No Hot Air

How dependent is Europe on Russian Gas? Not very.

Interesting post here from the pre shale days of long ago, although shale moves so fast that means we're talking November 2008, touching on the easy story of the  Russia narrative and finds :

Conventional wisdom has it that Russia dominates Europe’s natural gas market, and that European imports of Russian gas are growing and can only continue to grow. This supposedly places the EU in a dangerous state of dependency and compromises its strategic position towards Russia. All sides of the debate over Europe’s Russia policy share these premises, including those “realists” who argue that dependency on Russian gas makes it irresponsible for the EU to pursue policies that antagonise Moscow. But the conventional wisdom is wrong: Europe’s gas supply is not dominated by Russia, or, for that matter, by any other exporter.

Regular readers know that we just can't resist stories that start out "Conventional wisdom...",  because CW is almost invariably wrong. It was wrong about shale and it's definitely wrong on Russia:  Jonathan Stern has said so in any number of places and so has Peter Voser CEO of Shell in a widely ignored speech three weeks ago that we think has to be tattooed under the eyelids of energy reporters:

The U.K.'s fears of over reliance on imports of natural gas in the future are overdone because supply of the fuel will remain ample and secure, said Royal Dutch Shell PLC Chief Executive Peter Voser Tuesday.

The focus of the U.K.'s fears - supply from Russia - made up less than 5% of total supply in 2008 and will be a similar proportion in 2020, he said. Shipments of liquefied natural gas and pipeline imports from Norway will be a much larger proportion of U.K. supply, he said.

"The U.K.'s energy challenge is acute. This raises the question why it can afford to dismiss natural gas as a future source of energy

Back to Pierre Noel's piece from last year:

93.5% of the energy consumed in Europe is covered by sources other than Russian gas – and natural gas, unlike oil, faces direct competition from other fuels and technologies.

And of course as we highlighted last week, about 15% of UK electricity supply is directly dependent on Russian coal imports (!), but coal for some bizarre reason isn't considered a threat.

Two Upper Houses

In the House of Lords this week, one of the noble lords (are there any ignoble ones?) mentioned shale gas.  He got it a bit wrong, but still:

My Lords, it is now possible to convert the world's oil shale deposits outside Russia into enough natural gas to meet energy needs for the next 200 years. Will the Government increase gas storage facilities to switch more coal-fired power stations to gas to maintain stable energy prices,..

The obvious mistake is that oil shale and gas shale shouldn't be confused.  Oil shale via oil sands is an environmental nightmare totally as different from gas shale as well, oil and gas. 

But then Lord Tanlaw, missed an important, and rather obvious to us, point.  If we have enough gas for 200 years why on earth do we need to store it?  I'll do a post on storage one of these days because it's a classic example of the anecdotal beating the prosaic, and technically complex reality that we don't need to worry about storage.  We have a huge herd of dairy cows. Why should we get milk delivered?  We have at least 8 gas import terminals.  The chances of concurrent failure are literally astronomical.  If 8 meteorites hit the terminals at the same time, which is what it would take,  the impact on gas prices would be the least of our problems.

The answer was this:

Lord Hunt of Kings Heath (Deputy Leader of the House of Lords, House of Lords; Labour)

My Lords, I can assure the House on the latter point. We can depend on the world's scientists to take great care and note of what the noble Lord has suggested. On shale gas, he is right to suggest, as I think he does, that the availability of gas supplies has changed and is much more liquid as a result of activities in the US. In a sense, this country is in a good position because of the increased possibility of LNG coming to this country and the increase in our import facilities. Again, I am confident—one can never be complacent—that we are in a good position in relation to energy supplies at the moment.

Paying Lord Hunt's ticket to the Buenos Aires World Gas Conference was not wasted. Although it must be asked: Why can't we be complacent, given the facts of shale?  Why spend a lot of money putting gas that is flowing out of various holes in the ground into other holes in the ground. This is simply energy whack a mole. But Lord Hunt, along with almost everyone else in the UK, has to break the habit of a lifetime, and that habit is confusing a carbon constrained future with an energy constrained future.

