Non Gazprom Exports

Following up on yesterday's post,  Gazprom has Russian independent Novatek already exporting stable gas concentrate to China.

What's notable is not only the company nor the customer but the route:

Moscow, 6 September 2010. OAO NOVATEK (“NOVATEK” and/or the “Company) has announced today the successful delivery of a consignment of its stable gas condensate to China National Offshore Oil Company (CNOOC) via the Arctic Ocean’s Northern Sea Route.
The cargo of stable gas condensate, produced at NOVATEK’s Purovsky Gas Condensate Stabilization Plant, traveled from Russia’s Murmansk Port to China’s Ningbo Port in 22 days, approximately half the time required by the traditional shipping route through the Suez Canal.
The success of the first high-tonnage shipment, combined with the significantly reduced delivery time, demonstrates the possibility for future trade with China and other countries of the Asian-Pacific region using the Northern Sea Route as well as providing additional logistical options for developing hydrocarbon fields on the Yamal peninsula and arctic shelf.
An Aframax class tanker from Russian shipbuilder and operator, OAO Sovcomflot, was used to transport the stable gas condensate via the Northern Sea Route with icebreaking support provided by the Russian Federation’s, Atomflot.

But what is gas condensate ?And for that, we'll have to say that it is not LNG, or CNG, or even LPG. It's most likely some portion of gas used more for chemical feedstock than energy use, but the expertise on this is clear as mud. Of course it could be Yamal to China LNG in 22 days, but you have to ask yourself again, what  would be the point? Although if the alternative is for a company like Novatek to simply flare off associated gas from oil production,  then it starts to make sense.

China can have all it can eat from Australia, 5 days tops away, and has had Gazprom gas from Sakhalin recently as well, and 22 days is still almost double a Qatari voyage.

So an interesting choice of supplier, customer and route that probably indicates something important to watch for in the future.  Although what that might be is yet to be learned.


Price/Weather Forecast

Everyone from domestic users to institutional investors might be better off if we stopped betting on forward gas prices.  There are bets, and there are bets.  Investors are simply looking for arbitrage returns, while UK domestic consumers are forced into betting forward markets as they have no other option.

But natural gas demand, and price, depends more than anything on weather. So why do people who wouldn't go into the bookies and put down a bet on a White Christmas, or a snowy January, or a cold February, do just that by buying forward gas?  Fixing a gas price is no different from fixing a petrol price, and how many people do that?

On the subject of the weather, it's been interestingly consistent in most of the Northern Hemisphere over the past year: A cold winter has the obvious impact and a hot summer pushed up generation demand.  But for energy we also have hurricane forecasts which pushed up US gas markets earlier this summer, or at least prevented them from collapsing entirely

ATMOSPHERIC SCIENTIST PHIL KLOTZBACH is in the business of forecasting hurricanes months in advance – which, he admits, cannot be done. "It's impossible to say, 'We're going to have 18 storms and nine hurricanes this year.' We can say it's going to be an active season and here's the science behind it."

As far back as last December and as close as July, he was predicting a busier than average hurricane season. But, with one month of the season to go, not one has made landfall in the continental US.

But…. If it's impossible to say, he seems to make a good living anyway.  People crave information, and even find the wrong information useful.

Prof. Daniel Kahneman has dozens, perhaps hundreds, of stories about people's irrational behavior when it comes to making economic decisions. … But the story Kahneman recalls when asked about the economic models at the root of the current financial crisis is actually taken from history, not an experiment. It concerns a group of Swiss soldiers who set out on a long navigation exercise in the Alps. The weather was severe and they got lost. After several days, with their desperation mounting, one of the men suddenly realized he had a map of the region.

They followed the map and managed to reach a town. When they returned to base and their commanding officer asked how they had made their way back, they replied, "We suddenly found a map." The officer looked at the map and said, "You found a map, all right, but it's not of the Alps, it's of the Pyrenees."

According to Kahneman, the moral of the story is that some of our economic models, perhaps those of the investment world, are worthless. But individual investors need security – maps of the Pyrenees – even if they are, in effect, worthless. …

Going back to this winter, take this with a grain of salt

— U.S. natural gas production at a 37-year high and forecasts for mild weather next year are crushing the premium on March futures compared with the April contract.

