Thursday, December 3, 2009

From No Hot Air

(c) 2009 F. Bruce Abel

This from No Hot Air, the very good blog in the UK. The news about natural gas becoming the new base load rather than coal is huge.

The same thing is happening in the US.

This is relevant for aggregation.


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Gas as the new UK baseload!!
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Bears and reality mug the gas bulls 55%
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Shell and gas, shale and China.
South African Shale Gas
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Gas as the new UK baseload!!
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November Autopsy
Bears and reality mug the gas bulls 55%
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Shell and gas, shale and China.
South African Shale Gas
Demand Destruction
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Dec 02, 2009
Gas as the new UK baseload!!
Six months ago when we were telling UK contacts the surprising news that gas is replacing coal in US generation, we were met with disbelief. But now:
Gas replacing coal as UK baseload power source.
Centrica is running all its gas fired power plants at full capacity this winter to lap up a deluge of cheap gas in Britain amid a slump in global demand, an executive from Britain's biggest gas-fired power generator said on Wednesday...
As gas prices have fallen we have switched all our gas fired power plants on, which we weren't expecting to do this time last year or certainly two years ago, which is one of the methods we have of dealing with all the LNG that arrives in the UK," Simon Bonini, director of LNG at Britain's biggest residential gas supplier told the CWC World LNG Summit in Barcelona."Instead of coal being the baseload supplier of power in the UK it's actually gas right now."
This is, at least to gas experts, really, really, really big news. This is of course fabulous news for the environment. And where does this leave CCS? But while the proximate reason for this is LNG, the story behind the LNG collapse is the shale surge, which is alluded to here:
The United States has largely lost interest in imported LNG because of falling costs for its own production, leaving LNG suppliers that have invested billions in new facilities aimed at supplying North America scrambling for a market to sell it in.
Posted at 07:05 PM in Current Affairs, Energy Prices, LNG, Next Big Things, Shale Gas Comments (0) TrackBack (0)
Gas v Coal
It's worth remembering that coal has a significant advantage over gas in Europe via the carbon credit subsidy coal plants receive. In the US, coal doesn't have that advantage. But gas is winning on economics even before any carbon trading system:
A large Southern utility said Tuesday that it would close 30 percent of its North Carolina coal-fired power plants by 2017, a step that represents a bet that natural gas prices will stay acceptably low and that stricter rules are coming on sulfur dioxide emissions, which cause acid rain.
What is key here is their "bet that natural gas prices will stay acceptably low".
The utility, Progress Energy, based in Raleigh, said it would close 11 coal-fired power plants built between the 1950s and 1970s.“Some of these plants are quite old,” said Bill Johnson, the chief executive of the company. But, he added, “They have a lot of useful life left in them, absent the need to put emissions control units on them.
Interestingly, Progress sees natural gas as the bridge fuel to a no/lo carbon future, but that future will be nuclear for sound local reasons.
While the short-term substitute is natural gas, the long-term plan is a nuclear backbone for the company’s generating system, he said.
Progress said it might repower some coal-burning plants with wood waste. It does not anticipate large-scale wind or solar power in the near future, Mr. Johnson said. There is good wind offshore, but the area routinely experiences hurricanes that are stronger than existing wind machines can handle, he said.
Posted at 08:43 AM in Energy Tech, Next Big Things, Renewables, Shale Gas Comments (0) TrackBack (0)
Dec 01, 2009
November Autopsy
Here goes on going through the entrails of November gas pricing. First off, anyone who got finagled into a fixed price in 2008 or 2009, has those guts nailed to the floor. How painfully? Very.
One therm equal 29.3071 kWhs, therms are still used for trading gas although we also see US gas priced in MMBTU which equals ten therms. Sound complicated? Of course it is, but once we get through that pain barrier pricing itself should be simple.
A gas network has to be kept in balance, that is what goes in at any of the main gas terminals must come out, which means actually burnt in boilers, gas fires and ovens at home and huge boilers at electricity generation stations. This means there is an active daily market (prices here) reflecting supply and demand fundamentals 24 hours a day. The System Average Prices are averaged out and the SAP for November was 0.8982 or 26.32 pence per therm.
SAP is impacted by how much gas is chasing how many customers, which in turn is basically, but not only, weather related.
In the UK, as opposed to many markets worldwide, and especially in North America, the SAP does not act as a benchmark for most classes of end users. Anyone with a fixed price contract is basically paying a price set on wholesale markets like the ICE which goes up, down and around every day. A fixed price commodity only price is set by multiplying the projected monthly use of a site by the monthly pricing strip. On a standard heating profile this means November is 10% or so of total annual demand. But since November was so mild, that projection would have been blown out of the water anyway.
