Tokyo Gas to re-negotiate gas prices

I've been posting all year on yet another paradigm shifting game changer: Asian markets will disconnect from oil linked prices. Never gonna happen the conventional wisdom said. Japan especially has been well served by the security of supply engendered through oil linked LNG contracts. Japan for example imports almost all it's gas, and besides its too conservative in buying strategy. The CW is wrong again.

After yesterday's news of how E.ON and Gazprom are renegotiating oil linked contracts, it's reasonable to expect that once the ball starts rolling, it starts rolling quicker.  As usual both the CW and I are wrong. The CW is totally wrong by saying it will never happen, and I'm wrong by underestimating how soon it happens.

Tokyo Gas Co., Japan’s biggest gas distributor, said the oil-related cost of liquefied natural gas is too expensive and it’s renegotiating contracts with sellers.

Suppliers should offer “reasonably economic LNG to buyers,” Tony Okada, general manager of procurement and trading, said in an interview at the World LNG Summit in Barcelona today.

What next?  Remember the conventional wisdom in Europe, who are often energy bulls who for various reasons want to make energy more expensive, like to scare European buyers by empty threats that gas will flow to Asia instead of Europe.  Ofgem and DECC actually believe them too. But this is starting to look like another thing the CW said would never happen:  a world gas price. I've been saying all year that we need a one world benchmark for gas like BFOE oil. Simply because we don't yet know what form that will take doesn't mean that we won't eventually see it. We can already see glimmers ofa deal:

Tokyo Gas is hoping to secure in excess of 15 percent spot gas pricing in long-term contracts, he said. Future sales may include as element of pricing from Henry Hub in Louisiana, the U.S. benchmark, he said. Other options include a “gentle slope” in gas price deals, he said.

But what I liked is this. This is a big deal from a Japanese company at this early stage. If negotiations don't work : We'll see you in court.

It’s possible that if no agreement over price is reached there may be formal arbitration to resolve the dispute.

Coal’s turning point

Compare and contrast two market theories.  One based on fear, one on reality.  The fear?  Well that's the UK of course, where fear has been the main driver to nudge end users into ridiculous bordering on criminal long term contracts for years: 

Chris Huhne, UK DECC Secretary:

“The current market framework is not fit to deliver the investment we need,” Chris Huhne, U.K. secretary of state for energy and climate change, said in published remarks from a speech today in London to the Confederation of British Industry, or CBI. “Left untouched, the electricity market would allow a new dash for gas, increasing our dependence on a single fuel, and exposing us to volatile prices.”

Meanwhile, in a true market based on reality,  one of coal's big customers bolts:

Plunging  natural gas prices, however, offered Progress Energy an alternative that would save money and help it achieve pollution goals at the same time: scrapping the coal plants and replacing them with two gas plants over the next four years, at a cost of $1.5 billion.

“It’s a turning point,” said Bill Johnson, chairman and chief executive of Progress Energy, the parent company. “We’ve been a coal-based generator for decades, and until a few years ago, we thought we would remain largely coal-based and nuclear until people started talking about carbon regulation. We decided we had to do something about it.”

A lot of utilities are coming to a similar conclusion. Over the last year and a half, at least 10 power companies have announced plans to close more than three dozen of their oldest, least efficient coal-burning generators by 2019. A few are being replaced by new, more efficient coal plants, but many more are being replaced by gas-fired plants.

Am I missing something, or isn't the UK government continually telling us how in education, health, transport and policing that market solutions are the best?  So why do people like DECC suddenly get hot on intervention now, as gas provides an affordable road map to low carbon, low prices and low risk after sitting on their hands for years when the market wasn't working?

Even nuttier is how an organisation like the CBI which constantly rails against government intervention think that this is a good idea.  Market intervention is simply plain old energy industry corporate socialism.  That kind of government intervention works for a narrow range of suppliers of crack pot theories based on fear, but can't the CBI see that it impoverishes the rest of industry?

Oz shale to LNG to Japan

I've remarked for over a year on the possibilites of Australian shale and wondered how much luckier can The Lucky Country get on gas.  There are already massive conventional LNG projects geared up to serve Asia and the CBM to LNG project from Queensland is well advanced.

