Pravda versus Ofgem

Less than twenty years ago Pravda (Truth) was the official newspaper of the Soviet Communist Party.  Time has moved on and so has Pravda.

Ofgem, made up of Ofgem and Offer, for gas and electricity has been around since the late 80's. It certainly hasn't moved on much since then.

Ofgem is obsessed with Russian gas. Convinced that the UK is at the mercy of both Russian gas supply cuts and surging Asian demand that prices Europe outside of energy markets, they propose that we must spend lots of money bailing out, sorry, investing in,  projects that have three things in common:they are ridiculously expensive, don't work and aren't needed anyway.

The UK press follows them down the blind alley and they take millions of customers with them who pay at least double for energy than they should.

Time for some new thinking. But we won't see it from Ofgem while either Labour or the Tories are in control.  But we do see it from Pravda:

Russia has virtually lost the sales market for its natural gas in the United States of America and runs risks of losing its positions in Europe at this point too.

By 2009, Gazprom had taken only 0.5 percent of the US gas market. The share is expected to be increased to five or even ten percent with the help of the Stockman deposit and another large deposit on Russia’s Yamal Peninsula.

However, the USA considerably increased the extraction of shale gas last year which can ruin another project of Gazprom – Sakhalin-2. Both Shtokman and Sakhalin-2 projects are being conducted to sell natural gas mostly to the United States.

Russia ’s gas leadership in Europe is not so stable either. The countries of Western Europe cut their purchase of Russian gas by 29 percent during the first six months of 2009. Germany cut the import of Russian gas by 44 percent, Italy – by 34 percent, France – by 21 percent. Europeans try to boost their gas deals with Norway, the countries of Northern Africa and the Persian Gulf.

What a bizarre world we live in.  The Wall Street Journal and Pravda combine to admit that Russian dominance of the European (that does include the UK Tories!) gas market is a thing of the past. 

Tories, Labour, Ofgem and the UK press combine to ignore them.

US shale keeps marching on..

A few things this week that make it seem that observers like myself have been over cautious, hard as that may be for some to believe.

I've been meaning for a while to discuss the impact of the Marcellus.  This was estimated at less than 2 TCF as little as four years ago.

Now it's the second largest gas field in the world at over 500 TCF and it sits exactly where it the market for it is greatest,  less than a hundred miles sometimes from New York, Philadelphia, Washington, Baltimore and Cleveland and within 400 miles of Detroit, Toronto, Montreal and Boston.

So much gas, so many markets yet still Where to put it?

The amount of infrastructure in planning and development is astounding in both scale and scope," said Lee Van Atta, Vice President – Advisors with Ventyx, an Atlanta-based energy and utilities software, data, and advisory services firm. "Anywhere from $2 billion to $3 billion will be spent on pipeline expansions over the next four years. As Marcellus Shale production increases, new pipeline infrastructure is brought on-line, and new supply paths are developed, additional underground natural gas storage projects will follow, as well."

The impact on LNG in the North East US, which impacts UK prices, is going to be big:

The high price premiums above Henry Hub that Northeast markets experience seasonally will likely decline as utilization of gas supply routes from Western Canada and the Gulf Coast drop," Van Atta continued, adding that the LNG scene may be relegated to a more secondary role. "The LNG import terminals in the Northeast may continue to see higher utilization given expansion of liquefaction capacity if European and Asian gas demand remains relatively low for the next several years. However, beyond that the growth in the Marcellus Shale could limit LNG to winter peaking duty in the Northeast."

Talking about Western Canada, CNN speaks to Peter Tertzakian:

Forecasting agencies, long known to play it safe before touting new trends, are only predicting a modest increase in gas' share of the world's overall energy mix by 2030.But some analysts are saying it could be much higher, with big implications for the electricity markets – and coal-fired power plants in particular.

Prices have since dropped significantly, partially due to all the new shale gas, but utility execs are still leery this resource is for real.

'It's a question of believing," said Tertzakian, who also thinks the estimates for future natural gas use are low. "Once they believe the trend, gas demand is more likely to gain momentum."

Link to UK Gas price information

Two links here:

National Grid Gas Prevailing View is live UK gas grid system information.  Prices are in the lower right hand side.

