No Hot Air

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.

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.

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 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.

No surprise

From PA:

• British Gas parent Centrica has said its residential utility arm was on track to see profits soar by an expected 43% this year, despite a 7% fall in energy consumption.

Seven per cent drop in sales, 43% increase in  profits.  Why can't the rest of UK industry do this well?  Probably because they don't have an as blind, toothless and incredibly naive regulator as Ofgem.

Ofgem believes, solely because the Big Six told them so, that they simultaneously had the misfortune (ours, not theirs evidently) to buy July, August and September 2009 gas during the highest prices ever recorded in July 2008.  Ofgem has resisted calls to have an open book investigation of suppliers on the grounds of commercial confidence.

Unless the Big Six are complete morons,  they would have  contracted for that gas at the time, with the price set at the prices in effect on the wholesale markets at the time of delivery.  They would have perhaps bought an option to buy the gas at that price, or any number of derivatives to protect themselves but they probably didn't bother.  This was the time of $143 oil, and everyone knew which way that was going.

Wholesale prices today are up  to 70% lower than they were last year.  And that is the price that the big six are paying, which explains  how they increase profits even as sales decrease.  Ofgem is naive on the verge of incompetence if they believe, with no proof, that suppliers bought into iron clad agreements last year.

Utility bills are as unavoidable as taxes.  Utilities are essential a tax for modern life.  And they have a similar impact as taxes.  If they are higher than they could or should be, they have a macro economic impact that should take precedence over the narrow interests of Big Six shareholders.  Better economists than I can say what the £50 a month that the average user over pays would be equivalent to:  It would surely be equivalent to a point or two on income tax or VAT. Energy bills are an incredible downward drag on consumption and may explain why the UK is doing worse than other economies.  I don't believe this is deliberate, as it imputes competence they don't have , but the net impact of Ofgem sabotages the recovery. That £50 a month could be going from energy payers, which is just about everyone who also pays taxes (and those who don't like the unemployed and pensioners) into retailer tills, or paying down debt or even investing in companies like Centrica.

But we can do something about those who raise taxes.  We can't do anything about energy bills, because Alistair Buchanan says that British Gas's prices are just fine with him.  The Tories are allegedly planning to ditch Ofgem. 

What"s the betting that Alistair Buchanan ends up on one of the boards of the Big Six sometime in the future? 

Less Hysterical Tones on European Gas

From Datamonitor via iStockanalyst a story which starts out plainly noting that Nord Stream, the Russia/Germany pipeline under the Baltic has all the necessary approvals but then provides some of the best analysis of European gas going, and that includes us:

Thus it appears that the fundamental beliefs which have underpinned European states' energy planning for the past five years may soon be turned on their heads. From 2011, Nord Stream will increase the security of Russian supplies to Europe. LNG regasification capacity will also be far higher and it is reasonable to assume that LNG supply will remain strong for at least the next four years. Finally, indigenous supplies may not actually be declining at the rate previously assumed. Hence, over-reliance on gas (the central obstacle facing policy makers between now and the new generation of nuclear plants' activation around 2020) may not present such a critical flaw as previously thought. Of course, under-investment in new infrastructure resulting from the financial crisis could yet leave the gas market tight by 2015 (particularly if the global economy were to rebound powerfully) but perhaps the debate surrounding Europe's energy strategy might now be conducted in less hysterical tones.

Less hysterical, and less paranoid. And dare we ask realistic to boot?  It will take a while for the gas Chicken Littles to get worked out of the system, but their days may be numbered

Two sides of the global gas glut

All of a sudden everyone says what we've been saying for over a year:  There is a global gas glut.

 There may be an “acute glut” of natural gas in the next few years because of rising production of so-called unconventional fuel in the U.S. and Canada, according to the International Energy Agency.

Bloomberg have been slow on shale, whereas the WSJ has been on this since the beginning.

The International Energy Agency says in its annual outlook, published Tuesday, that a glut of natural gas is looming. The boom in North American shale gas and a demand-depressing recession mean there will be a giant amount of unused pipelines and liquefied gas terminals, enough to move 200 billion cubic meters, or 7.06 trillion cubic feet, by 2012. That’s more than enough for all of Africa or Latin America.

Back to Bloomberg:

Gas prices will tend to rise in Europe and Asia-Pacific because of the predominance of oil-indexation in their long-term supply contracts, diverging from those in North America,” according to the report

But WSJ says:

The consequences of that have already been felt on the European spot market. LNG exporters, discouraged from selling into the U.S. market, are increasingly offloading their cargoes in Europe and Asia, depressing spot prices.

