The worst happens and nothing happens

January 2010 was very instructive for what did happen, and what didn't happen. For example last summer the energy bulls were talking up prices and in the UK that means signing people up to one year fixed deals. The average one year fixed price was 45 to 50 pence per therm commodity only depending on when one took the plunge last summer. 

Few business energy buyers have a choice as to whether to buy fixed or floating: The deals are very hard to find for those who spend only (!) £5 to £50 K a year on energy. Even worse,many bigger users are often sold prices are rising fables, and fix to avoid risk.

Two of those "risks" are cold weather and the possibility of rising Asian demand causing European gas prices to buy as we had to compete for gas. So those who paid 45 or 50 did so to avoid even higher prices that would appear with those risks.

Well we all know about the weather. Highest ever UK gas demand, coldest winter in years etc etc. But the floating index price for January barely crossed over the 40 pence barrier. So much for that theory.

What about the Asian scare stories. Surely if gas demand in Taiwan increased 90 per cent it would have us shivering in the dark in the UK according to the Ofgem narrative? It did. And we didn't.

Taiwan, Asia's third-biggest importer of liquefied natural gas, increased purchases of the fuel by 90 percent in January, the sixth month of gains.
Industrial output in Taiwan surged 70 percent in January from a year earlier, a record pace, according to an economic ministry report yesterday. Production by electricity, which consumes about 75 percent of the LNG used, and gas suppliers climbed 15 percent.

Not only that they paid 50 per cent or so over the market in Europe and North America:

Taiwan paid US$328 million, or about US$475 a ton on delivered terms, for the cleaner-burning fuel in January, 46 percent higher than a year earlier. That's equivalent to US$9 per million British thermal units.

However, places like Taiwan, Japan and Korea have multi year deals that are more expensive than spot prices. There the story is not too far away from European prices:

The island imported LNG under multiyear contracts from Indonesia, Malaysia and Qatar. It received two spot cargoes from Nigeria and Trinidad & Tobago in January.

Taiwan paid about US$12 per million BTU for term supplies from Indonesia in January, according to calculations based on the Energy Bureau data. Term contracts are typically priced off crude oil.

Spot purchases cost an average US$6.6 per million BTU on delivered terms, calculations show. That compares with $4.8 per million BTU for U.S. gas future at Henry Hub and about $5 for UK gas for delivery in March. UK and U.S. benchmarks are typically used to price spot supplies to Asia.

Note that Trinidad and Nigeria are the two exporters most dependent on US markets.  The fact that LNG tankers made a voyage of up to three weeks speaks both of market's operating normally and exporter desperation.

Shale gas is pushing down prices in Taiwan.  But not for domestic consumers in the UK.  Thanks Ofgem!

Of course we still have Russia to fear.  Don't we? 

Gazprom on Friday detailed the concessions it was giving to its four largest customers, saying its long-term contracts would take into account the much-lower spot price for gas for only three years.

The company said earlier last week that it renegotiated contracts with Germany's E.On, France's GDF Suez, Italy's Eni and Turkey's Botas as spot-traded gas remains about 25 percent cheaper than Gazprom's deliveries, which customers are contractually bound to buy.

Shale Gas goes east.

We read headlines like game-changing so often these days thats it easy to pass them by. But this is!

Proof positive how separated from reality Ofgem really are.

Very important news this, just goes to show Saturday can be a big news day:

It's a common mis-perception that Gazprom is the only game in Russian gas. They are the dominant company but far from the only one. Within the next couple of years Gazprom is set to lose it's export monopoly and there is the high possibility that companies like Novatek will be exporting the LNG that Alistair Buchanan fears won't reach us from Shtokman. The other big Russian energy company is TNK which has a JV with BP. We've mentioned before the probability that Russia has shale gas. Now word that elsewhere in the CIS, and maybe even in Turkmenistan that AB worries about, shale gas goes east.

BP Plc’s Russian venture, TNK-BP, is considering unconventional gas opportunities in eastern Europe, as hard-to-extract deposits start to “make sense” with available technology and pricing conditions.
“That’s a game changer,” Chief Operating Officer Bill Schrader said in an interview. “It will have an impact globally. As economic activity recovers, that gas will be developed.”

