No Hot Air

Gas hydrates

With enough on the plate with shale, I generally ignore Coal Bed Methane the other "unconventional" gas. CBM does have plenty of potential and thanks to a far sighted Queensland government who wanted to produce gas from their massive coal reserves, they are doing a CBM to LNG play which is unique.

The other gas on the horizon is gas hydrates.  But going back to Peter Tertzakian  it gives us a chance to quote him again:

Furthermore, with all the gas currently coming online in the United States from the vast shale reserves, it's doubtful crystal gas is going to see much investment in the near term.

"Why would anybody allocate money to gas hydrates, when there's almost a gas glut emerging," said Tertzakian, the economist at ARC

Almost a gas glut?  He was misquoted for sure.  But the possibility of gas hydrates means that we now have a winner in our how secure is gas supply analogy contest:

The potential is enough to power humanity from now until the asteroid hits," said Peter Tertzakian, chief energy economist at ARC Financial, a Calgary-based private equity firm.

Watch Ofgem hire a consultancy to advise on post-asteroid energy shortages. "Its important not to be complacent over energy supply" a spokesman will say from the Ofgem bunker.

More Oz shale

NHO has noted before that the last thing Australia needs is more gas.  LNG, Coal Bed Methane, conventional gas offshore Victoria/Tasmania and plenty onshore Western Australia.

The Beetaloo Basin in Northern Territory came into view last year, and then shale in South Australia.

Now it's WA turn:

New Standard Energy (ASX: NSE) will accelerate the progress of its shale gas exploration acreage in Western Australia's Canning Basin following an internal and external review of the shale gas prospectivity in its exploration acreage.

The company's decision to accelerate shale gas exploration follows encouragement received from ongoing work with New Standard's independent shale gas adviser that supports the view that the Goldwyer formation in New Standard's Canning Basin permits exhibits many of the necessary geological prerequisites for shale gas.

As we said last time around, they don't call it the Lucky Country for nothing.

Quadrillions today, Zillions tomorrow?

The ever-upward path of estimated shale gas reserves goes into nose-bleed territory.  What are the actual numbers behind the adjectives of game-changing, paradigm shifting, seismic Klondike proportions  being bandied about?

At CERA week in Houston, an actual number to back the adjectives:

The outlook for natural gas development, by contrast, points toward more localization and regionalization as nations around the world begin exploiting the abundant natural gas reserves from unconventional sources, such as shale.
“Globally, our estimates put recoverable shale gas at between 5 and 16 quadrillion cubic feet. That's over 150 years of supply at today's current global consumption levels,” said Rafael McDonald, an IHS CERA expert in the liquefied natural gas area.
Shale deposits occur in almost every corner of the world. If the success achieved in the U.S., which has increased natural gas production from shale from 14 percent in 1990 to 50 percent last year, can be replicated globally “we would more likely see a refragmentation,” McDonald said.

How big a number is that?  A quadrillion is 1 followed by 15 zeros.  One thousand million million cubic feet or 1000 trillion.  The low range of the CERA estimate is 5,000,000 trillion cubic feet.

The entire gas usage of the UK is 3.2 TCF. The largest off shore gas field in Europe is the Troll field with 48 trillion. Perhaps we made an error and that estimate is merely 5000 TCF.   That's still 1562 years if the UK was the only place in the world buying gas.

This puts estimates of natural gas reserves not in the merely abundant, but for all practical definitions of the word as being eternal.  Natural gas is certainly far more abundant than oil and coal.  The only source of energy more abundant are the eternal (we hope) duo of wind and sun. Security of supply fears anyone?

Klondike

I always read and learn a lot from Peter Tertzakian, the Canadian energy observer from Alberta.  Consistently ahead of the curve on big stories, notably on shale. He could see it coming and he knows enough about the industry to know when to listen to the conventional wisdom and when, more often, to ignore it.