Meanwhile in another place, sadly not the House of Commons but the US Senate,  an upper house that actually has some power, they are both better informed and way ahead of us in planning for the new world:

Development potential from unconventional sources in the Lower 48 states has definitely changed the domestic gas supply outlook, they told members of the Energy and Natural Resources Committee. Richard G. Newell, administrator for the Energy Information Administration, called it “the major and very positive story” in terms of production, proven reserves, and estimates of technically recoverable reserves. 

Very positive story and DECC or Ofgem have never been known to appear in the same sentence. The EIA then went on to admit they got it wrong:

"EIA has traditionally taken a relatively optimistic view of the unconventional natural gas resource, even at a time earlier this decade when many other analysts were suggesting that the lack of gas resources in North America would lead to a rapid and inexorable increase in our reliance on imports of LNG,” Newell said. “Recent shale gas developments suggest that even our perspective was not optimistic enough.

Lamar McKay, president of BP America was there.  There was a time when the UK press and energy establishment hung on every word uttered by chief executives of companies like BP or Shell, but now the press simply calls up a switching site and asks them for a unbiased opinion. McKay noted:

“Current legislative proposals do not create a level playing field and, as a result, natural gas is danger of being squeezed,” he said. “In spite of its economic, energy security, and environmental benefits, gas is caught between support for emerging low-carbon technologies on one hand, and relief for coal generation on the other.” 

Jack Fusco, CEO of Calpine,

Fusco said existing gas-fired power plants could make a bigger immediate contribution if they were more fully utilized. “In other words, a near and medium-term solution to our climate-change solution is at hand. No guesswork. No huge spending programs needed. The power would reliable—available all day, every day,” he testified. “And if we embrace this solution with the right incentives, American business would continue to invest its own capital in existing proven technologies to build even more gas-fired plants to dramatically further reduce emissions for the longer term.”

Fusco said Calpine, a Houston-based operator of power plants in 16 US states and Canada, already emphasizes lower-carbon sources with its geothermal and gas-fired installations. The company has historically been involved in the climate change and clean energy policy debate and generally supports the bill which passed the US House on June 26 as well as the measure currently before the Senate. But it also believes that real incentives to encourage more gas use to generate power are missing from the bills, he said. 

Imagine if a Big Six Utility CEO in the UK said that. One reason they don't is that they have no incentive to disagree with regulators who consistently predict woe and havoc and high prices.  It would be nice to have some regulation from the reality based community.

Uruguay and Shale Gas

Uruguay has the bizarre distinction of being the only half-way civilised country in the world without it's own Lonely Planet guidebook. There's an LP guide to Saint Helena for instance, but not Uruguay.

But shale gas prospectors from Texas will be happy to go south of the border and keep on going and going and going.  We wrote recently about shale activity in Neuqen Argentina, and we know there is plenty more  going on there than people let on. And Maple Energy might sound Canadian but are investigating shale in Peru's oil fields.  But Dallas' Schuepbach Energy disproves the theory that previous oil or coal is a precursor for shale, since Uruguay isn't famous for carbon fuels, or much else it must be admitted, although I've always wanted to go.

Dallas-based Schuepbach Energy has signed a two-year contract with Uruguay's state oil company Ancap to search for shale gas in a 10,000km2 area in northern Uruguay, company CEO Martin Schuepbach has said. "We are looking for gas trapped in shales in Uruguay. We believe there are similar shales in Uruguay to the Barnet shales in Dallas Fort Worth," the CEO said. 

"We signed the contract last week, and we are beginning initial studies now. We are starting with surface analysis and we will analyze those for the barometers which you need for shale gas, such as the content of organic material. We are also conducting feasibility studies for gravity measurements," he said.

If gas is found after the exploration period, an international bid will be called with Schuepbach having preference, according to local press reports.

Schuepbach currently has exploration assets in the Marcellus shale in the northeastern US, according to the company's website.

We're seeing the breakout here of companies who have learnt a lot from the Barnett or Haynesville or Marcellus, but now they're getting crowded out there and finding new acreage hard to find and expensive,  it's time to go international:  Think BNK, Toreador and plenty we probably don't hear about.

I can't resist pointing out to Alistair Buchanan of Ofgem who banged on about a UK gas shortage the other night in the Currie Lecture at Cass Business School,  the obvious:  Is Ofgem even more off the edge of the earth than Uruguay?

