No Hot Air

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.

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.

Gazprom goes green

Interesting Bloomberg report on Gazprom wanting to push up gas supplies

- OAO Gazprom, the world’s largest
natural gas supplier, joined BP Plc’s call to replace some coal-
fired power plants with natural-gas utilities to battle global
warming.
    Replacing about half of Europe’s existing coal-based
generation with modern gas-fired combined-cycle power stations
will cut carbon dioxide emissions by the same amount as using
wind power, while costing one third of the price, Gazprom Chief
Executive Officer Alexei Miller said, according to an e-mailed
transcript of his speech at the World Gas Conference in Buenos
Aires yesterday.

Fossil fuels will provide most of world’s energy needs in
the “foreseeable future,” said Miller, the head of the world’s
biggest producer of the natural gas. Gas consumption will
increase for power generation and as a transport fuel, he said.
    “So far, the main goal pushed forward by some politicians
amounts to nothing more than just a decrease in hydrocarbon
consumption,” according to Miller.

No comment!

More on US LNG Exports...

Following on from what we think is unprecedented news that the US is considering exporting LNG from the Gulf of Mexico , a link here to the Conoco Philips request to the US DOE to do just that:

The Office of Fossil Energy (FE) of the Department of Energy (DOE) gives notice of receipt of an application filed on August 31, 2009 by ConocoPhillips Company (ConocoPhillips), requesting blanket authorization to export liquefied natural gas (LNG) that previously had been imported from foreign sources on their own behalf or as agent for others on a short-term or spot market basis from existing facilities on Quintana Island, Texas in an amount up to the equivalent of 500 Billion cubic feet (Bcf) of natural gas to the United Kingdom, Belgium, Spain, Portugal, Turkey, Brazil, Argentina, Chile, Mexico, the Dominican Republic, Japan, South Korea, India, China, Taiwan, France, and/or Italy, as well as any country with the capacity to import ocean-going LNG, with which trade is not prohibited by U.S. law or policy. ConocoPhillips seeks to export the LNG over a two year period commencing on the date of the authorization.

Just because it's unprecedented,  and the mere whisper of it would have led to men in white coats being called only a few months ago,  doesn't mean it doesn't make economic sense.

In support of its application, ConocoPhillips states that there is no domestic reliance on the LNG that it seeks to export. Due to global LNG Market conditions,U.S. natural gas demand and prices do not currently support the importation of LNG into the U.S, and export authorization is needed in order to enable the applicant to economically import LNG should U.S. market conditions change.
ConocoPhillips also states in its application that local natural gas supplies will not be reduced. The applicant states that it intends to export only foreign sourced LNG, and does not intend to export domestically produced natural gas. Additionally, ConocoPhillips states that granting the requested authorization would make the importation of LNG into the U.S. more attractive because, once imported, ConocoPhillips will have the option of either selling into U.S. markets or exporting to other markets based upon prevailing market conditions.

The US is approaching 100% storage capacity, another event that was considered impossible last year (although we said it would happen in  a post in Spring 09). When  capacity is reached, physical barriers kick in: Producers and Traders would scream, but you cannae argue with the laws of physics.  If storage is full, gas cannot be produced. And if it's not produced, instead of a low price, producers get even worse: no price at all.  By the way, the statement that Conoco-Phillips don't want to export domestic gas doesn't really matter. Mix up the molecules and domestic and imported is a meaningless concept.

Many Nat Gas newbies don't understand this. If no one buys gas, uses it or exports it, then some people make nothing at all. Natural Gas contracts can't be rolled over month after month.  Someone has to burn it.  We won't scare people about how using past, if short-lived,  UK experience, natural gas could go negative: You have to literally pay people to take it off your hands. 

So even if LNG gets exported for nearly nothing, it beats nothing at all. Economics differ from location to location, but US LNG exports could still make some money on $1MMBTU, just as much LNG coming into the UK would still be profitable at less than 10 pence per therm.

US LNG export prices would be unpalatable, but some money is better than no money.  It may make sense, and as we see from the above,  people are covering all bases.