ICE UK NBP Gas prices shows forward prices from the wholesale market (15 minute delay).

What do they mean?  Firstly, the ICE prices are in therms, the National Grid uses both therms and kWhs.  One therm  = 29.3071 kWhs and kWhs are the units seen on the bill.

The ICE prices are the ones that an energy supplier will price against when offering one year or longer contracts.

How?

Every gas site has a monthly profile of it’s gas use, also called load shape, spread out over the year. For example a common domestic shape is for 9.80% of annual volume to be consumed in April,  2.40% in July, 13.80% in January, like so:

Apr-10 9.80%
May-10 7.10%
Jun-10 4.20%
Jul-10 2.40%
Aug-10 2.40%
Sep-10 4.20%
Oct-10 7.30%
Nov-10 10.30%
Dec-10 12.70%
Jan-11 13.80%
Feb-11 13.60%
Mar-11 12.20%
Apr-11 9.80%
May-11 7.10%
Jun-11 4.20%
Jul-11 2.40%
Aug-11 2.40%
Sep-11 4.20%

Using this example from March 25 2010, the one year price for gas supply from April 2010 is calculated by multiplying the monthly factor by the monthly price and adding the result like this:

Apr-10 30.85 9.80% 3.0233
May-10 30.02 7.10% 2.13142
Jun-10 30.15 4.20% 1.2663
Jul-10 29.48 2.40% 0.70752
Aug-10 30.25 2.40% 0.726
Sep-10 30.25 4.20% 1.2705
Oct-10 33.05 7.30% 2.41265
Nov-10 37.39 10.30% 3.85117
Dec-10 40.92 12.70% 5.19684
Jan-11 42.81 13.80% 5.90778
Feb-11 41.81 13.60% 5.68616
Mar-11 40.83 12.20% 4.98126 37.1609
Apr-11 37.89 9.80% 3.71322
May-11 36.21 7.10% 2.57091
Jun-11 35.19 4.20% 1.47798
Jul-11 35.64 2.40% 0.85536
Aug-11 36.25 2.40% 0.87
Sep-11 35.9 4.20% 1.5078 39.03113

In the above example a one year gas price for this profile is 37.16 pence per therm for one year from April or 39.03 for one year from October.

Since the market changes everyday, the price changes every day. 

Back to the National Grid Prevailing view.  The price there is the live price effective over the last few days based on prices needed to balance the system.  It is actually a perfect model of supply and demand, as the system needs to be balanced at all times or would literally explode.  The beauty of the live prices is that they reflect reality.  The ICE prices connection to reality recedes with the time horizon. The three biggest impacts on natural gas prices are weather, supply and the general state of the economy.  Simply put, it is impossible to predict weather next winter (although plenty of people make good money trying). What traders will do is to build in worst case scenarios:  awful weather, accidents impacting supply and an economy much healthier than today impacting demand for example.

That explains the huge discrepancy between today’s prices based on today’s actual live factors and the forward prices which are at best educated guesses, but guesses nevertheless.

For example the seven day average System Average Price on 28 March 2010 was 30 pence per therm.  The average SAP for March will probably settle at about 33 pence, due to the colder weather and shorter days (more electricity generated from natural gas) earlier in March.  The price is also impacted by the UK using up a lot of stored gas in the cold weather of December and January, as some gas is already going into storage to replace  that gas.

If someone is on an index price, then they will pay the commodity charge for March plus Cost of Service, 6 to 11 pence per therm depending on transportation charges which vary according to profile.

So a one year gas prices

The narrative v reality in UK gas storage

Those experts on gas storage, the Tories,  like to push up prices, oops sorry I meant scare voters, with simplistic stories on complex issues, chief among them being gas storage.

The narrative:  The UK has only so many days of storage compared to France and Germany. Therefore we are that much closer to disaster and lights out broken Britain.

The three realities:

1.  The UK produces far more gas than France or Germany.  We have a huge amount of gas in storage in the North Sea

2. It may or may not be correct to say we have six weeks, two weeks, four hours, five minutes or whatever the scare brigade say, but they don't mention the rest of the sentence "…if all eight UK import terminals broke down at once."