We've recently pointed out that shale 2.0 may include oil. But there's something more than that and it has the not inconsiderable benefit of coming out of the same hole in the ground:

Yet like this year’s crop of Academy Awards, plays like Barnett and Fayetteville may be soon be yesterday’s news. Excitement is building in more virgin plays like the Eagleford, Bossier Shale and Granite Wash to name a few. And it’s not just because these resources hold the promise of untold trillions of cubic feet (Tcf) of exploitable natural gas. There is a bonus in some of these gassy treasures: natural gas liquids. In the Northeast, the Marcellus play also has NGLs, which is why there is a pipeline being built from Pennsylvania to Ontario. NGLs like ethane, propane and butane sell for a premium to natural gas, so the financial incentive to drill baby, drill in liquids-rich areas is attractive even when natural gas prices seem uneconomically low.

Does the Dizard/Berman theory that shale is an expensive scam include this news, quite apart from the steadily declining cost of drilling?

The Smith Bits natural gas rig count is back up to where it was a year ago, almost 1000 active, after having retreated 40% during the depths of the Great Recession. But the total gas rig count is deceiving. Not surprisingly, the real story continues to be in the prolific shale plays, where Klondike levels of exploration, development and pipeline construction continue unabated.

Untold trillions of cubic feet?  Klondike? Shouldn't this hit the price radar? Peter T points out that the forward price of gas, at least in North America has fallen recently:

Long-dated prices for natural gas – prices being paid for delivery one-year out and beyond – have fallen by over $1.00/MMBtu (about -15%) in the past six months, with most of the drop being recorded in the last few weeks. Clearly the market is expecting more cheap gas to come to market next year and beyond. For this year, 2010, the numbers still don’t suggest that supply will exceed demand due to substantial declines in conventionally produced reservoirs, and also because of time lags in the drilling-to-production cycle. However, if the observed drilling trends continue, prices are definitely going to be fighting a tough battle in 2011, especially if the weather doesn’t cooperate.

For once, the UK curve market is making similar falls, here's what May 2011 looks like these days:

But the problem for end users is that the forward price for May 2010 is 30% higher than for May 2010 and is higher than the daily tracker price for February 2010.  May 2011 higher than February 2010 doesn't make sense.  It may happen.  And take a one year fixed price as most suppliers foist on end users, and it will happen.

On the NYMEX the spread between this year and next is only 17%, still high but do able. Why is the UK market higher?  A chicken and egg situation I think:  May next year is only higher because most UK end users buy on the curve.  Why?  They are either not given a choice for tracker products or bullied by the energy risk industry and the regulator/cheerleader for high prices that Ofgem has degenerated into, to fear high prices.  Buy next May, and surprise, surprise, the price goes up.

Maybe they will read about it in the papers after all.

Kind of a breakthrough here, when the FT, puts Shale Gas on the front burner after studiously ignoring it's potential for some time.

All across Europe big oil companies are scouring millions of acres of countryside and buying up rights to tap the natural gas trapped in prehistoric shale beds thousands of metres below its surface.

The shale gas rush has made its way over from the US, where breakthroughs in technology have allowed companies to extract gas from reservoirs previously seen as untouchable.

As usual, what's unsaid is the most important.  Last month both Alistair Buchanan of Ofgem and Sam Laidlaw of Centrica dismissed shale gas as not relevant to their shared view that the UK is running out of gas and prices will inevitably get so high that we will wish we spent money on various boondoggles such as CCS, Nuclear, Nabucco and storage.

Alistair and Sam are going to look merely dumb once European shale and unconventional resources are uncovered.  But every UK energy user is going to look like a sucker for believing them.

I hope that Ofgem reads the FT.  Will they learn from this?  Sooner or later.  They are dumb.  But they aren't stupid.

New world,old world. This world, next world

Why aren't we hearing more about shale in Europe?  We've always thought that people are operating as far under the radar as they can get, and the behaviour of US companies back home says why:

The wide range of lease and royalty rates being offered to landowners has led to some concern, particularly among those who signed for lower rates.