Six reasons why gas will go up. And five (of the same) reasons why it won't

One really has to look hard for a bullish gas story these days, but with a lot of amateurs in the market poring over the charts, or is that tea leaves,  some still hope.

The discussion here is about North American gas, but with Henry Hub setting  the price for LNG imports to the UK, we've got to take all opinion on board.  Even when it's wrong as in this article from Canada's National  Post,which asks Natural Gas Time  to Buy?

With all the supply side issues, why would I be bullish on Natural gas?  Well there are a few reasons - read on:

i) The economy is picking up: Demand is showing signs of life and the manufacturing sector is demonstrating its first signs of growth. One can expect gas demands from gas-fired power plants to rise accordingly.

Demand is falling and falling permanently. Just today we see that US Steel demand, closely allied  to the automotive sector is down 33% this year, and the UK is no different. National Grid Transco sees flat or  declining demand for the next 20 years in it's long term outlooks. Demand does not bounce back by double digits, especially when the  recovery,if it even exists, will  be a jobless one.

ii) The oil to gas price ratio: Eventually, I do believe that the relation between the price of oil and gas will resurrect. The recent spike in the oil to gas price ratio to 25x will likely return back to normal in the long run. With the economy picking up and oil futures pointing upwards, one can expect that the gap in this ratio will close.

The oil/gas link is permanently broken with the gas glut from shale, LNG and permanent structural demand drops. Looking at the past is not a way to predict this future, since the present is undergoing a  transformational paradigm shift.

iii) The weather: We are heading into Q4 which means that winter is approaching! Gas demand typically picks up in the winter months and gas prices historically have done well during this time of the year. Further, as we are at the height of the hurricane season it is quite feasible to see a gulf-based storm emerge in the coming weeks creating a short term supply shortage, allowing inventories to come down.

Apart from which hurricane season is that, it being the quietest in years and only has 6 weeks to run,  hoping for a cold winter to raise gas prices sounds as desperate as it is cynical. And markets always factor in risk of cold weather:  that's why January is 37.20 and October is 22 odd today. On this day last year we saw the same  spreads for winter. When the coldest winter in 18 years met another Ukrainian fiasco, January 2009  gas still ended up 50% lower day ahead prices than September forwards.  And it happens almost ever year like clockwork.

iv) Environmental policy: The Obama administration is pushing ahead with climate change initiatives that will cut green house gas emissions over the coming decades. Although the plan is not centred on gas-fired energy production at the moment, there is almost no feasible alternative to the power plan that would allow the U.S. to reach its targets in its given timeframes. Most of the power in the U.S. is generated from coal-powered power plants which are a key contributor to the green house gas problem. Getting off of coal and onto emision friendlier power substitutes like wind, solar, and nuclear is a long term project which will likely require a mid-term solution. Gas-fired plants do produce green house gases but much less than their coal-fired counterparts - it would be much quicker and cheaper to substitute coal-fired plants for gas powered ones. This would allow for an interim step in achieving the green house gas emissions reduction time frames.

Just as big a fear in the UK, just as unlikely. Facts, as opposed to anecdote are that environmental costs are small portion of  the total  bill. Sure those costs will  go up by 7%, but that's 7% of  less than 10% of the final price -  not very much. Environmental costs have minimal impact on the actual commodity price or demand short term, and especially so this winter.

v) Demand from Emerging Economies: It's a known fact that India and China are consuming more oil, but they are also consuming more natural gas. With gas liquefying techniques improving, the transportation of natural gas across our oceans, as is done with oil, is likely to become more feasible in the future. More accessible gas transportation = more demand from emerging economies = increased prices.

The bull's favourite reason. Which part of gas glut doesn't he believe? There is so much gas in the US that it pushes down world prices, i.e ours. And there is so much LNG available from new sources that Asian prices have never been lower. Finally, we have said from day one here, China is using more gas, but the rate of growth is slowing and world supply will reflect this new balance between supply and demand.   China as smog ridden energy hog is a peak oil story, not reality.

vi) Have an opposing view to the market: One of my key takeaways from my Ivey MBA, specifically from sitting in Steven Forester's Portfolio Management class, is that you are more likely to drive above normal returns by formulating views that oppose the overall market view. The majority of the market believes that the natural gas market faces long term supply issues that will suppress prices for years to come - I oppose this view and think that gas prices are a great play over the next 24 months.