That, the IEA says, “could increase the pressure on gas exporters and marketers in Europe and Asia-Pacific to move away from, or to adjust, the formal linkage between gas and oil prices in long-term contracts.” More uncontracted supplies being released to the spot market could push down prices and boost demand, especially in power generation, it says, which would soak up the supply glut.

The IEA report seems to have something for everyone's point of view.  It mentions how uncertain shale gas is outside the US, while also mentioning what a game changer it can be:

The extent to which the boom in unconventional gas production in North America
can be replicated in other parts of the world endowed with such resources remains
highly uncertain. Outside North America, unconventional resources have not yet been
appraised in detail and gas production is still small. Some regions, including China,
India, Australia and Europe, are thought to hold large resources, but there are major
potential obstacles to their development in some cases.

 This projection is subject to considerable uncertainty, especially after 2020; there is potential for output to increase much more.

No wonder people are confused.  The IEA puts in all the usual dampers on shale outside the US and then says it can be much more.

We tend to believe the Wall Street Journal more.  The IEA assumes that the gas/oil link will still be strong enough outside the US, whereas we and the WSJ think the gas oil link is wobbling in 2009.  To assume it will still be around at all in 2020 is very optimistic.

The Oxford Institute for Energy Studies asks:

Continental European Long-Term Gas Contracts: is a transition away from oil product-linked pricing inevitable and imminent?

The spot market is too volatile which doesn't help anyone: producers,end-users or transporters.  There has to be a new way to provide long term funding for gas without crippling volatility.  But it might make gas geology look simple.

Geography and natural gas

Back in the old days, or at least the last century days of drill, baby, drill gas and oil were considered to be so rare that nowhere was too far away to find it, and wherever that was no self respecting oil or gas company would let polar bears, newts or indigenous people stop them extracting it.

But shale gas is so abundant that we can see the rise of a new phenomenon:  the choosy gas driller. We remarked on that recently when Chesapeake Oil walked away from drilling in the NYC watershed part of the Marcellus Shale in upstate New York.  Aubrey McLendon said simply that "we don't need the brain damage".

I was reminded of this by news out of Canada, where the emergence of shale plays in the Eastern US and Canada has led to choosy buyers.

emergent economic forces don’t care about the mountains and are progressively challenging the traditional west-to-east flow of natural gas. In fact, the whole character of where North Americans get their natural gas is undergoing realignment of seismic proportion. Recent events provide indications of how the dynamics are changing

Alberta has traditionally been the Canadian Oil and Gas patch.  But the emergence of the Marcellus Shale has changed a lot:  Gas from the Marcellus Shale doesn't have to pay 3000 miles of transport fees to reach markets that are next door.  Marcellus drillers can charge a premium over Barnett or Haynesville gas but the customers make money anyway.

Everyone's a winner.  Apart from some gas transporters.  Which may explain why National Grid is eager to join in as the final link in CCS, transporting CO2 from power station to depleted gas field.   In the UK, if there were significant shale finds, National Grid might even get shut out of transporting them since the local grids were sold off.  Local grids could  transport shale finds the short distance to generators, CHP or larger end users.

In Europe, if shale is produced in Poland or Northern Germany  why generate electricity in Berlin, Hamburg or Warsaw with gas imported from Russia, Norway or Nigeria?  Shale is so abundant that it may well be under most people's feet.  Not only will this make energy security risk meaningless or disrupt capital flows, it will make energy simultaneously cheaper and more precious.

BBC discovers shale

Until now the BBC, the outlet which usually leads UK print media and puts it to shame, has not had it's finest hour in reporting on shale gas.

But now even they have suddenly discovered shale, and unlike those who report shale more as a US phenomenon, the BBC goes straight to what we've always said is the heart of it all:

  Upgraded shale gas reserves are particularly relevant ahead of the Copenhagen summit, as it could help the world meet the Kyoto targets for carbon emission cuts,

With coal being too dirty and wind farms and nuclear power plants arriving late, it seems the world is left with a stark choice: keep on polluting or turn out the lights.

Unless, that is, someone comes up with an alternative.
Energy executive Rune Bjornson thinks he has the answer.

"Natural gas, more than any other fuel, is an option we have here and now," he tells the BBC in an interview.

The video is the really interesting part here:  Bjornson when asked for a comparison of shale reserves in Europe says they are 14 times those of the Troll field, which is already the largest off shore field in Europe and in the US the reserves are "significantly more".

We have to point out here that it is Statoil who supply 80% of UK gas imports, so we're glad to see they are being listened to.