Let's assume a contract starting in October and fixed for one year: Fixing that sometime over the summer would have meant a price in the range of 42 to 50 pence per therm for commodity only. Other costs, for delivery and margin would be anywhere from 35% for a domestic supply to less than 10% for a steel mill. But the gas cost itself is the same whether the business makes computer chips or fish and chips.
The vast majority of SME users buy on fixed prices. Why? Because, until recently, they were never told the alternative. What they were told, and often by energy brokers, is that gas was running out, or the Russians would cut them off and a variety of scare tactics used to separate the punters from their money.
Another option, used by higher level brokers who style themselves energy risk consultants, is to buy gas much closer to the time of use. Although a contract might start in October, the gas for November in this example could have been bought in March at 50 or 40 in June or near the low of 31.2 in October. Many people have gas purchased for them by consultants as part of a consortium, or bucket of users. It sounds reasonable to the amateur that if they put themselves in with a large volume of demand they will get a better price. That works in paper clips. Not in energy. Go to your usual petrol station and ask for a discount if you promise to come back next week, or to bring your brother-in-law or even promise to switch the Fiesta for an SUV. Doesn't work, does it? Gas prices are wholesale commodities, and the impact of even the largest end users is minimal. In fact going into a bucket can actually drag the price up, by committing all users to a highest common denominator. Many aggregators have risk matrices which operate independently of market events. They may slavishly buy 10% of November's gas in each of the preceding six months for example and then buy the remaining 40% sometime during the last week before the month starts. This approach works better than fixed and that is how they are sold. What the price would have been varies from buyer to buyer, but the reality is that for November 2009, gas was never cheaper than in mid-October at 31.2. This means that if you went the consortium route, it would have been physically impossible to get a price lower than that, and most people would have paid more. The average for November in the month of October for example was 33.08. Energy consultants will benchmark themselves against either that price or a fixed one, so 31.2 compared to 40 or 50 looks like a great success.
But.... The average SAP for November was 26.32. Any SME end user could have paid for that by asking for it. No consultant fees would be rolled into the margin either. Totally transparent, this provides the default option of doing nothing. Which explains why a broker would never offer it. Who would pay a lot of money to be told the best thing to do is to actually do nothing>
Posted at 11:48 AM in Energy Prices Comments (0) TrackBack (0)
Bears and reality mug the gas bulls 55%
There has been a lot of speculation in US natgas this year, and those who have been betting on a gas recovery are losing millions. An expensive lesson about what we have told anyone for free: shale gas changes everything. A rear view mirror is not a crystal ball. Conventional wisdom no longer applies.
Rising supplies threaten to hurt the record-large $4.2 billion bet in the U.S. Natural Gas Fund LP, while traders hold 51 percent more options contracts to buy gas than they do to sell. The International Energy Agency warned of a glut that Qatar’s energy minister said may last until 2012. Wall Street’s consensus forecast for a 51 percent rise in U.S. gas futures to an average $6.09 per million British thermal units next year is too high, according to industry consultant Schork Group Inc.“We have more gas than we know what to do with in the U.S., we have more waterborne gas floating around the world’s oceans that doesn’t have a home,” Stephen Schork said in an interview from Villanova, Pennsylvania. Prices this winter will “gravitate toward, and remain closer to $4, rather than $7” for each million Btu, he said
The Conventional Wisdom has been proven so wrong for so long now it's hard to see how people can still get talked into recovery scenarios. Somewhat like the economic recovery story, which now appears to be at best flat and at worst a U bend scenario: The economy goes down, perks up a bit and then - next stop the sewage system. The US is still the world's largest economy but one in seven US mortgages are in arrears and a quarter of children are fed via food stamps. That kind of scenario doesn't mean US (or UK) demand will lift up so much in 2010 that it merits December 2010 gas trading at a 55% premium to December 2009.
There will be a bottom for gas, but when? We predict the merde really hitting the fan unless there is a severe winter. A mild one will see a nightmare scenario of getting to next spring with a substantial storage backlog in both the US and the UK, depressing prices further, just as even more LNG hits world markets and shale production goes ever upward. Not only is Qatari gas abundant, it's cheap:
As the world’s most efficient producer, Qatar can profit at lower prices. The nation can pump 1 million Btu for as little as 15 cents, compared with about $4 for Russia and Norway, according to the IEA. Most costs are covered by so-called condensate, an oil-like petroleum that’s pumped along with natural gas and refined as if it were crude. Qatar then spends another $2.83 to liquefy that gas ready for shipping.