3. Whoever the buyer of storage gas would be,  government, trader or whomever, the obvious economic impact of buying any commodity going is that the price goes up.  Duh!

More here from Argus

European gas storage withdrawals slowed last week, ahead of the start of injections in some regions this week, according to the latest aggregated data from GSE.
Last week's call on storage was cut to around 473mn m³, from a 2.6bn m³ drawdown the week before. Withdrawals continued in all regions except the UK, where small net injections were recorded.Barring an unexpected need for sizeable withdrawals later this week or in early April, a number of regions are poised to enter the summer injection season with considerably more gas in reserve than at the same time a year ago, despite exceptionally cold weather during the first quarter.

We need to stop obsessing about power cuts.  Lightbulbs need to go on, in people's heads:  There is so much gas still floating around the world  that even after the worst winter in decades:  Everything's fine and prices will only go lower still.

South African Shale Gas part three

History's like that.  Get obsessed with one direction (North America and Russia) and big news comes from somewhere completely different.

Norwegian state energy company Statoil was one of the big investors in Chesapeake's  Marcellus shale, where they just took a further interest only this week. The obvious reason was to learn how to use shale technology worldwide, but the first public investment of the Statoil/Chesapeake link was curious. South Africa is a backwater of the world energy industry, with no pressing need to produce gas given its' massive footprint of coal and a mild climate.

Two weeks ago we saw the third party in the venture SASOL reveal shale as being a gas to liquids play, cleverly taking advantage of the big disparity in the gas oil link. Converting low price gas to high priced petrol or diesel is thinking outside the box at its best.

Is this just a flash in the pan?  Is this an experiment that won't work?  One way to see if something has legs is to see if someone else puts their money where their mouth  is.  In South Africa, someone who has little energy, but lots of mining experience is breaking cover:

 Diversified miner Anglo American – as well as Shell International – have applied to explore for shale gas in South Africa's arid Karoo, Petroleum Agency SA frontier geology manager Jennifer Marot tells Mining Weekly Online.

This follows the news that South Africa's Sasol has teamed up with Statoil of Norway and Chesapeake of the US to do the same.

"There has been a flurry of interest since the US's shale gas successes," Marot tells Mining Weekly Online, pointing out that Petroleum Agency SA – headed by CEO Mthozami Xiphu – should not be confused with the State-owned PetroSA.

Already we see South Africa is getting crowded:  Chesapeake/Statoil was good, Anglo American very interesting and Shell – well they're  quiet and closed mouthed all over the world.  But what is making this South African story really interesting is how the smaller guys are coming in.  

Marot says that the first application to explore  was from the South African company, Bundu Gas & Oil Exploration, which focused on deep resource gas.

The second application was from American shale-gas explorer Falcon Oil and Gas. Shell International was third,  the much publicised Sasol/Statoil/Chesapeake partnership fourth and now Anglo Operations has come in fifth."The whole of the southern part of the country is now covered with people interested in investigating shale gas,"

Falcon has had bad luck in Hungary,  is exiting Alberta and is investigating Australia's Beetaloo Basin as I noted last September.  But they still keep plugging away in the spirit of the wildcatter.  There are only two possibly destinies for wildcatters:  They go broke or they make a fortune.  But they can't stop trying.

Bundu is financed by two Texans and an Australian entity.  They may be in a spot of trouble in that they are up against a UK company in an argument over a game reserve.  And if there one thing the British do better than anyone is "not in my back yard".  Throw in a few zebras and lions and a super posh game resort and one has to admire Bundu's even trying.

A TRANS-Atlantic battle is brewing in a small Eastern Cape town where two Texans want to drill for gas – but in their way is an internationally-acclaimed British-owned game farm.


The Economist’s muddled thinking

The Economist has a number of revenue generating streams apart from the magazine.  I assume that the reputation of the magazine for high standards and expertise rubs off on their substantial Economist Conference Unit.Is their attitude to UK energy coordinated?

Only two weeks ago The Economist ran a leader entitled  This Changes Everything. As per usual it was based on editorial in the magazine, or the newspaper as they like to call themselves on the glut of gas:

Newly economic, widely distributed sources are shifting the balance of power in the world’s gas markets

But how much money is there to be made in telling good news?  None if the Economist's own Energy Conference is to be believed. 