U.S. heating demand this winter will be 10 percent lower than last year from December to February, according to Commodity Weather Group LLC. Weather in the U.S. Midwest, East and South will be mostly warmer than normal this winter as the La Nina phenomenon drives up temperatures, the Bethesda, Maryland-based meteorologist said.

I've known guys who would bet on raindrops going down windows or give you odds on the sun coming up tomorrow. The morality or wiseness of betting on the weather is debatable, but why don't we think the same way in trying to predict the movements of gas prices? Why is one cautious and the other a gamble, although both are the same thing? It's all in a name I guess.

Environmentalists study the Marcellus. And like it

Not everyone liked it of course, but an independent fracking review in Pennsylvania studied the "big problem" of shale, and found out it's not so big a deal after all.

This comes from Reuters, but you can be sure it won't find a place in 10% of the media who print anything the Gasland posse tell them, including serious science outfits like Vanity Fair and New York Magazine.

Pennsylvania's Fracking Program Gets Mostly High Marks in Independent Review

Pennsylvania needs some stricter regulation of the controversial gas drilling technique of hydraulic fracturing in the Marcellus Shale formation, with stiffer rules for testing water for toxins and lining leaky pits to contain chemicals, an independent review panel said.

The review by Okla.-based State Review of Oil and Natural Gas Environmental Regulations, or STRONGER, also recommended that drillers alert regulators before they begin their hydraulic fracturing, or "fracking" operations. That way experts can inspect for contamination before it's too late.

Currently, firms can frack a well and wait 30 days before going public.

But mainly, reviews of the state's fracking rules were positive. "The review team has concluded that the Pennsylvania program is, overall, well managed," it said.

Some environmental groups agreed with that characterization.

"I would agree that it's well managed," said Jan Jarrett, president and CEO of PennFuture. "There's a real commitment on the part of at least this administration to do what they can to police this industry with the tools that they have," she told SolveClimate News.

Russian gas. But not Gazprom gas

Interesting story here from Platts on something I've pointed out in the past, that Russian gas and Gazprom aren't necessarily the same thing:

Russia's largest oil producer, Rosneft, is to discuss with the country's
gas monopoly Gazprom the possibility of supplying gas to China, Rosneft
President Eduard Khudaynatov was quoted as saying Wednesday.

     "Rosneft could supply gas to China and we would like to study the
possibility of cooperation with Gazprom," Khudaynatov told journalists in the
far eastern city of Petropavlovsk Kamchatsky, quoted by Ria Novosti news

     Khudaynatov added he would meet Gazprom CEO Alexei Miller in the near
future to discuss cooperation.

     "Entering the [Chinese] market together [with Gazprom] would be
desirable," Khudaynatov was quoted as saying by Prime-Tass.

There are multiple gas producers within Russia: Rosneft, Lukoil, Norilsk, Novatek etc, but Gazprom has always held the export monopoly.  Interesting story to keep an eye on.

Gas output accounts for around 10% of Rosneft's total hydrocarbons
production, the website said.

     Rosneft gas production potential exceeds 55 billion cubic meters of gas
and proven gas reserves were 816 Bcm of gas, as of the end of 2009, under
Society of Petroleum Engineers approved PRMS standards.

     The company's chief onshore gas reserves are concentrated in the West
Siberian Yamal-Nenets Autonomous region.

If non Gazprom suppliers can be incentivised to find markets, they can be incentivised to invest in Russia's massive shale potential for only one example.

Not If. But When

I've spent most of the past week at two excellent shale gas conferences here in London,  Platts last week and SMI Group this.

Lots of what I heard there is non attributable, but enough is that readers will be hearing more over the coming days.  These are the key takeaways to gnaw over:

  • There is absolutely no doubt whatsoever surrounding whether the geology for shale gas is present in multiple locations in Europe and worldwide. NONE  Which part of absolutely no doubt appears debatable?
  • The environmental issues require community engagement, but aren't show stoppers. The shale genie is not going back in the bottle.
  • Connected to the environment and reserve estimates, the technology just keeps on getting better and better and better.  Much of what you knew about shale last quarter is out of date.
  • Anyone hoping that shale won't impact their plans for nuclear, CCS or offshore wind are deluding themselves. No mattter how obstructive DECC and Ofgem will be in the UK for example, and no matter how clueless most of the rest of the UK government is on shale, the capital markets know that UK energy policy is toast. Crispy and carbonized.
  • Nothing underlines the insanity of UK policy more than how by the middle to end of the teens,  we're going to see a lot of  gas imported to Europe from a big, cold and empty country full of bears: Canada. If that doesn't kill off the security of supply issue, that especial UK combination of xenophobia and paranoia for good, what will?
  • My message to the energy retail sector and their regulators: It's not about supply, it's about demand. Assuming demand will always be there is unwise. Demand drop-off won't be back to normal after the recession. Whenever that will be.
  • The recession could end much sooner in markets where regulators push for collapsing wholesale gas prices to translate into electricity prices.  In the UK, that will be a long wait.  Smart countries know that utility prices are analogous to taxes and present an opportunity to put money in every one's pocket from next months utility bill.
  • The civilians, i.e. the non-geologists and non-energy people, are blissfully unaware of what is going on. Investors in alternate energy, chemicals, fertilizers and any energy intensive industry will be impacted more than they can ever believe. Mostly for the good.
  • What if scenarios surrounding shale gas belong in the past. Time to start planning for when.
  • Unconventional oil is next!

Fell off the back of a truck…

I don't usually post on anything I can't link to, but this major bank investment analysis is interesting enough that I'll pick out the big pieces in the greater public interest for people who don't have access to what the big, big money boys are thinking.  After all, they have enough already.

If you are the author and you get upset,  don't sue me: I don't have any money, and I'll gladly take this post down anyway..

  • Delivered gas price is less than coal in Southeast thru 2011
  • Shale and storage growth increases chronic oversupply risk

 Lower gas prices and volatility driving power prices, heat rates, and dark spread outlook

• Gas price outlook & renewable push limit future coal plants

• Delivered gas price is less than coal in Southeast thru 2011

• Efficiency push & economic outlook limit future growth outlook•  

Difficult to see any 2010 prices above $5 unless extreme weather occurs.

Finally, the last page, a few of those new to us and a few more old hat, but good to see them all together now:

Longer Term Implications

•    North America to regain its competitive edge for gas and NGL intensive industries
–    May cause industrials to rethink global capital investment strategies that emerged in high gas price periods 200-2008
•    NA gas price and Western Canada shale resources impact Alaska gas pipeline strategies
•    Disconnect between natural gas and refined products will start to provide market incentive to
overcome transportation fuel infrastructure barriers
•    Disconnect between crude linked LNG and NA gas will encourage push for LNG exports •    Provide additional rationale to go gas not coal or greenfield Nuke in power sector new builds
•    Weather issues change –    Hurricanes less bullish natural gas, but as bullish crude oil and refined products –    Well freeze off potential more bullish
•    Forward traded East coast basis can be influenced by European gas prices
•    Coal producer’s strategies revise / infrastructure improvements needed to supply export market
as power markets rely more on gas

•    Could accelerate market appetite for multi-BTU contracts between suppliers and power utilities •    Unconventional resources are a global phenomena but unlikely to hit LNG projects prior to 2015

I've been thinking about the impact of low natural gas prices on the  energy intensive sectors like chemicals, refining and fertilizer but they beat me to it.

But as any financial institution would say,  but in two pages not a few words:

Forward looking statements are just that.  If I really knew the outcome of random numbers with any certainty,  Euro Millions is £82 million this Friday. So take the above with a pinch of salt.  Might never happen.  Or might.  Predictions are difficult, especially about the future.

…no longer an interesting concept, but an economically positive reality.

{jacomment on}

LNG-fuelled marine transportation is no longer an interesting concept, but an economically positive reality.

So said Tor Svensen of DNV recently in this piece on how building up demand while solving carbon emissions is a win for the planet, a win for ship-owners and a win for gas producers.  Not very helpful for oil producers, but if it doesn't help them it helps us by putting a further lid on oil price increases.  Not to mention another nail in the coffin of the Peak Oil crowd.

The cooperation between owner and charterer in this project is a clear signal that LNG-fuelled marine transportation is increasingly seen as a viable, long-term solution to help reduce emissions,” Olsen said, adding that the project has received support from Norway’s Næringslivets NOx-fond, a state sponsored organisation promoting emissions reductions.