But Beach Energy in South Australia's Cooper Basin is now working with Japan on a shale to LNG project:


Itochu Corp. announced November 26 that it was considering exporting liquefied natural gas (LNG) from Australia to Asian countries including Japan. Under the plan currently under consideration, Itochu and Beach Energy Ltd., an Australian oil and natural gas producer, are to jointly construct an LNG facility capable of producing 1 million tons of LNG a year to export LNG made from Beach Energy's natural gas and shale gas. The total investment for the LNG export terminal will amount to Aus$1 billion.

The proposed site for the LNG terminal is on the coast of Spencer Gulf, South Australia. Beach Energy owns a total of 1.4 trillion cubic feet of natural gas resources in regions such as the Cooper Basin in South Australia and some areas in Victoria, a southeastern state of Australia. The Australian company is also working on shale gas development.

Another assumption we can make is that this gas will be priced on something other than the Japan Crude Cocktail oil index link.  Along with shale activity in Western Australia,  this may be the start of gas to gas competition in Australia as a result of shale impacting on Asian prices:

Australian oil and gas producer AWE said Tuesday it had found a potentially commercial shale gas resource in the Perth Basin in the state of Western Australia.
     "In AWE's view, the strong commercial drivers apparent in the Perth Basin could allow this shale gas opportunity to provide Australia's first commercial venture in … shale gas production," the company said in a statement.  

A shale tsunami of this side  could swamp conventional oil and gas economics in Asia – and the world.


Gazprom settles out of court

After facing down reality all year by insisting that 1) demand is only cut by recession, everything goes back to normal next year, 2) European consumers have no alternative and 3) the  oil gas link came down from Mount Sinai,  Gazprom gives into reality:

The world's largest gas export monopoly, Russia's Gazprom, said on Monday it was ready to cut prices on its long-term contracts to Europe as the volume of paid for but undelivered gas mounted, Gazprom said on Monday.

Long-term contracts remain an indispensable term of gas trade in continental Europe. However, Gazprom is ready to take consumers' opinion into account and pursue a flexible trade policy if the gap between contract and spot prices becomes significant," it said in a statement.

And in a paradigm shift in another year full of game changers:

"If one of the parties says that market conditions differ significantly from what was expected, the parties will then start negotiations on the revision of the contracted price."

It's becoming increasingly clear that gas oil link prices are on shaky ground legally.  Gazprom has essentially settled out of court.

Gazprom conceded to E.ON Ruhrgas which demanded Gazprom cut its prices or change contract terms. Gazprom agreed to sell some of the gas at spot market prices on condition that if E.ON Ruhrgas failed to buy minimal amounts of gas, deliveries at spot market prices would also be cut.

This isn't the first nail in the gas oil index coffin, nor will it be the last. But Gazprom facing up to reality is a key event. What next?  Russian Shale?

Chatham House on shale in Europe

On the give them enough rope theory,  here's a video from Chatham House,  who are about as conventional wisdom as one can get. Chatham House invented their famous rule of none of their meetings are for public attribution.  They should have stuck to what they're good at. Like much of the "conventional" wisdom they never predicted shale or it's impact on LNG prices or US gas exports or the reality not fantasy over water and chemicals etc etc, so they now have become it's biggest detractors. Which at least makes a change from the lets ignore it and it will go away prevalent elsewhere in the UK. However wrong, and this one is almost totally wrong including "the" and "and", at least they come out and engage shale. The author here of a rather unique report from September,  that shale gas isn't reliable, it's expensive and it's not low carbon and it will end up costing us money. Chatham House is a big fan of that big green fear (but not mine I hasten to add) which has morphed into a massive white elephant in both the US and Europe, the nuclear industry.  This report also has some alarming sounding research about shale which, strangely from an academic, relies on various shaky sounding Russian sources.

If you have time, watch this:


Gee, where do I start…

Download this entire section from Global Shale Gas, What Now? What Next? available at the top of your page, which covers many of the it won't happen here scenarios Paul Stevens and others come up with:

Hope this goes to show that the other 110 pages are worth paying for. All UK taxpayers of course are already paying for Professor Stevens, and his report is free, so if nothing else, it provides great value for money.  But then, where was the conventional wisdom on shale in August 2008?  Reminds me of Nassim Taleb's quote earlier today that bears repeating:

A trader according to the Chicago legend, "made 8 million in eight years and lost 80 million in eight minutes". According to the same standards, he would be, "in general", and "on average" a good risk manager.