The UK faces a range of urgent and critical energy challenges.
The next UK Government will be expected to deliver policy initiatives to ensure that progress is made towards tackling climate change, dwindling North Sea oil reserves and concerns over energy security whilst keeping the country on track to achieve its stated target of reducing carbon emissions by 34% by 2020.
Following on from The Economist's indepth analysis of Britain's energy crisis and held in the immediate aftermath of the General Election, The UK Energy Summit will provide a superb opportunity for strategic discussions to take place and allow attendees to debate and define a vision for the UK’s energy sector.

The indepth analysis referred to was the Economist's UK cover story of last August 

A shortage of power-generation capacity could lead to blackouts across Britain—and a dangerous reliance on foreign gas

That was the same old catastrophe story, with the same old suppliers and doom merchants, including the High Price Enabler in Chief, Alistair Buchanan.  And they'll be there again at the Dorchester in June trying to get the new DECC secretary to cough up for the usual cockamamie schemes to cure a problem we don't have.

A year is a long time in both politics and energy. This conference will probably make the Economist a lot of money, although it also highlights how little the one hand that takes the cash speaks to the one that writes.  Who has the upper hand at the Economist?

Fair and balanced

So which way for gas prices?  No surprise that I think the only way is down.  What saved the market's butt this year was a one in 31 year UK winter, similar proportions in Europe,colder than average in the US (but not the North East or Canada) and a tough one in China. Basically the entire Northern Hemisphere winter was relatively extreme. But this winter saw prices fall compared to futures from as recent as Q4 2009. 

In the US, gas storage was still being filled as recently as the end of November and the past week. The idea of storage being filled during the heating season is not unknown, but it is rare. The idea of it being done during an extreme winter is very bearish. 

Natural gas markets have to be in balance, otherwise the market, and pipeline systems literally go bang. The key fundamental of northern hemisphere markets is that gas flows into storage April through October and flows out in the winter. The fact that it isn't during a very severe winter points to another piece of conventional wisdom hitting the dust.

A Reuters story headlined "Bearish and bullish factors for US natgas prices" caught my eye.  I try to keep an open mind, as well as an open mouth, but one has to really grasp at straws to see chances of future price spikes.  Sadly for Ofgem, which is proposing 60 pence per therm as an end 2010 gas price according to Project Discovery, the chances of seeing US prices even rise look like slim to none.

The bullish factors aren't anything exciting or new: The possibility of a hot summer pushing up power demand,  a busy hurricane season (obviously they didn't read yesterday's post on that ex-indicator), US nuclear maintenance and that big fear that UK energy consultants push:  A rising economy will push gas prices.  We should be so lucky.  Let's cross that bridge when we come to it.

Past performance, and especially past their sell by date fundamentals, can't predict future outcomes. It now seems that the LNG will be available in even greater volumes and there will be a grand battle between shale and LNG in North America.  At least in the  near to medium term, it's a battle European end users will be benefiting from.

The flip side of low volatility.

How much better can the good news of shale gas get, than to hear that the unintended victims, although hardly innocent bystanders of abundant gas include gas traders:

The US natural gas market, which is famous for its volatility, is giving traders headaches with its uncharacteristic calm.

Benchmark gas futures have sunk nearly 15 per cent in the past month. But expected volatility, as implied by options prices, has glided to a five-year low.

UK gas futures still have some way to go as we've mentioned before. UK and European wholesale gas markets are still far smaller than US ones, and have the not inconsiderable benefit of having no touch at all regulation. In the UK, it's still unclear who the regulators actually is.The FSA is even sleepier about energy market regulation than Ofgem. The market's often don't make sense.This snippet from a daily price report on UK gas markets (for Monday March 22) is not at all uncommon:

Despite the prompt and curve trading in tight ranges for most of the day, a late rally saw prices jump. .. There was no clear indication as to why prices had moved in the way they had.

As a result we see UK curve prices at up to 30% premiums over prompt as opposed to a 18% in US markets. The size of the US markets means that manipulation of gas prices is nigh impossible, especially when, unlike in the UK, everyone knows the simple reason why volatility is falling away.

