Volatilty returns with a vengeance

The UK gas market has been up to its old tricks lately.  I thought nothing could surprise me in how the market has occasional outbursts of manic depressive behaviour.

What the market does one day or the other shouldn't really impact buyers, but unfortunately it does. 

The UK has the worst of both worlds:  They have  a competitive market, (good) but with no touch at all regulation combined with unreliable meter information, which adds up to anyone who doesn't invest time, thought or money in energy consultants knowing they are getting ripped off, but unable to prove anything. And that is bad.

The competitive market can't really give customer what they  want (low prices) or the Mick Jagger solution of giving them what they need (trust and transparency) either. 

Unless you are a large (£200K+) user, you get three things you don't want: no information, muddy pricing and shafted.

Even large customer's contracts depend on guesswork. In a world where your mobile phone can find you zooming down the highway on the other side of the world, your energy company can't find your meter. Even when everyone knows it's under the stairs. Or to be exact, your energy company can't, or won't read the meter information. 

Without volume of Time of Use information, energy buyers, or payers as we prefer to call them, have no visibility.

Both sides now.

Terry Engelder doesn't mention in this piece from the Philadelphia Inquirer that he was the geologist who first broke the story on how absolutely massive the Marcellus Shale in the eastern US is.  As I say to the disbelieving UK masses, the only controversy over the Marcellus is whether it or Qatar is the largest gas field in the world.

He is also remarkably balanced and fair in the pre-Fox meanings of the word and seems to remain more of a scientist than a businessman as he could easily have been. He makes good points here:

The exploitation of natural resources often spawns two camps, the industrialists and the environmentalists, each of which engages in disingenuous arguments – the bigger the resource, the more disingenuous the arguments. The debate over extracting natural gas from the Marcellus Shale has followed that pattern.

We've pointed out before that some environmentalists have a gut reaction against any kind of hydrocarbon while some oil and gas industry people can't quite shake off their drill baby drill past either.

A notable exception is someone like Chesapeake who made the realisation that there is so much resource available, that where the opposition, or as they put it the brain damage, is so strong, they simply walk away. Its actually cheaper. Pick a fight with greens and it makes things worse.  Walk away to drill elsewhere and it drives some greens nuts. The green narrative is some kind of Silkwood story of defeating corporate evil. When the corporates leave the space to go somewhere where people realise that $5K an acre and 25% royalty means they have the option of showering in Evian if they are that concerned with ground water contamination, it annoys greens far more to win by being ignored.

Back to the issue of contamination, where the narrative of bad water has a possible scientific explanation:

Many private wells in the state have dissolved methane in their water, and people drink this water all the time with no ill effects. But if the volume of methane in the water is near saturation, it can collect in pockets of gas when underground pressure is released by water pumps that aren't properly vented.

In the course of our research, my colleagues and students at Penn State have drilled into pockets of methane gas at depths of 500 to 2,000 feet. When such a pocket is penetrated, gas rushes up to the surface, blowing foaming, white water out of the well – much as carbon dioxide drives soda out of a shaken bottle. Fourteen families in the Dimock area have described milky-looking water in their wells.

Reading this by the way brings to mind Gazprom's view, also widely supported by UK CCS and nuclear handout fans,  that shale gas is bad for the environment.

The state Department of Environmental Protection is also working with the industry to make sure groundwater is protected, and the Cabot shutdown is clear evidence of this. Yet, in a long letter to the Centre Daily Times in State College, an environmentalist recently wrote that gas drillers and DEP regulators "can and do destroy communities and ecosystems, even when the people in those places don't want to be destroyed and say so." This is an equally disingenuous statement from the other side of the debate.

Whether groundwater is contaminated by chemicals employed in deep hydraulic fracturing – the process used to retrieve shale gas – is a controversial question. The industry claims there have been one to two million uses of the technology without a single report of such contamination. The physics of groundwater flow give some credence to that contention. (Surface spills are a different issue, but they are relatively easy to manage.)

One environmentalist recently pointed to alleged cases of contamination in Pennsylvania. But one was a clear case of methane migration from shallow pockets, not from hydraulic fracturing. Another involved the presence of arsenic at 2,600 times the federal standard for drinking water, but arsenic isn't used in fracturing.

The lessons from the Marcellus that companies like Statoil will learn are not only how to access shale gas, but also must be to put the gift of shale in a proper perspective.

