The Henry Groppe Award

When, If I get to 80,  I hope I have finally figured out that, at that age of all times, that certain predictions are not so much unwise as plain stupid:

Time To Go Long Natural Gas
You’ve heard it all before: Supply is out-pacing demand… Our ability to horizontally drill for shale gas has made the supply picture seem unlimited… The short-term outlook is bleak…
Those are all fine examples of herd-mentality thinking.
Contrarians like us, on the other hand, keep a close eye on natural gas. Companies like Chesapeake Energy (CHK) have the potential to make you a killing.
And we’re not the only ones who think so…
This 80-Year Old Oil Man Thinks So, Too
Henry Groppe, a Texas petroleum analyst with a long track record of betting against the herd, believes natural gas will double by the end of summer 2010.
He’s arguing that shale wells are depleting rapidly, and that there is a real shortage of gas “which will become apparent this summer in dramatic fashion,” according to The Globe and Mail. “Gas inventories are about to get a lot tighter… new supplies are overstated, and prices are headed north of $8 by the end of summer.”
Why the confidence?
Horizontal drilling advancements are not the Holy Grail they’ve been cracked up to be, he says. “Not even close. Horizontally-drilled wells face a huge amount of rapid depletion once tapped, and so the supply that we are all counting on to be there is ephemeral at best.”
But still… a double by summer’s end?
Let’s Take a Look at Groppe’s Track Record…
According to reports, “In 1980, when oil approached $40 a barrel and forecasters predicted $100 oil was inevitable, Mr. Groppe said crude would fall below $15 by the mid-1980s.”
And it did.
“In 1998, when crude dipped to barely above $10 and some prognosticators were hailing a new era of cheap energy, Mr. Groppe said oil was set to soar.”
By 2000, oil topped $30.
And just two years ago, when oil threatened to breach $150 and forecasters were calling for $200, Groppe said oil would fall back to the $60 to $70 range in the second half of the year.
Again, he was right.
“Now,” he says, “a slow-but-gradual decline in North American natural gas reserves — regardless of shale — means an average price in the $8 range is inevitable to trigger the ‘demand destruction’ necessary to keep the supply-demand picture in balance… Eventually, that price will creep up toward $10 by the end of the decade, as gas production slowly depletes.”
We stand behind Groppe as his past success with market calls proceeds him. There’s also Mario Gabelli, another shot-caller in the sector…
Meet Mario Gabelli, who just made a big play on natural gas
Gabelli just bought 800,000 shares of National Fuel Gas — his “cheap way to play America’s energy.”
“With the economy improving, we think natural gas is undervalued,” he says. “America will increasingly depend on gas… “
Let the herd keep hating natural gas… We’ll roll in profits by the time they catch on.

In December the HH is still at $4 – and it’s been lower. So much for $8. On average,  Henry ( nowhere to be found as numerous journalists are trying to discover) and Mario have a great track record. But don’t think you can’t drown in a stream that on average is three feet deep.

A drunk walking down the road swerving from left to right is on average safely in between the double yellow lines. In reality?  Splat.

Be well and be careful and happy new year.

Nick Grealy

Gazprom: Shale gas is not a myth

In among an interesting story on Gazprom's baby brother Novatek from Russian paper Vedemosti via Novosti comes this aside:

What’s worse, the Russian natural gas monopoly now has to admit that U.S. shale gas is not a myth, and show more consideration toward its European customers, because its European exports will not regain their pre-crisis level in 2010 or 2011, said Denis Borisov, a Bank of Moscow analyst.
Germany’s E.ON, WIEH and Wingas, France’s GdF and Italy’s Eni negotiated adjustments to its long-term contracts, which may inflict losses on the supplier.