Conventional wisdom energy experts have been right for years.  Even I have been in the UK energy industry for pushing twenty years.  Unlike the experts, I admit I've made mistakes in the past, but predicting the shale gas revolution and it's impact worldwide, has not, so far, been one of them.

Download Eurosample

ENI in Poland on shale gas

This from Bloomberg about ENI is interesting for a couple of reasons:

 Eni SpA, Italy’s biggest oil company, plans to search for shale gas in Poland to make up for production declines in other European countries, Chief Executive Officer Paolo Scaroni said.

The Rome-based company “believes in” shale exploration even though extraction in Europe is more complex than in the U.S. because of population density and governments will have to grant exploration licenses, Scaroni told reporters today in Milan.

First,  exploratation in Poland has been predominantly US oil majors who missed the boat back home, and a collection of UK, USA and Canadian independents.  All of them are pretty enthusiastic and the geologists are fairly unanimous that it looks pretty good.  But ENI is the biggest European oil major to make a European foray, outside of Shell who are everywhere.

But ENI, which has a vested interest in their own market of curbing Gazprom's power (and are currently going legal with them over take or pay and index linked contracts)  has some of the longest standing US experience via it's hook up with Quicksilver Resources over two years ago, back before Exxon, Chevron and the other latecomers to the shale party got started.

That means that ENI is looking at Poland through educated eyes.  There is always some guess work in gas and oil, but the story of shale has been that risk surrounding dry wells and failed shale plays is pretty much non-existent in most of North America.  ENI is looking at Poland with more than wishful thinking, there's good science there too.

Are (energy) markets socially useful?

We'll get a lot of graphs and rocket science emanating from UK utilities as they try to rationalise recent price rises.  To most of us, they won't make much sense, because they try to make complex what is actually simple.

A  lengthy recent New Yorker piece on the finance sector in general has much which sound familiar as we try to make sense of energy trading in particular:

What Good Is Wall Street?
Much of what investment bankers do is socially worthless.

Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as “socially useless activity”—a comment that suggests it could be eliminated without doing any damage to the economy. In a recent article titled “What Do Banks Do?,” which appeared in a collection of essays devoted to the future of finance, Turner pointed out that although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth—payments that economists refer to as rents. “It is possible for financial activity to extract rents from the real economy rather than to deliver economic value,” Turner wrote. “Financial innovation . . . may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted a priori.”
Turner’s viewpoint caused consternation in the City of London, the world’s largest financial market. A clear implication of his argument is that many people in the City and on Wall Street are the financial equivalent of slumlords or toll collectors in pin-striped suits. If they retired to their beach houses en masse, the rest of the economy would be fine, or perhaps even healthier.

Further on:

Most people on Wall Street, not surprisingly, believe that they earn their keep, but at least one influential financier vehemently disagrees: Paul Woolley, a seventy-one-year-old Englishman who has set up an institute at the London School of Economics called the Woolley Centre for the Study of Capital Market Dysfunctionality. “Why on earth should finance be the biggest and most highly paid industry when it’s just a utility, like sewage or gas?” Woolley said to me when I met with him in London. “It is like a cancer that is growing to infinite size, until it takes over the entire body.

Woolley had an epiphany: financial institutions that react to market incentives in a competitive setting often end up making a mess of things. “I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” Financial markets, far from being efficient, as most economists and policymakers at the time believed, were grossly inefficient. “And once you recognize that markets are inefficient a lot of things change.”

Well worth reading from more than an energy perspective.  Which makes me go back yet again to Nassim Taleb, talking about VAR (Value at Risk), since we still don't seem to get it.

Never cross a river because it is on average 4 feet deep.

I find that those professional risk managers whom I heard recommend a "guarded" use of the VAR on grounds that it "generally works" or "it works on average" do not share my definition of risk management. The risk management objective function is survival, not profits and losses ( see rule-of-thumb 8 ). A trader according to the Chicago legend, "made 8 million in eight years and lost 80 million in eight minutes". According to the same standards, he would be, "in general", and "on average" a good risk manager.



Russia doesn’t like shale

They would say that wouldn't they?

