China and shale gas

Hidden among the reports of the recent China/US talks about energy, where some would look for conflict, were two important messages.  Number one, which we have been saying for a long, long time:  China doesn't want to be as good as "developed" nations.  It wants to be better:

Secretary of State Hillary Clinton announced that the two nations — the world's largest producers and consumers of energy — agreed to "enhance cooperation on climate change, energy and the environment." China helped move the process forward by explaining what it was willing to consider and what investments it already was making in clean energy, "which I'm not sure is as fully appreciated in our country as it needs to be," she said.

Talking about what is not as fully appreciated in our country as it needs to be, in this case shale gas and the UK/Europe, one area where China is looking at could have a massive impact.  But for that you have to go to the official China news agency Xinhua:

Gu Jun, an official at the National Energy Administration (NEA),told a press conference at the China-U.S. strategic and economic dialogue that the two sides have held in-depth discussion on the clean energy cooperation and energy security.

    "Both sides are of the opinion that, as major energy producers and consumers, China and the United States need to ensure the stable and reliable supply of energy, avoid drastic fluctuation of the oil price and oil price hikes," she told the reporters.

    The two countries have the common need to safeguard the world energy security and have lots of complementarities in energy cooperation, Gu said.

    "There is bright future for cooperation in the areas of new and renewable energy, smart grid, shale gas, coal bed methane, clean use of coal and advanced nuclear energy. "

We've almost given up on getting the UK Mainstream Media to do shale gas stories, they much prefer to simply rewrite switching site press releases, where they don't print them verbatim and unchallenged anyway.  If it bleeds, it leads as they say, or in energy the only story they ever want to print is high prices, shortages and foreigners stealing our gas.

But shale plays in China would be massive. The world LNG industry  losing one of it's key markets would certainly mean lights out for a lot of people. But definitely not for consumers.

Risk Taking. And Risk Giving.

As we get to the end of July, we suddenly see the UK gas market trying a dead cat bounce.  It isn't anything to really worry about, but it does seem a bit odd that as storage hits 94% , LNG tankers are literally lining up to off-load and the demand is consistently low that prices are rising. 

Our theory is connected with the UK singularity of fixing energy prices long term.  This started back in the early days of competition.  The host REC and British Gas were constrained by having to offer tariff prices, that were the same to all levels of business user.  This provided a target for new suppliers to aim at.  A long term, or at least a one year prices allowed end users the comfort of guaranteed savings.  It also made those who knew nothing about energy prices to make simplistic evaluations of complex systems.  And prices kept coming down, so who cared? 

After 2002, prices started going the other way, and every year prices seemed to go up. At this time energy consultants, that other UK singularity, had a problem: retail competition on any given day provided as much variability as petrol prices.

The solution was the invention of "ENERGY RISK".  Mention risk to some people and they open up their wallets- these are the bozos who pay £6 to insure a £9 toaster.

Our (and definition of energy risk is that it's a cure more dangerous than the disease.  Last year's fixed prices ended up being almost 80% higher than index in some months, but even before then the worst case scenario would have been that the index and fixed were roughly equal.  In fact most people would have come out ahead even then since consultant fees can eat up 3 to 10% of the fixed price.

The reality is that UK energy users lose far more avoiding risk than they spend suffering it's consequences. Which is why energy prices are shooting up right now. The fixers are fixing the cost of winter gas to avoid the risk of paying more for it.  Not unsurprisingly, price reflects demand. If people didn't buy it until they used it, the price wouldn't go up. 

We're not saying that energy fixes are wrong.  Merely pointless.

Can Energy Charges encourage Energy Efficiency?

We sure think so, no surprise there, considering is our other business, where our only product is market match pricing.  We think AMR plus market rates are the way to go for 95% of energy users, and we think dynamic pricing of various structures is tomorrow's solution today.

But the big surprise is where the above titled thought provoking and sensible document comes from.  Not descriptions we usually apply to Ofgem.

The paper is meant to prompt debate and is interesting for looking for answers in the pre-Smart Metering world. Too bad they didn't think of that ten years ago, but we're thankful all the same.

Well worth reading.

How to counteract falling demand

Iberdrola are not only dominant in the Spanish market but also elsewhere and have been hit by a worldwide fall in demand.

Iberdrola noted weakness across all its main markets, which include Spain, the UK, the US and Latin America. However, the decline was marked in the domestic market, where wholesale market prices plunged 32 per cent year-on-year, and electricity demand dropped 6.4 per cent – "the steepest fall in 40 years", according to the company.