One example is Oglebay and Wheeling parks. Last year, the Wheeling Park Commission got Chesapeake to pay $750 per acre and 14 percent production royalties for drilling at the two parks.Last month, the Marshall County Board of Education signed rights to 177 acres in Sherrard to Chesapeake for $2,800 per acre and 18.75 percent production royalties. Another Marshall County resident, Kerry Foster, has not yet signed with a company because he is holding out for better offers on his 69 acres.
"In 2008, CNX wanted to give me $5 per acre for it," he said of his land. "Now, the highest offer I have gotten is $2,800 (per acre) and 18.75 (percent).

A Weirton resident who owns about 50 acres in Marshall County requested to not be identified. He said a CNX representative initially offered him only $250 per acre for a lease..At first, this guy wanted me to sign for $250. Then, he went straight up to $1,250

God does work in mysterious ways, and although some may look to the future, members of a Hare Krishna community in West Virginia are happy to take the money in their current incarnation:

Members of the New Vrindaban Hare Krishna Community in Marshall County can attest to that, as they are set to gain roughly $10 million in lease payments from AB Resources.

With Ohio-based AB Resources set to pay the community a lease rate of $2,500 per acre for about 4,000 acres - and 18.75 percent production royalties if the company begins pumping natural gas - community member Gabriel Fried said he believes now is the time to sign.

"We could wait two years to see if the price goes to $5,000 per acre. But we wanted to get the production going because the royalties are the real source of revenue," Fried said.

God also takes care of those who take care of themselves.  Here in Europe, land and mineral rights are far more complex than in the US to start off with, but producers have an advantage in that no one has heard of shale gas.  Who is going to tell them if not regulators or their own governments?  They won't learn it from expro companies, and they won't read about it in the papers.

That suits those like the US company we know who is on public record as paying a whole 55 cents an acre and 1% royalty in Poland. 

Back to the Hare Krishnas. Next time someone complains about any alleged ecological impact of shale drilling, remember this:

The lease agreement includes $2,500 an acre and 18 3/4 percent of the gas royalties. The money also will be used to improve the community’s organic garden. Terry Sheldon manages the Krishna’s small farm training center.
“Some of these monies will be used to promote apprentice programs and the presence of cows in a farm community means guaranteed fertility in a community and when you have fertile soil you have social security so the money will be used to create housing and infrastructure enhance our cow protection program,” said Sheldon.
Fried said the Krishna’s plan to plant hundreds of nut trees on their property. Future plans even include building a holistic health clinic with the royalties. The Krishna agreement also includes drilling 400-feet below where the community pulls its water from.

In the mid 1980’s, there were more than 600 Hare Krishna members living in the New Vrindaban community. Today, that number is about 200.

International Society for Krishna Consciousness is one of the more obscure and unexpected links NHO has ever had, and boy have we had some left field ones. 

Dawn of the Gas Economy..and one whinger.

One thing shale gas hasn't been short of are adjectives: game changing, disruptive, paradigm shifting and revolutionary are only four.

It's only natural to be cautious, but it's counter-productive to be cynical.  Publications like Petroleum Economist naturally hold to the side of caution. It means a lot when they see the global implications of shale in both a systemic and planetary sense.

The oil industry and free markets may yet accomplish what politicians at Copenhagen couldn't – by making the world a gassier place.
There are robust environmental, strategic and economic reasons to reduce oil consumption. Assuming it's replaced by a less carbon-intensive alternative, it would reduce carbon-dioxide pollution. For importers, lowering oil consumption usually means reducing reliance on other countries; the US, where plenty of energy savings are to be had, is forthright in its desire to reduce its dependency on foreign oil suppliers to improve its energy security. Doing so would also strengthen its economy.

The PE leader follows what has been happening over the past six months with stunning speed.  Oil & Gas is so 20th century.Today it's either Energy companies or Gas and Oil, reflecting the change from an era where gas was either afterthought or inconvenient by-product to the main menu item. Obviously the shale "seismic transition" has a lot to do with that, but it's not only about supply.  Oil demand, in common with gas and power markets , despite the fervent hopes of Peak Oil conspiracy/catastrophe theorists, is falling, something NHO has pointed out from day one.

