Thursday 17 December 2015

Oil Price, Yes - and What About Gas?

Further to Timbo's prodding, it's time to wheel out the old oil-price graphic - recalibrated for the remarkable current turn of events.  Last time something like this happened it was $10 in 1998 - which turned out to be the bottom (where canny John Browne bought Amoco, Arco and BurmahCastrol).  At the time, the Economist surmised it might fall as far as $6 ...

We've had several cracks at this since it crashed through 60 a year ago - click on our 'oil price' thread if you fancy - and the geopolitics are still playing out.  Saudi Arabia is behaving as though it reckons it can hold its breath; and of course little Volodya is disinclined to blink.  US producers, debt-financing and all, will simply play the market game; and their stamina has long since confounded the ignorant.

Anyhow, today my subject is the parallel collapse in the price of natural gas.  The current situation is that the world is divided into 3 gas markets: North America (cheapest); Europe (mid-range); and Far East (highest).  Until the shale gas revolution really got into its stride, imported 'Atlantic' LNG was the marginal source for both USA and Europe, and so prices in these markets converged, with those of the Far East at much higher levels - even higher still after Fukushima, when Japan increased its gas burn significantly.  However (cutting the long story short) North America is now self-sufficient but essentially unable to export, and so becomes a low-priced 'gas-island'; but LNG is now available in vast - and growing - quantities and demand is falling across Japan and Europe, so the Eu and Far East markets have converged (mediated again by LNG).  The USA is now on the point of being able to export its shale surplus, and soon the whole world will be one gigantic, heavily over-supplied gas market.

With me so far?

For reasons good, bad and historical, the price of gas can often be highly correlated to that of oil, and the weakness in oil is exacerbating the weakness in gas. None of these phenomena seem likely to go away imminently.  So: the price of gas in the USA is set to rise a bit, and that in Europe + Far East to fall even lower.  This has been brilliant for Japan & Korea.  The Chinese don't use very much, but Russia of course would dearly like them to, and has at long last sold them some future supplies on terms so humiliating, they don't really like to talk about it.   In the meantime some extraordinary power-politics has seen Gazprom trying to muscle back into the good books of their main hard-currency customer, playing their mighty German card for all it is worth, which is quite a lot.  In any event they are doomed to another mammoth round of price renegotiations, as continental European buyers trigger their crazy Civil Code 'price re-opener' clauses and demand cuts or rebates by the billion.

The other big gas exporters, notably Qatar, also Nigeria and increasingly Australia - all LNG rather than pipeline - are a bit stuck, and will probably just have to suffer from disappointing sales prices on their sunk-cost production.  The problem for LNG sellers is that the production cost is high, whereas Russian (and Norwegian etc) pipeline gas has a much lower marginal cost, sometimes even negative if oil production comes with the gas.

So:  some world-scale economic impacts, geo-politics, power politics - but what about us in Blighty?  All this price-softening has come at a very good time for us because (a) our own North Sea gas production is in terminal decline and (b) one of our important sources of winter gas - the Dutch - are rapidly winding down production from the gigantic Groningen field (which kicked off the whole North Sea thing in the 1960's) in light of its increasing age, and propensity for causing serious earth tremors

On the other hand it does nothing for stimulating a shale-gas industry here: but hey, that gas ain't going nowhere, it'll still be there when we need it.  Genius George seems willing to burn some political capital to get the fracking underway, but I'm not really sure why.

It will directly impact two other industries (and indirectly, many more).  Firstly, it will hasten the long drawn-out demise of European coal use, which has been enjoying an indian summer here and elsewhere.  We are gradually seeing gas become cheaper for power generation once again after several years of being out-of-the-money; and of course government policy is to stimulate - somehow, they are not quite sure how - a new and very substantial 'dash-for-gas'.  They "want" 30 or so new gas-fired power stations to spring into being, and sustained low gas prices are the way to get 'em.

Secondly, it trashes the prospects for renewables and nukes, because it will cause the price of electricity to fall, and make fixed-price subsidies ever more expensive.  The whole low-carbon thing was predicated on ever-rising prices.  The greens know this (despite loud denials) and we must draw a kindly veil over their ever-increasing misery

Everything has its cycle, and who knows how long this one will last?  Long enough to cause tremors even greater than those Groningen earthquakes, I suggest.  Many will wonder why domestic gas bills don't fall in proportion to the wholesale price: but that's not the only way consumers can benefit from these mega-trends.



A Non said...

Generally great news.

As for George, he is doing the fracking thing now because 1) he can get it through, 2) he is sending message that the UK is open for business, 3) it means that the market can decide when to dig, rather than wait until the price gets high again before considering the framework, 4) to drive a wedge between the hard left and the pro-business "smokestack socialists".

