Can gas be the new oil?

Can gas evolve into a globalised, fungible energy commodity the way oil is?  The world oil market is based on a network of local markets, where arbitrage provides the principles and governs the market. Despite numerous local markets each with a variety of blends, the key oil marker is the BFOE, Brent,Forties, Oseberg, Ekofisk Crude. WTI,Dubai, Singapore and all the others seek direction from BFOE. The markets are liquid enough to operate efficiently. Price discovery is open, immediate and efficient.

We are a long way off in gas, but not perhaps as far off as once thought. Gas has three strong precursors already present: the very liquid North American market,  world LNG flows and a strong supply and demand base. The oil gas link in European markets, although likely to be strong for many years, will gradually disappear, with the oil link a declining, specialised influence in some of the older markets in North Asia and  Europe. Declining is not disappearing – but it certainly is not growing either.The gas glut this past winter has already led to adjustment of gas purchase volumes, and each October, the start of the European gas year, we are going to see more and more spot gas entering the market as old contracts expire and new fields come on line.

Liquidity is the main issue, but the physical and virtual links between world markets is only going to increase. Henry Hub will increasingly act as a world benchmark with varying uplifts in different markets. LNG trading will use HH for various reasons, but I think that HH pricing will come to the fore for a surprising reason that even a year ago thought unlikely: US gas exports.

I have it on unimpeachable, but for the same reason unattributable, information that  US exporters and European buyers are talking LNG deals based on HH+ pricing from the US Gulf Coast.

It's unlikely to happen this year. The first requirement is to ensure that US gas storage fills up. Assume that the US hurricane season springs no surprises. Next, assume, as appears to be happening, that shale moves from strength to strength. That means converting the existing terminal to export.This means that US gas will need an export market to prevent a domestic price collapse, which is the last thing the nascent shale industry needs.

The only logical alternative is world markets, where NBP winter 2010 is already trading at well over $7MMBTU. Even $5 is a substantial improvement for both European consumers and North American producers. Last years $4 gas went to below $3. It will go there again. But exports can provide a bounce back. Stuck in the middle will be European consumers between the mammoth Qatar volumes coming to market this winter and at a minimum North American re-exports of recycled Trinidad, Peru and Nigeria cargoes that get parked at US LNG terminals. And if Qatar is worried about that, it's clear that if the Gulf Coast can export, then virtual and subsequent physical exports straight from the Marcellus to the world via Cove Point LNG in Baltimore will prove that shale gas will change the world.

US gas exports to the UK. If that won't nail down the lid on security of supply fears, what will?

Catalytic shale gas

Strikingly different approach to gas in this report on catalytic shale gas, i.e. gas that can engineered. Shale gas itself is released from rocks.  What if it can be manufactured in those same rocks?

The prevailing belief with oil and gas is that they’re finite, or non-renewable, resources – in other words, what’s there is there.

But what if that’s not true? What if, wonders one Houston geochemist, the gas that comes up isn’t just sitting underground waiting for extraction, but instead is “engineered.

Think of this sort of as an enzyme,” said Eleanor Herriman, an engineer at Petroleum Habitats who has co-written papers with Mango and Jarvie. “This overturns a lot of thinking of where gas comes from and it has a lot of implications for how shale gases are drilled and produced.”

The sound of conventional thinking being overturned  is of course our favourite noise. This isn't an easy piece to understand for the non-geochemical engineer with a fair amount of physics and a dash of techno-optimism, but this isn't the first time it's been mooted. Last year I posted on The Great Energy Transition a book by Robert Hefner, another one with a long, long oil patch history, who posited similar ideas that gas is essentially limitless.

For those who think that today's shale gas is hype,  engineered gas starts moving into the realm of science fiction. But, lets have some perspective:

The concept of catalytic gas has been around but it’s never been given serious consideration because certainly nobody thought five years ago that producing gas out of a source rock would generate anything other than what’s already there. We didn’t,”

Conventional wisdom says oil and gas drilling is all about examining geology, locating the best spots to drill and getting it to work – there are good wells and bad wells and the former is the goal.“What people currently think is there’s a set amount of gas down there, and what we’re doing is drilling down and tapping into it,” Herriman said. “No, no – it’s an active chemical process down there and we can engineer to get more gas than is currently getting produced.

