What’s happening in UK LNG imports. And what’s not

A key part of the energy bull story is how UK energy security is threatened by the UK in competition on world markets for gas. The spiel is that UK will have to pay any price just to keep the lights on, so why don't you buy next year right now.

A key part of that narrative, used to create the scar(e)city story, is surging Asian demand meeting the UK in competition for scarce gas on world markets. According to that theory, expensive, scarce and volatile gas, make CCS and nuclear generation more attractive on both price and security of supply issues.

But facts, not the anecdote, are not as scary. The UK has two main import areas, South Hook and Dragon terminals at Milford Haven in SW Wales and the Isle of Grain facility, 40 miles east of Central London. This year the IOG terminal has not been busy. The two main importers are BP, which brings in gas from Trinidad or Egypt, and Sonartrach from Algeria. BP hasn't imported a cargo since June, diverting cargoes from Trinidad to Japan, India and bizarrely, Kuwait. Sonartrach, the Algerian state gas company used to run a shuttle service on the LNG carrier Berge Arzew  basically creating a floating pipeline. But the last time that ship unloaded was November 7 and now it's on the way to Korea. 

When a pipeline floats to Korea, meaning we won't see the Berge Arzew at IOG until at least late January, we should see this as confirmation of UK prices rising in competition with Asian markets story.  Instead a 20% drop in December and January prices developed during the month of November.

Another example of why we don't believe in hot air: The reality is far less scary than the story.

Shale Gas is an Alberta headache

Alberta made a lot of money for a lot of years by exporting natural gas to Eastern Canada and the United States. Alberta has many parallels to the role of Russian gas to Europe: A steady supply, but linked to oil. Both Alberta and Russia now suffer from the dual problem that their gas is expensive to produce and far away from the markets.

Alberta's natural gas is in the midst of an extraordinary tumble, with year-over-year production declines higher than 7 per cent, and a stunning 18-per-cent drop in U.S. exports. If the province cannot rapidly halt that slide, it risks entering a period where revenue shortfalls will hurt employment and provincial budgets, said Murray Edwards, one of Alberta's most successful businessmen and vice-chairman of Canadian Natural Resources Ltd., which has substantial Alberta natural gas holdings

The cause of course is shale:

Though it has dropped in the past 12 months, natural gas has filled nearly three-quarters of Alberta's petroleum coffers in recent years. But gas prices have been clobbered this year, by the financial crisis and by technological advances that have suddenly provided the industry cheap access to massive shale gas reservoirs in the United States, triggering supply glut concerns.

Alberta has been hit particularly hard, because the majority of the province's gas wells tap conventional reservoirs, which are both much smaller than shale pools and much more expensive to extract. Some new shale plays can turn a profit with gas prices at $4 (U.S.) per thousand cubic feet.

Most of Alberta's gas loses money below $7 or $8.With gas now just over $5, the province has gone from multibillion-dollar surpluses to a $4.3-billion deficit this year, and promises of more red ink in years to come. Alberta is now home to Canada's fastest-rising rates of mortgage arrears, employment insurance and insolvency.

Russia, and even possibly Norway and Algeria may have similar issues in either a far off future of European shale or in the near term from LNG. The solution may not attractive, although this may explain Statoil's interest in shale gas. Royalty regimes that made sense in a world of finite gas supply, may need revisiting in the world of gas glut. Alberta still hopes for increased oil revenues from their massive, but environmentally problematic, oil sands deposits…

But the years between now and then are cause for enough worry that even Iris Evans, the normally sunny Alberta Finance Minister, admits to concern about entering "a period of more fluidity."

"It's not only the freefall of the prices, it's what's happening south of the border," she said in an interview yesterday. "The shale gas … can be a real headache for us."

Could the North Sea provide a similar headache one day?

Shell and gas, shale and China.