This puts the floor at around $3, but Marcellus shale producers are profitable at $2.50 and getting better all the time. That means sub 20 pence per therm gas is looking increasingly likely.
Posted at 10:47 AM Comments (0) TrackBack (0)
Nov 30, 2009
What's happening in UK LNG imports. And what's not
A key part of the energy bull story is how UK energy security is threatened by the UK in competition on world markets for gas. The spiel is that UK will have to pay any price just to keep the lights on, so why don't you buy next year right now.
A key part of that narrative, used to create the scar(e)city story, is surging Asian demand meeting the UK in competition for scarce gas on world markets. According to that theory, expensive, scarce and volatile gas, make CCS and nuclear generation more attractive on both price and security of supply issues.
But facts, not the anecdote, are not as scary. The UK has two main import areas, South Hook and Dragon terminals at Milford Haven in SW Wales and the Isle of Grain facility, 40 miles east of Central London. This year the IOG terminal has not been busy. The two main importers are BP, which brings in gas from Trinidad or Egypt, and Sonartrach from Algeria. BP hasn't imported a cargo since June, diverting cargoes from Trinidad to Japan, India and bizarrely, Kuwait. Sonartrach, the Algerian state gas company used to run a shuttle service on the LNG carrier Berge Arzew basically creating a floating pipeline. But the last time that ship unloaded was November 7 and now it's on the way to Korea.
When a pipeline floats to Korea, meaning we won't see the Berge Arzew at IOG until at least late January, we should see this as confirmation of UK prices rising in competition with Asian markets story. Instead a 20% drop in December and January prices developed during the month of November.
Another example of why we don't believe in hot air: The reality is far less scary than the story.
Posted at 09:22 AM in Energy Prices, LNG Comments (3) TrackBack (0)
Nov 28, 2009
Shale Gas is an Alberta headache
Alberta made a lot of money for a lot of years by exporting natural gas to Eastern Canada and the United States. Alberta has many parallels to the role of Russian gas to Europe: A steady supply, but linked to oil. Both Alberta and Russia now suffer from the dual problem that their gas is expensive to produce and far away from the markets.
Alberta's natural gas is in the midst of an extraordinary tumble, with year-over-year production declines higher than 7 per cent, and a stunning 18-per-cent drop in U.S. exports. If the province cannot rapidly halt that slide, it risks entering a period where revenue shortfalls will hurt employment and provincial budgets, said Murray Edwards, one of Alberta's most successful businessmen and vice-chairman of Canadian Natural Resources Ltd., which has substantial Alberta natural gas holdings
The cause of course is shale:
Though it has dropped in the past 12 months, natural gas has filled nearly three-quarters of Alberta's petroleum coffers in recent years. But gas prices have been clobbered this year, by the financial crisis and by technological advances that have suddenly provided the industry cheap access to massive shale gas reservoirs in the United States, triggering supply glut concerns.
Alberta has been hit particularly hard, because the majority of the province's gas wells tap conventional reservoirs, which are both much smaller than shale pools and much more expensive to extract. Some new shale plays can turn a profit with gas prices at $4 (U.S.) per thousand cubic feet.
Most of Alberta's gas loses money below $7 or $8.With gas now just over $5, the province has gone from multibillion-dollar surpluses to a $4.3-billion deficit this year, and promises of more red ink in years to come. Alberta is now home to Canada's fastest-rising rates of mortgage arrears, employment insurance and insolvency.
Russia, and even possibly Norway and Algeria may have similar issues in either a far off future of European shale or in the near term from LNG. The solution may not attractive, although this may explain Statoil's interest in shale gas. Royalty regimes that made sense in a world of finite gas supply, may need revisiting in the world of gas glut. Alberta still hopes for increased oil revenues from their massive, but environmentally problematic, oil sands deposits...
But the years between now and then are cause for enough worry that even Iris Evans, the normally sunny Alberta Finance Minister, admits to concern about entering "a period of more fluidity.""It's not only the freefall of the prices, it's what's happening south of the border," she said in an interview yesterday. "The shale gas ... can be a real headache for us."
Could the North Sea provide a similar headache one day?
Posted at 09:19 AM in Energy Prices, Energy Tech, Prices and Politics, Shale Gas Comments (0) TrackBack (0)
Nov 27, 2009
Shell and gas, shale and China.
