 'GO' and 'WAIT'. Under GO the infrastructure is built and if gas is found there is a cost arising from premature investment. Where no gas is found then GO is the best decision. Under the WAIT strategy investment in new supply infrastructure is deferred and if no gas is found then extra costs are incurred arising from the generation of electricity from more expensive fuels or having insufficient gas or electricity to meet customer's demands. If gas is found in commercial quantities then the WAIT strategy is the correct one.

The DKM analysis suggests that a GO strategy is more likely to be correct where:

· real discount rates are low and there is therefore a smaller cost penalty of spending capex early.

· the costs of switching power generating plant to gas oil are high.

· there is a low probability of a commercial gas find.

The reverse must be true for the WAIT strategy to be preferable.

DKM concluded that in the absence of a commercial gas find the supply option which most economically meets future gas needs in Ireland and Northern Ireland is the one that expands capacity on existing alignments and does not require a Belfast - Dublin interconnector. However, DKM's main recommendation is that any decision concerning major capital investment in import pipelines be delayed pending clarification of the position concerning the Enterprise gas discovery. Meanwhile it is prudent for Bord Gais Eireann to continue their work on the preliminary engineering of new gas supply infrastructure even though some of this expenditure may come to be written off in due course. DKM also recommend that Bord Gais Eireann make the maximum effort to identify and negotiate all opportunities to reduce the peak-time demand for gas.

The DKM report is available on the Department of Public Enterprise website at: http://www.irlgov.ie/tec/energy/gasdemand.htm

The Gas 2025 Project has identified feasible supply options for meeting Ireland's future gas needs both in the short and long term. BGE is preparing a Gas Plan which will set out its proposed approach to the development of the transmission network both onshore Ireland and offshore. This, together with analysis of the impact on tariffs and a funding plan, will be submitted to the Minister for Public Enterprise. The impact of a commercial gas discovery in the Corrib Field affects only the timing and phasing of the necessary additional gas import infrastructure. The effect of the construction of additional pipelines supplying Ireland by BGplc/Keyspan, Canatxx or any other party, would impact the timing and the design capacity of BGE's planned infrastructure but would not eliminate its need. In the absence of commercial development of the Corrib Field or of the construction by third parties of new supply pipelines, additional gas import infrastructure must be in place and operational by the winter of 2003 - 2004 under either of the GasWorld demand scenarios. It is therefore prudent that Bord Gais Eireann's Gas Plan will take account of these factors. However, by the autumn of 2000 when decisions would have to be made which would commit BGE to the heavy capital expenditures associated with new import pipelines, the positions concerning Corrib and Canatxx should be much clearer. The optimum course of action at this stage is for Bord Gais Eireann to progress the less costly preliminary engineering stages of the realistic alternative supply options and maintain its management dynamic to take decisions in its own best interest while monitoring developments outside its immediate control.

At this time BGE have appointed consultants to undertake these preliminary studies. The assignment covers preliminary engineering, routing and initial environmental assessment of :-

• A second Scotland - Ireland interconnector

• A Northern Ireland - Dublin interconnector

• Piping gas to and from the west of Ireland

• Reinforcing the existing gas transmission network within Ireland.

An application for EU funding has been made in respect of the preliminary engineering of the two alternative interconnector projects.

BGE, in consultation with the Department of Public Enterprise has issued a document called Gas 2025 - Review of Natural Gas Requirements for the purpose of advising interested parties of the projected natural gas demand to the year 2025 and the proposals of BGE to cater for this demand. BGE has sought public comment on these proposals. This document is available from Bord Gais Eireann's Cork office.

The scope of the study is to project Irish natural gas usage to 2025 and determine the optimal long-term transmission infrastructure necessary to meet these projections.

The study will consist of a number of elements:

 Evaluate the existing Interconnector facilities

 Identify the relevant natural gas sales volumes applicable over the selected timespan and develop 3/4 scenarios (low to high) describing Irish (North/South) gas market demands over the study period.

 Determine the transmission system reinforcement required for each market scenario developed. Key options include:

- Reinforcement to Interconnector

- New Interconnector: UK or France

- LNG (Imports or Peak Shaving Plant built on existing pipeline network)

- Northern Ireland line (with and without compression)

- Irish transmission system reinforcement (Dublin-Cork, Galway-Shannon, Other)

- Underground Storage (Marathon or other)

- Further indigenous supplies

As well as establishing the necessary pipeline infrastructure required, the study will also need to evaluate the security of supply implications for the gas network and possible security implications for downstream customers for each scenario examined.

Determine the transportation tariffs applicable under each scenario above.

Carry out economic and financial analysis associated with each scenario with respect to its impact on

(a) BGE
(b) Ireland inc.

 Identify/Research possible EU funding for any projects which might be initiated.

(a) Study
(b) Infrastructure

Arising from the above, the study should recommend a strategy for consideration by the Board of BGE and by the Minister.

Appendix 2 Steering Group Documents