This sounds catastrophic stuff for Iberdrola shareholders. Luckily at  the UK "regulated" business Scottish Power sales are down but profits are up:

Iberdrola was hit by the recession in Spain, which resulted in a 6.4% drop in electricity demand, the steepest fall in 40 years. This translated into a 32% fall in wholesale power prices. Core earnings from regulated and unregulated activities in Spain fell from 1.24bn in the first half of 2008 to 1.226bn.

Imagine if the pound hadn't been so weak against the Euro!
Another UK supplier SSE has also pulled off the trick of producing higher profits in a falling market.

UK utility Scottish and Southern Energy expects to achieve moderate
profit growth for the 2009-2010 fiscal year despite distributing 5% less
electricity in the three months to June 30, it said Thursday.

SSE said that adjusted profit before tax for the six months to September
30 is expected to be "significantly higher" than a year earlier. The group
said profit for the period will revert to a more normal proportion of
full-year profit from the low level seen in fiscal 2008-2009.

This is some trick, even better than Iberdrola.  How does that work?

 "SSE's strategy of operating and investing in a balanced range of
regulated and non-regulated energy businesses supports our fundamental
commitment to delivering year-on-year real growth in the dividend," said SSE
chief executive Ian Marchant.

Which regulated market is that then? The one overseen by Ofgem which enable suppliers to hike up prices on the wholesale rise and fuhgedaboutit on the downside.

Russia feels shale’s impact.

Ironic that most UK gas pros don't even know about shale gas' impact on not only US but also UK prices, while a couple of thousand miles to the East, the big bad bear who is threatening our way of British life, seems more aware of shale as a threat to themselves, and far more clued in than we are.

Gazprom also said it may push back the development timeline for gas deliveries from the offshore Arctic Shtokman project because of falling demand.

“This timeline may be revised accordingly to reflect natural gas market conditions,” Gazprom said in a bond prospectus.

Shtokman Development is scheduled to make a final investment decision in March 2010 on plans beginning with pipeline deliveries in 2013. The venture plans to begin liquefied natural gas deliveries of as much as 7.5 million tons the next year, the prospectus said.

“Relatively inexpensive shale gas has significantly reduced the U.S. demand for LNG,” Mikhail Korchemkin, executive director with East European Gas Analysis, said Tuesday. “Shtokman is aimed to get a piece of the U.S. market, but there is no free space in it.

So if Europe is at the mercy of Russia cutting off our gas, how does Gazprom cutting off gas exports because there is a worldwide LNG glut fit in?

Foreign influences: The Two Gs

It sometimes seems to us that xenophobia runs rampant among UK energy "experts".  It's never the UK's fault for high prices, or to be exact the perception of high prices as prices themselves have been going south all year.

The DECC says imports come from some "dangerous places", to which we way: Norway for example?  Or did you mean Trinidad?  We've cheekily pointed that a big LNG exporter is Qatar, and as Kensington and Chelsea Planning Department knows only too well, the Qataris have a track record of interference in internal affairs, even if the Prince of Wales put them up to it. Will we be at similar risk of International Royal Wrath in energy supplies?

The EU is another favourite target, as always. We blame European monopolies for high UK energy prices, although we then turn around and sell things like nuclear assets and most of the retail market to them. A very positive, and we hasten to add, only reason to support UKIP  might  be that if we left the EU, we might actually start considering how much we are responsible for our own destiny. Mustn't grumble, it's far more good traditional British (English) fun to blame foreigners.

Of course, it's the big bad bear we must really fear. They are the ones who have us at their mercy of cutting off gas supplies.  Considering the entire track record of Cold War hysteria was later proved to be totally groundless, it amazes us that otherwise rational people still believe this one during an era where the Russians have about as much reason to disrupt  UK national interests as the Isle of Wight does.

But what is the bottom line on  prices?  Who does the most damage?  For example during January there was minor flare up of the old Russian issue, although as we note often, no one thinks the Ukrainians are blackmailing the EU by not paying their Russian gas bills. The impact on prices? Not that bad actually. On January 14 at the peak of the 2009 brouhaha, one year gas from October shot up by 2.68 % in one day.

But yesterday, on a day much unlike any other lately, i.e. good supply, low demand, no news and storage getting even closer to 100%, the same period shot up by 4.34 %.

Foreign intervention again?

Yes, but  it was the other G.

U.K. natural gas prices gained as Goldman Sachs Group Inc. said prices had reached “target levels” and were unlikely to continue falling.

UK energy consumers can rest easy, knowing that vital national interests are always protected from foreign foes.  Unless they are US investment banks of course!

