The key words here,apart from cheaper, is suddenly abundant.
The concept of an energy glut has caught most people by surprise, although not anyone who read our posts last August, when UK gas was £1 a therm.Of those who didn't, many SME users often got talked into three year deals by suppliers such as British Gas or npower or their TPI. This was based on an inaccurate representation of risk: a concentration on the consequences of energy shortages, not the likelihood. An energy shortage has been axiomatic to some people and the businesses they have founded on a scarce energy model. But reality, in the form of the marketplace has a habit of intruding sooner or later.
Three different groups have a vested interest in searching so hard for gas shortages that they inevitably found them:
- Peak Oilers. The Peak Oil crowd are still around, and they at least have some utility, in that oil can still possibly be said to have passed it's peak of production. The interesting thing about Peak Oil analysis is that it invariably included the nuclear lobby as solution to all our problems. We must admit here that unlike the next group, we don't have an issue with nuclear (it is 80% of French and Japanese generation), but wonder on the cost and have concerns about waste. What worries us is how expensive it is. We think that each nuclear plant's investment would more likely be better spent on efficiency savings first. That would solve the problem sooner and cheaper while providing many more jobs. In the unlikely event that doesn't work, we have no problem with nuclear fission, while hoping for fusion. Peak Oilers don't really care if you go short or long, they want you to go nuke.
- The next group with an interest in talking up shortage are environmentalists. Again, some of our best friends are environmentalists and we think that on cost levels alone, green should be encouraged. But pretending that all carbon fuels are wrong, or running out, or both, is wrong headed.
- TPIs have the biggest financial vested interest in promoting a shortage view of UK energy. Firstly, any idea of "foreigners" having the UK at their mercy is xenophobic nonsense. Secondly, in a multi-polar world, the UK is not going to be short of gas. Thirdly, if there is no energy shortage, long term prices provide sub optimal outcomes. Anyone who goes for them runs a very, very big risk: They'll pay more.
The issue really is what the price of gas will be, not whether it's around or not. But if there is much more gas available than conceived even five years ago, prices will inevitably go down. Back to the NY Times story on abundant gas:
The decline in crude oil prices gets all the headlines, but the first globalized natural gas glut in history is driving an even more drastic collapse in the cost of gas that cooks food, heats homes and runs factories in the United States and many other countries.
Natural gas is becoming a world commodity like oil. It is still loosely connected to world oil benchmark prices and its price, usually set by longer-term contracts everywhere except for the United States and Britain, can diverge widely from one continent to another. Until the last few years, liquefied natural gas was a high-priced necessity for countries that did not produce their own gas supplies or have access to piped reserves; but it now has become a cheap economic driver for countries like Japan with few energy resources.
Of course in Britain, according to Ofgem, gas companies buy gas years in advance, which explains domestics pay so much for it.
But as more terminals have been built, the amount of gas that is shipped from one continent to another in giant tankers has climbed. And now the emergence of the global market in gas is about to take a giant leap.
The global capacity for liquefied natural gas exports of 200 million tons a year will increase by 25 percent with the completion of six new plants in Qatar, Russia, Indonesia and Yemen, totaling $48 billion in investments, and the upgrading of a seventh plant in Malaysia. National energy companies in those countries, assisted by ExxonMobil, Total, BP and Shell, rushed construction of those projects in recent years to satisfy the mushrooming appetite for energy around the world. More large plants are due on line in 2010 and 2011.
So on LNG alone, the best is yet to come. And this is without the NYT mentioning the game changing impact of shale gas, the main driver pushing the increase in US gas production which now depresses prices even in areas where shale gas is not yet produced. But why should the US still be importing gas? Basically because they have massive storage capacity, combined with the flexible option of shutting in oil and gas production if prices get too low.
The UK may have low gas storage compared to France and Germany, but a) Japan and Korea have far less and b) with production in the North Sea storage is not as urgent a need. France and Germany produce, little or almost no, gas. That is why they need more storage. With UK production on it's doorstep, the value of storage is reduced. It's like a dairy farmer buying all the milk at Tesco. And if we have natural gas discoveries continuing offshore in the North Sea or West of Shetland or off Ireland (Corrib) combined with increased LNG from every corner of the globe, which then meets shale gas production from southern England, and all over Europe: then we have plenty of gas for decades to come. Which means: short, not long.