The Marcellus Shale is too important to America's energy future to be the subject of disingenuous arguments from either side. It is a gift to the people of Pennsylvania and the greatest opportunity they will ever have to move away from foreign oil and toward a fuel with a smaller global-warming footprint. It is an opportunity that requires clear thinking on both sides of the debate.

Declining energy use again.

I pointed out the other day the key fact being ignored by energy buyers, energy markets and just about everyone, except for energy network owners,  is that we are using energy far more efficiently, which means we use far less, which means running out of gas:  No way.

Despite the coldest winter since 1978,  British Gas recorded a decline in gas use year on year:

Average gas bills fell 2% in the first three months of 2010, despite the coldest winter for a generation, British Gas said today, as it proclaimed that investment in energy-efficient boilers and insulation is starting to pay off.

We are seeing the benefit of underlying energy efficiency measures, improvehearingnaturally.com/Buy-Propecia.html with half a million new boilers installed across the UK in the last year alone and more than 1 million homes putting in better insulation," he said.

Bad news on the horizon though for domestic end users:

But although gas bills came in lower than expected in the first quarter of this year, the outlook for next winter is poor. In recent weeks, the price per therm of gas has jumped from 37p to 43p, with forward contracts linked to the rising oil price.

But of course for customers of www.easybusinessenergy.com who pay spot prices are unaffected.  Why pay for December today?  Sadly domestic end users don't have the option.

Coal v Gas in US Power

The conventional wisdom was always coal was dirty in carbon but down in price.  But now that we see gas as cheaper and cleaner what future is there for coal.  Judging by what’s happening in Canada, its not a good one.

It was nearly one year ago that federal Environment Minister Jim Prentice got into a bit of hot water with power generation companies when he said the government was going to require coal-fired electricity plants to be phased out as they reached the end of their useful lives.

The comments didn’t go over too well because many coal-fired players, Trans Alta Corp. among them, have been refurbishing old plants to extend their lifespans. There was no indication in Prentice’s comments as to if or how said companies would be compensated for investments made that would not be recovered. This continues to be an issue.

But the times they are a changin’.

Prentice has been meeting with all the coal-fired players and appears to be moving in the direction where the emissions associated with natural gas-fired power will become the gold standard for all electricity generators. The first step will be to get the older plants converted to using natural gas.

Imagine the gnashing of teeth from UK electricity producers.  Surely the Canadian power industry will dump this one?  Maybe not

And Snyder, as operator of the largest coal-fired fleet in the country, is onside with where Prentice is headed.

“It makes sense to migrate the older plants to using natural gas because it will decrease the economic impact on those plants and will decrease carbon dioxide emissions faster,” said Snyder.

One reason maybe that gas isn’t any more expensive than coal these days and is far cleaner.  The same old CCS story is still spun as a rearguard action by coal but…

The newest plant being built by Calgary’s TransAlta and Edmonton’s Capital Power — Keephills 3 — will have a CCS mechanism to address emissions. Still, the jury is out as to whether CCS is viable on a commercial level. Moreover, it will undoubtedly add to the cost of power; the cost of building coal-fired plants with CCS will result in a higher price to consumers than will the construction of plants that use natural gas as a fuel source — especially if natural gas remains range bound between $5 and $6 per thousand cubic feet in North America.

The jury will be out for another ten years , during which we squander the rather obvious opportunity to simply use existing gas capacity  efficiently . And if gas stays at $4.20 where it remains today coal CCS will be truly pointless.



Fearing the wrong G

I did a post on this subject last July 22 pointing out that while in January 09,  a one day jump of year ahead gas futures of 2.68% was blamed on Gazprom, no one complained of foreign threats to energy security when Goldman Sachs said that UK prices would rise, and surprise, surprise they did, ramping up 4.34% in one day.

Goldman got it wrong of course, although since they are forever on the winning side of any bet they ever make,  they didn't actually have to cover it.  Prices didn't rise, and after a short bump up they, as we had predicted, collapsed a further 40% as this chart for November 10 NBP gas shows.

November 10 Gas

 Still, when your name is Goldman,  getting it wrong is irrelevant:  as far as the markets are concerned Goldman is invincible, despite the recent revelations.  How else to explain an incredible 10.3% rise in May UK NBP gas day on day.


So which nefarious foreigners had the UK gas buyer at their knees.  Gazprom?  Those evil Norwegians, or perhaps we can blame the Dutch. 