Gazprom has been bailed out in 2010 by European prices diverging from the Henry Hub, primarily due to the severe weather at either end of the year.  But if weather reverts to the mean,  Gazprom is back to where it was. Surging US gas production is not only not going away, it's headed this way. Gazprom and Russia are not as interchangeable as people think and Gazprom is not the world's largest gas company by luck alone. The future is gas, and the future of gas is shale.  Combine shale and Russia and the Russian economy can strengthen.

Gazprom could be more efficient than all Western majors and have greater market value, a company source said. However, this will only happen if the gas transport system is operated and financed by a separate entity, and if the gas giant is no longer forced to “voluntarily” sponsor social programs, and Olympic and APEC projects.

I'm not out to get lawsuits by pointing out the half dozen or so European energy think tanks that rationalise Gazprom and are financially supported by them.  But those guys need to get with the new instructions from Moscow Central, possibly attached to a goodbye check:  Shale is here. And you aint' seen nothing yet.

Gas and Chemicals

Just as the shale story is littered with predictions over costs, depletion and environmental costs that came to nothing,  we recently have seen two further unanticipated consequences of the shale gas revolution.  One is the emergence of increased oil production, and closely related to that is the resurgence of what was considered a dying industry:  The US chemical sector.

Louisiana Economic Development Secretary Stephen Moret says the U.S. has moved from an expensive and volatile natural gas market to one with prices that are much lower and that are expected to stay reasonably low and stable for years—perhaps even decades.
“That is a gift from heaven,” Moret says. “The competitiveness and the outlook for our chemical industry are dramatically better than they were two years ago.”
And unconventional shale plays are a big reason why. Louisiana chemical industry was in real danger of losing facilities, Moret says, as companies were tempted by low-cost feedstocks in the Middle East and Asia. Many facilities have become profitable again, and companies see Louisiana and Texas as logical places to expand.
An international company like BASF not only competes against other corporations, there’s also internal competition over which facility might receive a specific investment. Tom Yura, general manager of BASF’s Geismar plant, says low natural gas prices give the U.S. a significant advantage over Asia and Europe, where heavier, oil-based feedstocks typically are used.
“The stability for us here in Louisiana is good because then you can plan,” he says, adding that the proximity to shale sources nearby also is comforting since transport costs are low.

Chemicals are a key industry.  In Europe we need to take advantage of this gift from heaven.  But with government policy more likely to increase costs than to reduce them,  we are in a greater danger of making life more difficult for the chemical industry.

Another opportunity for Europe squandered? Perhaps not. One of the centres of Europe and the world's chemical  industry is in South West Germany and Northern Switzerland. Which just happens to sit on a prospective shale play.

If a city like Basle, Swizerland for example found natural gas underneath or very nearby,  the cost of the gas, and the various liquids it contains, would revolutionise the cost base.  Given the knock on effect of the chemical industry that could make everyone better off.

The not so good news on Poland is…not so bad.

From Poland news from Polish incumbent PGiNG on what some might think of a disappointment and the shale deniers perhaps as vindication:

 Sztubski warns against an excessive optimism. The experimental bore in Markowala(Lubelskie voivodship )and the fracturing of the tight gas deposits by the Halliburton Company has brought lower results than expected. Currently, the hole of the shale gas is drilled in Lubocin, and its effects will be known in the summer of 2011. It seems a lot of time until we know the amount of the shale gas deposits in Poland. The Geological Institute estimated that in Poland may be approximately 150 billion cubic meters of the unconventional gas, Americans believe that it may be even more- from 1.5 to 3 trillion cubic meters.

But Poland is a big place.  Lubelskie is over 650 kms from Lebork, home of the Lane Energy/Conoco Phillips well I highlighted recently.  For those who need translation that is more than Pittsburgh to New York City or the same as from London to Glasgow.

The sweet spot of shale won't be six hundred kilometers long, but it is more likely to be found in Northern Poland than South Eastern. It may be a disappointment for that part of the world, although note how they aren't giving up either.  But some parts of Poland, France, Germany and the UK will be better than others.  And some will be really, really good.