CCS at coal-fired plants to almost double cost of power production

Based in Canberra, the Global Carbon Capture and Storage Institute is a cross government organisation that is tasked with promoting CCS.  But if this is promotion,  we'd hate to hear anything negative:

The use of carbon capture and storage (CCS) technology at coal-burning power plants would add 78 per cent to the price of producing electricity, according to a new report released yesterday.

"A viable business case for commercial-scale, integrated projects has not been established at this time for coal-fired power generation and other large CO2-emitting industries," said the report, titled Strategic Analysis of the Global Status of Carbon Capture and Storage.

Their solution of course is for governments to dip into our pockets and support coal CCS.  Whereas last time we looked, all gas is asking for is a level playing field and a carbon price. Which won't cost most people anything at all, and certainly far less than the untried CCS technology which appears to be up to 20 years away anyway. We're trying to find out about CCS at gas plants, but can't find much that makes sense. The GCCSI report states that gas carbon capture is twice as expensive as coal.  Any hints out there as to why?

Ofgem loses it entirely....

What planet is Ofgem on?

Alistair Buchanan, chief executive of the energy regulator, has found that Europe could be under-supplied by 41bn cubic metres in six years’ time, if key Russian projects – many already delayed – fail to deliver. This will affect the UK if it relies on a significant expansion of gas-fired power stations to replace retiring coal stations, while nuclear plants are not operational until 2020 and energy demand rises in a strong global economy. It would narrow to a 33bn cubic metre shortfall of gas by 2020

On AB's planet, Shale has never happened.  Shale in Poland, Germany, the Netherlands, France, Switzerland, Sweden, Hungary or Austria doesn't change a thing, especially by 2020.

We cannot believe that a public official (salary £260,000) is so inexpert! Has no one in Ofgem read the papers or perhaps they should ask Jonathan Stern his opinion:

Worst Crisis of Russian gas supply imaginable had no significant effect on UK gas supplies and prices

We'll call out each and every paper who prints this rubbish!  We remind them again of the words of someone who Alistair Buchanan obviously thinks is a rank amateur compared to an expert such as himself:  Peter Voser the CEO of Shell quoted in the WSJ of October 13:

The U.K.'s fears of over reliance on imports of natural gas in the future are overdone because supply of the fuel will remain ample and secure, said Royal Dutch Shell PLC Chief Executive Peter Voser Tuesday.

The focus of the U.K.'s fears - supply from Russia - made up less than 5% of total supply in 2008 and will be a similar proportion in 2020, he said. Shipments of liquefied natural gas and pipeline imports from Norway will be a much larger proportion of U.K. supply, he said.

"The U.K.'s energy challenge is acute. This raises the question why it can afford to dismiss natural gas as a future source of energy," particularly because it contains less carbon than other fossil fuels, Voser said.

Journalists at least should expect some minimum level of competency from such an important person.  What's Mr Buchanan's excuse?

No wonder he gives a free pass to suppliers, the man is either totally inept or simply the most gullible man in Britain.

The smart ones walk away.

Most oil companies have never made themselves any friends in the past through a desire to "drill, baby, drill" just about anywhere, polar bears, dolphins, indigenous tribes and every other sentient being be damned.

Aubrey McLendon, head of Chesapeake Energy is disrupting, along with most things, that part of the hydrocarbon matrix that  has never found a potential source they didn't like.  

Gas drillers have been exploring  the giant Marcellus Shale coming up from West Virginia and Pennsylvania for most of the past year, and were waiting for go ahead on drilling in upstate New York to unleash yet another gas land-rush. 

Although the southern section in the Catskills,is especially attractive for being in the New York City exurbs, this portion of the Marcellus was also close to the watershed for the NYC drinking water supply. There was the potential for a big battle between classic Manhattan limousine liberals and upstaters who wanted to take the money and move to Miami, an attractive prospect in a depressed area.  In short the old nimby v economy story, which usually ends up eating column inches and grand debate for years.

But not this time:

Bowing to intense public pressure, the Chesapeake Energy Corporation says it will not drill for natural gas within the upstate New York watershed, an environmentally sensitive region that supplies unfiltered water to nine million people.

The reversal seems to signal a more conciliatory tone from the gas industry, which is facing mounting opposition in New York to its drilling practices.