Nothing can underline the importance of the emergence of shale, and more vitally the coming permanence of abundant gas as this report from the Telegraph where Shell says that they will be a bigger gas company than they are an oil company:

The International Energy Agency has forecast a gas glut and depressed prices until 2015, but Mr Voser insisted the medium to long-term outlook for demand was strong.
"We are intensifying our gas production because clearly it is the fossil fuel that has the lowest carbon dioxide content," he said. "We will be more than 50pc gas by 2012 and increasing afterwards."

Qatar sits on the second largest gas field in the world, and its LNG deliveries coming to the UK are pretty secure: where else is that gas going to go?

But Shell is also betting on the Pearl project in Qatar where natural gas is to be converted to liquid for fuel. You can bet that all over the world this is the one to really watch:  If the gas glut can provide a low carbon substitute for diesel fuel as well as replacing coal in generation this portends a vision of the future where trucks and buses run on gas and cars run on electricity produced from renewables backed up with gas.

Despite Shell's history as Europe's largest oil company, Mr Voser made it clear that gas production would overtake oil production by 2012, as 1bn electric cars hit the world's roads over the next few years. A few years ago, Shell's production was split 60:40 in favour of oil.

But the big story from Shell today is the plans in China to produce shale gas:

China has begun its first joint development project in shale gas, in a bid to tap into an unconventional source of cleaner-burning fuel to meet the nation's rising demand.
Energy major Royal Dutch Shell PLC (RDSB) and China's top listed gas producer PetroChina Co. (PTR) have signed an agreement to jointly develop shale gas resources in southwestern China's Sichuan province, China National Petroleum Corp. said Friday.
The agreement to jointly evaluate shale gas in the Fushun-Yongchuan block was signed Nov. 10 in Beijing, the state-owned parent company of Hong Kong- and Shanghai-listed PetroChina said in a report on its Web site.
Shell China spokeswoman Li Lusha confirmed the agreement, adding it came after PetroChina and Shell had successful cooperation in gas production in the Changbei gas field in Shaanxi province.
This marks the nation's latest effort to tap shale gas resources after the launch of a Sino-US Shale Gas Resource Cooperation Initiative earlier this month during U.S. President Barack Obama's first state visit to China.
The initiative is expected to assess China's shale gas potential through joint technical studies with reference to American experience with shale gas. Development of shale gas in China lags far behind the U.S., where it's a major contributor to the energy mix.
Shale is a sedimentary rock composed of very small particles of clay, mud and sand. It has a low permeability, meaning it releases trapped gas very slowly, and can be expensive to develop.
Developing shale gas resources in the Sichuan basin has much further room for foreign cooperation and could potentially alleviate tight gas supplies faced by China, CNPC said.
Beijing wants natural gas to account for 10% of the nation's energy mix by 2020, up from 3% in 2005.

What is slightly eyebrow raising about this is that Shell's experience in shale is limited.  What will happen when Chesapeake and Statoil start work in China?

South African Shale Gas

We've seen shale exploration in place or in plan in North America, South America, Europe, Asia and Australia.  Why not Africa?  North Africa, specifically Algeria and possibly Morocco could be promising with Algeria's Sonatrach supposedly up to something with shale, despite their already massive conventional reserves.

But now interesting news from South Africa:

A multinational gas exploration joint venture submitted an "exploration right application" to the Petroleum Agency South Africa (Pasa) on Wednesday for an onshore shale-gas resource in the Karoo Basin, situated in the central region of South Africa.

The usual caveats:

The partners noted in a joint statement that the Karoo Basin had unproved shale gas potential and significant exploration efforts were still required to assess the resource.

But we like who is involved apart from SASOL.  Two companies who have been cooperating in the Marcellus Shale are now going a long, long way from home:

The participants in the joint exploration venture include Sasol Petroleum International (SPI), a subsidiary of JSE-listed Sasol, Statoil ASA, of Norway, and Chesapeake Energy Corporation, of the US.

As far as I know, this is the first publicly confirmed operations of Chesapeake outside the US. 


Demand Destruction

Energy demand is another building block of conventional energy wisdom that from the very start on this blog has appeared shaky.