Nothing can underline the importance of the emergence of shale, and more vitally the coming permanence of abundant gas as this report from the Telegraph where Shell says that they will be a bigger gas company than they are an oil company:
The International Energy Agency has forecast a gas glut and depressed prices until 2015, but Mr Voser insisted the medium to long-term outlook for demand was strong."We are intensifying our gas production because clearly it is the fossil fuel that has the lowest carbon dioxide content," he said. "We will be more than 50pc gas by 2012 and increasing afterwards."
Qatar sits on the second largest gas field in the world, and its LNG deliveries coming to the UK are pretty secure: where else is that gas going to go?
But Shell is also betting on the Pearl project in Qatar where natural gas is to be converted to liquid for fuel. You can bet that all over the world this is the one to really watch: If the gas glut can provide a low carbon substitute for diesel fuel as well as replacing coal in generation this portends a vision of the future where trucks and buses run on gas and cars run on electricity produced from renewables backed up with gas.
Despite Shell's history as Europe's largest oil company, Mr Voser made it clear that gas production would overtake oil production by 2012, as 1bn electric cars hit the world's roads over the next few years. A few years ago, Shell's production was split 60:40 in favour of oil.
But the big story from Shell today is the plans in China to produce shale gas:
China has begun its first joint development project in shale gas, in a bid to tap into an unconventional source of cleaner-burning fuel to meet the nation's rising demand.Energy major Royal Dutch Shell PLC (RDSB) and China's top listed gas producer PetroChina Co. (PTR) have signed an agreement to jointly develop shale gas resources in southwestern China's Sichuan province, China National Petroleum Corp. said Friday.The agreement to jointly evaluate shale gas in the Fushun-Yongchuan block was signed Nov. 10 in Beijing, the state-owned parent company of Hong Kong- and Shanghai-listed PetroChina said in a report on its Web site.Shell China spokeswoman Li Lusha confirmed the agreement, adding it came after PetroChina and Shell had successful cooperation in gas production in the Changbei gas field in Shaanxi province.This marks the nation's latest effort to tap shale gas resources after the launch of a Sino-US Shale Gas Resource Cooperation Initiative earlier this month during U.S. President Barack Obama's first state visit to China.The initiative is expected to assess China's shale gas potential through joint technical studies with reference to American experience with shale gas. Development of shale gas in China lags far behind the U.S., where it's a major contributor to the energy mix.Shale is a sedimentary rock composed of very small particles of clay, mud and sand. It has a low permeability, meaning it releases trapped gas very slowly, and can be expensive to develop.Developing shale gas resources in the Sichuan basin has much further room for foreign cooperation and could potentially alleviate tight gas supplies faced by China, CNPC said.Beijing wants natural gas to account for 10% of the nation's energy mix by 2020, up from 3% in 2005.
What is slightly eyebrow raising about this is that Shell's experience in shale is limited. What will happen when Chesapeake and Statoil start work in China?
Posted at 11:26 AM in Current Affairs, Energy Tech, Next Big Things, Shale Gas Comments (2) TrackBack (0)
Nov 25, 2009
South African Shale Gas
We've seen shale exploration in place or in plan in North America, South America, Europe, Asia and Australia. Why not Africa? North Africa, specifically Algeria and possibly Morocco could be promising with Algeria's Sonatrach supposedly up to something with shale, despite their already massive conventional reserves.
But now interesting news from South Africa:
A multinational gas exploration joint venture submitted an "exploration right application" to the Petroleum Agency South Africa (Pasa) on Wednesday for an onshore shale-gas resource in the Karoo Basin, situated in the central region of South Africa.
The usual caveats:
The partners noted in a joint statement that the Karoo Basin had unproved shale gas potential and significant exploration efforts were still required to assess the resource.
But we like who is involved apart from SASOL. Two companies who have been cooperating in the Marcellus Shale are now going a long, long way from home:
The participants in the joint exploration venture include Sasol Petroleum International (SPI), a subsidiary of JSE-listed Sasol, Statoil ASA, of Norway, and Chesapeake Energy Corporation, of the US.
As far as I know, this is the first publicly confirmed operations of Chesapeake outside the US.
Posted at 12:15 PM in Shale Gas Comments (0) TrackBack (0)
Demand Destruction
Energy demand is another building block of conventional energy wisdom that from the very start on this blog has appeared shaky.
The CW says rising economic growth inevitably means rising energy use. Cutting energy use is therefore per se anti-growth, and similarly renewable and efficiency measures are seen in some quarters as some sort of anti-capitalist cabal.