An oil-demand peak in the OECD is a compelling theory for two reasons. First, it is likely that a strong, sustained price signal encouraging conservation and alternative energy will prevail. Second, a realistic alternative – unconventional gas – has been established (ironically thanks to persistently high oil prices), presenting consumers with an attractive opportunity to cut carbon emissions and oil imports.

But there's always got be someone to whinge, and in keeping with stereotype, it has to be a Pom.

John Dizard, occasional FT contributor, appears to be one of life's natural conservatives:  any change at all is a change for the worse. Tuesday is awful, quite simply because it's not Monday. 

The shale gas religion crosses the usual political boundaries. The environmentalist wing believes that shale gas can displace dirty, coal-fired generation. Liberals believe it will help power the clean energy policy. National security conservatives believe shale gas can end dependence on Middle Eastern or Venezuelan oil. Economic conservatives believe it can close the current account deficit, and drive an economic recovery, at least until even more nuclear power can come on line.

There are environmentalists, rural landowners and health advocates who worry that shale drilling could contaminate water supplies. Most of them, though, want to have more careful regulation, rather than prohibition, of shale gas exploitation.

The point seems to be that if so many people are in favour of it, it must be wrong. Skepticism, caution and cussedness are all just fine. The issue here seems to be that simply because gas has become the new  conventional wisdom, it's right to attack it. It's an interesting point, and someone has to do it. It doesn't necessarily make it right.

I think it might not be a bad idea to examine the faith-based assumption that the US has a virtually unlimited supply of natural gas from shale formations that can be extracted at a low price for the indefinite future. Perhaps the few people who think shale gas will be produced at a higher cost, and more slowly, than generally believed should be heard out, rather than be executed or sentenced to work in the salt mines.

No one is proposing transports to the east for shale-gas deniers. Just market solutions. The market will choose winners, and markets are not necessarily democracies or popularity contests. But to support his theory Dizard puts forward one analyst who doesn't hold with shale. Maybe he's right, but to be polite the odds are against him.

Ben Dell of Bernstein Research in New York who has, so to speak, done some of the deepest drilling into the shale gas industry numbers, believes that the full cost of finding, developing, and operating shale gas wells , and paying an average return on capital to investors, requires a spot gas price of $7.50 to $8 a thousand cu ft.

As Mr Dell points out, the horizontal drilling rigs that are needed to drill shale gas wells are in relatively short supply. "We think there will be a 15 per cent to 20 per cent increase in costs from last year to this year. That includes the costs of drilling and fracking [hydraulic fracturing of rock layers holding gas]."

No word on Arthur Berman, who must be labouring in the salt mines somewhere, possibly converting them to gas storage.

Dizard seems to have more of a problem with shale's prices than the actual concept. Let's say for example that he's right and shale requires a $8MMBTU gas price.

So what? Coal Carbon Capture and Storage and Nuclear are still far more expensive. Oil is about the same. So are we talking about whether shale gas will solve the carbon issue or are we just haggling over the price?

A fine mess

We're all used to headlines using words like "shock" in energy headlines, but for once this incredibly disturbing news from today's FT is completely right.

The CRC Carbon Reduction Commitment was an over-complex mess at the best of times,  but now it's degenerated into a mere total shambles.

The government has underestimated by six times the number of businesses to be covered by new greenhouse gas emissions legislation, which will take effect in just over three weeks.

Ministers have told the business community for more than a year that about 5,000 to 6,000 companies in the commercial sector will be covered by the incoming regulations, but in fact as many as 30,000 could be involved, the Financial Times has learnt.

This enormous revision to the government's estimates is likely to cause consternation among small to medium-sized businesses, thousands of which may be unaware of the new restrictions they face.