We looked at the Barnett, Marcellus and others in the lab and we knew they generated catalytic gas at room temperature. It was a natural activity,” he said. “What was a total surprise was that the process we were looking at in the lab was occurring during the production of unconventional gas. It’s new. We think pressure is playing a very critical role

This is one of those articles that thanks to it's complexity and especially because of it's importance, I'd recommend reading it all. Just remember who pointed you that way and don't forget to come back.

India understand shale

India's Economic Times in a story called Shale gas, not Iran pipeline, our energy hope understand the geo-politics around shale.

External affairs minister S M Krishna visited Tehran in mid-May and said India was still interested in the proposed Iran-Pakistan-India (IPI) gas pipeline, but expressed reservations on security grounds. However, there is now a more important economic reason to oppose the pipeline.

The IPI gas price has become ridiculously high in the light of new technology for extracting gas from shale, a common sedimentary rock found across the world. The IPI project never made sense from a security viewpoint. It now makes no sense from an economic viewpoint.The US has pioneered shale gas technology.

Meanwhile, India (Reliant Industries recently bought into the Marcellus big time) is a quick study on shale. Certainly far quicker than Europe.  But while we hope the following is true,  Europe still has a lot to gain:

(India) must insist that the Gulf countries abandon the old price link between gas and oil, and accept the new low prices established at trading hubs like Henry Hub in Louisiana. Iran, Qatar and other Gulf countries are aghast at the emergence of shale gas as a rival, and want to stick to the gas-oil price link. India must refuse to do any gas deals with them until they drop the link.

Indeed, India may need no gas deals at all with Gulf countries for a long time. Gas from the Krishna-Godavari offshore basin is going to flow in huge quantities in the next few years, making India self-sufficient. New gas deposits are constantly being found offshore.

If Henry Hub + prices become the method for price discovery of natural gas in the same way that Brent+  is the worldwide oil benchmark, then Europe also benefits.  The only question is if Europe shies away from actual production and loses money that way, or simply chooses the quick, easy and relatively cheap option of paying HH+ anyway.


In case you missed No Hot Air in the FT

Strange events at the FT last week in that No Hot Air was significantly quoted in a piece within the Wednesday Gas Industry Special Report specifically in a story that curiously never made it to the print edition.  Any publicity is good publicity, but call me old fashioned, and newspapers should print the story as much as possible.

For those who missed it, it was interesting in that it did raise some questions that UK Energy Policy needs to address.

“The sudden emergence of shale gas as a global driver on gas supply and prices means that security of supply concerns are certainly dormant and possibly dead,” says Nick Grealy, an energy analyst who runs the No Hot Air website.

He adds: “If gas is the new game-changer in world energy, then much of UK energy policy must move with it. Coal carbon capture, and possibly nuclear generation and gas storage, the most expensive solutions to a problem we more than likely no longer have – that of gas scarcity – need to be updated to reflect reality, not paranoia.”

Great stuff, but nothing new for my on-line readers. Hardly likely to ignite a national debate if nobody actually reads it (there was no link from FT Energy Source either).  But there are some surprising national forums coming up where I will be spreading the shale gospel in person.  Details soon.

Meanwhile at the FT Weekend Edition, the opposite happens.  Matt Ridley, author of The Rational Optimist appears in the print edition, but not on line.

Sorry, I left the piece in Manchester, but it basically was a list of five things he felt optimistic about including as I recall  genetics, climate change and shale gas.  Well worth reading, but with the print edition lining  cat trays all over the world as we speak, it's another shame that the story is becoming less accessible!

Gazprom downgraded on shale.

On the one hand the May 12 DECC report on UK energy security:

The Russia-Ukraine gas dispute in January 2009 highlighted the impact that events far away can have on the transit of gas to the EU. The UK was affected only indirectly by the consequences of that dispute. However, the growing interconnectivity of the UK and European markets – and an expected increase in EU import dependence as a whole up to 2030 – points to the need to take a cautious approach.

The step from caution to paranoia to delusion isn't far. But come on guys, update it.  We'd tell you but for once there are no phone calls or emails allowed, and not a single name attached to it.

But at the end of it all, forces far, far more powerful than the UK government or any other.  Gazprom meets the most powerful forces on the planet: It gets downgraded:

Bloomberg

MOSCOW — Gazprom was downgraded to “sell” from “hold” by ING Groep as the world’s biggest natural-gas producer may have to lower prices on increased competition from U.S. shale gas and liquefied natural gas.