Forecasting for 2011

Although I consistently say forecasting is for fools, I somehow tend to get much more right than wrong.  Some connection surely?

So here goes for 2011:

1. Shale in Europe makes the leap from a blog like this (August 2008) to the mainstream press (FT July 2009, Telegraph October 2009) to the mainstream.  Read these ideas here first:  The Guardian, Independent and BBC will steal them later.

I hope one reason for the visibility that won't be true, but let's not underestimate the potential of otherwise rational people to do stupid things, is that Gasland gets nominated for an Oscar.  And I went to NYU Film School! 

It's a long shot, but assuming it is in the documentary category, it will mean that the exposure will mean that Josh Fox will have to subject himself to those inconvenient facts. When I first heard about this one, I didn't know whether to laugh or cry, but actually the oxygen of publicity could easily blow this out.  Gasland on Oscar night would help Europeans be at least aware of shale, but they will be hearing plenty about it anyway:

2.  The penny drops in Europe: not only is this gas, this is going to be oil too. People who yawn over gas, perk up at $100 barrel oil. Money doesn't talk, it swears as Bob Dylan said and much of the opposition to European shale evaporates.

3.  Shale goes global. Last year I predicted Argentina, Australia and enough LNG for the US to export.  I missed India but that should be big this year.  This year, there will also be a lot of little discoveries, enough to ultimately change the game worldwide. 

4.In Europe: while we wait and wait and wait for Poland, think Germany and the UK, with other plays popping up anywhere: Denmark, Switzerland, Italy, Spain and Ireland are all possibles and France will wake up to shale oil. I've said all year that the Paris Basin is the new Bakken. 

Which is why I now say: Northern Germany (and the Netherlands) is the new Eagle Ford. But, while I've been right, I've been wrong occassionally too. I have a good feeling and some educated hunches and don't bet the house on this. But what if it did happen?




Gas v Nuclear

The UK is still making nuclear a prime component of it's energy policy.  But in the USA, according to Hitachi, one of GE's partners in reactors:

Hitachi and GE joined forces in 2007 and set up joint ventures in Japan and the United States, with the aim of tapping growing demand for nuclear power. Hitachi owns 80 percent of the Japan venture while GE has a 60 percent stake in the U.S. firm.

The partners have set a target of securing orders for at least 38 nuclear plants by 2030. Of that, 10 were originally expected to come from the United States, Nakanishi said.

"When we formed the joint venture, the situation was that we expected a nuclear renaissance in America, with 30 new plants to be built in the United States alone," said Nakanishi, who took over the helm at Hitachi in April.

"That has changed enormously, with the discovery of shale gas and big swings in fuel prices… We now don't expect any new nuclear plants in the United States in the next 10 years."

But in the UK,  nuclear power is one of the foundations, along with CCS, Wind power and gas storage of the government program.  And shale gas?  Won't work for years UK experts say.  Who has the better track record?

Time for a Plan B?


China and Blackpool

Two stories of note. From China,

China's top listed gas producer PetroChina Co. (PTR) and energy major Royal Dutch Shell PLC (RDSB.LN) have started drilling the first evaluation well at the Fushun shale gas block in Sichuan province, PetroChina's parent China National Petroleum Corp. said in an in-house newsletter Monday.

The move marks a milestone of the two companies' shale gas cooperation, 13 months after signing an agreement to jointly develop shale gas resources in the area.

Assessment work in the Fushun block that covers an area of approximately 4,000 square kilometers began in January this year.

If China can do this in 13 months,  why should we believe the doomsayers who say that Europe won't have any game changing shale even within 10 years?

Any European shale won't be helped if we see stories like this from Cuadrilla's operation area of Blackpool that follow the accentuate the negative model:

A GAS company has been granted permission to expand its controversial energy revolution on the Fylde coast – despite concerns about hazards to planes from Blackpool Airport.