No, it was Goldman who made this call today:

US nat gas rebound our most differentiated energy commodity call
We believe our most differentiated energy commodity call at this time is our view that US natural gas is near trough and can rebound over the remainder of 2010 and into 2011; the pullback in the rig count announced this week is consistent with our view that drilling activity cannot be sustained at $4/MMBtu. Gas-leveraged equities have notably lagged oil- leveraged equities over the past two months, such that near-term relative risk/reward increasingly favors the former; small-/mid-cap E&P stocks and land drillers are most leveraged to rebounding US natural gas prices.

Even Goldman couldn't really come up with anything convincing

    On April 22, the EPX index was down 0.6% prior to 10:30 am; then, following the announcement by the EIA that natural gas storage the week ended April 16 built by 73 Bcf versus 78 Bcf consensus, the EPX rose 1.7%.

  On April 23, EPX index was up 0.3% prior to 1:00 pm; then, following the announcement by Baker Hughes that the natural gas rig count dropped 17 on the week, the EPX rose 2.7%.

So why mention it:

On an absolute basis, neither data point was meaningfully positive. The 73 Bcf build was higher than the five-year average of +33 Bcf for the week, but was partially impacted by mild weather. The rig count has returned to levels of 2-3 weeks ago, still +175 rigs for the year. However, the week-on-week rig count decline was the first in 2010, while gas storage built by 715 MMcf/d less than consensus.

Maybe being Goldman means never having to say you're sorry.  It's time to ramp up Natgas 10% in a day, and don't let little things like fundamentals of supply and demand get in the way.

After all,  the little people as Leona Helmsley referred to us, are the ones who pay for the gas or the power generated from it at the end of the day.  Just like taxpayer bailouts, but with even less representation.

Declining energy use

One of my favourite topics at NHO from the start is the news that energy use in developed countries is declining.  One of my favourite energy commentators is Peter Tertzakian from Calgary and he highlights this key issue for UK end users here.  The entire UK energy establishment, especially those in thrall to Peak Oil, combine with oil and power traders who sell shortage scenarios based on an interminable rise in energy use. As usual, the conventional wisdom jars with reality.

While the big “oil story” that every one talks about is China’s growth, there is another big story, which is not recognized as “big,” because it’s a collection of little stories that are slowly adding up to be significant news at the margins of global oil consumption. A few thousand barrels here, a couple of hundred thousand there, and pretty soon consumption is held in check or starts declining.

That’s what’s happening in the wealthiest, developed countries like Japan, and even in the United States. This fact is borne out in data from the International Energy Agency (IEA) that shows that collective oil demand within the OECD (Organization of Economic Cooperation and Development) countries to be flat-to-retreating – and the stalled consumption is not all explainable by the Great Recession. In fact, oil demand in many OECD countries peaked well before the price spiked to $147/B and well before the financial crisis.

In the UK and most of the OECD, oil, natural gas and power use peaked as early as 2005. The reality is that little things mean a lot as the old song goes.  And a lot of little things – low energy bulbs, efficient boilers and HVAC, power sipping electronics – soon start to reduce energy consumption in noticeable ways.

Most energy commentators just don't get it.  They go with outdated models which track rises and falls in GDP with changes in energy consumption.  They then start selling the same old high priced solutions to problems we no longer have.  But change is inevitable. Just gradual.

For the next one-to-two years the China story is still going to dominate oil market sentiment.Such assessment is justified, because each new barrel of oil demanded by emerging markets will not be fully offset by a full barrel of demand mitigation or fuel substitution in developed nations. However, that fragile conjecture is only valid at today’s oil price in the mid-$80/B range.At $100/B little stories turn into much bigger stories that endure.

Why not on Russian shale?

An intriguing view on Russia and shale:

I added up the numbers shown for West Siberia and the Russian Arctic and quickly understood that Russia is No. 1 worldwide in shale gas reserves – though I’d not actually heard anyone say this in any of the conferences or round tables I’d attended. The speaker was taking written questions from the audience, so I scribbled one down about Russia. It went unanswered. So I approached him after the meeting ended and asked him directly. His reply? “Oh, yeah, they do have reserves but they’ll never do anything about it.”

Gazprom has made noises about accessing US shale technology, and why not?  Many of the reasons given for European shale not adding up- crowded country, lack of capability and infrastructure and lack of political will – don't apply in uncrowded, gas expert Russia.  In fact it may make more sense to access Russian shale than the big expensive projects in places like the Yamal.