The Energy/Economy escalator is a keystone of Peak Oil Theory, the strange movement that seems to relish the thought of civilisation's collapse. In fact they deliberately appear not to offer any ways to avoid it. Their cult like behaviour - covering themselves in arcane and obscure theories, shooting the messenger of any good energy news and belief in some sort of negative energy rapture, makes the them the survivalist cult of energy. Peak Oil, like other Malthusian theories, assumes that the future will be a simple rerun of the past, and confuses the rear view mirror with a crystal ball.
Past experience shows that the death of energy has been predicted with boring regularity for years, and the experience shows that energy responds to price signals. Shale gas is only one case of higher prices leading to new ways of extracting old resources.
What's different this time is that not only is supply increasing but demand is falling. But energy buyers must understand why it is falling, at the risk of being led to higher long term prices. Demand actually peaked in 2005 for oil, and there are signs that gas use in the UK peaked as long ago as 2003. Electricity demand is another key indicator and it appears that electricity demand also peaked in the UK in 2006.
What's different this time is the combination of carbon awareness, high prices and technology. As we've noted before, energy obesity is falling. The old paradigm that if a home is better insulated the inhabitants simply turn up the heat and take off their clothes eventually hits a brick wall. LED lighting is only one coming example: No one is going to replace one 60 watt light bulb with 40 1.5 watt bulbs that provide the same lumen level. Similarly, any refrigerator, TV, computer, central heating that is bought today is more efficient than the one it replaced even where it may be physically bigger or more powerful. This is what we call the great impact of small things.
Barclays Capital have picked up on this in warning how the energy and natural gas markets are betting on increased demand that won't show up independent of the onset or not of any economic recovery.
The accelerating rise in commodities prices may leave energy behind. Even if the economy recovers next year as expected, energy consumption in the industrialized world fell so far, so fast, that it will struggle just to meet 2007 levels.The economy that does come back may be different than the one that collapsed. A huge increase in wind power will trim natural gas demand, says Barclays analyst Biliana Pehlivanova, as utilities shut down more expensive gas-fired plants to accommodate the new supply. She’s forecasting an increase of industrial demand of 0.8 billion cubic feet a day, not enough to overcome the 1.3bcf decline in 2009.
Adding to the woes of natural gas producers, the new supply of shale gas, obtained by drilling horizontally through shale rock, is proving to be larger and longer-lived than many expected. Supply is holding up even after the number of drilling rigs in service has plunged 31% to around 1750, the lowest levels since 2002.
Posted at 09:06 AM in Current Affairs, Energy Prices, Next Big Things Comments (2) TrackBack (0)
Nov 22, 2009
Remember the Alamo
In San Antonio Texas, home of the Alamo you'd usually expect the nuclear option to be popular. To UK eyes, San Antonio also raises eyebrows in that the local utility is (municipal) government owned, a quite common US phenomenon.
The owners of CPS Energy, who just happen to be the voters via a board of trustees, seem to work pretty well:
Thanks to a diversified mix of fuels including coal, natural gas, nuclear and renewable energy, monthly residential bills for CPS Energy customers are the lowest in the country when compared to the bills of residents living in the 20 largest U.S. cities.
Lately, CPS has been studying a new nuclear plant and just returned from a shopping trip to Tokyo where they encountered sticker shock
The nuclear option isn't dead yet — the utility's trustees will learn Monday whether last week's trip to Japan yielded an estimate low enough to win back City Council support. But its prospects have dimmed since news that a $4 billion cost estimate increase had been kept under wraps, leaking out just two days before a crucial council vote on financing.And while Mayor Julián Castro says he is committed to protecting the utility's investment thus far, depending on what he hears at Monday's utility board meeting, he's ready to walk away from the deal and begin looking at alternatives.
Unlike in the UK, when the government wants to do something, they can consider all the options, but critically make a decision as well:
For CPS Energy, which spent the summer touting the nuclear expansion as the most affordable choice, natural gas is the next best option.At dozens of public meetings across the city, CPS Energy officials had said nuclear energy would cost 8.5 cents per kilo-watt hour, with natural gas coming in at 10.5 cents. The utility estimates wind would cost 12.5 cents, solar 21 cents.While renewable energy advocates dispute the figures for wind and solar, CPS Energy says they're high in part because they require backup sources of power. But natural gas, unlike wind and solar energy, can generate power 24/7 if needed.Yet CPS Energy also points out natural gas' weaknesses: its cost has been historically volatile — from highs above $12 per unit to current lows of $3 to $4 — and there are long-held concerns that the supply is declining.
But:
Consensus is growing within the energy industry, however, that new technological advances may have turned conventional wisdom on its head.
The sound of conventional wisdom turning.
Posted at 06:39 PM in Energy Prices, Energy Tech, Shale Gas Comments (2) TrackBack (0)
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