This is going to be a big story.  How on earth could they get is so wrong, with so long to prepare for it.  One hint is the lack of reliable metering, a complaint of ours from day one. 

The regulations, originally called the carbon reduction commitment and now known as the CRC Energy Efficiency scheme , cover companies whose electricity is metered by the half hour and whose total electricity consumption exceeded 6,000 megawatt-hours in 2008, requiring them to monitor and report their electricity use.

Some companies, particularly smaller businesses, may be unaware of how much electricity they use, if bills are paid at the branch level rather than centrally.

This highlights the old adage of being unable to save what you can't measure.  The government's glacial pace on smart metering has come and bit them in the behind.  If this is the sort of issue that arises with larger end user, it only underlines the mess that smaller sites and domestics find themselves in over both usage and price.

But is the government the only one to blame?  Energy suppliers themselves and the data aggregators such as Elexon, Xoserve and National Grid should have seen this coming. Building on the experience of the EUETS scheme, we would have expected a failure rate of 20% or so for sites not registering, but five fold is strangling this at birth.

Another group that should have seen it coming are the energy consultancy industry who have been helping firms with CRC and/or profiting from it. Surely they should have seen by now if the figures are out by five fold?

The Tories have been talking about a transparent carbon tax to replace CRC. Forget politics, lets put the entire CRC on the back burner for a while.

Bloomberg v Reuters

The same story of Exxon Mobil talking about Polish shale gas gets two interpretations.

First Bloomberg:

Exxon Mobil Corp., the U.S. oil company that agreed to buy XTO Energy Inc. last year for its shale gas expertise and assets, said it’s “early days” for unconventional natural-gas projects in Europe

“We have to have realistic expectations about being able to extract commercial quantities of natural gas from these unconventional resources,” Richard Guerrant, Exxon’s director of Europe, Russia and the Caspian, said today in an interview at the Flame conference in Amsterdam

Next up Reuters sounds like they were speaking to someone else.

Oil major ExxonMobil Corp. sees a lot of potential for unconventional types of gas such as shale gas in Europe, and plans to focus first testing in Germany and Poland, its head of gas marketing in Europe said Tuesday...Exxon’s Richard Guerrant said in an interview with Reuters

“Looking at shale and other forms of unconventional gas, we see a lot of that type of geology throughout Europe,” Guerrant said.

But going back to Bloomberg,  Guerrant said something instructive:

There’s “potential” for such gas production in Europe, Guerrant said. “We wouldn’t do it unless we’d figured out we can make some money out of it,” he said.

A third view. Poland will be massive. That's our view.  East Texas?  Perhaps more like Haynesville East.  This will be the biggest event in European energy since the North Sea.

Gazprom, shale and LNG

This is getting complicated:

 OAO Gazprom expects liquefied natural gas shipments to compete with rising output of shale gas in the U.S. as the Russian producer aims to expand into the world’s biggest energy market.

The company has no reason yet to revise its target for U.S. market share given the costs and possibly negative environmental impact of developing shale gas, Medvedev said. Gazprom’s output will depend on market conditions, he said.

That's Gazprom on track for the unlikeliest green award, trying to protect us from the negative environmental impact of shale. Unlike their track record in digging up the Siberian permafrost and who knows what else over the years.

The reality is  easy. 

U.S. shale gas could displace significant volumes of LNG, potentially growing to a similar scale as the entire current global LNG market by 2015, JPMorgan Chase & Co. said in a report on Feb. 9. The unconventional resource is “a complete game changer” in the U.S., BP Plc CEO Tony Hayward said in January at the World Economic Forum in Davos, Switzerland

So easy that the penny will drop at Ofgem, who believe that shale will have no impact on UK supplies and LNG will be so expensive that we must make investments immediately in cheaper alternatives such as CCS or nuclear to keep the lights on. Ofgem's other two big fears are that a) Russia will cut Europe off in a repeat of the Ukraine crisis or b) won't be able to supply us because they've run out of investment.

Yes, that does sound confused, no I didn't get it wrong.