This year, the situation for gas shale has changed, says Gazprom executive, Alexey Miller. In 2009, some LNG volumes that primarily targeted the US market were sold to Europe, but in 2010 according to our calculations, daily volume of gas supply to the US is 500 mln cubic feet more than it was in 2009; that’s why I think that shale gas is more about promo campaign than a real alternative to natural gas.
When they talk about “shale gas revolution” and an oncoming closure of the market for Russian gas, says Valery Yazev, the president of Russian Gas Community, I want to respond to them with the following: shale gas is not exported due to a very simple reason – its transportation is very expensive. Since shale gas is profitable only at the place of its development, then there will be no real competitor for Russia in gas exports for many years ahead.

Rather curious in that US LNG import demand is even lower than last year, and we have not one but four export projects in various stages of planning.

November 23, the Gazprom Management Committee was tasked to keep monitoring the shale gas industry development in various regions of the world. On the same day, Gazprom discussed its strategy to secure its position on the markets of Europe, Asia and Northern America, and to expand its sales to other markets. Accordingly, the board was assigned to strengthen the Company's position in exporting its products to the European and other international markets by increasing the competitive capacity of Russian gas in the current market environment; to raise the share of liquefied natural gas (LNG) in export supplies of Russian gas; and to provide for timely implementation of the Shtokman project.

Interestingly,  Alistair Buchanan of Ofgem, drew the wrong end of the stick from the Shtokmann LNG cancellation earler this year, asserting that it was a risk to Europe's gas supply. Like Ofgem, he should monitor the situation.


The positive side of increased China LNG use

I've been doubtful before on the China to bail out LNG producers and raise prices for everyone narrative,  so this piece from Reuters provides an interesting take on the overlooked use story of LNG in China as transport fuel

Independent firms supplying retail volumes of liquefied natural gas (LNG) around China are targeting hundreds of thousands of users such as Liang, gunning for as much as 10 percent of China's roughly 1.6 million barrels per day diesel market for transport use by 2015.

LNG, gas chilled to liquid form for transport, will be used to fuel heavy-load trucks, city buses and river fleets as the world's top energy user and greenhouse gas emitter moves aggressively to boost gas use to combat emissions.

Firms such as Xinao Gas (2688.HK) and Xinjiang Ghuanghui are involved in the sector, which liquefies and transports small volumes of gas and which has flourished quietly outside of the focus of China's leading energy firms.

A key point to consider of course is whether Europe should learn from China. Replacing diesel with LNG or CNG in the transport sector is far easier than most people think. Which is where the problem lies: EVs are far sexier if at present very expensive and although the infrastructure for EVs is far more problematic, there is a perception of NGV, Natural Gas Vehicles powered by Liquefied Natural Gas, or CNG (Compressed Natural Gas) as being old fashioned.

I won't go into the economics of EV (electric vehicles), which in personal transportation may have a long term role.  But 30/40% of oil use is in trucking and shipping and there are no electric buses, ships or trucks even on the most optimistic horizon.

But for suppliers, it's a good news, bad news kind of story. First, the cost to the consumer, and added to that the carbon reductions are compelling:

Energy policy makers in Beijing started with a "no-go" for onshore liquefaction plants, seen as a distraction from China's massive pipeline drive, but the surging demand for gas, which tripled in the past decade, and recurrent winter shortages forced the government to review its stance.

Despite the lack of policy support, scores of LNG plants have mushroomed since 2001, near marginal gas reservoirs often overlooked by big oil firms and which are now churning out some 20 million cubic meters of gas a day, equivalent to 7 percent of China's total gas demand, industry officials estimated.

Similar to the "teapots" — China's small oil refiners — these liquefaction facilities have become a dynamic swing supplier to container trucks at major ports, factories and new residential compounds, a cluster of consumers that has expanded faster than the pipelines can reach.

Gas for transport is not new in China, which early this decade started using compressed piped natural gas under high pressure (CNG) for thousands of city buses and cabs, replacing diesel or liquefied petroleum gas – a refinery byproduct.

But gas in liquid form is more efficient, with a driving range nearly triple that of CNG.

I think that the NGV sector is going to be big. It should be even bigger in Europe, but it will be a while yet as most aren't getting their head around the global supply glut in general. Also, as with renewable's for generation, there is a general anti-any carbon at all narrative at work in transport.  But  NGV has a number of fascinating angles starting with this one from China:

The growth in the sector could help absorb global oversupply after a rise in output of unconventional gas took the United States out of the market as an importer.