But both Blackpool and Fylde Green Party and Blackpool Airport have expressed concerns about the plans, with the airport filing an official objection to Lancashire County Council claiming the Westby development could prove "hazardous" to flights.

Paul Rankin, the airport director, said: "We find it potentially conflicts with national and international aerodrome safeguarding requirements, and it presents a hazard to the safe operation of aircraft in the vicinity of Blackpool Airport."

This guy is mis-informed.  Firstly,  the derrick is about 30 meters high. Blackpool Tower, only marginally further away doesn't interfere with the operation of the airport and is 158 meters high.

Secondly,  why isn't he interested in increasing investment in the area?  Perhaps it would bring in more passengers and save his business, which is declining?

Thirdly, if he's worried about international standards, one need only look at Dallas Fort Worth airport, number eight in the top ten busiest list.  Cheaspeake have not only been drilling at the  airport since 2006, they have given them over $180 million in royalties.



Where there’s light, there’s hope

Am I linking to this story because at this time of year we start to look forward to the future?  Or am I doing it because Christmas Day is a good day to tell a story of good news?

Or is this story instructive in how betting on the future can be one of betting on hope and not negativity. 

For Sara Ruto, the desperate yearning for electricity began last year with the purchase of her first cellphone, a lifeline for receiving small money transfers, contacting relatives in the city or checking chicken prices at the nearest market.

Charging the phone was no simple matter in this farming village far from Kenya’s electric grid.

Every week, Ms. Ruto walked two miles to hire a motorcycle taxi for the three-hour ride to Mogotio, the nearest town with electricity. There, she dropped off her cellphone at a store that recharges phones for 30 cents. Yet the service was in such demand that she had to leave it behind for three full days before returning.

That wearying routine ended in February when the family sold some animals to buy a small Chinese-made solar power system for about $80. Now balanced precariously atop their tin roof, a lone solar panel provides enough electricity to charge the phone and run four bright overhead lights with switches.

“My main motivation was the phone, but this has changed so many other things,” Ms. Ruto said on a recent evening as she relaxed on a bench in the mud-walled shack she shares with her husband and six children.

As small-scale renewable energy becomes cheaper, more reliable and more efficient, it is providing the first drops of modern power to people who live far from slow-growing electricity grids and fuel pipelines in developing countries. Although dwarfed by the big renewable energy projects that many industrialized countries are embracing to rein in greenhouse gas emissions, these tiny systems are playing an epic, transformative role.

That's what small scale solar will provide: An epic transformative role. One reason I say that gas is the bridge fuel to the future, is how positive sounding much of the research on solar power is. Combine breakthroughs in energy efficiency, LED lighting and solar generation with breakthroughs in energy storage/batteries, we could be on the verge of something wonderful – and epic and transformative.

Under the gas as bridge fuel scenario, we get to 2030 and the world is far different than it was in 2010.  Or if we go under the UK's energy policy, the world of 2030 is the same as 2010, and more mistakenly it makes the dangerous assumption that any technology in 2030 is the exact same as today. 

We in the "advanced" world can learn from Kenya: We too can replace much of our lighting needs entirely via solar. Not all. Not even most. But easily enough to make obsessing over when will the lights go out even more of an expensive waste of time. Another thing we can stop being paranoid about is the developing world in an inexorable race for scarce oil and gas.

Or we can look for problems instead of solutions – choose the small picture, the conservative and the past.

The study, "Can unconventional gas be a game changer in European gas markets?", says that although unconventional gas development will not be a "game changer" for European gas markets overall, it could have a significant impact in individual countries, although this would probably not happen during the next decade.

More on the Oxford Study soon.

Hard Oil. Easy Gas.

Exciting analysis here from the NYT on the big picture behind the Sasol acquisition in Alberta of earlier this week. This is the time of year that people like to make predictions.  Any that I made this time last year were wrong:  they were too conservative.  But in 2011 to 2015, this is going to get bigger and bigger:

Diesel and jet fuel are usually made from crude oil. But with oil prices rising even as a glut of natural gas keeps prices for that fuel extraordinarily cheap, a bit of expensive alchemy is suddenly starting to look financially appealing: turning natural gas into liquid fuels.