The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

European Gas takes an unconventional turn

Why should UK and European energy buyers, i.e. all of us, read only catstrophic stories about energy in our press, leaving the US press to report on what's going on in our own back yard?

WSJ piece today tells NHO readers nothing very new, but it would be much more important if we'd see a piece in the UK press about unconventional gas instead of the usual shortage rubbish. 

Energy companies operating in Europe are turning to more unorthodox sources of natural gas to get around maturing gas fields and the European Union's worries about its dependence on Russian fuel

In recent years Europe has made up for its maturing natural gas fields by tapping pipelines from Russia and Norway, and is also now looking to the Middle East and North Africa. But a series of spats between Russia and Ukraine that curtailed gas flow to Europe has reinvigorated the search for more secure sources of the fuel.

"All the European utilities are interested in indigenous gas supplies," said Christopher Wheaton, manager of Allianz RCM Energy Fund. "With technology, the application of cash, brute force and the best ingenuity, we've the potential to unlock a previously unusable resource."

Allow us to point out here:  The application of cash to nuclear plants, CCS, pipelines to nowhere and LNG imports may not be too much different, that is we always will have to pay one way or the other. 

How about paying for something a bit closer to home and on technology that is tried and tested in North America?

Exxon MobilCorp. is now exporting expertise and technology it developed in North America to gas markets in Europe. In Germany, for example, drilling and testing activity on licenses covering 1.3 million acres of the Lower Saxony Basin started in 2008.

This report not only highlights are old friend shale, but Coal Bed Methane as well.

A recent report by energy consultancy Wood Mackenzie said production of CBM in the U.K. is commercially feasible at the current gas price as well as under longer-term projections. The report estimated there could be as much as four trillion cubic feet of gas available in the Cheshire Basin, at the heart of the U.K. gas market.

Now that there are some people, apart from us, coming out about this maybe we can see  UK journos acting as reporters on energy as opposed to stenographers to either the sky is falling and lights are going out disastrist school  (the alleged "quality" press), or simply cut and paste jobs on the PR releases of energy switch site "experts" as the more mass market (and BBC) do. But let's not hold our breath. Switch sites make the papers a fortune both from advertising and web links.  Any time there is  an energy story, up pops the link to "best energy deal".   And the BBC must simply be just more harassed than they used to be when they had a few hundred or so more reporters.


Game changers

Having given up on energy information providers in the UK a while back,we have often looked at the experts in Wall Street, Houston and Calgary.

But lets not forget another expertise centre, Abu Dhabi, where unlike the UK, they recognise game changers instead of trying to protect the game itself:

Game changer one, oil sands.

  • Two Stealth advances have also transformed the gas transportation business, and now Qatar, one of the smaller Gulf states, is becoming one of the world’s leading exporters of hydrocarbons, mostly in the form of liquefied natural gas (LNG). By the end of next year, it will be capable of exporting the equivalent of 5 million barrels per day of oil, making it the Gulf’s second-biggest combined oil and gas producer after Saudi Arabia.

Transoceanic gas shipments began in 1959, but it is only recently that the LNG industry has shown signs of fulfilling its promise of making gas a globally traded commodity, carrying gas that was previously stranded to market.

And three, no surprise to our readers, fall off the chair time for the average Brit:

In a third example of game-changing technical advances, US government energy analysts found early last year that gas production in the world’s biggest energy consumer had unexpectedly jumped. Why? Because improvements in directional drilling and a technique called hydraulic fracturing had unlocked vast underground stores of shale gas that were previously too costly to produce.

As a result, North America may never need to import gas, unless it chose to because the supply on offer was especially cheap or convenient.

And in an aside to the old timers in the UK:

Such quiet revolutions are energy producers’ best response to the “peak oil” alarmists who predict an imminent, irreversible decline in global oil and gas production.

Gas cheaper than coal?

We pointed this out in the US a couple of months ago and people didn't believe us.

But now, it could happen here say Bloomberg today (sorry no link available yet)

At these prices, the most efficient gas plants will displace coal stations, said Evolution Securities Ltd.’s Lakis Athanasiou.

    “Gas is almost in the position of taking coal out for the entire winter,” said Athanasiou, a London-based utilities analyst. “A wall of liquefied natural gas” coming to the causing fuel prices to drop and making it more economic than dirtier-burning coal, he said.


Another history breaking moment:  For the first time ever,  Summer 2010 gas is cheaper than Winter 2010 gas!


Too bad Centrica shows no sign of reducing it's 35% price increase of late July 08, despite a 60% drop in winter 2009 gas. That would be almost historic too.