Articles from 2013
UK Shale Gas and Prices Part 3
- Written by Nick Grealy
- Published: 17 September 2013
Last week David Cameron gave an interview that would have been front page news last month. Yet, in a sign that the mainstream press has decided that shale gas protests stories belong in the silly season, the interview with BBC Radio Lancashire wasn’t worth mentioning to the London press.
The clear and unambiguous message of support of shale gas from Cameron, Davey, Osborne and Fallon makes the Balcombe protests seem like an inconsequential chorus of doomsters by the side of the road. Which is what they almost exclusively are of course.
Note here the consumer cost issue. Compared to the big picture protest angle of catastrophic climate change or mass poisoning of drinking water, suddenly changing the green debate to something as mundane as the gas bill appears rather petty. The idea that people will support shale gas or not based solely on gas bills, doesn’t reflect well on either environmentalists legitimate concerns or their arguments in the greater climate debate.
I only found out about this interview via Ribble Estuary Against Fracking, and their comment indicates how far in tone the debate has fallen:
Rational debate? Lets see who says Shale Gas *will not* bring down energy prices for consumers? That would be;
Ofgem, Deutsche Bank, Bloomberg, IEA, EIA, Ernst & Young, Talisman Energy, Marathon Energy, Lord Stern and Caudrilla!!!
But somehow David Cameron thinks he knows better than all of the above?
But as in so much of the rest of the debate, fractivists rely on the out of date, and the out of context. They also cherry pick what may tend to support their view and discard the rest
Starting with the first, Ofgem is from February 2012, but based on a Pøyry report from last summer. Ernst and Young is from December 2011 and doesn’t mention UK shale at all. But the report cited in almost totemic terms by opponents, with Natalie Bennett of the Greens mentioning it just last week and Caroline Lucas mentioning it just before here arrest last month, is the Deutsche Bank Report. I asked Michael Hsueh, the author of the November 2011 report to comment
I am equally amazed at the longevity of our 2011 report. I have published a more recent update which may have escaped your notice. I attach it below. While it is not completely up to date, it does describe some of the changes afoot in the UK. I hope this helps your survey of opinions.
The report was mentioned here earlier this year, and the very first sentence of this year’s version is as good a place to start:
A series of developments has improved the outlook for shale-gas development in the UK in the past year.
A measure of caution is in order in drawing conclusions about the future of international shale-gas development given the large number of unknowns, including the scope for improvement in extraction technology, further resource discoveries, the wide variation in recovery factors and the uncertainty over the possible rate of production, all of which make it highly speculative to determine which countries, if any,will achieve a price “revolution” in domestic natural gas markets.
Highly speculative strikes me not as it will never happen, but that it might, but then I’m a glass half full kind of guy. Michael seems to be saying it could go either way. Apart from anything else, this report pre-dated the BGS assessment and the UK government’s strong support, both of which developed just this summer.
I would imagine that shale antis won’t cherry pick this line:
Thus, a robust regulatory framework exists to monitor the spectrum of risks which may be associated with shale-gas exploration and production in the UK.
The Ofgem report is especially interesting, It’s all part of a negative feedback loop ultimately derived from an OIES study of 2010 which I’ve discussed several times before. I wrote a post a year ago on The Long Half Life of Outdated Shale Gas Reports in detail on the subject. The OIES report, whatever else it said, had no references to US shale economics and technology later than 2009, thus making its conclusions out of date more than anything else. Let’s see this chart from today’s Shale Daily and compare US production over time:
Sorry about the switch in units, but 30BCFD, (billion cubic feet per day) is 310 BCM per year.
The rest of the world is starting at zero. Florence Geny, author of the OIES report later updated her views in 2011, but the written report has been the one that informed Chatham House, IMech, E+Y, Pøyry and Ofgem. Here she is at a conference in 2011:
A slide in her presentation entitled “Growing industry interest for Unconventional Gas in Europe - A rapid race for acreage” showed that the number applications for land concessions in Europe last year had shot up like a weed to over 70,000. By country, Poland and France towered over most other countries where unconventional gas exploration had taken place in Europe.
“What kind of level of production would we need to see to change the game?” asked Geny, who looked at the demand side and supply side and showed production scenarios. “I also looked at European gas consumption – even if it covered 5% of it, it would be a game changer.”
So what is 5% of European Gas Consumption? At 2012 it 466 BCM/ 16.45 TCF according to Eurogas. Even if Europe's shale growth rate was a tenth of the US success, we're still talking game changing amounts of shale gas. Says who? Well actually, Florence Geny.
Considering the Bowland alone has a resource of 1300 TCF, even 5% percent production over 40 years means 1.625TCF or 46 BCM. That doesn't include European gas production from the Netherlands, Poland, Germany or my next favourite break out spot of 2014/15 Denmark. Yes, that is green, windy Denmark.
The issue, as I've said before and no doubt will say again, is that we don't have any consumer visibilty over wholesale gas components of bills or actual consumpton.
It seems to me that scientific debate has declined with the smoking rate. In the old days, many an insight was derived from the "back of a fag packet" method, and in the days of email gas bills, we can't even depend on back of the envelope. But here goes:
According to Ofgem 67% of bills come from wholesale gas costs.The average annual usage is 16,500 kWh, or 563 Therms or 56.3 MMBTU or 1,594 cubic metres. The average gas price today is 2.337 kWh, and that's been fairly constant, which give a commodity cost of £385. Year ahead NBP has been in the area all year, as gas volatility is far lower than it once was.
A ten percent drop would be nice, but it wouldn't be a game changer to most people. Could shale gas drop European prices by 20%? Let's point out that US Henry Hub prices are less than $4MMBTU and 2.337 over $10MMBTU. We're constantly told that shale won't have an impact on wholesale prices, a decline to $8MMBTU under an extra supply is not inconcievable. Or would that be conservative? Expert opinion on that coming soon, but going back to the fag packet and thinking outside the envelope, £77 per year is not only £77 a year but more to the point, at 21 million domestic gas households, £1.64 billion. Not to be easily dismissed.
But we don't want to give you that. At an average 13 pence per kWh, the average electricity consumption of 3,300 kWh would cost £429. If electricity costs reflected gas costs, we could see a doubling of the savings.
By the way, the price of $8MMBTU is not far off from the landed cost of US LNG set to hit European markets from 2015 or 16, which is liable to set the margin cost of supply anyway. Which make me think. Do financial insitituons really not want to invest in EU shale production on the grounds it won't make any money?