New report: Gas security: The foundation of energy security

Today I have published a new report on the gas markets: Gas security: The foundation of energy security. In it I call for Britain to increase its domestic gas production, reduce its reliance on imported electricity and fundamentally rethink the way it plans for energy security. UK energy policy has long been undermined by a poor understanding of how gas markets actually work, leading to all sorts of false beliefs that result in very poor policy decisions.

My report makes six key recommendations:

Fix the broken understanding of how the gas market works. Policymakers should recognise that British gas production is not sold on global markets at a global price. The GB gas market uses marginal pricing and additional domestic production displaces more expensive LNG imports, thereby reducing British gas prices. The report argues that claims that additional UK production cannot affect domestic prices are simply wrong.

Increase UK Continental Shelf gas production. Domestic gas should be preferred to imports wherever possible. UKCS gas is both cheaper and cleaner than imported LNG and provides a secure source of supply directly connected to the British gas network.

Reduce reliance on electricity imports. Britain is increasingly depending on electricity imports during periods of low domestic renewable generation. However, highly correlated weather patterns mean low wind generation in Britain can coincide with shortages elsewhere. The report warns that Norway and France cannot be assumed to provide unlimited electricity to their neighbours during periods of stress.

Model gas and electricity security together. The gas grid transports far more energy than the electricity network. Electrifying heating will take decades while gas-fired generation will remain critical to electricity security for years to come. The report argues that planning should recognise the interdependencies of gas and electricity to a greater extent.

Focus on cheap energy. Rapidly rising network costs are overtaking fuel costs as the main driver of energy bills. The report calls for tighter control of network expenditure and for the suspension of the Connect & Manage regime, arguing that consumers should not be required to fund expensive infrastructure whose output is frequently constrained or wasted.

Treat energy security as national security. The government should subject energy policy to an explicit national-security test, prioritising resilience, diversity of supply, sufficient domestic energy capacity and the preservation of strategically important industrial capability alongside affordability and sustainability.

Policymakers must correct their misunderstandings about gas markets

British gas is not sold on some mythical global gas market at a global price. Gas markets are regional and constrained by physical infrastructure which means that price arbitrages persist because the infrastructure to move the volume of gas needed to equalise prices does not exist. North Sea gas is the cheapest source of gas available to Britain, and as almost all of it has nowhere else to go except the British gas grid, it lowers the cost of gas and therefore also of electricity.

Why? Because just like the British electricity market – and every other freely traded commodities market in the world – the British gas market uses marginal pricing. A bizarre myth has been allowed to develop whereby policymakers assume marginal pricing is a weird quirk of the UK electricity market. It is not. It is the default method of price formation in commodities markets absent state intervention.

So if the UK increases its production of cheap domestic gas, that gas enters the British gas grid and displaces more expensive LNG imports. The most expensive cargoes are displaced first, so as UKCS production increases, progressively cheaper LNG cargoes become marginal, lowering the British gas price.

The Jackdaw field is large enough to fully displace price-setting LNG for between two and four months of the year, which would have a meaningful impact on summer gas prices. (Some LNG may still be delivered, to meet contractual obligations or for operational reasons such as terminal cooling, but these would not be price-setting.)

Once this marginal pricing mechanism is understood, the case for maximising domestic production becomes obvious. North Sea gas is not only cheaper than imported LNG, it is also cleaner, so preferring it is a no-brainer for anyone not completely brain-washed by Just Stop Oil zealots. UKCS gas is also more secure than imported gas – it is directly connected to the National Transmission System (“NTS”), and, unlike an LNG cargo, it cannot just sail away when a buyer elsewhere in the world offers more money.

Declining UKCS production only makes Britain more dependent on imported gas – as I explain in the report, the UK is going to need gas for decades still. Even in the domestic heating sector, the only one with a firm electrification target, it will take decades to displace boilers with heat-pumps even if the target installation rate was met (which so far it isn’t).

Accelerating the decline of domestic gas production while domestic demand remains strong increases Britain’s energy-security risks while failing to deliver climate benefits due to the higher carbon footprint of imported LNG. A lose-lose position.

Gas prices are not global

Another myth is that the UK suffers from high energy prices because it is forced to pay expensive “international” prices for gas. In a recent LBC interview, Energy Secretary Miatta Fahnbulleh literally said “the reason why our energy bills are much higher than in other countries is because those costs are being driven by global fossil fuel markets”, failing to notice the lack of logic – surely everyone pays the same price if they are “global” so why would this make UK energy prices higher than in those other countries?