But before the New York Green Party uncorks the organic Champagne,  this isn't a victory for them, it's a victory for rational common sense:

“We are not going to develop those leases, and we are not taking any more leases, and I don’t think anybody else in the industry would dare to acquire leases in the New York City watershed,” Aubrey K. McLendon, the chief executive officer at Chesapeake Energy, said in an interview on Monday in Fort Worth. “Why go through the brain damage of that, when we have so many other opportunities?”

Over all, Mr. McClendon said, the company’s holdings in the watershed are “a drop in the bucket” compared with the Marcellus field’s potential. He suggested that Chesapeake had more to lose by drilling there than by forgoing it, even though he contended such drilling would do no harm.

“How could any one well be so profitable that it would be worth damaging the New York City water system?” he said.

The simple fact is that there is so much gas that contrary to reputation, drillers can be choosy.  Bad luck if you own land in the Catskills.  And Dorset.  There often will be  those among the  legions of UK nimbyists who secretly want to sell out and move to Marbella.  The lesson from New York is possibly don't protest too much. 

Lessons to be learned from Canada

The UK and the EU aren't the only places where there are long held dreams of expensive grand energy projects. Alaska has been dreaming of gas pipelines tothe lower 48, and next door the Mackenzie Valley pipeline from the Beaufort Sea to Alberta is another project that at one time might have made sense.

Today?  Reality intrudes:

Ottawa has decided not to proceed with its investment in the $16.2-billion Mackenzie Valley Pipeline, sources said, throwing the future of Canada's largest construction proposal into doubt....

Bob Hastings, an analyst at Canaccord Adams, who has been following the pipeline saga for decades, does not think it will be built.

"The price of gas isn't fantastic and the only thing that has really happened in the last year or so is that we've found a heck of a lot of shale gas close to consumer markets," he said. "And what would you rather do? Buy gas from up in the Northwest Territories, a long, long, long, long, long, long ways away at a very high cost, or get the gas that is just next door?"

Will Europe learn similar lessons regarding Nabucco?  Or Carbon Capture, or nuclear or storage for that matter? 

At the end of the day, most of the money will come from banks anyway, with government guarantees unable to cover anywhere near the entire cost. All of the above projects are underpinned by gas being  constrained physically or politically. Take away the foundation and nothing may ever get built, grand or small.  

Simply substitute Turkmenistan for Northwest Terrritories above, and ask does Nabucco make sense?

Who's screwing who?

If you are a gas trader, then the view is far different from being a gas consumer:

Shale Is Really Screwing Natural Gas Investors

Production of natural gas from shale has been surprising both industry players and analysts on the upside, which clearly isn't helpful for natural gas prices either now or into 2010.

Whoa!  When prices were over £1 a therm in summer 2008, was that helpful?  For end-users now, or at least for those who have consistently followed our advice and only, and we mean ONLY, bought on day ahead prices, then things are looking better all the time:

Thus the era of ultra-cheap natural gas could be upon us, which would be bad news

Not so disastrous news for end users, and not so bad for the economy either. Everyone has to pay for energy, what is so bad when we all can pay less for it?  Energy is simply a tax that isn't democratic: taxation without representation. If taxes were lower, markets would be ecstatic. Lower energy should be good news too. But not at some guys over the Barrel at Platts:

One recent example of just how jaw-dropping the US shale gas story has become came from big independent Newfield Exploration. Houston-based Newfield said in a conference call this week that its production from Oklahoma's Woodford Shale today is 308,000 Mcfe/d, versus about 240,000 Mcfe/d at June 30 -- up nearly 30% in less than four months. Moreover, the company has an inventory of 28 drilled but uncompleted Woodford wells waiting to be put online by early 2010, signalling the potential to boost production still higher.

The astounding output jump prompted a comment from analysts at investment bank Wells Fargo, who in an October 22 report called Newfield's gushing Woodford production trend "disturbing." They noted the company's output had "reached recent highs despite (a drilling) slowdown and deferred completions."

But Newfield, and the Woodford field, are hardly the only purveyors of über-volumes of gas. Despite cutbacks in activity elsewhere, dozens of companies both large and small are drilling away at shale and other unconventional plays which they claim continue to offer towering economic rates of return. Their efforts have resulted in huge gas volumes flowing around the US and also recently in Canada. But with just a week left in the refill season, US gas storage bins are brimming over with the commodity. And current demand is not enough to use it all, which could continue the surplus into next year.    