TNK-BP, owned equally by BP and a Russian group of billionaires, is looking at former Soviet republics “where we can bring technology that we have, or even BP has, in exploiting tight gas,” Schrader said. Ukraine and other eastern European countries are possible areas, and the company is assessing the geological potential, he said.

European shale could be sufficient to displace the equivalent of about 20 million tons a year of LNG by 2015 and about 60 million tons a year of capacity by 2020, JPMorgan Chase & Co. said in a report on Feb. 9

That last paragraph is really big news, although I've reported on it before, I missed it, hiding in the middle of the story.  20 million tons displaced by 2015.  That's more than double the current UK LNG imports!  Has someone told Sam and Alistair the news?

Ofgem, Centrica and Gazprom say the shale word

Two key players and an influential, but only in the UK, body all mentioned shale this week.

Centrica and Ofgem both share an obsession with Russia, so it's interesting that Gazprom, Russia's state gas company has a much more informed and up to date view on shale gas than their UK quasi-state collegaues.

Sam Laidlaw CEO of Centrica tells the FT:

For the man in charge of British Gas, Sam Laidlaw has a strikingly cautious outlook on the fuel’s future.

The hot topic in the energy industry is the flood of previously uncommercial gas coming onto the market.

Technological advances have brought down the cost of extracting gas from difficult rocks such as shales, producing a boom in US production. Tony Hayward, chief executive of BP, has described it as a “game changer”, transforming the outlook for energy in America.

Mr Laidlaw, chief executive of Centrica, is not convinced that it has the same significance for Britain.

“When you look at the UK, we are different from the US. We are running out of gas,” he says.

Perhaps it's more true to say that Mr Laidlaw hopes it does not have the same significance for Britain. Because if it does, the days of scaring customers into paying long term prices while themselves buying on the cheaper spot market will come to an end. The UK is running out of UK gas.  That's all.  It's as pointless as worrying about the UK's banana production. Fifty per cent of all UK industry is foreign owned. Four of the Big Six are foreign owned. HSBC, Santander, Asda, Cadbury, every single car manufacturer – foreign owned.  The paranoid and xenophobic fear of a gas shortage sounds like it should come from UKIP, not Ofgem.

Alistair Buchanan of Ofgem is allegedly the regulator of companies like Centrica, although a more accurate title would be enabler-in-chief.  AB has never met a price he didn't like.  So with Ofgem's track record on protecting customers, it's not surprise that he has a similarly dismissive attitude to the disruptive impact of shale.  

In another report from Platts on the hearing at the Energy and Climate Change Committee (ECCC) on Project Discovery on 25 February, Ofgem chief executive Alistair Buchanan said that shale gas was unlikely to come on-stream fast enough to secure UK energy supply. Buchanan said that although shale gas “appears to be part of the answer […] can it developed fast enough?”

Laidlaw and Buchanan are joined at the hip in a desire to spend lots and lots of energy consumer's money on investing billions of pounds to solve a problem (energy security) that does not, and will never again, exist. Ofgem are really unique by world standards:  A regulator battling against it's own government, consumers and world energy markets in an effort to push energy prices up.

Particularly hilarious is AB's views on Russia about 14 minutes on the video minutes, where he confuses the Shtokman LNG postponement with some sort of threat to energy supplies to the UK. He does make the bizarre claim that Russia has not cut off gas to Germany since WW2, which seems to show an ignorance of a European natural gas industry which only started in 1959 in the Netherlands or Russian gas exports which started in 1970. 

At 32 minutes or so, my eyes were glazed over at this point, AB talks about gas. It's instructive that he refers to gas shale instead of shale gas, as from this point he really is back to front and confused. First he throws in a new unstable supplier Turkmenistan (!) to the list of funny accented foreigners threatening our shores, before going on to say the time line for shale is over ten years and won't help the UK supplies.

He then goes into his other fears that LNG supplies won't flow to Europe, without saying where on earth the LNG will go?  Asia is well supplied and North America will be exporting LNG within three years. Any idea that LNG won't come to Europe is misinformed and verges on the delusional. Someone should buy the man an atlas.