The technology takes “a lot of money and a lot of effort,” said Michael E. Webber, associate director of the Center for International Energy Environmental Policy at the University of Texas, Austin. “You wouldn’t do this if you could find easy oil,” he said.

But oil, as the Peak Oil crew like to say is hard. But what they didn't figure on is that gas is easy.  It's far mroe easier, and far cheaper than oil.  And by using old technology now getting even better,  gas to oil is simply turning one hydrocarbon into another.

But with the huge spread between oil and gas prices, and predictions of oil topping $100 a barrel next year, the conversion technology could be a “a money-maker for whoever is a first mover in that space.”

Which makes Peak Oil past it's peak. My presentation on February 8, 2011 at 6.30 in the Grand Committee Room of the House of Commons to the All Party Parliamentary Group on Peak Oil and Gas (!!!) is called "The Energy Crisis is Over. Get Over It."

No one has to pay to attend. The Mother of Parliaments allows anyone to stroll in (after significant police security naturally).  Details on how to attend willl be here in the New Year.  Look forward to seeing you there.  But I'm not trying to convince my readers: that battle was mostly won a while back. But I'm not scared of the Peak Oil crowd. Someone has to stand up to them, it may as well be me.

The next battle will be over the economics, cash and carbon wise, of natural gas to liquids.  I would venture that using natural gas instead of oil is going to be at least marginally efficient carbon wise and more than that when the entire energy chain is included.   

Mr. Mogerman, of the Natural Resources Defense Council, said that given the historical market prices for oil and natural gas, only countries with no other choice had pursued the conversion process. “The only ones who’ve done it are people with their backs against the wall, and who had no financial considerations,” he said.

But if oil prices stay high and gas prices remain low because of shale gas, that view could be history.

People needn't bring up the Nazi and Apartheid past of gas to liquids here – I've already done that.  But what we have to move on to is the promising future of this technology.

Yesterday in Parliament

Thanks to Alex F, Alex C, Maurice and John for the heads up for this one.  I'm so inured to a non-existent debate on the UK energy future,  that it was surprising to find this from the House of Lords debate on the Energy Bill.

For our international audience, the UK House of Lords has very few heredity peers any more and seems to be stuck as a combination anteroom to the funeral parlour for retired politicians. One of those is Nigel (now Lord) Lawson who was one of the chief architects of energy deregulation, and indeed UK economic policy in the Thatcher years. As a general rule that would distance him from me politically and his vocal climate change opposition would tend to push us even further apart. But to give him credit, he along with Christopher Booker another big UK CC skeptic are both spot on about shale gas' role. Of course, as father of Nigella Lawson, we have to be well disposed to him for that alone.  This from yesterdays' debate:

The purpose of this Bill, or, rather, the policy behind it, is to bring that to an end in an obsession to eliminate United Kingdom carbon emissions. Again I will quote from the Statement for what I promise to be the last time. Mr Huhne said that,

"we face growing demand, shrinking supply and ambitious emissions reductions targets".-[Official Report, Commons, 16/12/10; col. 1064.]
We do indeed face growing demand, although the massive economic burden imposed by the energy policy that lies behind this Bill will certainly damage the economy sufficiently to reduce the growth in demand. We are undoubtedly lumbered with self-imposed unilateral emissions reductions targets. The reference to "shrinking supply" is complete nonsense. It is the very reverse of the truth. Indeed, Mr Huhne admitted as much when he explained to the CBI:

"Left untouched, the electricity market would allow a new dash for gas".

Indeed, so it would and so it should.