The BBC, in the spirit both of "balance" and good old fashioned English pessimism (notice we didn't say British pessimism) is desperate to create a controversy.  So who pops up, but Arthur Berman the world's most popular shale gas debunker.  Of course that is a very small field.  In fact, apart from Berman, it's empty.

The Texas-based geological consultant believes the latest estimates are vastly exaggerated and suggests the shale gas reserves are neither as large as nor as profitable as many in the industry predict.

The BBC doesn't provide balance to the many who have an alternative view on Berman :

HOW ARTHUR BERMAN COULD BE VERY WRONG…

There isn't anything in the BBC story that hasn't been said here at some length and some months ago.  However, to have shale put into the spotlight, directly discrediting previous BBC lights are going out stories will be important in changing the UK energy debate.  With a piece on shale in the UK's small, but influential Spectator Magazine, unavailable online,  and some other news coming up that we know of,  ignorance will soon be no excuse for UK energy "experts".

Which leads us back to the BBC piece, directly to No Hot Air's target audience:

Unconventional gas will exert downward pressure on energy prices for years to come," predicts Mr Sterne - in the US, as well as elsewhere.
"As shale gas fields come on line in the next five years, it is likely that European prices will drop in half."

Which leads us to ask:  Why use an energy consultant in a world where security of supply and energy prices risk no longer exist?

The background to disaster

UK energy policy seems to actually relish a disaster and this year the press including people who should really know better like the Economist and the BBC, are acting as cheerleaders for doom in promoting the risible idea of electricity shortages in 2016.  I predict that as reality intrudes, we'll see those stories disappear, but the basic narrative of ever rising power prices is based on anecdotal, but not fact based, assumptions, of constrained gas and rising environmental costs that will echo for years. One reason it will is that there is a lot of money to be made in promoting energy as a problem. Energy consultants, especially the 3PIs (Third Party Introducers) and switching sites, have a huge vested interest in making customers fearful so that they take a longer term price which is inevitably a higher price. The up to 10% commission 3PIs receive from suppliers is the underlying incentive for them push the "energy risk" narrative, even when that story no longer applies.

3PIs have  unwitting, or is that witless, enablers within Ofgem, who  seem to promote unhealthy behaviour that actually undermines the UK economy. Ofgem feels perhaps that promoting risks,even where they are unlikely or impossible makes them more indispensable.  Is this for their own short term needs?  Ofgem is in fact the largest energy consultancy in the UK. It promotes the doubtful benefits of competition while having a sacred belief in the value of "choice" even where the choice is fairly empty, often only laying the framework for consumer confusion which costs far more than the choice saves. Suppliers are a stranger bunch. Some I+C suppliers are smart, progressive and provide good value. Other suppliers have mixed feeling about 3PIs where they both shovel millions of pounds their way while trying to escape doing so. 3PIs are basically outsourced marketing arms, with most suppliers politely having mixed feelings about the sums they spend with the 3PIs. Customer capture is difficult, with the utility market being very sticky. Suppliers need to be either very expensive or very incompetent to lose business. But it's also hard to gain new business.The other reality is that most retail arms are happy with the business they have. It costs money to find new business and the existing business is rarely profitable enough to fund seeking any.

Let's think about "competition". Does choice and value in a market like petrol/gasoline?  Of course it doesn't. Petrol prices are within a pence per liter in any one area.  The vast majority of drivers make the "choice" of where to fill up based on need or convenience.

At least in a petrol station, pricing is transparent, unlike the confusopoly pricing of the big six domestic energy firms, where tiered rates in randomly metered arcane units of measurement mean a true choice providing true value simply isn't provided.

In domestic supply, pay by monthly direct debit and the standard rate between the six is essentially the same. It's the same for the the same reasons as petrol, in that they are priced against a wholesale market.

In the UK, only the largest end-users can access wholesale prices because of the lack of monthly meter reads for almost everyone. The level at which you can use index prices is falling, but not far enough.  The difference of day ahead index prices compared to long term prices is stunning, with 70% savings common over the past year. In fact there has only been one month,January 2009,in the past eighteen  where the day ahead index price was not lower than any price available in advance of the month of use.

For example for November 2009 things looked like this:

 

A fixed price is basically the projected monthly volume multiplied by the monthly price.  November is roughly 10% of an annual heating load.  If one fixed a price in September 2008 for one year, November was £1 a therm.  The lowest possible price one could pay for November in advance was on 32.05 in early September.  But the wholesale index price for System Average Price has been below 25 this month.

In English:  Consultants cannot beat the default price, the price of doing nothing. So what are people paying them for?