Gazprom, which supplies about a quarter of Europe’s gas, is facing growing competition from increasing global LNG infrastructure and production from unconventional sources such as shale rock in the U.S. and coal-bed methane in Australia, Igor Kurinnyy, a London-based analyst at ING, said in a report.

“The emergence of unconventional gas poses a serious risk for Gazprom’s oil-linked export prices in Europe,” Kurinnyy wrote in a report dated Wednesday. “The volumes of gas traded on the spot market will increase substantially to the point where the gas spot price will become more relevant than the current oil-based price.”

So now we have DECC and Ofgem battling the markets in insisting what a threat Russia is to UK energy security.

Water, the enviroment and shale: Some surprising facts

The idea that shale gas is some kind of blot upon the landscape and a massive consumer of water is approaching the level of an urban myth. It certainly is the number one objection raised by the few people who have even heard of shale.

It's a similar story to the we're running out of gas story.  Let's get reality to catch up with perceptions.

These figures come from Chesapeake, so the true opponents of shale may look askance, but for those seeking facts instead of opinion:

Water is an essential component of Chesapeake Energy’s  deep shale gas development. Chesapeake uses water for drilling, where a mixture of clay and water is used to carry rock cuttings to the surface, as well as to cool and lubricate the drillbit. Drilling a typical Chesapeake Marcellus deep shale gas well requires approximately 100,000 gallons of water.
Water is also used in hydraulic fracturing, where a mixture of water and sand is injected into the deep shale at a high pressure to create small cracks in the rock and allow gas to freely flow to the surface. Hydraulically fracturing a typical Chesapeake Marcellus horizontal deep shale gas well requires an average of five and a half million gallons per well.

And, as we always do with numbers, How big a number is that:

How much is 5.6 million gallons?
The 5.6 million gallons of water needed to drill and fracture a Marcellus deep shale gas well is equivalent to the amount of water consumed by:

New York City in eight minutes

A 1,000 megawatt coal-fired power plant in 13 hours

A golf course in 28 days

Nine acres of corn in a season

While these represent continuing consumption, the water used for a shale gas well is a one‐time use.

Sounds a little less threatening.

Sounds even better compared to the alternatives:

Water

Kitimat LNG update

The conventional wisdom, the CW being the same guys who failed to predict shale or dismissed it as some type of happy talk from a simpleton, says shale gas won't be around in Europe this decade. After the BNK video earlier, I have my doubts.

But the story of the Kitimat LNG terminal is very instructive.

Firstly, it was initially planned to import LNG back in the pre-shale days of scarce gas fears. But now it's to export gas from the massive Montenay and Horn River shales in British Columbia

Secondly, the first leases were only signed in 2008.  The place is not only pristine wilderness, it's relatively inaccessible.  It was only named in 1922 for one example of how remote it is.

Thirdly,  it is in beautiful British Columbia: one could probably not find a jurisdiction anywhere in North America (including any number of First Nations tribes) that values the environment far more than your local nimby group.

I think that there will be jobs that will be created through the construction period and obviously longer-term sustainable jobs once the plant is up and running,” Boulton said.

“We feel very confident that it will go ahead.”

The $3-billion Kitimat LNG terminal project will be located on Haisla lands near Bish Cove. It is projected to employ 100 permanent workers and ship out 700-billion cubic feet of natural gas per day by cooling it into liquid form prior to shipment.

The terminal will also link to the proposed $1-billion Pacific Trail Pipeline network and EOG also acquired Galveston’s 24.5 per cent interest in that system. Pacific Northern Gas also has 24.5 per cent of that pipeline project and Apache the rest.

The majority of the gas put through the local terminal will originate from the Horn River gas play in the far reaches of northeastern B.C., in which both Apache and EOG have large stakes.

The terminal’s front-end engineering and design is slated to start next month and will provide both project partners with price certainty before construction.

The decision to build, which could provide up to 1,500 jobs, is expected to be made next year.

The first LNG shipments are expected for 2014.

Six years from inception to physical export on huge brand new pipeline?  Now this would never happen in Europe, judging by the four year battle I had for planning permission for my loft extension.

But is shows what's possible.

Where is the gas going?  The two lead customers as pointed out in NHO last September are Kogas which makes sense.  Kogas are the world's largest single customer of LNG (Japan's utilities are split up between various utilities), so they're a natural to be interested.  But the other customer is Spain's Gas Natural, who until the UK opened up, were Europe's largest LNG market.