The doom twins (although they deliver good news for energy shareholders, they condemn 24 million UK households to paying £400 more a year for energy than they should, and Ofgem thinks it's not enough!) make a key mistake:

As I told Petroleum Economist in December, and via the same reporter but unattributed The Economist, the UK already is influenced by shale. Whether the UK produces any is irrelevant. The permanent disappearance of US LNG demand means world gas markets will never be the same again, yet the Sam and Alistair show want us to party like it's 2006. Shale's sudden emergence has shown that experience can actually be counter-productive in the face of disruptive, paradigm shifting, game changing events.  Laidlaw and Buchanan have everything invested in the past, which is why they are so eager to paint the future as a scary place.

So, what does Russia think?  From Novosti, this story doesn't sound like anyone who is threatening UK supply. Not now. Not ever.

Gazprom sources sounded vague as they commented on the situation. "Talks with some of our European customers have resulted in mutually acceptable decisions while complying with the terms of their long-term contracts. We are currently adjusting prices taking current market trends into account," a source said.
Gazprom has not disclosed the volumes to be purchased by Italy and France this year. Alexei Logvin, an analyst with the Rus Capital asset management company, estimates the potential losses as "minor." "Even if Gazprom adjusts all of its European contracts, linking them to gas prices on the spot market, it would only cut the company's revenues by 15%. On the other hand, making concessions to its European customers will help Gazprom keep its share of the European markets. Russian gas is currently the most expensive in Europe, so European customers are opting for other producers such as Norway or African countries," he said.

And even if Ofgem doesn't know and Centrica knows but doesn't want to say, at least Gazprom know what is really happening:

 Logvin sees a different threat for Gazprom: growing shale gas production is more serious than the need to use spot market prices. "America has managed to replace natural gas imports almost entirely by developing shale gas production. European countries are doing the same. Gazprom might lose the market for its huge quantities of gas," the analyst said.

Ofgem, in order to save UK consumers from exposure to high prices in some far off future that may never happen, want to condemn us to high prices today via consumer subsidies of high energy costs for any number of outdated schemes. Over-insurance, gold-plating and scare-mongering. Throw in Ofgem's not so subtle anti-green and let's blame Brussels agenda and Ofgem are well on the way to strangling economic recovery at birth.

Gas Prices in the UK…and Ohio

Interesting parallels can be drawn from this story on a new natural gas pricing system for consumers in Ohio:

A new natural gas pricing system put in place by Ohio regulators would have saved customers of the state's largest gas utility hundreds of dollars over the last four years, a newspaper concluded.

Just as in the UK,  Ohio consumers were lightly regulated :

How would you like an extra $450 in your pocket?

That's the amount that a typical Columbia Gas household could have saved from 2005 to 2009 if the company had used the purchasing practices that it will begin in April, according to a Dispatch analysis of newly available pricing data.

The figure is the estimated difference between Columbia's past prices and what the prices would have been under a new system that includes an annual auction and rates tied directly to changing commodity prices.

There are lessons to be learned for UK consumers:

"There could be something systematically wrong," said Ken Costello, chief of the natural-gas section of the National Regulatory Research Institute, after reviewing the data. "The numbers suggest that the company was consistently paying more than the market price for gas."

Under the new system, called a "standard service offer," outside wholesalers bid for the right to supply Columbia with natural gas. The price has two components. First is a service fee that is set through a reverse auction, meaning the lowest bidders win. Second is the price of gas on the New York Mercantile Exchange on the last trading day of the previous month.

In essence, the price is set by the market, rather than how it was before when Columbia had more control

Based on average monthly usage during those four years, the price differences meant that a typical household paid about $450 more than it would have under the new system. For Columbia's territory as a whole, this adds up to hundreds of millions of dollars.

And why can't UK domestic and small SME consumers get the benefit large end users already get from market match prices? 

For example on our analysis the 22 million UK gas consumers paid an average of over £200 during 2009 by being only offered a price that is set with zero transparency by the Big Six.

That's £4.4 billion pounds less in the UK economy than could have been. Yet people obsess about things like a 2.5% increase or decrease in VAT, or £100 extra on council tax.  Why not this?

To get an idea of the savings visit the wholesale UK natural gas prices here.