Goldman Sachs told clients last week: “We do not see a great entry point for a tactical trade in natural gas at the moment.”

Gas in some ways mirrors the milder tone across all risky assets. The Vix equity volatility index is at its lowest level since May 2008.

But while a lower Vix is often interpreted as a bullish signal for stocks, the volatility reading of gas coincides with a price slide.

This seeming paradox reflects a historic shift in the US, the world’s largest gas consumer. Drillers have unlocked vast new shale reserves and with the cost of production below the current $4 per million British thermal unit gas price, they keep adding to supply.

Poor Goldman. Traders always like to say that they don't make money on rising, or falling prices, but on the volatility.  But when massive supply meets stable demand the only thing to do is to hope for bad weather:

Hurricanes remain a threat, but many new supply projects are inland so the market appears less vulnerable to storms.

Apart from the fact that we're months away from hurricane season, let's revisit one of my favourite posts on the subject from May 2009:

In the past, waiting for the first hurricanes in the Gulf of Mexico has been a highly anticipated time for onshore natural gas producers, like waiting for the park warden to open the campgrounds in spring. The mere threat of a hurricane barreling over Cuba and into the Gulf toward the Texas or Louisiana coast – trashing production platforms and creating enough of a surge to uproot shallow pipelines and disrupt supply lines to the continent – was enough to elevate natural gas prices, allow producers to boost their Q3 cash flows and use the opportunity to lock in higher priced forward contracts.

Everyone in the business is now well aware of the shale gas boom, which is an ongoing mega trend that is redefining the sources and costs of supplying natural gas in North America. One less-realized consequence of this shakeup is that hurricane season in the gas markets has effectively been neutered. There isn't a lot of production coming from the Gulf of Mexico anymore, so there isn't much left to be trashed by the occasional Category 4 storm. In effect, hurricane season in natural gas markets has been obsolesced with a human activity that's been around ever since the time of Stonehenge – innovation.

So if you're a trader, or an end-user who is on the other side of a trade that uses hurricane fears as a backstory, one word of advice:  Don't.


China, Shell and Shale

At an energy event last week, a speaker trotted out the new Russophobia: Sinophobia. Can't be scared into being scared by Russia anymore? Easy,  energy consultants push out the China as big huge energy hog story. China is going to suck up all the energy in the world, but if you pay a big fee commensurate with the size of the problem, those expert consultants will get you a long term price deal.

I've noted at length here how China is far more likely to solve an energy crisis than cause one. They'll make good money doing so as well.

China has also been the obvious place to look for shale, and signs today that the search is bearing fruit:

Royal Dutch Shell has strengthened its ties in China with a 30-year deal to explore for natural gas in the country.

Hmm. Is that it? How about this buried at the bottom of this BBC story:

And in January the two companies began assessing a shale gas field in Sichuan.

NHO readers knew that story in, er, November actually. No, the real story is, as usual, not in the UK press. Thirty year gas deal is the lead at the boring Beeb.  At the WSJ, they can see below the lede and figure out what the real story is. Not that that should be so difficult given the chief executive of Shell spells it out:

International oil companies such as Royal Dutch Shell PLC are betting they can tap unconventional sources of natural gas in China and copy their success in the U.S.

"There is a big expectation building up, clearly, given the fundamental change in the domestic North American gas market," Shell Chief Executive Peter Voser told reporters Tuesday. New sources of natural gas have added supplies in North America equivalent to about a century's worth of use, he said.

"China has similar geology, which could therefore have a significant potential," Mr. Voser said.

"This is another step forward for Shell's world-wide tight gas strategy, building on our technology and production track record in China and elsewhere," said Malcolm Brinded, executive director of Shell's upstream international division. "The agreement will strengthen our partnership with CNPC in developing cleaner energy to meet China's growing needs."

Which is where we came in. China can well handle it's own energy needs. It won't push up your gas bill now, in the medium term or the longer term. But it's a nice little scary story earner.

UK Shale Gas

I originally posted this on March 11 2010.  4 months before Channel 4 and 10 months before the Radio 4Today show. 

So what about the mysterious Cuadrilla Resources mentioned earlier this week in our E+P link?