The most dramatic technological breakthrough in the world of energy since my time as Secretary of State almost 30 years ago is the very recent development of horizontal drilling and hydraulic fracturing, which together have made the production of gas from shale economic and highly competitive. As a result, the official US Energy Information Administration, for example, announced only last week that America's technically and commercially recoverable shale gas reserves are twice as abundant as they previously thought them to be. Indeed, the United States is already set to overtake Russia-if it has not already done so-as the world's largest gas producer, and this is just the start.

Although America has been first in the field-a result of a technological breakthrough by the private sector, incidentally, which owes nothing to any government support or technology stimulus-the world is awash with shale, in Canada, Europe, Asia and Australia. We now know that we live in a world in which there will be an abundance of gas far into the foreseeable future and beyond. Because it is spread throughout the world, we no longer need to fear the strategic insecurity of being overdependent on either Russia or the Middle East.

Indeed, in so far as there is an energy security problem in this country, it stems entirely from the Government's obsession of ensuring by means of massive subsidies, combined with growing penalties and restrictions on the use of gas, that we become heavily dependent on wind power. That government-imposed insecurity has three dimensions. First, there is the inherently unreliable nature of wind, which sometimes blows and sometimes does not. Secondly, there is the question of whether it is practically possible to build and install wind turbines on the scale required to meet our energy needs, leaving aside the huge economic and environmental costs of doing so. Thirdly, there is the fact that an indispensable component of wind turbines is neodymium, a rare mineral, which is mined and refined-in a highly polluting way, incidentally-only in China, so we are dependent completely on China.

What are the consequences of the new energy policy which lies behind this Bill, whose essential purpose is substantially to raise the cost of UK energy by turning our back on abundant low-cost gas and relying on higher cost nuclear power and, to an even greater degree, on very much higher cost wind power? There are three consequences, two of them certain and the third quite likely.

The first is that by substantially raising the cost of energy, the policy will do great damage to the economy in general and to manufacturing in particular, at a time when it is clear that our principal competitors overseas have not the slightest intention of following suit. It is indeed curious, to say the least, that a Government that came to power saying they wished to rebalance our economy so as to reduce our relative dependence on financial services, which implies having a stronger manufacturing sector, should be determined to impose the most anti-manufacturing energy policy of any Government in British history.

The second consequence is that, despite the provisions in the Bill before us today, the massive rise in energy costs, which is the clear purpose of this policy, will lead to a huge increase in fuel poverty at a time when conditions are tough enough as it is for those on low incomes. Those two consequences of this policy are certain.

The third, which is not certain but quite likely, is that the dysfunctional energy policy to which the Government are committed will prove unable to provide sufficient reliable electricity to meet the nation's demand, and the lights will go out. The noble Lord, Lord McFall, warned of that in his intervention earlier in the debate. And all this in the cause of eliminating UK carbon emissions.

Moreover, there is a further irony. Per kilowatt of electricity generated, gas produces only half the carbon emissions of coal, so it is quite possible that by switching from coal to gas, the UK might be able to meet or at least get very close to the 2020 target for emissions reductions enshrined in the Climate Change Act. It would not, of course, make it possible to meet the near total decarbonisation enshrined in the 2050 target, but by 2020, or more likely well before that, it will have become abundantly clear that global decarbonisation is simply not going to happen, and that for this country to persist with a policy of unilateral national decarbonisation will be manifestly absurd and indefensible. Indeed, as we suffer the coldest winter since records began 100 years ago, well before 2020 it might just begin to dawn even on green-obsessed government Ministers that there may not be any case for doing so.

At present, the coalition Government are having to tackle with determination and vigour an unenviable fiscal inheritance in a tough economic climate. I wish them well. But to make that task substantially harder by embracing, for no good reason whatever, the massive self-imposed economic burden embodied in the policy which lies behind this Bill is madness.

Politics is the art of the possible. Is there room for agreement between the Nigel Lawson's of the world and the Caroline Lucas's (the UK's only Green Party MP)?  I think there is and creating a Plan B for UK energy policy is one of my combination predictions and resolutions for 2011.