The CW says rising economic growth inevitably means rising energy use. Cutting energy use is therefore per se anti-growth, and similarly renewable and efficiency measures are seen in some quarters as some sort of anti-capitalist cabal.

The Energy/Economy escalator is a keystone of Peak Oil Theory, the strange movement that seems to relish the thought of civilisation's collapse. In fact they deliberately appear not to offer any ways to avoid it.  Their cult like behaviour – covering themselves in arcane and obscure theories, shooting the messenger of any good energy news and belief in some sort of negative energy rapture,  makes the them the survivalist cult of energy.  Peak Oil, like other Malthusian theories,  assumes that the future will be a simple rerun of the past, and confuses the rear view mirror with a crystal ball.

Past experience shows that the death of energy has been predicted with boring regularity for years, and the experience shows that energy responds to price signals.  Shale gas is only one case of higher prices leading to new ways of extracting old resources.

What's different this time is that not only is supply increasing but demand is falling. But energy buyers must understand why it is falling, at the risk of being led to higher long term prices. Demand actually peaked in 2005 for oil, and there are signs that gas use in the UK peaked as long ago as 2003.  Electricity demand is another key indicator and it appears that electricity demand also peaked in the UK in 2006.

What's different this time is the combination of carbon awareness, high prices and technology.  As we've noted before, energy obesity is falling.  The old paradigm that if a home is better insulated the inhabitants simply turn up the heat and take off their clothes eventually hits a brick wall.  LED lighting is only one coming example:  No one is going to replace one  60 watt light bulb with 40 1.5 watt bulbs that provide the same lumen level.  Similarly, any refrigerator, TV, computer, central heating that is bought today is more efficient than the one it replaced even where it may be physically bigger or more powerful.  This is what we call the great impact of small things.

Barclays Capital have picked up on this in warning how the energy and natural gas markets are betting on increased demand that won't show up independent of the onset or not of any economic recovery.

The accelerating rise in commodities prices may leave energy behind. Even if the economy recovers next year as expected, energy consumption in the industrialized world fell so far, so fast, that it will struggle just to meet 2007 levels.The economy that does come back may be different than the one that collapsed. A huge increase in wind power will trim natural gas demand, says Barclays analyst Biliana Pehlivanova, as utilities shut down more expensive gas-fired plants to accommodate the new supply. She’s forecasting an increase of industrial demand of 0.8 billion cubic feet a day, not enough to overcome the 1.3bcf decline in 2009.

Adding to the woes of natural gas producers, the new supply of shale gas, obtained by drilling horizontally through shale rock, is proving to be larger and longer-lived than many expected. Supply is holding up even after the number of drilling rigs in service has plunged 31% to around 1750, the lowest levels since 2002.

Remember the Alamo

In San Antonio Texas, home of the Alamo you'd usually expect the nuclear option to be popular.  To UK eyes, San Antonio also raises eyebrows in that the local utility is (municipal) government owned,  a quite common US phenomenon.

The owners of CPS Energy, who just happen to be the voters via a board of trustees, seem to work pretty well:

Thanks to a diversified mix of fuels including coal, natural gas, nuclear and renewable energy, monthly residential bills for CPS Energy customers are the lowest in the country when compared to the bills of residents living in the 20 largest U.S. cities.

Lately,  CPS has been studying a new nuclear plant and just returned from a shopping trip to Tokyo where they encountered sticker shock

The nuclear option isn't dead yet — the utility's trustees will learn Monday whether last week's trip to Japan yielded an estimate low enough to win back City Council support. But its prospects have dimmed since news that a $4 billion cost estimate increase had been kept under wraps, leaking out just two days before a crucial council vote on financing.

And while Mayor Julián Castro says he is committed to protecting the utility's investment thus far, depending on what he hears at Monday's utility board meeting, he's ready to walk away from the deal and begin looking at alternatives.

Unlike in the UK, when the government wants to do something, they can consider all the options, but critically make a decision as well:

For CPS Energy, which spent the summer touting the nuclear expansion as the most affordable choice, natural gas is the next best option.