The truth is that there isn’t even a single European gas price, never mind a global gas price. How do we know this? Well, not only can we look at actual marker prices, we can also look at flows on the pipelines between GB and the EU. Gas flows from the cheaper market to the more expensive one. Historically, GB exported to Europe in the summer and imported in the winter, treating the Continent as a synthetic storage facility.

But since the summer of 2021 GB has imported almost no gas from the EU – the pipelines have been almost exclusively in export mode. While winter exports have been modest, summer exports have been high. The reason is that the cost structure of European gas changed with the loss of cheap Russian piped gas making it more expensive than NBP almost all of the time (and when it isn’t the premium has been too low to offset the transportation cost).

Market flows tell us that the UK has a strategic cost advantage given its domestic gas production, yet the Government seems determined not only to ignore this fact but to waste the benefits that the basin still has to offer.

The UKCS is not on its last legs – or it doesn’t need to be

UKCS production was 332 TWh in 2025, just a quarter of the 2000 level. In 2019, the then-Oil and Gas Authority projected that 6.5 billion barrels of oil equivalent could be recovered from the UKCS between 2025 and 2050, with a near-term challenge of reaching 1.3 million boe/d of production by 2030. NSTA’s current position puts total 2025-2050 recovery at just 3.8 billion boe, a fall of more than 40% from the 2019 figure, with the 2030 production target now more than halved, to 0.6 million boe/d. Every intervening revision has pointed the same way – downwards, driven by a hostile fiscal regime and a ban on new exploration drilling.

These forecasts are often used as “proof” that the UK’s gas resources are rapidly declining and that approving new production is largely futile. But this is to misunderstand what lies behind these forecasts – they are not a representation of total available gas, but a forecast of economically recoverable gas. If policy changes restrict drilling and make production less profitable, the amount of economically recoverable gas will fall regardless of the actual volume of gas reserves.

OEUK believes that recovery under a supportive fiscal and licensing regime could reach 7.5 billion boe, almost double the NSTA’s current projection, while under continued deterioration in investor sentiment it could fall as low as 2.6 billion boe. The equivalent range expressed in gas volumes specifically, rather than combined oil and gas, is comparably wide: OEUK’s modelling puts the NSTA’s November 2025 gas production projection for 2025-2035 at 176 bcm, against an OEUK “upside potential” of 288 bcm for the same period, rising to a cumulative 2025-2050 gap of 226 bcm (NSTA) against 456 bcm (OEUK upside).

It is clear from this analysis that under a less restrictive fiscal and regulatory regime far more gas could be recovered from the UKCS. Indeed, in the past year Norway has made material discoveries adjacent to the UKCS, some of which may well extend into our side of the median line – except our ban on drilling prevents us from verifying this. We are deliberately choosing not to explore the potential of the UKCS and then using the difficult economic environment created by the Government as “proof” the UKCS is in terminal decline and no longer worth bothering with.

This is both dishonest and stupid.

Gas security is fundamental to energy security and national security

If we are going to need gas for decades to come, policy should focus on making sure we have access to affordable and reliable gas supplies. Yet policy is tilted towards a gas-free world policymakers dream of, rather than the real world where gas will be integral for many more years.

There is some recognition that if gas is treated as a dying market the investment needed to ensure security will not materialise, leading the Government to explore support mechanisms for storage or floating regas terminals. But the Government’s consultation on this misses key market developments such as the structural change in the relationship between British and European gas prices described above.

Gas security is impossible to separate from energy security. It’s not a subordinate or transitional concern to be addressed once the “more pressing” work of decarbonisation is complete. And energy security cannot be separated from national security. A country which is unable to reliably power and heat itself, maintain essential services or sustain its industrial base is inherently vulnerable. Every major energy-policy decision should be subjected to a national-security test.

The objective of energy policy should be to provide consumers with secure, affordable energy. Instead, we risk asking them to pay increasingly high costs for a system which is less resilient and increasingly dependent on other countries being willing and able to export energy to us.

Gas is not going away because policymakers would like it to. We need to plan for the energy system Britain will actually have, rather than the one we might hope to have. Britain needs an integrated energy-security strategy which recognises the continuing importance of gas, maximises economically viable domestic production, reduces dependence on electricity imports and puts affordability and resilience at the centre of energy policy.

Anything less is irresponsible.