   And when “European” shale gas production is spoken about, it’s Eastern Europe we’re talking about. I’d assume that Russia will be watching closely this development and might need to develop a strategy to participate in shale gas in Eastern Europe. For sure, if Europe produces shale gas, this will have an effect on demand for Russian gas. So the whole debate over shale – whether shale is a serious, long term source of supply or a speculative soap bubble – is important for the Russian oil industry to consider.

The end of the Ukraine gas wars?

It's not just the combination of changes in economics and geology that makes European fears over natural gas security of supply outdated,  perceptions also need to be revised to take into account changes in the political landscape

April 22 (Bloomberg) — President Dmitry Medvedev agreed to spend $40 billion to cement Moscow’s ties with Kiev after five years of tension by cutting gas prices to Ukraine in return for an extended Russian naval presence in the Black Sea.

Russia agreed to cut the natural-gas prices it charges Ukraine by 30 percent in a deal that obliges Ukraine to import more gas from its neighbor to the east. As part of the accord, Russia will keep its Black Sea Fleet base 25 years longer than the existing lease allows.

The Ukraine Russia brouhaha has always had a large political element, and politics are far more fluid than gas or oil. Enormous changes can happen at the last minute and often do.  Multi-year investments in things like Nabucco to increase gas security in Europe, or CCS to keep the lights on as in the UK, can end up being irrelevant very quickly. 

For Ofgem particularly to think that the Russia-Ukraine dispute is as permanent a part of the political landscape as the Berlin Wall, Northern Ireland, apartheid to name just three "intractable" political problems, has far higher potential to be an expensive mistake than to be a safe bet on a secure future.  Unfortunately, it's far more likely to be an expensive mistake for us, if we pay now to solve problems that are just as likely to no longer exist at some point over the next forty years of UK energy policy.

“It looks like a peace treaty after a war,” said Mikhail Korchemkin, director of East European Gas Analysis in Malvern, Pennsylvania. “This deal will be valid as long as Ukraine behaves. If they do something the Kremlin doesn’t like, the discount will be canceled.”

This won't be the first time internal Ukrainian politics can change and they may change yet again. But why build an entire energy policy on assuming the worst? That builds in a high priced risk that history may suddenly change and volcanoes can erupt and that seismic shifts can occur in places like UK politics for example.

Gas prices to the deep freeze for 10 years.

For those who continue to miss the point of any impact of shale gas on UK gas prices, one has to realise, as this volcano has shown, that we live on an inter-connected planet. The idea that the UK as a unique  gas island, where as well as  three pronged plugs and driving on the left the 21st century doesn't apply,  flies in the face of globalism. UK gas prices have as much to do with the North  Sea as 2010 has to do with 1995, which goes a long way to explaining why some who live in the past don't quite get it.  UK Gas prices depend almost completely on US Henry Hub gas prices, because LNG will flow to either market.  So the combined impact of shale and LNG means UK gas prices will move in tandem.  Predictions are dangerous, especially about the future.  But if one can get out of the Little Britain tendency, this is a good place to start:

Shale gas has destroyed demand for liquefied natural gas imports in the US, sinking cargoes into a deep freeze for perhaps the next 10 years according to a new research report by Houston-based securities analyst Tudor, Pickering, Holt 

Shale gas renders US LNG imports nearly unnecessary over the next five to 10 years,” the report stated.

TPH managing director David Pursell said: “The general gist is the US doesn’t need it. We (the US) are the market of last resort.

The US is the largest user of natural gas.  The subtraction of the US gas demand means that even with increased use in Europe of LNG, Europe's role as the second last market of last resort will mean that unless we talk ourselves into security of supply paranoia, we have plenty of gas at fair prices for years to come.  Even without a molecule of European shale.

Three Reasons why gas prices will go up. And Three Reasons they won’t.

Ever notice how those who try to convince people that prices today (or any day for that matter) represent a buying opportunity, can only do so for negative reasons.  Here are three of the most common here in the UK:

1) Foreigners: Almost everyone, with the possible exception of Ofgem,  don't believe that Russia is threat anymore.  But many share Ofgem's equally delusional fear that LNG cargoes won't come to Britain.  It isn't quite explained where it will go to but one fear, is that there will some type of Gas OPEC that will cut gas supplies to push up prices.  First the economics:

If Algeria, Russia, Qatar etc etc cut gas production prices will go up.  That will be the best thing that happened in years to US shale producers,  the North Sea,  Alberta, Norway, Netherlands etc etc.  It would also give a massive shot in the arm to potential shale production in Europe, China, India, Australia.  It would be an own goal of massive proportions for such an organisation.