The implication is that shale will be possible directly imported into Europe by 2014.  But whether some kind of swap makes Kitimat only a virtual import source for Europe, the results are the same.  More gas

The negative view on European shale

For the shale deniers out there, why read NHO for free when you can buy this report.  Interesting allies?

The boom in shale gas production in the US and its wide-ranging influence on markets rocked the gas world. Liquefied gas deliveries were redirected, altering the already fragile balance of demand and supply in traditional markets for pipeline gas in Europe.
 
The psychological effect proved just as strong. Many began to speak about a "shale revolution," a technological breakthrough, and an upcoming realignment of the global gas industry. Major corporations began to look for opportunities to participate in this business. The governments of nations depending on the import of gas see in shale their salvation and freedom. Experts predict a decline of the "era of diktat" on the part of conventional natural gas exporters.
 
As is the case with every fashion trend, however, there is a great deal of emotion involved, and it is only in time that one begins to realise the potential lifespan of the trend and its objective limitations. Still, we will try look into this matter seriously and without making "hot-on-the-heels" conclusions.”

 
 

BNK on European shale

Really good interview, one of the first of any shale producer in Europe with James Hill, vice president of exploration with BNK Petroleum, who are active in Poland and recently announced major acreage in Germany.

He says "We're going to be here for a long time"

I say: Don't believe in European shale this decade? Think again.

http://www.smi-online.co.uk/UGasInterview/

For equal time, since I'm getting involved with both SMI and Platt's,  I'll mention  that Wolf Regener CEO of BNK will be at the equally fantastic Platt's Unconventional Gas Conference also in September.

180

Global natural gas reserves should be able to cover any likely demand increases to 2030 and beyond. The International Energy Agency (IEA) has estimated that there are 405 trillion cubic metres of recoverable conventional resources remaining – equivalent to 130 years of production at current rates.18 Growth in North American unconventional production has been strong in recent years. And an ongoing expansion in global LNG capacity has further boosted supply. However, there are inevitable uncertainties around long term reserves and availability.

So what is it:  130 years of reserves or "inevitable uncertainties"? The only uncertainty appears to be the consistent under-estimation of gas reserves as the shale story gets better with each passing month.

But here are their fears:

Even if there are ample gas reserves, transporting gas to consumers can prove challenging. The abundant potential supply will not necessarily be brought to market.

Not one scenario to back that one is provided.

There are particular uncertainties about unconventional gas reserves. There have been high levels of unconventional production in North America, but resources outside of the US and Canadian markets have yet to be exploited significantly. There is certainly the potential for large volumes of unconventional gas to be brought to market in Europe, Asia and the Middle East. But there are also several possible barriers, including the environmental impact of exploitation, lack of existing infrastructure and difficulty in accessing resources in areas with relatively high population density.

Again, let's think there is a worst case scenario and there isn't a molecule to be had from outside North America.  We're been asked to fret about supplies running out in 2140.  Aren't there some more pressing problems.  

An increasing reliance on imports does not need to compromise our energy security.

Amen

However, the greater uncertainties associated with high levels of interdependency requires a more diverse and resilient energy system, able to cope with unplanned challenges and risk.

And what about the risk of failing to deal with positive market developments?

Depending too much on a single supplier or transport infrastructure would increase the UK’s vulnerability to geopolitical instability, technological failures and to prices that may become higher or more volatile in the future.

The UK has a wide range of import terminals, storage facilities, inter connectors, and still a lot under the sea (and we won't even mention possible UK shale, now drilling near you.  How much more gold plated do we need?  I bet that if I posited that if all seven import terminals were hit by a simultaneous meteorite strike we would be well and truly out of luck, DECC would immediately commission a 100 page report on a response plan. 

And then:

The Russia-Ukraine gas dispute in January 2009 highlighted the impact that events far away can have on the transit of gas to the EU. The UK was affected only indirectly by the consequences of that dispute. However, the growing interconnectivity of the UK and European markets – and an expected increase in EU import dependence as a whole up to 2030 – points to the need to take a cautious approach.

Cautious?  Or paranoid/obssesive not in touch with reality? What's more delusional here?  The idea that we're impacted by Russian gas or the idea that we construct an entire energy policy for 2050 on something that happened in 2009 (and which had zero impact on UK consumers anyway)?