No Hot Air

Stored Solar: This year's model

One story we got real excited about in August 2008 about the same time we discovered shale, was the work of Daniel Nocera from MIT on storing solar power:

In one hour enough sunlight falls on the earth to power the world for a year. There are just two problems with solar energy: it's still expensive- and night. But now researchers at the Massachusetts Institute of Technology have figured out a way to store solar energy when the sun don't shine. To accomplish the technological trick, the scientists sort of turned over a new leaf: their innovative process imitates what nature does: photosynthesis.

Whatever happened to that?  Daniel Nocera is still around, still at MIT and still thinking of creating energy through chemistry:

What if you had a solar panel on your roof that could easily make hydrogen from the sun, use the sun's rays to make hydrogen? And you power up your own personal fuel cell, you store that solar energy in the form of hydrogen over time and you just click a switch and use it when it's needed. Well, with the right chemistry and the right catalyst, it might be possible.

Will anything happen here?  We don't know.  But we should think of possible game changing technologies like these instead of game freezing technologies such as CCS.  Carbon Capture and Storage is incredibly expensive and may not work.  But even worse it locks the mid 21st century into electrical generation technology from today. Spending a huge amount of money on something like CCS will prolong an already doubtful technology long after it can be supplanted by the likes of stored solar or oilgae or any number of breakthroughs in producing, using and storing energy.

In 2050 CCS may work.  It also may be as useful as an electric typewriter, or a fax machine or a video cassette is to us today.

Prices: It's beginning to look a lot like New Year's

The shops are just starting to feel as if it's beginning to look a lot like Christmas, but for gas markets it's New Year's that is coming early.

Traditionally Q4 is the time of year when gas prices are at their highest, with the entire winter spread out ahead.  Every driver that can possibly be bullish is exaggerated and the mere hint of a snowflake is grasped upon as sign of a massive wave of demand lying ahead.

What tends to happen in even cold years is that after January 1, traders look a few months ahead and ask themselves how are they going to dump all this gas in storage.  Gas is now over 98% of capacity in the UK, and at similar levels throughout Europe and the US.

US gas prices are down 15% this month.  But UK December gas has lost 24% in three weeks.  November day ahead is 21% down on the lowest month ahead price traded early in October. Anyone who uses even the luckiest of brokers is losing money every day. Gas traders are not postponing the inevitable any more, they are finally dealing with it. The main drivers of UK gas prices, which are also the main drivers of UK electricity prices are:

1. A historically high storage level, despite increases in storage capacity.
2. The collapse of US demand for LNG
3. A warm November.
4. Increased gas supply from Qatari LNG meets other LNG that is in storage on the oceans or that has been diverted from Asian lower demand.
5. Industrial demand increasing isn't happening.

Factor in the long-term outlook from the US and International Energy Agency on worldwide gas glut and the smart money in the market is getting out now.  January could look like all of the above but with the extra complication of that if gas is not used enough,i.e. taken out of storage, then we'll see a real bloodbath in prices  that will only be solved by either a very cold winter in both Europe and the US or significant switching away from gas in generation in both markets.

It's that man again

One of our key beefs with the MSM in general and energy reporters in particular is how they are always willing to highlight problems and rarely follow up on any solutions or even counter arguments.

This comes to mind with the curious case of Art Berman.  Berman was all over the FT at the start of November

The leading shale sceptic analyst is an independent geologist, Art Berman, often described as a “radical”. Rather soft spoken, though, he says: “I hope I’m wrong about shale.” The problem, as he sees it, is that the standard industry analysis about shale well Estimated Ultimate Recovery, or lifetime production, is too optimistic. “They have fantastic initial rates, but the question is whether the (rate of production) persists as they say.” For example, he says, in deep shale formations “the rock collapses as gas is produced, and crushes the proppant. And as the fractures are drained you have to frac and frac and frac.” Expensive.

And:

Geologist and energy consultant Arthur Berman has also been pointing out the rapid decline rates for some of the big shale gas plays for some time now

But we aren't the only ones who take our Berman with a healthy dose of salt:

Questions about Berman’s research were so frequent that investment bank Tudor Pickering Holt & Co. in Houston put out an e-mail to clients rejecting claims by shale skeptics, said Dave Pursell, a managing director at the firm.