Put us with the happy end-users and the realist traders

While prices are now teetering at the $5/Mcf level, many industry observers look at storage figures and scratch their heads. Says one: "Given the amount of gas sitting around out there, it's a mystery why prices are so high.

Why do we fear Russia on energy?

A foundation of UK energy policy is that we're running out of gas, making us dependent on the charity of others.

A sub text of much of the same policy is security of supply. But why are fears over security of supply directed against Russia who is accused of following in the footsteps of Molotov in any number of places, this one just happening to be today's FT, but it could be anywhere

 The US ambassador to Sweden last year denounced Nord Stream as a "special arrangement between Germany and Russia" and called on the EU to counteract "Russia's energy weapon".

The reality is far more boring, and one of Britain's top energy experts, Jonathan Stern of the Oxford Institute for Energy Studies pointed out earlier this year talking about the Russia/Ukraine dispute of January 2008, in slide 16 of this fascinating presentation:

Worst Crisis of Russian gas supply imaginable had no significant effect on UK gas supplies and prices

No Hot Air, somewhat like Jonathan Stern, believes in facts, not anecdotes.  He points out that the worst disruptions to energy supply come from the UKCS not from external sources.  He also points out that they are for the most part short term, not structural. In other words, sometimes bad luck happens. To which we would add, it's much more bad luck to try and avoid it. Think of how many people bought long term prices that only provided the dubious value of paying double or more for energy in the name of risk avoidance.

Back to the Red Menace.  Oops, we don't call it that anymore. Maybe we should mention the Cold War, so we can see how insane today's view of Russian energy weapons are. Example number one: Coal.

Coal and Gas are roughly tied as sources of generation. We always thought it bizarre that although 70% of UK coal is imported, no one has kittens over security of supply. But that was before we found out who the number one source of imports to the UK is.

How does the UK reconcile dependency on Russian coal with concerns about over-dependency on gas?

Coal supply is fundamentally more flexible  Not dependent on pipelines
More diverse supplier base

We know a thing or two about energy.  But we didn't know this!  Coal supplies about 40 per cent of UK electricity, 70 % is imported (28% of total), Russia supplies 60% of that.  Or in other words, 15% or so of UK electricity is directly at the mercy of the evil empire:  Russia's energy weapon.

But why do we hear about gas. Russia supplies at tops 5% of UK demand, and that is debatable, Jonathan Stern says it's none and there isn't a better expert on Russian gas around.  But why don't we hear how insecure we are about coal?  Gas is just as fundamentally flexible, doesn't depend on pipelines and has a far more diverse supplier base than coal.

Why electric cars will impact your natural gas bill

We always have thought that a key paradigm shift in energy is how we are using less of it.  But what would be the impact of electric vehicles on gas and power use?

The answer is that we don't yet know, but we should at least start asking the question. One more transformation over the next few years looks like being EVs.

After years of hope and hype, electron-powered driving finally appears to be on the verge of reality.

In the next three years, at least a dozen pure electric or plug-in hybrid cars are slated to hit the market in the U.S. Electricity-driven vehicles from giants such as General Motors Co. and Nissan Motor Co., as well as start-ups like Fisker Automotive Inc. in Irvine, will provide consumers with a wide variety of choices. ..

Battery makers and automakers alike are tooling up factories to produce big volumes of electric vehicles. Meanwhile, power utilities and regulators are scrambling to figure out just how big the market will be...

"This is happening and it's happening soon," said Mark Duvall, director of electric transportation at the Electric Power Research Institute, an independent, nonprofit research group. "By the end of 2011, consumers will have more choices in vehicles they can plug in than they currently do for hybrids."...

But in the last couple of years, huge improvements and new battery chemistries "opened the opportunity" for ambitious product plans, she said. Gioia predicts that as many as a quarter of new vehicles sold by 2020 will be electrics, plug-in hybrids or traditional hybrids.

It's too early to say at this point how much electricity, and gas to generate that, will be needed to power EVs.  But it's not too early to say that abundant natural gas and distributed generation is the way to supply those needs whatever they end up being.