As for gas trumping renewables, I am not sure: wind and solar are falling in price, too. Maybe a combo of gas and renewables is exactly what we need, without huge nuke subsidies. Looks as though Britain may be the lucky country yet again.

This mild winter must also be good for keeping the lights on. We have two weeks left of 2015, and for CU's prediction to come true!!

A Non said...

Also, re Russia, we must collectively pretend to have a heart of stone. Just last week (?) the Russians based their medium term budget on $60 oil, and it has nearly halved again since then...

Nick Drew said...

Good input, Non - your (1)-(4) is a great assessment of Osborne's thinking (I suspect there is also (5), viz 'pure provocation' ...)

I agree with you on solar, and there is still a way to go because solar tech and cost appear to be following some version of Moore's Law, which is very encouraging: getting the bastards off their subsidy-addiction is the key, and then, good luck to them! Maybe storage will follow in due course ...

the capital cost of wind wind isn't really falling much - for a 'mature' technology (over a century old!) - having been featherbedded for far too long. And, whereas the 'intermittency' of solar is utterly predictable, and in countries like DE the peak output of solar coincides nicely with peak demand; wind output just isn't sustained enough, which is a fatal flaw (until storage ... and it needs to be cheap & effective storage, too) - so the full cost of wind isn't properly recognised, and certainly not properly allocated to where it belongs

(and as an old North Sea O&G man, I harbour a longstanding gut belief that the maintenance costs and reliability of over-the-horizon offshore wind haven't been assessed at all realistically: let's see what a few years' experience brings)

the right answer must be gas for now, phasing over time into unsubsidised higher-tech renewables / storage / efficiency / demand-side response / networks / interconnectors - indeed, whatever can make its way in the world on its own two feet (which pretty much rules out nukes, but who knows?)

Sackerson said...

If we continue to have mild winters, urban rats can't be ruled out as a biomass fuel source, provided they can be economically extracted.

CityUnslicker said...

LNG will for to $4 I reckon and then a big dash for gas.

This suits:

1) America - lots of gas
2) Russia - lots of gas
3) Europe - lower carbon than coal for the hand-wringers
4) UK - most houses already connected to the network for gas
5) China, havng rinsed the ruskies, will be quite happy and need to stop the mega pollution coalk is causing them.

It really does not help, Saudi, iran, Iraq, Libya, nigeria, Venezuela, Brazil. None of these countries sit at the top table, diddums.

Cheap gas will eb the future.

Timbo614 said...

Thanks ND I asked for post and boy! did I get one.

For me (who gets instantly lost in international politics) it was the domestic UK prices side I was interested in. My home fixed price contract runs out in April so the timing for a new cheaper deal could be good because all this spouting of cheap energy by the press like "Roll-up roll-up £1.00 a litre fuel" (I think Morrisons have already gone to 99.99p) will prompt a press led consumer demand for falling fuel bills at home.

Let's see eh?

If it needs an international price war to get there, then so be it, we all know from the supermarkets share price debacle where price wars lead.

A Non said...

Hmm, AEP was suggesting that wind is getting more productive, and I read somewhere recently that the grid is able to predict very accurately the level of wind power produced. I can't comment on relative costs, etc., though.

I am confident that all the antis crying HOAX! are utterly irrelevant. We are now probably past peak energy/GDP as a planet.

Nick Drew said...

Non - in terms of managing the problem, the Grid is getting better and better at accommodating the vagaries of wind, & credit to them for that

BUT wind output is still random, i.e. can't be despatched to order, and may deliver 0 for days at a time, including often during the coldest weather when power is most needed

the problems range from trivial when the wind % is small, to extremely challenging when you reach German levels: and the costs of dealing with them rise exponentially (literally)

I could (and indeed have) written at length on the massive trouble this causes in Germany, and indeed in neighbouring countries, onto which Germany dumps a number of its problems. Grid engineers in developed systems are very good at solving these problems in purely practical terms and keeping power going to residential customers & hospitals at all costs - but 'at all costs' is the operative expression, it's beyond a joke

and these costs never get laid at the door of the wind-farmers. In fact in most countries the costs are carefully obscured

auralay said...

Non. You say
"...wind and solar are falling in price, too. Maybe a combo of gas and renewables is exactly what we need..."

Great. Glad to hear it. Can we now scrap the Renewables Obligation (RO)

and allow the grid operators a free market to decide when from whom they want to buy electricity.
We would then see how viable wind and solar are without artificial protections.

(I have my suspicions as to the outcome - I would love to see if I am right.)