“If you read his stuff, he’s basically said there’s fraud being committed by Wall Street, E&P companies and reserve engineers all in collusion,” Pursell said. “When you start calling companies out by name and you start insinuating and implying very strongly that there’s a degree of fraud going on, you get our attention.”Berman doesn’t have the experience in unconventional gas projects to validate his assertions, Pursell said. U.S. shale- gas output will climb to about 22 billion cubic feet a day at the end of 2013 from 8 billion at the end of last year, Tudor Pickering said in August.

If exploited properly, shale formations will be a “game changer” to boost U.S. energy supplies and help cut carbon emissions, said Porter Bennett, chief executive officer at consulting firm Bentek Energy LLC near Denver.

“There’s a preponderance of evidence that suggests that those shale plays are very real,” Bennett said in an interview.

David Hager, exploration chief at Oklahoma City-based Devon, took on Berman’s claims with an Oct. 19 op-ed piece in the Oklahoman newspaper. Hager likened shale-gas development to a home run to win the World Series and said Berman “is in the stands speculating on whether the slugger is on steroids.”

Chesapeake, also based in Oklahoma City, ignored Berman’s arguments until it learned of speeches the geologist gave calling shale production a speculative bubble, Chief Operating Officer Steve Dixon said in a telephone interview.

“He called us out,” said Dixon, who devoted part of Chesapeake’s analyst and investor meeting in New York on Oct. 14 to rebutting Berman. “He left me no choice.”

Perhaps this is the best route:

“We’re ignoring Mr. Berman,” said Brad Sylvester, a spokesman for Southwestern Energy Co., the Houston-based company that pioneered development of the Fayetteville Shale in Arkansas. Southwestern was he only oil and gas producer in the Standard & Poor’s 500 that rose last year.

But lots of people will read the Berman story and believe it all the more if they don't hear rebuttals.

Obama in China. And in the planet UK...

President Obama on Copenhagen:

"We should not make the perfect the enemy of the good"

The DECC in an off-the-record conversation today:

"I'm interested in 80% reduction by 2050, not CO2 reductions in the short term". She also said that shale is a "US phenomenon".  So that means it wasn't David MacKay.  But it is the old story.  Spend a huge amount of money on some pie in the sky scheme like CCS instead of immediate actions.

Meanwhile back in the two countries that matter:

It may have been toward the bottom of the list. But US President Barack H. Obama and Chinese President Hu Jintao did include a shale gas resource initiative in their Nov. 17 announcement of measures to strengthen clean energy cooperation between the two countries.

“Under the initiative, the US and China will use experience gained in the United States to assess China’s shale gas potential, promote environmentally-sustainable development of shale gas resources, conduct joint technical studies to accelerate development of shale gas resources in China, and promote shale gas investment in China through the US-China Oil and Gas Industry Forum, study tours, and workshops,” the White House said in a statement posted at its Web site.

The China as energy bull story: soon to be bull?

We've remarked before on how common, yet outdated, perceptions of China's energy demand and resultant carbon emissions are used by a variety of energy market participants to talk up their own book at the expense of end-users and or tax payers. The basic approach of the various actors is to talk up China as some sort of bottomless energy pit, but the results depend on who is talking up the bull market.

Energy consultants, oil traders, peak oil theorists, CCS developers, climate change deniers are among those who in general want to talk up energy as a big problem.  Some have political axes to grind. Others are only in it for the money;  for describing the big problem, they can offer a solution with a fee relative to the size. A big part of the problem is to have an alarmist, hysterical and unrealistic view of China which describes a narrative of China as bottomless energy pit.  

China is often used for example, as an excuse not to act on carbon reductions at the  company, local and/or national level.  Similarly, those who want to push up prices, or finagle end users into fixing long term,  or bullish traders on oil and gas markets often use China as a threat to scare people into acting emotionally instead of rationally.

Those who expected me to mention shale gas in China, will be disappointed here.  China seems to be doing just fine on the supply/demand balance even before any shale gas comes into play.

China's domestic gas production will increase 50% in 2010 according to Sinopec's Xie Dan.  Most of that is due to the Puguang gas field coming on line.  China seems to have not exhausted any possibilities yet on conventional natural gas, as a recent discovery in Chonqing is allegedly three times the size of Pugang.

Where does this leave China in a few years?

China's natural gas consumption has been growing at double-digit rates for the past few years, but industry officials said the growth is likely to slow in the next few years.

"With a number of LNG projects, the second West-to-East gas pipeline, the volume of imported natural gas will grow quickly in the next few years," Xie told the conference, adding that the annual supply of natural gas is expected to increase by 2 bcm a year.