Prices are in pence per therm so you have to do an arcane calculation to find the kWh price than appears on your actual bill. Divide the monthly price by 29.3071 to get the kWh price. Add 55% and that should be the domestic rate. For businesses, the figure depends on delivery fees which are the same for all suppliers, but are likely to range from 35% to 15%. All that's left is a further margin which could be zero to 10%. If you go through a broker the margin will be higher still as it includes their fee which is generally 3 to 10%.

Now check the price you are paying. Horrible isn't it?

Starting soon, we'll offer Market Match Prices to all business level consumers. Drop us a line at guru@nohotair.co.uk.

Shale Oil update

Shale 2?

More on shale oil at the FT today:

With continued weakness forecast in north American gas prices, a growing number of upstream players are turning to the Bakken – and other onshore oil plays – to leverage the technoloiges and drilling practices that have successfully unlocked the unconventional gas resource plays…In short, too many rigs, too much frac equipment, and too many crews in a world of strong gas well productivity is playing into the hands of the shale oil developers.

Nobody knows how big the oil shale play could eventually be. But few are willing to dismiss it after writing off US onshore gas as a declining play for years only to witness today’s boom.

Shale oil.  The consequences are a little mind boggling and interesting, although a little amount enough to shut up Peak Oilers would be worth paying for.  And what if we see shale oil in Europe as people whisper about Toreador in France? 



The Centrica stories being missed.

Wonder if we'll see these interesting snippets from Centrica's result conference today anywhere else.

It doesn't help that Centrica don't use video players with minutes and seconds like everyone else.  So if you want check this out you'll have to slog through the whole thing, or at least to the end of Nick Luff's presentation.  The information isn't on the slides either.

To understand the importance of the first point, consider that British Gas say, and Ofgem believe them, that they can't reduce prices any further because they bought the gas used today two years ago. (Sam Laidlaw on the Today show in January)

But today Nick Luff says that they shut down the Morecambe gas field for 30% of the year because it was cheaper to buy gas for CCGT power stations on the spot market. Who's right?

And in another factoid,  demand from even domestic customers was down seven per cent, despite more extreme weather at both ends of the year due to "energy efficiency measures". Which underlines one of the NHO basics:  demand is falling, supply is increasing, prices are set to fall further.  Anyone who buys gas on contracts priced anywhere past this weekend, is burning money.  Unfortunately, that means all domestic users until we get smart metering which is years away.

Business consumers can now buy gas at all levels of usage on spot market + delivery + margin contracts, but only if you push.  Contact us at guru@nohotair.co.uk and I'll tell you how.

Russian Gas

With fears over security of supply being used as excuses by suppliers and their enabler Ofgem, where is the best place to find out what is really happening in the UK?  Not in the British press.

First the NY Times

German and Italian energy companies have begun renegotiating some of their long-term contracts with the Russian energy titan Gazprom as natural gas prices sag along with demand, despite an increase in oil prices.

But in recent months, the companies have been unable to sell gas to consumers at the high prices they had earlier negotiated with Gazprom, a state-owned energy monopoly. The spot-market price for natural gas last month was 30 percent lower than the long-term contracts, according to analysts.

Several factors seem to be at play. Demand has fallen because the United States is developing natural gas from shale deposits and the Europeans are using less, despite an unusually cold winter, largely because of the weak economy, which has idled much industrial production. More European consumers are also switching to renewable fuels and have become more energy-efficient.

The last paragraph is important, as the UK press parrots Ofgem in thinking that the economy is the only cause for low demand, ignoring how gas demand is falling organically and started the slide in 2005.

Another piece of outdated theory on gas is the oil gas link.  We've pointed out that died a year ago in markets, but now  in a fundamental movement again ignored in the UK, the oil gas link is not frayed, but broken:

E.ON Ruhrgas said Wednesday that part of the purchase of gas from Gazprom would in the future “no longer be coupled to the oil price but to the spot gas price.” A spokesman said the amount of gas renegotiated with Gazprom was in “the lower double-digit percentage area.”

Remember the above when EON UK simply follows British Gas lead on pricing.  But since consumers don't have an alternative to the Big Six, no one is going to jump, and Ofgem certainly won't push.

