Articles from 2012

British Gas says nyet to UK shale, da to Russian imports

Here's an interesting bad news/good news story about a deal between two companies that have consistently played Dumb and Dumberer on shale gas,  Gazprom and Centrica.

The bad news is that when these two crooks work together, consumers generally pay the price. The good news is that it could be a lower price.

The background is how liquidity already present in world gas markets as a result of the US no longer needing LNG thanks to shale, is causing the oil gas price link to break. Gazprom has been playing hot and  cold on the trend. Until recently they were pushing a relentlessly ostrich response, saying shale would never work, it was bad for the environment, Europe was too crowded, blah, blah, blah. At the same time, despite aggressively talking the talk on how important the oil link would forever be to supply security, they sheepishly slithered into reducing price or take and pay adjustments with several European gas customers who can now buy LNG cheaper.

Meanwhile Centrica is spinning and don't know what to do. They have a lot financially vested in a high gas price scenario which provides rationales for products which they call providing the the security of a fixed price, or what I call overpaying to solve a non-existent issue. 

One notable way of achieving this is has been Centrica's continual briefings on shale gas will never amount to much, won't provide a silver bullet, will have no impact on domestic gas prices, Britain is too crowded,  blah blah to all who would listen. Note the similarities between blah blahs. Quite a lot of people listen due to Centrica's huge lobbying. Anywhere in UK energy, journalists, MP's and policy makers first port of call is to ask those nice people at Centrica's opinion, followed by that charming man at Ofgem on anything about energy. They do so because they simply don't understand all those confusing cubic feet and cubic meters and kilowatts thingies. They also have a touching faith in what used to be a national champion but is now a multi-national whose only loyalty is to capital. The only remaining British thing about Centrica is the name of the British Gas brand. Who can blame Centrica of taking advantage of such cupidity? The Centrica PR machine doesn't need to hire media graduates, they only need retired shepherds.

Centrica also uses the shortage scenario to rationalise any nuclear, wind or grid upgrade expenditure schemes, which are simply subsidy sucking scams. All  British Gas and Ofgem needed to do until shale was repeat 'when will the lights go out' and consumers, journalists and governments reached for their wallets.  

Now we see a multi-national company that denies UK shale (at least onshore where they can't get a subsidy), and owns British Gas, starts to buy Russian gas.

British utility Centrica onThursday signed a 2.4 billion cubic metre, three-year gas supply deal with the UK arm of Russian export monopoly Gazprom, it said in a statement. 

 Gas deliveries will begin from 2014 and will be entirely priced against the UK's freely traded spot gas market, the National Balancing Point (NBP), Centrica said in a statement.

  The deal marks Gazprom's longest ever gas supply contract that is not linked to the price of oil, a Gazprom source told Reuters.

 Gazprom Marketing and Trading, the UK arm of the Russian parent, will deliver gas to Britain through a sub-sea pipeline from Belgium, the source added.

This is the same Centrica who told  the PM at a Number 10 briefing:

 The Prime Minister convened the Downing Street summit to hear from companies including Shell, Centrica and Schlumberger, which have been working on shale gas projects in America and exploring the potential of supplies in Ukraine and China.

The ministers were told Britain was not in a position to exploit vast amounts of its own shale gas stores. "The reserves aren't absolutely huge compared with the likes of America, Ukraine and North Africa," said a senior government source. "And we are relatively densely populated. It is a question of how much we can get out, and at what cost. There is a not-insignificant amount of domestic supply, but not a game-changing amount."

There's that old Britain is too crowded line, see yesterday by the way.

The deal is also Gazprom's first import contract into the UK directly. So good old BRITISH Gas is happy to talk up shale denial in the UK but happy to import Russian gas.

Importing gas is no different than exporting money. I assume that this is a 2.4 BCM annual contract, which has a rough value at 55 pence per therm of £450 million pounds.  Now if as Patrick Heren, father of the Heren Index told me a few months ago, UK gas prices under a 25BCM per year production, fall to 40 pence per therm  UK consumers would pay only £327 million for 2.4 BCM. Even better, at a rough 60% tax and royalty take, they also give the UK Treasury £190 million pounds.

But BRITISH Gas doesnt want to help BRITISH consumers. Or their Government. That's Centrica's angle but what's in it for Gazprom? The view from Moscow:

“Shale gas production in the U.S. is already having a negative impact on gas prices in Europe and on Gazprom,” Chris Weafer, Chief Strategist at Troika Dialog, told Oil&Gas Eurasia. “Even though there is as yet no actual U.S. gas imports to Europe, the high domestic (U.S.) gas production has displaced coal as a major fuel source and that coal is finding its way into Europe and other world markets. The greater availability of cheap coal has already very significantly undermined the gas market and Gazprom’s ability to price gas. 

“That is why Gazprom is under pressure to negotiate existing contracts and also why it is in a hurry to build Nord Stream and South Stream,” Weafer said. “It wants to at least lock in the customer base before European and/or U.S. shale gas arrives; at least then it will be an issue of price bartering rather than market share.”

At least we can get honest answers from Russia these days.