Demand from industrial users may weaken due to rising prices and the introduction of alternative energy forms, Xie said.

"Some regions may see an oversupply of natural gas," he said

Where will that leave us?  Without China sucking up every spare molecule on the planet, it means simply there will be more for everyone else.  Which means less for those pushing China as a problem.

Gas: the scenario which changes everything.

Geneva's Le Temps  has an article on gas on the back of the IEA report, interesting to see a more general perspective and an international one:

The translation is ours and Google's:

The most essential part of the report contained other information that was more surprising. The world's gas reserves are probably much larger than expected. So far, it was commonly accepted that the planet could meet its gas needs for the next 60 years, drawing on stocks from three countries (Russia, Iran, Qatar), which share a good half of the reserves. In reality, reserves could cover two centuries of consumption if we combined the unconventional gas, particularly gas contained in shale and transition zones (Coal Bed Methane, very deep reservoirs)...Shale gas is producing an investment frenzy..experts predict 60% of US production will come from shale by 2030, an enormous quantum jump considering it is only a few per cent today...One can imagine the practical consequences. Europe, which feared becoming increasingly dependent vis-à-vis Russia, would find untapped resources to loosen the vise is closing on it. The major pipelines, designed to connect Europe to the new fields in Siberia and the Caspian Sea, and perhaps one day Iran and Iraq are at the heart of a war in which geopolitical threats and diplomatic gamble poison our relations with Russia. However, in a throw of the dice, everything could change. This perspective would explain in part the financial difficulties encountered by proponents of new gas routes and he major liquefied gas projects which should allow the United States and Europe to diversify their sources of supply.

...we are witnessing a handover between gas and oil which the magnitude and consequences seem to confuse the International Atomic Energy which has just began to sketch these issues.

The Gas Oil Link

In UK natural gas prices,  2009 has seen a paradigm shift, a game changer and a revolution.

The paradigm shift has been the drop in energy consumption.  Although the recession had a big part in this, energy consumption of oil, gas and electricity started to go down in 2005 in what are called "developed" economies which signifies that the "recovery" if it ever shows up, does not mean a return to the bad old days.

The revolution has been shale.

The game changer is the globalisation of natural gas prices, primarily  deriving from the sudden emergence of shale reserves  pointing toward a future permanence of prices divorced from a link to oil prices.

The gas oil link has always been controversial among UK end-users but had been considered permanent due to the power of the link's big fans at Gazprom and Algeria's Sonatrach among others.

The link is over 50 years old and in Europe started out in the Netherlands. At the time, natural gas was a disappointment; the real prize was oil. Natural gas didn't have anywhere near the infrastructure or popularity it does today and gas had to compete with oil. Gas was naturally cheaper than oil, but had to remain priced in comparison to oil.  This made sense when comparing gas versus oil in fuel switching at generators or as feedstock in chemicals or for very large end users.  It wasn't very rational in pricing at small users - no one we know has dual fuel central heating. The link was logical in the days when oil was plentiful and carbon was a non-issue. Today, gas has two major advantages to oil: it has 31% less carbon content and doesn't have any of the supply issues, actual or imagined, that surround oil.

This year the link seems to have cracked as in May as this comparison of UK NBP gas and Brent Crude shows:

Is this permanent?  Via the FT's Energy Source Blog, we asked Fatih Birol, chief economist of the International Energy Agency the following.  I've highlighted  some key points:

The link between oil and natural gas prices is getting very frayed. Do you see it breaking permanently?

A. Dear Nick Grealy, in Europe and Asia-Pacific, gas is imported mainly under long-term contracts, which, in most cases, link the price of the gas to changes in the prices of oil under what are called indexation formulae. The original logic behind this arrangement is that gas competes against oil products, though increasingly gas competes more against other fuels, including coal and electricity. For now, the exporters and many importers are happy to stick with oil indexation. But the glut of gas that is building up does could put increasing pressure on both sides to adjust their pricing terms and even move towards an alternative pricing system, the most obvious of which would be direct indexation to spot or future gas prices. Russia’s Gazprom and Algeria’s Sonatrach – the two biggest external suppliers to Europe – have lost market share over the past year to cheaper spot LNG. They may decide at some point that enough is enough, and opt to move away form oil indexation, though they have made it absolutely clear that they have no intention of doing so for the time being. And the big importers may also start asking for it, as the gap between the price of cheaper spot gas and the price of gas under their long-term contracts widens. For now they don’t want to upset the status quo, but again that could change – especially if their confidence in pricing on the basis of spot markets increase. Certainly, the gas glut proves a window of opportunity for Europe and Asia to move to a more rational system of market-based pricing

Indian shale gas

Reliance Industries, one of India's biggest companies and Cairn India, a spin off of Cairn UK are getting active in Indian shale exploration:

Reliance Industries (RIL)... may join global oil majors in search of shale gas.