More reality from Newsweek:

Five years ago, when oil prices were climbing steadily and economists were stoking fears about peak oil and gas, it seemed that major energy producers like Russia were holding all the cards. Then-president Vladimir Putin spoke of his country as an "energy superpower" and used energy supplies as a blunt instrument of Kremlin foreign policy.

But all that is over…

Green Gas

It's easy for other blogs to link to the WSJ, FT, NYT etc.  But where else can you discover the latest energy news from The Kerryman?

THE extension of the national gas grid into North Kerry is not viable at present but could become a reality if both Shannon LNG and Endesa achieve their planned projects in the Tarbert area, CEO of Bord Gais, John Mullins said this week."Ninety two per cent of our gas supply is currently piped in from Scotland so from the perspective of energy security, the Shannon LNG plant in particular would represent a massive asset. We very much welcome the project from the point of view of gas supply. It could supply half the country's gas needs by the middle of decade if all goes according to plan," he said.

I can see it now.  UK gas rises because the Shannon Estuary is a day closer than Milford Haven.  But Ireland is joined at the shoulder with the UK gas wise, and they have security of supply concerns too:

"Ninety two per cent of our gas supply is currently piped in from Scotland so from the perspective of energy security, the Shannon LNG plant in particular would represent a massive asset. We very much welcome the project from the point of view of gas supply. It could supply half the country's gas needs by the middle of decade if all goes according to plan," he said.

More gas for the UK in that Norwegian gas won't have to make the trip across Scotland.   And, if we believe what we hear, Russian gas as well.

But why stop at supplying half of Ireland's gas needs?  You knew this was coming.  Ireland may have shale gas:

The Lough Allen Natural Gas Field is an unconventional carboniferous gas basin which was formed 350 million years ago. It was once contiguous with the Appalachian Basin in the USA, a proven natural gas territory, and by North American standards the Lough Allen Basin remains virtually unexplored.

There is evidence from the limited drilling in the basin that shales such as the Bundoran and Benbulben shales are gas charged and are potential shale gas formations. Finavera Gas plans to further investigate the shale gas potential in the area

Centrica Wholesale Retail Price Links

On the left hand side is an analysis comparing the underlying wholesale cost of gas in 2009 with British Gas standard tariff rates.  What would be the difference if UK consumers could simply pay for gas on a floating monthly rate, just like every consumer in North America for only one example.

I tried to be fair and balanced, but still came up with a 42% difference.  For one example I used NERA's figures for the  Energy Suppliers(not Ofgem's) figures that said that the wholesale cost of energy is only 45% of the retail price.  That's debatable.  I figure on domestics it's closer to 65%, and that includes a healthy Ofgem size margin.

Another area where I gave British Gas the benefit of the doubt was to say the domestic rate was 3.2 for all energy used.  But the reality is that the first 2680 kWhs is charged at 6.95.  That means that the 15,500 average domestic customer used as an example would actually pay 3.91 on average.

That would give a 53% difference instead of 42%.  Centrica's results appear to show a 57% increase in profits at British Gas.  So much for being fair and balanced.

Centrica Wholesale Retail Price Links

The majority of UK natural gas consumers, including all domestic users, most SMEs and a surprising number of large (<£50K) end users pay for gas on a fixed annual price.

In North America, the opposite is true, – over 80% of domestic users are charged on the default option of a monthly rate that changes parallel to wholesale price movements.

Centrica will release results on February 25, which are expected to show a large increase in profits. This is where they come from.

The standard British Gas tariff for the London area is 6.95 ppkWh for the first 2680 kWhs and 3.20 for the remainder, (sourced from confused.com). To simplify matters in this comparison, No Hot Air has presumed the lowest rate applies for ALL kWhs used  based on an average domestic load of 15,500 kWhs.

We have used Ofgem’s Retail Wholesale Price report of February 2010, where the commodity cost of gas is estimated as 45% of the end cost.  NHO disagrees, but for now we’ll go with their figures.