We have an MBA from the University of Hard Knocks Upside Your Head. Which naturally makes us  agree that the contrary view should be respected and expected. If we could accurately predict the outcome of numbers as random as gas prices, we'd invest in Lotto tickets. A contrary view should always be respected. But not listened to on principle alone.

So much gas it has to be exported.

The Kitimat LNG plant in British Columbia was planned four years ago to import gas.  But now

The shale gas play has set up a scenario in which the amount of natural gas available in North America will likely exceed the combined US-Canada demand.

Kitimat was originally set up to import Australian or Sakhalin gas. But what a difference shale has made.  The new Horn River Shale discovery in Northern BC has so much gas that it will be just about the first North American gas to be diverted from the home market.  Obviously no one is worried about gas shortages there. Kitimat will export to Korea and elsewhere in the Pacific.  And where will that Australian gas go?  In the best case scenario it will continue to go to Asian markets, but pushing down prices as it goes. In the other best case, Australian gas will (as it did this past winter) show up in the UK, pushing prices down here.

But if gas is exported, it also pushes down the need for LNG imports to the US, which will push down prices in Europe.  Win, win, win for gas consumers, or at least those lucky enough to live in a market where regulators trust markets, not suppliers.

 

Storage fills up

They said it could never happen, although NHO did back in March: US gas storage, the equal of the rest of the world's storage combined is almost full. And it's not full because of low demand. This isn't a temporary aberration which will soon disappear sending prices zooming up again, now that the stock markets are playing Happy Days are Here Again. That argument is also one perennial peak oil bulls and UK energy catastrophists bandy about in their desperate attempts to hold up prices through scaring people.

What's happening in the US is peak demand and peak supply. Peak demand is the realisation that end-users do have a small number of alternatives to high prices that in aggregate deliver meaningful, permanent and growing demand destruction. "Conventional" energy experts have always dismissed the impact of conservation, efficiency, new technology and renewables.  But little things mean a lot when there are a lot of little things: that's the impact of scaling up.

Peak supply is the sudden flooding over the past year of the market by shale gas producers. But what is getting interesting is that shale isn't working out as the nay sayers were saying even six months ago. At that time, the theory was that "unconventional" gas was expensive. If prices got too low, shale gas production would shut in as people would lose too much money, which would increase gas prices all over again. There would also be, according to a theory that sounded born out of desperation, not reality, that when US gas prices recovered, the US would suck in LNG (and it would have to really suck given the simultaneous surge in LNG production throughout the world) which would then push up UK prices which are increasingly linked to  US prices.

Well it hasn't turned out that way.

U.S. natural gas producers are pumping huge volumes of the fuel into a market about to have its fill - an event that could push gas prices even lower and create pain across the industry

The situation underscores how the natural gas industry is changing, thanks to vast new gas supplies trapped in dense rock formations known as shales. New technology has allowed producers to increase output from these rocks even as the industry, as a whole, spends less on drilling. But a further slump in price may squeeze cash-strapped producers that are already struggling amid an economic downturn that has undermined energy demand.

As we were saying, conventional wisdom was producers go on a production strike. But apart from the obvious that any price at all beats no price at all,  as "unconventional" gas goes mainstream,  producers are learning how to produce shale at lower costs for lower prices:

But companies are counting on the diminishing cost of shale gas extraction in order to make it through the slump. Anadarko Petroleum, which saw its production jump 12% in the second quarter, said it would ramp up activity in the Marcellus Shale - a vast natural gas field stretching from West Virginia to New York - where the company can achieve a 10% rate of return at gas prices of $2.50 a million British thermal units.

Which considering the year low for gas is about $3.2 should make UK traders mighty nervous, and they should be looking over at their US colleagues:

Aubrey McClendon, chief executive of Chesapeake Energy said that there will be much "wailing and gnashing of teeth in the next 60 days" across the industry as storage fills.

But at the same time producers are turning in big results from natural gas fields that have cropped up around the country. And some producers aren't willing to hold back gas in order to defend prices.