RIL has been studying the breakthroughs and the new technologies that are being used in producing shale gas that is now a huge rage in the US.This unconventional gas has caught the fancy of every big oil company ever since new technologies made the fuel commercial. According to an energy analyst, the cost of production of shale gas has come down by as much as 80% over the past five years in the US with new technologies and fiscal incentives provided by that country to encourage exploration.

Back home, in India, early steps are being taken for this new-age fuel as well. Cairn India, which recently started producing oil from its field in Barmer, Rajasthan, has begun work on shale gas in its fields. Mr Bott, who has come in as the new COO, is leading a team of technologists and explorers to search through the layers of rock in the Barmer hills. “We are very excited with the studies and possibilities and are hoping to have pilot projects over the next 12 to 18 months before we submit a detailed plan. The early signs are very positive,” he said.

Why would anyone in the UK care about Indian shale?  The answer is LNG. Qatar's top four customers in 2010 are likely to be Japan, South Korea, India and the UK.  The less India takes, the better for UK customers.  This is a classic example of the impact of shale elsewhere in the world on UK prices.  Whether or not the UK has any shale gas or not is irrelevant in that regard.

Where the UK should be concerned is if gas exploration companies aren't interested in the UK. As the largest single gas market in Europe, it would be surprising if there isn't under the radar activity going on.

Consider the other possibility: The UK's planning process is so famously hostile to any movement away from the status quo, that expros are going to environments such as the Netherlands, Germany and Poland where governments already see the value of shale and work with them.

An Independent view on Ofgem and prices

Leading article in today's Independent newspaper makes our view of Ofgem appear charitable. We almost feel sorry for them.  Almost, but not quite.

Such profiteering is little short of scandalous. And yet Ofgem, the most useless of the government's regulators, has done almost nothing about it. Instead it parrots industry PR about how since privatisation two decades ago prices have fallen in real terms and customers' bills have been reduced by £1bn per year. The truth is that privatisation has been a failure because public monopoly has been replaced only by private oligopoly. The number of suppliers has fallen from more than 20 in the late 1990s to six dominant conglomerates today. Bodies that big, and that few, do not need to collude; they have a confluence of interest which creates market failure. Their 4,000 different tariffs renders meaningful comparison – and therefore true competition – impossible.

The job of Ofgem should be to ensure that retail prices in the industry track international energy prices. To that end it must enforce greater transparency on the industry about how prices are calculated so consumers can tell whether they are being offered value for money set against the international market price. Instead, it seems to accept industry blandishments without question. It needs massive and immediate reform.

Gas Glut and prices

November has seen prices collapse. This is the 13 month curve in just the past two weeks.  One key lesson here is how depending on the  curve for price prediction is rather foolish.  December 09 is now the cheapest month. If the market depends on supply and demand for prices, why should the  lowest demand month of July be lower than the second highest demand month of December?

The quick answer is that curve  prices are not very liquid, that is that there aren't a lot of buyers and sellers.  Liquidity cascades from Within Day to  Day Ahead, Month Ahead, M+1 etc to the point where prices for two years or so away are effectively not traded - in other word the market simply guesses.

This shows the ultimate pointlessness of buying on Fixed Terms, and larger end-users increasingly don't bother.

But what about those who don't have a choice?  Floating Prices are not available from most suppliers for most size of end-user. Smaller users are forced to take prices made on guess work, and that includes domestic users. The rationale where December next year should be 72% higher than this year shows the insanity here. Even assuming some recovery of UK demand due to a recovery that may or may not show up, that month and winter 2010/11 seems divorced from any possible reality.

But SME's have another issue. They are often advised by energy brokers who have a vested interest in scaring them into shortage scenarios, and not only the press, but Ofgem enable them in this. What value is "security" of a fixed price when the default option of pricing against day ahead or month ahead indices provides much lower prices? The reality is that end-users aren't told about the difference between fixed and index prices since it is not in consultants interest to tell them.

December 09 dropped another .05 while we were writing this.