Shale Gas 2012

DECC's Heren Gas Price v Patrick Heren's Gas Price

The Policy Exchange's recent report was unwilling to make predictions about gas prices

Gas Works? Shale gas and its policy implications says that the government is “unnecessarily gambling with billpayers' money”. It says that the UK’s energy generation plans are based on forecasting future gas prices which is a flawed strategy, potentially resulting in the UK missing out on the potential economic and environmental benefits of shale gas.

Current Electricity Market Reform (EMR) proposals, which enable the government to plan and direct the future energy generation mix, are based on the view that future gas prices are likely to be high. No-one can predict future gas prices but shale gas developments suggest prices may be lower than previously assumed. The international Energy Agency’s forecast for gas prices in 2030 with the emergence of unconventional gas is a fifth lower than in its previous, pre-shale projection.

The UK  Department of Energy and Climate Change have a huge range for 2020 gas prices going all the way from 35 pence per therm ($5.55 MMBTU) to £1. I don't know what cricket is for covering all bases, but that is what this is. DECC are classic examples of both civil servants and energy consultants. Choose figures so incredibly broad as to be useless, but at the same time so broad that they can never be criticised for being wrong.

But one consequence of scenario stretching is to make the mid-range scenario for 2020 far higher at 70 pence per therm ($11.09 MMBTU),noticeably higher than today's price of 57 pence, $9.10 MMBTU and miles ahead of current $2.50 Henry Hub. 

The US Energy Information Agency predicts US gas at less $5MMBTU by 2020, but more to the point, the International Energy Agency predicts 

 More gas production – including significant quantities of unconventional gas – becomes available in several regions later in the Outlook period: our analysis suggests that plentiful volumes of shale gas, tight gas and coalbed methane can be produced at costs similar to those in North America (between $3-7 per MBtu). 

So why does the UK use $11 as central prediction (and $15.80 as high)? The only rational answer is that they need to provide as high a price as possible to justify investment elsewhere in energy.

DECC, and Ofgem, wish that shale would go away.They insist that prices based on a combination of unsucccessful European shale, no US exports, China shale failure and most especially that gas will remain forever linked to oil.  

That is the desperate wish of Gazprom. It should not be that of the UK government.  Could it also be the desperate wish of Centrica, who have an entire business model built on insecure gas scenarios they can scare their customers into.? Centrica also have to talk up gas prices to make their business more attractive to potential buyers, and this from 2010 is only one of the rumours over the years that put Gazprom at the head of the list. 

 Gazprom will “look carefully” at Centrica and may consider buying Britain’s largest energy supplier, chief executive Alexei Miller said Friday.

“We weren’t planning and weren’t planning, and they just kept matchmaking and matchmaking,” he said. “So we decided to take a look.”

I get nowhere with my government, but I speak to several others.The crazy part of this is how almost certainly, several years before 2020, Gazprom won't believe in oil linked prices or shale failure either.By that stage, it will be only SS Planet Ofgem, sailing over the edge and taking the UK economy with it.

So what could be the impact of the Cuadrilla discovery alone? Based on 200 TCF gas in place (not producible), a reasonable production rate would be 20% recovery over 40 years for 1 TCF or 28 Billion Cubic Meters each year. What might that do to UK prices? If Policy Exchange doesn't want to take a bet on gas prices, who might?

Someone who might know could be the guy who literally wrote the book on UK gas trading, Patrick Heren, who the ICIS Heren Gas Index is named after.

Patrick recently told me, based on the Cuadrilla figures alone, that UK gas prices would be 30 to 40 pence per therm.

The UK uses roughly 100 BCM a year, so the Ofgem mid range scenario of 70 pence equals £25.3 billion, but Patrick's mid range of 35 pence per therm is half. So we're tallking a difference of £12.65 billion per year. 

Can we afford to ignore this? Does the UK have too much money? Given the snail's pace of the 14th Onshore Licensing Round, the answer must be: we do. Major international oil players have money burning holes in their pockets to start drilling holes in the ground in the UK. China is way ahead of the UK in modern shale licensing, but the UK doesn't need any money!  Chris Huhne's DECC had the delusion that we'll  rich by selling the world offshore wind and coal CCS technology. It doesn't matter if shale tranforms the economics of those industries.The theory is we based this on the energy reality of 2008 and nothing has changed.  

The Ukraine is running a shale tender that will be finished by early summer. Argentina Australia, South Africa and even India are way ahead of us.David Cameron goes over the world saying the UK is open for business. But definitely not for the energy transformation of our time it seems.

France has a legal ban on shale that is getting more frayed at the edges each passing week But the UK appears to have a defacto ban on further development via regulatory inertia, aided and abetted by a press that can't think of anything to say about shale except earthquakes or taps on fire.This isn't shale. It's quicksand.