"That is going to divert Middle Eastern supplies earlier earmarked for the U.S., and China is an obvious destination," said Yan Kefeng of Cambridge Energy Research Associates.

In the US of course, the Pickens Plan, to soak up some of the shale gas glut has been around for a while:

The plan proposes getting 18-wheelers in the U.S. to use natural gas instead of diesel.

Boone Pickens told Squawk that in seven years, the U.S. could get 8 million 18-wheelers on gas, it would “cut OPEC in half,” saving 2.5 million barrels of oil a day against the Organization of Petroleum Exporting Countries’ 5 million-barrel-per-day production

But the best part of the rise of LN'G/CNG as a transport fuel is not only the intended consequence of increased security of supply, but also of the unintended consequence:

With natural gas at $4 today, Pickens observed that a reduction in oil prices to something at “parity” with gas, would lead to oil being priced at … $21 per barrel.

I don't think we'll get anywhere near that level. But we already see oil as solely a transport fuel. A transport fuel also losing market share in marine fuels as well. Natural gas can make big inroads in  petrochemicals, and even via gas to liquid aviation fuel. So oil will in the future be used mostly for personal transportation, that fancy way of saying cars.  Which means that in theory,  oil prices will follow oil demand down. And that's the bad news flip side to the good news of increased gas demand:

Those who have their heart set on a reassertion of the gas/oil link may yet live to regret it.

Ofgem on Channel 4 while Centrica cry poverty.

Interview with Alistair Buchanan to be broadcast tonight:


Krishnan raised lots of good points familiar to NHA readers:  Lack of transparency, pointlessness of switching etc etc. AB wasn't entirely wrong, but then for £270K a year he should be far better.  If the government is serious about cost cutting, I'll shut down this blog and do his job for £70K – and I won't be doing a worse job.

A contradiction from AB at the end of the interview is when he says that Ofgem only controls 20% of the cost in the regulated pipes and wires.

This is bit bizarre in that Ofgem has consistently reported that the wholesale cost of gas is as little as 45% of the end cost.  I definitely disagree, I think AB is confusing the issue even further,  the Cost to Serve, or the regulated pipes and wires as he calls end up at about 30%.  Consumers please note, these regulated costs are identical no matter how large or small your supplier is.  But it is the cost of the gas itself which needs to be clarified, or as NHA have always proposed, that we use the System Average Price as a benchmark.  It's different, but not impossible and it would provide the clear, transparent benchmark we need.

To give a for instance, the System Average Price of gas for the last seven days is 1.75.  Figure the average pipes and wires fixed cost at around 0.9 pence per kWh.  So anything over 2.65 is margin.  But according to Centrica's response just released they:

Analysts are forecasting that British Gas margins in the second half of 2010 will be around 3-4 per cent on residential energy sales, substantially less than the margin predicted by Ofgem for 2011.

So Centrica's profit will only be up 3%?  Unlikely. I sat through a presentation, unfortunately not distributed by Centrica's gas buying team earlier this week, and this wasn't rubbish about fixing the price last year, this was financial engineering on epic rocket scientist levels.  And evidently,  despite what they had told their customers last November,  they had been buying gas like this for years.

If those analysts are right,  then I'll retract the Ofgem work offer and propose to Centrica that I work for them on a no win-no fee basis where I keep just 5% of the profit.  I'll still retire a millionaire by March.

What we need are for the industry and Ofgem to come clean about not how they source the gas, but to come clean with using the SAP or NBP price as a benchmark just as the Henry Hub is used in North America for retail domestic users in most states and provinces. 

Finally, this interesting bit here from Channel 4:

The Ofgem announcement was welcomed by Downing Street.

"Energy bills are a significant expense for many families in this country and that's why it is important that we see these markets working effectively," the prime minister's spokesman said.

"[Ofgem] are doing exactly the right thing in looking into the effectiveness of this market and whether it is working from a consumer perspective."

Which means I was right when I said earlier how Ofgem was pushed into this.  I'm not sure but I imagine this is the first time Ofgem was mentioned in a Downing Street statement since John Majors time, it's that long that Ofgem have been allowed  a free ride. (Including by former Energy Secretary, present leader of the Opposition Ed Miliband).