Again according to Ofgem, UK suppliers buy gas in various hedging strategies up to 18 months before it is actually used. A far more likely scenario, based on commonly used derivatives used in other commodities would be that although the supplier set up contracts for volumes of gas several years in advance to secure supply, it is unlikely that all, or even a majority of gas is priced in advance.  Even if that were the case, there are hundreds of possible derivative tools that would be used to make the eventual price far different from a price allegedly set in stone many months or years ago. The price of gas changes daily dependent on demand. Gas contracted for years ago is likely to be paid for at the prices in effect on the day of delivery. Common benchmarks would be wholesale price indices such as Heren, ICE, NYMEX etc. A rapidly declining amount of gas is sourced against crude oil prices

The index NHO uses is National Grid’s Daily System Average Price averaged out monthly.  It is used widely in price discovery for larger end users. The SAP provides prices roughly equal to the indices mentioned above. Historic price information can be accessed at : http://marketinformation.natgrid.co.uk/gas/DataItemExplorer.aspx

What was the impact of a fixed cost against a floating monthly price?  Other supplier rates closely follow BG rates, so we’re not picking on BG. We’ve worked the following out using the standard domestic load shape or profile, based on a total annual volume of 15,500 kWhs.  January use is considered at 13.80% of total, April at 9.80%, July at 2.40% October at 7.30% etc., etc.

As shown here, fixed prices had a substantial risk premium over floating prices.  An annualised gas cost based on floating prices would have saved the average consumer over £200 or over 40% during 2009.  The trend continues into 2010.  We know from our work with commercial clients that there have been only three months in the past ten years where a fixed price was less expensive than a floating rate. Similar figures for commercial clients showed a 70% difference from a one year price for the period October 2008 through September 2009.  Savings from October 2009 through February 2010 are over 40% currently.

 

Jan-09

£68.62

£68.45

-£0.18

-0.26%

Feb-09

£53.93

£67.46

£13.53

20.06%

Mar-09

£32.21

£60.51

£28.30

46.76%

Apr-09

£23.30

£48.61

£25.31

52.07%

May-09

£15.53

£35.22

£19.68

55.89%

Jun-09

£9.01

£20.83

£11.82

56.73%

Jul-09

£4.57

£11.90

£7.34

61.64%

Aug-09

£4.30

£11.90

£7.60

63.87%

Sep-09

£6.46

£20.83

£14.38

69.01%

Oct-09

£14.60

£36.21

£21.61

59.69%

Nov-09

£22.26

£51.09

£28.83

56.43%

Dec-09

£31.46

£62.99

£31.53

50.05%

 

 

 

 

 

Total

£286.25

£496.00

£209.75

42.29%

 

 

 

 

 

 

January 2010 continued the trend,.  The idea of a fixed rate is sold to customers as a way of insuring against the risk of rising prices.  But the reality in a month where the highest recorded daily demand occurred shows again that forward prices are unreliable predictors of actual spot price outturns. The February figures are not yet final and will probably result in a slightly lower floating price.

Jan-10

£46.38

£68.45

£26.86

32.24%

Feb-10

£41.41

£67.46

£26.05

38.62%

 

 

 

The following table shows the actual benchmark SAP price in pence per therm.  One therm = 29.3071 kWhs.  The next column shows the floating rate in pence per kWh, Again, the rate is the SAP plus a markup of 55%. The fourth column is the BG fix rate of 3.2 pence per kWh, and the final column shows the percentage difference between the floating rate and the fixed rate.

 

SAP

Float

 

 

Jan-09

60.66

3.2082

3.2

-0.26%

Feb-09

48.37

2.5582

3.2

25.09%

Mar-09

32.21

1.7035

3.2

87.85%

Apr-09

29

1.5338

3.2

108.64%

May-09

26.69

1.4116

3.2

126.70%

Jun-09

26.18

1.3846

3.2

131.11%

Jul-09

23.21

1.2275

3.2

160.68%

Aug-09

21.86

1.1561

3.2

176.78%

Sep-09

18.75

0.9917

3.2

222.69%

Oct-09

24.39

1.2899

3.2

148.07%

Nov-09

26.36

1.3941

3.2

129.53%

Dec-09

30.22

1.5983

3.2

100.22%

Jan-10

38.09

2.0145

3.2

58.85%

Feb-10

37.14

1.9643

3.2

62.91%

 

The comparison of rates month by month is interesting, but the actual usage per month is important for an effective annualised comparison.  The percentage differences would be similar for commercial customers, but as they tend to use gas for process and manufacturing, it is likely that the actual savings will higher in percentage terms than those shown for domestics.