Then the politics.

April 19 (Bloomberg) — Algeria, Africa’s biggest exporter of natural gas, is getting no help from Russia and Qatar in curbing production to increase prices in this year’s worst- performing energy commodity.(Algeria's) proposal would make the group more like the Organization of Petroleum Exporting Countries, whose production cuts helped revive New York crude oil prices last year and pushed them to a 18-month high earlier this month.

U.K. natural gas for delivery tomorrow dropped 11 percent this year in London to 31.5 pence a therm ($4.85 a million British thermal units), or about $26.25 a barrel of oil equivalent. North Sea Brent crude is worth about $84 a barrel.

Can't resist pointing this out :

Rising crude prices, which gained 71 percent last year, are bolstering long-term contract prices for gas, leading buyers including Germany’s E.ON AG, Germany’s biggest utility, and GDF Suez SA to limit contract deliveries and buy cheaper fuel on the open market.
“The spot gas element in our overall supply portfolio has almost doubled,” Wulf Bernotat, chairman and chief executive officer of E.ON, said last month.

Strange how E.ON UK  is an unapolegetic price hawk in the UK who see no reason to pass on anything but derisory retail prices wholesale cuts usually by parroting Ofgem's fears.  Or perhaps they wrote a lot of Project Discovery themselves? But with a regulator as incompetent as Ofgem, who insist on bending over backwards to raise prices for consumers,  E.ON UK would fail their shareholders by not taking advantage of the planet's worst regulator. 

Meanwhile back in Oran, the other guests aren't helping the host:

It isn’t possible to limit supply, Russian Energy Minister Sergei Shmatko said April 8. Russia is the biggest single source of gas for Europe, ahead of Norway and Algeria.

“GECF cannot control gas production or prices for the next five or 10 years since the majority of natural gas supply deals are long-term contracts,” GECF Secretary-General Leonid Bokhanovsky said in a written reply to Bloomberg questions. A former executive at Russian pipeline-builder OAO Stroytransgaz, Bokhanovsky was elected as the GECF’s first secretary-general in December.

Qatar, the world’s biggest LNG producer, doesn’t plan to reduce gas output, Minister of State for Energy Mohammed al-Sada said last month.

Egypt doesn’t support a cut in gas production  Energy Minister Sameh Fahmy said in Oran today.

And just to underline to those who don't think shale gas has any impact on Europe:

If shale production can be replicated in Europe and Asia, it will threaten the two main markets for gas exports, Caruso said. GECF is “certainly concerned about the success of shale gas technology in North America,” he said.

I've pointed out before that even Russia doesn't share the Project Discovery fears anymore. So is it true that it's only  the very odd couple of Algeria and Ofgem who want to push up prices?

No, Ofgem are truly friendless:

Production of unconventional natural gas in the U.S. is sustainable, (Algerian Minister)Khelil said today. It has led to an oversupply of LNG import capacity in the U.S. and Australian LNG output will exacerbate the surplus, he said.

Reason Two

Oil is on the up again.The oil link is broken. It ain't coming back, no matter how hard some people want it. A picture or at least a graph from Reuters, is worth a thousand words.

Three: The economy is recovering, so gas prices will go up, best to buy next winter now. Or perhaps not:

Prompt British gas prices eased on Tuesday on comfortable supply, while prices for contracts for next winter and beyond rose.

And the logic for next winter:

The back of the curve is relatively strong compared to the prompt. People maybe think we are coming out of recession faster, at least the banks seem to," said one trader with a utility

Are those the same banks who failed to predict the recession, or the ones like Goldman who make money out of every side of the market bets?

But whether demand will rebound strongly enough to make a significant impact on supplies remains uncertain, with an ongoing shale gas boom in North America and increasing liquefied natural gas production set to keep pressure on gas prices.

 "There's a lot of gas around still," the trader said.

Gas has a floor, but with next January being offered at 15% more than January 2010, this market isn't it.  Predictions are meaningless, but history says:  Buy spot.  And suckers pay retail.