The designer of the vessel, Nordnorsk Skipskonsult worked closely with DNV on design specifications.

Tor E. Svensen, the President of DNV welcomes the project. “LNG is here to stay, and short sea shipping has been the most obvious place to start,” he says, noting that ECAs have already been established in the Baltic Sea and the North Sea, and will be soon enforced along the North American coastlines. “We have seen that LNG represents no technical obstacles and is more cost-effective than alternatives. Action taken by companies like NSK Shipping AS demonstrates that LNG-fuelled marine transportation is no longer an interesting concept, but an economically positive reality.”

Natural Gas transportation, in trucks and boats and planes,  if not yet trains, (not sure if  even I'm ready for an LNG powered TGV bullet train!)  is showing how quickly opinion is changing and what once seemed either niche or just plain outlandish is rapidly going prime-time. 

How big a number is that?

Some No Hot Air friends weren't in London this week, they were in Florence at this event on Environmentally Friendly Drilling Systems.

The fact that such an event exists shows that whatever issues there are over any alleged damage by shale to the environment will get solved.  Why?  How can we be so sure?  Simply because what is good for the environment is good for the bottom line.

Discussing Europe's shale potential, this is what a former US Energy Department official said:

Former U.S. Assistant Secretary of Energy James Slutz said European shale gas may alter the geostrategic balance between Russia and Europe.  Speaking in Florence, Italy, at a Technical Forum on Environmentally Friendly Drilling Systems, Slutz noted that shale gas presents Europe with new opportunities to develop significant gas reserves.  Shale gas has been exploited successfully in the United States for several years, Slutz noted, and Europe may soon follow suit. 

Shale gas deposits exist throughout Western and Central Europe, with large potentially recoverable reserves in Poland, Germany, Hungary, Romania, and neighboring countries.  Initial exploration is already under way in Poland, Sweden and Germany, but additional exploration is needed to determine the extent of the reserves.  Conservative estimates place the potential at around 500 trillion cubic feet, or roughly 5% of existing global supply.

How big a number is 500 TCF? That's 14 Trillion Cubic Meters. The big European markets of the UK, France, Italy, Germany and Spain used 314 Billion last year, so European shale, on this conservative estimate equal 45 years of use for those countries alone.

But consider that a cubic meter is worth about 20 cents.  What would be the impact on those countries economies of not exporting 60 billion dollars a year in energy costs ?

Do we really want to leave that sum of money lying in the ground because it may be a problem?  Perhaps we should spend 10 billion or so to make sure it won't be a problem. Money well spent.

Bad news in the US for EDF

One reason behind the nutty Chatham House shale is dangerous threat to energy supply story, is that one of their solutions is to go nuclear, the other being CCS.

I have nothing against nuclear.  I'm a bright glowing Green in that respect.  Nuclear has killed far less people than coal or even hydro.  But it is incredibly expensive.  Where it works at all.

The nuke lobby in the UK is so panicked that they are clutching at any straw going, hoping against hope that we don't notice what is going on with  the nuclear solution in the US.  But we do:

Constellation Energy Group is bickering with its French partner in nuclear energy over a $2 billion option that would effectively force the partner, Electricite de France, to buy several of Constellation's aging natural gas, coal and hydropower plants.

EDF are the only one left standing who are even moderately interested in building nuclear in the UK.  If EDF are forced out of the UK based on the miserable economics, then the UK does not have a nuclear option. 

Remember here in the UK that as regards market solutions to energy we were always following the US, even if we are way ahead of everyone else.  So what happens in the US does not bode well for a UK  nuclear policy:

The mere fact that Baltimore-based Constellation might be willing to anger its partner, which does not want to purchase the power plants, suggests that the relationship might become a casualty of deepening pessimism about whether the much-anticipated U.S. nuclear renaissance is imminent, analysts said. Constellation and EDF jointly own five nuclear power plants and are equal partners in Unistar, a venture aimed at building a fleet of U.S. nuclear reactors, starting with a third unit at Constellation's Calvert Cliffs plant in Maryland. EDF, which owns 8.4 percent of Constellation shares, is one of the largest companies in Europe; it has 38 million customers and operates more than 65 gigawatts of nuclear plants.