"Pretty soon, everybody is going to start involuntarily curtailing gas so we don't see any reason to take it on the chin for the team any more than we did," McClendon said during a conference call. The company stopped curbing output in the second quarter, and saw a production increase of 5% from a year ago.

When US gas fills up, during September it will impact the UK as the US sets the price for LNG, which sets the price for the UK and Europe. 

Crashing demand meets low LNG prices, high LNG production, high storage levels, Norwegian and North Sea production returning from maintenance and plenty of Russian gas sold outside of the usual oil index links. This will get interesting. We never thought we'd see single figure pence per therm gas again. We don't do predictions. But we keep open minds about all possibilities.  If there is a recovery, which is questionable, peak demand has passed and all we may see for some years is flat gas prices:  low prices and low volatility.

Confused?

Further proof that LNG trading is one big game of chess, or is that Risk?

According to Bloomberg,  an LNG cargo from Norway's Statoil Hydro Snohvit field was sold to Malaysia's Petronas, who then sold it to Russia's Gazprom, who are now importing it to  the Dragon LNG terminal in Wales.  Dragon is run by Petronas, BG and 4Plus, who are based in the Netherlands.

British gas consumers do end up actually using, and paying, for the gas.

China and shale gas

Hidden among the reports of the recent China/US talks about energy, where some would look for conflict, were two important messages.  Number one, which we have been saying for a long, long time:  China doesn't want to be as good as "developed" nations.  It wants to be better:

Secretary of State Hillary Clinton announced that the two nations -- the world's largest producers and consumers of energy -- agreed to "enhance cooperation on climate change, energy and the environment." China helped move the process forward by explaining what it was willing to consider and what investments it already was making in clean energy, "which I'm not sure is as fully appreciated in our country as it needs to be," she said.

Talking about what is not as fully appreciated in our country as it needs to be, in this case shale gas and the UK/Europe, one area where China is looking at could have a massive impact.  But for that you have to go to the official China news agency Xinhua:

Gu Jun, an official at the National Energy Administration (NEA),told a press conference at the China-U.S. strategic and economic dialogue that the two sides have held in-depth discussion on the clean energy cooperation and energy security.

    "Both sides are of the opinion that, as major energy producers and consumers, China and the United States need to ensure the stable and reliable supply of energy, avoid drastic fluctuation of the oil price and oil price hikes," she told the reporters.

    The two countries have the common need to safeguard the world energy security and have lots of complementarities in energy cooperation, Gu said.

    "There is bright future for cooperation in the areas of new and renewable energy, smart grid, shale gas, coal bed methane, clean use of coal and advanced nuclear energy. "

We've almost given up on getting the UK Mainstream Media to do shale gas stories, they much prefer to simply rewrite switching site press releases, where they don't print them verbatim and unchallenged anyway.  If it bleeds, it leads as they say, or in energy the only story they ever want to print is high prices, shortages and foreigners stealing our gas.

But shale plays in China would be massive. The world LNG industry  losing one of it's key markets would certainly mean lights out for a lot of people. But definitely not for consumers.

Russia feels shale's impact.

Ironic that most UK gas pros don't even know about shale gas' impact on not only US but also UK prices, while a couple of thousand miles to the East, the big bad bear who is threatening our way of British life, seems more aware of shale as a threat to themselves, and far more clued in than we are.

Gazprom also said it may push back the development timeline for gas deliveries from the offshore Arctic Shtokman project because of falling demand.

“This timeline may be revised accordingly to reflect natural gas market conditions,” Gazprom said in a bond prospectus.

Shtokman Development is scheduled to make a final investment decision in March 2010 on plans beginning with pipeline deliveries in 2013. The venture plans to begin liquefied natural gas deliveries of as much as 7.5 million tons the next year, the prospectus said.

“Relatively inexpensive shale gas has significantly reduced the U.S. demand for LNG,” Mikhail Korchemkin, executive director with East European Gas Analysis, said Tuesday. “Shtokman is aimed to get a piece of the U.S. market, but there is no free space in it.

So if Europe is at the mercy of Russia cutting off our gas, how does Gazprom cutting off gas exports because there is a worldwide LNG glut fit in?