At dozens of public meetings across the city, CPS Energy officials had said nuclear energy would cost 8.5 cents per kilo-watt hour, with natural gas coming in at 10.5 cents. The utility estimates wind would cost 12.5 cents, solar 21 cents.

While renewable energy advocates dispute the figures for wind and solar, CPS Energy says they're high in part because they require backup sources of power. But natural gas, unlike wind and solar energy, can generate power 24/7 if needed.

Yet CPS Energy also points out natural gas' weaknesses: its cost has been historically volatile — from highs above $12 per unit to current lows of $3 to $4 — and there are long-held concerns that the supply is declining.

But:

Consensus is growing within the energy industry, however, that new technological advances may have turned conventional wisdom on its head.

The sound of conventional wisdom turning.

Stored Solar: This year’s model

One story we got real excited about in August 2008 about the same time we discovered shale, was the work of Daniel Nocera from MIT on storing solar power:

In one hour enough sunlight falls on the earth to power the world for a year. There are just two problems with solar energy: it's still expensive- and night. But now researchers at the Massachusetts Institute of Technology have figured out a way to store solar energy when the sun don't shine. To accomplish the technological trick, the scientists sort of turned over a new leaf: their innovative process imitates what nature does: photosynthesis.

Whatever happened to that?  Daniel Nocera is still around, still at MIT and still thinking of creating energy through chemistry:

What if you had a solar panel on your roof that could easily make hydrogen from the sun, use the sun's rays to make hydrogen? And you power up your own personal fuel cell, you store that solar energy in the form of hydrogen over time and you just click a switch and use it when it's needed. Well, with the right chemistry and the right catalyst, it might be possible.

Will anything happen here?  We don't know.  But we should think of possible game changing technologies like these instead of game freezing technologies such as CCS.  Carbon Capture and Storage is incredibly expensive and may not work.  But even worse it locks the mid 21st century into electrical generation technology from today. Spending a huge amount of money on something like CCS will prolong an already doubtful technology long after it can be supplanted by the likes of stored solar or oilgae or any number of breakthroughs in producing, using and storing energy.

In 2050 CCS may work.  It also may be as useful as an electric typewriter, or a fax machine or a video cassette is to us today.


Prices: It’s beginning to look a lot like New Year’s

The shops are just starting to feel as if it's beginning to look a lot like Christmas, but for gas markets it's New Year's that is coming early.

Traditionally Q4 is the time of year when gas prices are at their highest, with the entire winter spread out ahead.  Every driver that can possibly be bullish is exaggerated and the mere hint of a snowflake is grasped upon as sign of a massive wave of demand lying ahead.

What tends to happen in even cold years is that after January 1, traders look a few months ahead and ask themselves how are they going to dump all this gas in storage.  Gas is now over 98% of capacity in the UK, and at similar levels throughout Europe and the US.

US gas prices are down 15% this month.  But UK December gas has lost 24% in three weeks.  November day ahead is 21% down on the lowest month ahead price traded early in October. Anyone who uses even the luckiest of brokers is losing money every day. Gas traders are not postponing the inevitable any more, they are finally dealing with it. The main drivers of UK gas prices, which are also the main drivers of UK electricity prices are:

  1. A historically high storage level, despite increases in storage capacity.
  2. The collapse of US demand for LNG
  3. A warm November.
  4. Increased gas supply from Qatari LNG meets other LNG that is in storage on the oceans or that has been diverted from Asian lower demand.
  5. Industrial demand increasing isn't happening.

Factor in the long-term outlook from the US and International Energy Agency on worldwide gas glut and the smart money in the market is getting out now.  January could look like all of the above but with the extra complication of that if gas is not used enough,i.e. taken out of storage, then we'll see a real bloodbath in prices  that will only be solved by either a very cold winter in both Europe and the US or significant switching away from gas in generation in both markets.