In the Netherlands, Cuadrilla Resources was recently awarded a license on the margin of the London-Brabant High and West Netherlands Sub-basin of the Anglo-Dutch Basin. The Epen Formation shale (Namurian) is likely the primary target in this location. Cuadrilla Resources, through its Bowland Resources subsidiary, also has interests in the Cheshire Basin in northwest England. Spudding in March 2010, the company’s Preese Hall 1 well will test the Namurian-age Bowland Shale. The depth to top shale is estimated at 4,300 ft (1,312 m) with a gross prognosed shale thickness of some 4,000 ft (1,220 m). This well is the first known test of the Carboniferous shale gas play in Europe.”

Cuadrilla is hiding out in Lichfield, Stafordshire, not exactly a center of world energy finance. They don’t even have a web site. But who needs to have a fancy office, when you can have two very influential and deep pocketed hedge funds backing you?

Riverstone for example

Riverstone/Carlyle Global Energy and Power Funds, a group of energy-focused private equity funds managed by Riverstone Holdings LLC, has committed to subscribe US$58.0 million for equity in Cuadrilla Resources Holding Ltd, the holding company established by Lucas to hold its investment for unconventional hydrocarbons exploration and development in Europe.
Cuadrilla is now well capitalised with sufficient resources and the ability to fund its drilling and exploration program for the next three years. The board of Cuadrilla will comprise three representatives from each of Lucas and Riverstone, with two representatives from management.
Allan Campbell, CEO and Chairman of Lucas, said: “With Stage 1 of the Cuadrilla Business Plan now completed, we are very pleased to have an investor of Riverstone’s standing join us to assist in the next stage of Cuadrilla’s development. Riverstone already has a significant investment portfolio in the energy and power industries. This network of strategic relationships together with Riverstone’s substantial financial resources will be of considerable benefit to Cuadrilla.

“Cuadrilla has acquired an extensive portfolio of highly prospective acreage throughout Europe. With continuing advances in drilling and fraccing technology, we have high expectations of proving up this acreage.”

Riverstone has John Browne of BP on the board besides others, but they are small fry compared to The Carlyle Group

The Carlyle Group is a global private equity investment firm, based in Washington, D.C., with more than $84.5 billion of equity capital under management, diversified over 64 different funds as of March 31, 2009.[1] The firm operates four fund families, focusing on leveraged buyouts, growth capital, real estate and leveraged finance investments. The firm employs more than 890 employees, including 495 investment professionals in 20 countries with several offices in the Americas, Europe, Asia and Australia; its portfolio companies employ more than 415,000 people worldwide. Carlyle has over 1300 investors in 71 countries.
Carlyle was ranked as the largest private equity firm in the world, according to a ranking called the PEI 50 based on capital under management.

 

The Carlyle Group has had not one but both President George Bush’sinvolved along with small fry such as John Major, James Baker, two former Thai Prime Ministers, former US Defense Secretary Carlucci etc etc.  And Olivier Sarkozy half-brother of the French President. Michael Moore even alleged the Bin Laden family was involved.  On a positive note, they also own Dunkin Donuts.

The point being of course that are serious money.  Now it could be that $58 million out of $85 billion means only back of the sofa money or that the chairman of Cuadrilla sat next to someone at dinner and it was his lucky night.  Or could they be on to something?  Alistair Buchanan thinks shale gas is no big deal and John Dizard of the FT think it’s all a big con.  But AJ  Lucas is huge in Australian infrastructure, including Gorgon LNG and pipeline and CBM amongst other things.  Amateurs, they aren’t.

So where is all this money going?  Down a hole, not in Blackburn Lancashire, but close enough. Preese Hall Farm is in Fylde, near Blackpool.

This is what Cuadrilla said in the Plannng Application:

Preese Hall
According to E+P, this is the first Carboniferous Shale Gas Play in Europe.  The area is in the same geological area as Centrica’s  Morecambe Bay gas field.  A lot has changed in shale technology since BG found the gas uneconomic in 1999. This could be big.  Maybe it will be a bust.  But all those influential people sure seem to be keeping Alistair Buchanan of Ofgem out of the loop.

A few years back Blackpool in NW England tried to revive itself by seeking to be the site of casino. They lost that one, but with big players coming to put money on the table,  they could still be in the money.