But the economics of nuclear plants in the United States have become more difficult.

Despite a visit by President Obama to Calvert Cliffs, federal loan guarantees that could save billions of dollars for construction haven't come through.

Moreover, increasing volumes of shale gas are bringing down long-term forecasts for natural gas prices, making it tougher for expensive nuclear plants to compete. And while many executives expected Obama to win congressional support for climate legislation, it appears improbable that lawmakers will agree to put a price on carbon fuels.

In an interview last week, EDF chief executive Henri Proglio said a loan guarantee was needed as "a signal that, first of all, there is a will to develop nuclear in this country and, second, to identify the best possible operators to be drivers of this."

Obviously, Constellation haven't read the price forecasts from Chatham House yet.

The UK is so resolutely against government loan guarantees for nuclear that they won't pay, and especially in these tight times. The UK prefers that ratepayers pay more in a growing list of subsidies added to bills or stealth transportation costs.  But never, ever tax increases or government subsidy. They also subtract billions from the economy by Ofgem's permanent free pass to energy suppliers via letting them get away with only offering domestic end users year or long term pricing based on expensive forward prices as opposed to the monthly market prices North American domestics get. But gas and electric bills aren't taxes so they don't count and nobody can blame the government. 

The economic theory here says, that energy use is optional, one more market "choice" we make although in this case the rather empty choice is between a modern civilised life or to freeze in the  dark and eat salad. Let's not forget the old truism: Taxes are the price we pay for civilisation. Seen from that view,  energy is the price we pay for civilised life.  We can use less of it (if only we had a smart meter to help us!), but we do have to use quite a big chunk of income on it either way.  Ofgem and DECC can sabotage the economy further by pushing up utility prices so they subtract at least £40 a month from every single energy user's disposable income. But if the government added £40 a month to the tax bill they would be toast.

One refreshingly different take on the WP story is that unlike any UK Mainstream Media,  not once is the threat of lights going out mentioned!

Shale Gas to raise prices!

Sorry I didn't post on this before, I've been at the Platt's Conference on Unconventional Gas in London, where the geologists couldn't make up their mind about the impact of shale gas in Europe:  really, really big, huge or merely colossal.

Meanwhile, as the world's gas experts are distracted….

The words beggar and belief come to mind in this story from UK Energy Experts(?) Chatham House.  I'm all for counter-intuition but this should win the Nobel Prize for Circular Economic Logic:

Misplaced hope in shale gas may lead to higher prices, a think tank has warned.

Shale gas deposits are abundant, and have been successfully exploited in the US, leading to hopes it will become a major energy source in the future.

However other countries may face prohibitive geological, economic and environmental problems, said foreign affairs analysts Chatham House.
Uncertainty over shale is hurting investment in conventional gas wells, threatening future supplies, it added.
If shale fails to deliver on current expectations, then in 10 years or so, gas supplies could face serious constraints”

"If the shale gas revolution in the US continues to flourish and is replicated elsewhere in the world, this inadequate level of investment will not matter," said Paul Stevens, author of the report.

Full report here…

The recent 'shale gas revolution' in the United States has created huge uncertainties for international gas markets that are likely to inhibit investment in gas – both conven- tional and unconventional – and in many renewables. If the revolution continues in the US and extends to the rest of the world, energy consumers can anticipate a future dominated by cheap gas. However, if it falters and the current hype about shale gas proves an illusion, the world will face serious gas shortages in the medium term.

Nobody can accuse them of not being  original.

The uncertainties created by the shale gas revolution have significantly compounded this investor uncertainty. In a world where there is the serious possibility of very cheap, relatively clean gas, who will commit large sums of money to what are for the most part extremely expensive pieces of equipment? This is especially relevant, for example, in the United Kingdom, where a debate is currently under way over whether to build replacement nuclear power stations in a situation where conventional domestic gas supplies appear to be in terminal decline and much of the generating capacity requires replacement

Perhaps this is simply a Nobel Prize for Fantasy?  Or merely a job for the men in white coats?

That was not a misprint:

In a world where there is the serious possibility of very cheap, relatively clean gas, who will commit large sums of money to what are for the most part extremely expensive pieces of equipment?

Who indeed?