It’s that man again

One of our key beefs with the MSM in general and energy reporters in particular is how they are always willing to highlight problems and rarely follow up on any solutions or even counter arguments.

This comes to mind with the curious case of Art Berman.  Berman was all over the FT at the start of November

The leading shale sceptic analyst is an independent geologist, Art Berman, often described as a “radical”. Rather soft spoken, though, he says: “I hope I’m wrong about shale.” The problem, as he sees it, is that the standard industry analysis about shale well Estimated Ultimate Recovery, or lifetime production, is too optimistic. “They have fantastic initial rates, but the question is whether the (rate of production) persists as they say.” For example, he says, in deep shale formations “the rock collapses as gas is produced, and crushes the proppant. And as the fractures are drained you have to frac and frac and frac.” Expensive.

And:

Geologist and energy consultant Arthur Berman has also been pointing out the rapid decline rates for some of the big shale gas plays for some time now

But we aren't the only ones who take our Berman with a healthy dose of salt:

Questions about Berman’s research were so frequent that investment bank Tudor Pickering Holt & Co. in Houston put out an e-mail to clients rejecting claims by shale skeptics, said Dave Pursell, a managing director at the firm.

“If you read his stuff, he’s basically said there’s fraud being committed by Wall Street, E&P companies and reserve engineers all in collusion,” Pursell said. “When you start calling companies out by name and you start insinuating and implying very strongly that there’s a degree of fraud going on, you get our attention.”Berman doesn’t have the experience in unconventional gas projects to validate his assertions, Pursell said. U.S. shale- gas output will climb to about 22 billion cubic feet a day at the end of 2013 from 8 billion at the end of last year, Tudor Pickering said in August.

If exploited properly, shale formations will be a “game changer” to boost U.S. energy supplies and help cut carbon emissions, said Porter Bennett, chief executive officer at consulting firm Bentek Energy LLC near Denver.

“There’s a preponderance of evidence that suggests that those shale plays are very real,” Bennett said in an interview.

David Hager, exploration chief at Oklahoma City-based Devon, took on Berman’s claims with an Oct. 19 op-ed piece in the Oklahoman newspaper. Hager likened shale-gas development to a home run to win the World Series and said Berman “is in the stands speculating on whether the slugger is on steroids.”

Chesapeake, also based in Oklahoma City, ignored Berman’s arguments until it learned of speeches the geologist gave calling shale production a speculative bubble, Chief Operating Officer Steve Dixon said in a telephone interview.

“He called us out,” said Dixon, who devoted part of Chesapeake’s analyst and investor meeting in New York on Oct. 14 to rebutting Berman. “He left me no choice.”

Perhaps this is the best route:

“We’re ignoring Mr. Berman,” said Brad Sylvester, a spokesman for Southwestern Energy Co., the Houston-based company that pioneered development of the Fayetteville Shale in Arkansas. Southwestern was he only oil and gas producer in the Standard & Poor’s 500 that rose last year.

But lots of people will read the Berman story and believe it all the more if they don't hear rebuttals.


Obama in China. And in the planet UK…

President Obama on Copenhagen:

"We should not make the perfect the enemy of the good"

The DECC in an off-the-record conversation today:

"I'm interested in 80% reduction by 2050, not CO2 reductions in the short term". She also said that shale is a "US phenomenon".  So that means it wasn't David MacKay.  But it is the old story.  Spend a huge amount of money on some pie in the sky scheme like CCS instead of immediate actions.

Meanwhile back in the two countries that matter:

It may have been toward the bottom of the list. But US President Barack H. Obama and Chinese President Hu Jintao did include a shale gas resource initiative in their Nov. 17 announcement of measures to strengthen clean energy cooperation between the two countries.

“Under the initiative, the US and China will use experience gained in the United States to assess China’s shale gas potential, promote environmentally-sustainable development of shale gas resources, conduct joint technical studies to accelerate development of shale gas resources in China, and promote shale gas investment in China through the US-China Oil and Gas Industry Forum, study tours, and workshops,” the White House said in a statement posted at its Web site.