Friday, 13 April 2012

What Do We Want? Shale Gas! NOW !

The shale-driven price of natural gas in the USA has fallen below $2 / MMBTU. This is a good bit less than one quarter of the current price of gas in the UK and NW Europe (and perhaps an eighth of that in Tokyo) - the kind of structural disadvantage to our economies we can't tolerate.

Few expect $2 to last for long: it will drive a supply / demand readjustment. But this isn't a small differential, either. And 'experts' had been predicting shale couldn't be produced below $5 ... or was it $4 ? ...

Gotta get fracking.



roym said...

will our problem be that as we are relatively more densely populated, nimbyism will hold up progress?

Anonymous said...

The trouble with gas is that the price goes up and down like a yoyo.

Nuclear power offers a reliable, steady supply at a constant predictable price. This helps businesses and consumers to plan ahead.


Steven_L said...

I wonder if my mate (the one that hadn't heard of shale gas) ever got out of his long UNG position?

I keep meaning to email him and ask, but if he didn't he won't be a happy bunny.

Sean said...

My boots are on and the wisper is we will be hard at it later this year.

Mark Wadsworth said...

That is very good news, can the shale gas in the north west be extracted for a similar low cost?

Nick Drew said...

Mark - no, for a number of reasons: (a) we have (much) higher environmental & planning standards (completely absent in some parts of the USA) which, quite objectively, lies behind what Roy is getting at; (b) you need a LOT of water; (c) we don't have an onshore drilling industry ready & waiting, but will need to build one up almost from scratch.

This isn't a small issue

The Poles will pioneer it - they need the gas much more than we do - and everyone will realise the scare stories are just that

the good news is that, as any proper economist (e.g. your goodself) will say, any incremental production in Europe will drive down prices for all of us

Steven - the old adage: if in doubt, go short ! there is always more stuff than anyone thinks

Sean - go for it !

rwendland said...

MW, from what I've read EU gas shales, including Lancs, are deeper than US shales, adding to costs. More, EU does not have much equipment and skilled staff, also increasing costs. But I don't know how much more that adds to costs.

On another thread I summarised some Select Committee evidence on costs. I'll repost it here:

The Select Committee meeting that Nick Grealy spoke at had some detail on economics at 11:37:30 on the video. Though most of the facts came from the other gas expert from the Geological Society of London giving evidence at the same time:

$5/MCF is the rough break-even point for US unconventional gas, a bit higher in the EU as the shales are deeper and costs a bit higher. This is higher than [back then] US spot price (around $4/MCF I believe). So currently US shales are only profitable due to:

1) US shale-gas producers hedged forward supplies as the fields were developed, so are currently still getting more than costs.

2) Small US shale-gas companies had large investments funds, so can use this to subsidise marginal production in the interim, or to explore areas before selling the semi-proven acreage to the majors.

3) Some shale-gas needs to be cleared out to make shale-oil available, and these companies are willing to sell that gas at almost any price. (Mostly in Gulf of Mexico region.)

Grealy was much more positive than the Geological Society expert, but was quite light on facts, so to me came across less convincingly. He said there had been much continuous improvement so far, and he expected production costs to fall. He did say Cabot Petroleum claim production cost is now $1.30/MCF.

Worth watching that section of the video. I'm not saying the stuff above is right; I don't really know much about this - just reporting what was said in the evidence.

rwendland said...

ND, interesting what is happening with our older gas leccy generation plant no isn't it. Due to reducing leccy demand and high gas prices 2GW+ of older, less efficient, gas generation plant has been mothballed.

Centrica CEO says "Gas-fired generation is not making money at the moment ... We’re shutting down two and we’ve moved three onto open-cycle." The UK reserve margin is 32%, well over normal reserve levels. Also "6.5 GW of additional gas-fired capacity will have been added to the system over 2011 and 2012".

It seems there are lots of 1990s dash-for-gas lower efficiency power stations coming toward EOL at around 20 years age. At least that means there should be plenty of cheap (capital written off) peaking gas backup plant available for wind power variability.

It seems by the second half of this decade gas plant retirements will exceed nuclear+coal EOL retirements. (Most nuclear plants are likely to get at least 7 year odd life extensions, making gas retirement even more dominant.)

Nick Drew said...

Mr W - yes, extremely interesting: load factors for 1st generation UK CCGTs (thermal efficiency looking a bit dated, but still perfectly serviceable) have been strikingly low since the middle of last year. Even more extreme in Germany, where very large quantities of , 'zero' marginal-cost wind + solar have trashed the market and gas plants are closing left, right and centre

A bit of prisoners' dilemma here, because if enough gas plant is decommissioned there will be doubly-acute and ever-increasing problems at peak, and/or low wind times - with juicy opportunities for any remaining flexible gas plant. Mothballing is the obvious middle course to steer.

I am hopeful that Ofgem et al are paying due attention to Germany, which just about got through the winter without those nukes but only because it was warm. And they have had some very narrow escapes.

HMG seems to be pinning everything on the Capacity Mechanism. I say 'the' CM but no-one knows what it will look like yet, or indeed whether or when it will in fact happen: "Ministers will take the decision on when to run the first [capacity] auction process based on future estimates of security of supply ..."

good luck to us all !

Nick Drew said...

By the way, Mr W,

"producers hedged forward supplies as the fields were developed, so are currently still getting more than costs"

why would you produce @ a cost of (say) $5 to meet a forward sales obligation @ $5.50, when you can buy on the market @ $2, take the superior $3.50 profit, and leave your gas in the ground for higher prices on another day ???

that 'explanation' doesn't fly (though Gazprom and others peddle it constantly as part of a disinformation campaign)

rwendland said...

Good argument ND.

Back at the Select Committee evidence time, spot price was $4/MCF, and marginal shale production cost would be a less than the ~$5/MCF because of sunk costs, so back then it might make sense to carry on producing. But unlikely now at just $2 spot price.

If you are a deep shale cynic you'd argue this is all a confidence game played by small players hoping to sell-out to the majors, so you'd have to maintain production to keep the upside image shining with an illusion of low costs. I would not go there.

So now at $2/MCF I'd agree this hedging argument looks very weak.

Electro-Kevin said...

Couldn't we just decant Scottish chip fat into flasks and take it to power stations before it cools ?

Nick Drew said...

Couldn't we just decant Scottish chip fat into flasks

I think I've seen it arriving @ Kings Cross