Shale Gas

Memorandum submitted by No Hot Air (SG 20)

• My name is Nick Grealy. I have had almost twenty years experience in the UK Gas Industry dealing with all levels of Industrial and Commercial Gas Customer.

• My employers have been London Total Gas, a JV between London Electricity and Total Gas Marketing, EnergyQuote a commercial consultancy and as Gas Buyer for the NHS Purchasing and Supply Agency, an agency of the Department of Health, responsible for purchasing gas for approximately 5,000 sites of the National Health Service in England

• Since 2008 I have published a web site No Hot Air, originally aimed at advising I+C End Users on how to reduce energy costs.

• In that capacity, at a time when Oil and Gas prices were at their peak, I first became aware in mid-2008 of the sudden emergence of the shale gas phenomenon in North America. I immediately saw the potential impact of shale gas in creating a paradigm shift for energy globally.

• I would define myself as an eco-pragmatist. I do not deny climate change science but feel that any hoax lies in how much we ask end-users to pay for it.

• I come from an initial view that since energy use is unavoidable, it has an economic impact akin to taxes. At the same time, the cost of not acting on carbon reduction has potential for longer term costs that need also to be considered.

• Although there are minimal differences between supplier rates, I strongly believe that the idea that competition between energy suppliers is pointless in a commodity based market. I advocate transparent solutions based directly on wholesale market indices that nudge end-users to act in their own best interests.

• As such I believe that end-users should not have to struggle to get the best rate as in the current market structure which is based on confusing customers far more than helping them.

• A key part of consumer confusion arises from the popular mis-conception that gas, and by extension power, is insecure as defined by volumes of actual supply and potential price volatility.

• The sudden emergence, and what I and many other commentators call the future permanence of abundant natural gas via the shale revolution will be beneficial for almost everyone, while causing massive disruption to current UK energy policy. This disruption is likely to be overwhelmingly positive.

• I have always approached the shale phenomenon from the viewpoint that it can be environmentally acceptable and affordable. There are no perfect magic bullet solutions to energy security and that includes natural gas. Gas is not a perfect low carbon solution. But shale promises to provided energy security as defined by both physical supply and affordability.

• UK energy policy, built as it is on the Energy White Paper of 2007, has an a priori assumption that natural gas is an insecure fuel as measured by the risk of finite supply and the connected implications for price volatility.

• I strongly believe that emergence of shale gas means that fear of gas supplies not reaching the UK is groundless.

• There are three basic reasons for this view :

1. shale gas causing a new reality in LNG supply

2. the potential for shale gas development in our near-neighbours

3. potential for development of substantial shale gas supplies on-shore UK.

• LNG:

• The development of a global LNG market ran in parallel to the emergence of shale gas. But the long lead times involved in engineering and capex of LNG led to a distortion when initial USA shales were able to ramp up production in short periods and rapidly declining costs of exploiting it.

• The LNG market was built on the expectation that the United States would join existing markets in Japan, Korea and Taiwan and an expansion in European, especially UK import capacity.

• But the sudden wave of US and Canadian shale gas has meant that apart from arbitrage plays into the US North Eastern states during the winter peak, there is no longer any fundamental need for US imports.

• Despite a recovery in Korean demand, and new supplies to Chinese, Indian and Brazilian markets, Asia is already very well supplied from existing suppliers in Indonesia, Australia, Malaysia and Brunei.

• Qatar based it’s strategy of a massive run up to over 70 million tons of LNG capacity on filling the US and UK markets. The evaporation of US demand means that those supplies will have little option but to go to Europe.

• Existing or proposed suppliers of LNG to the US also include Trinidad and Tobago, Nigeria, Equatorial Guinea and Egypt.

• Those nations, along with Qatari cargoes, are now effectively cut out of the US market. The UK has imported very large volumes of LNG both for domestic use and for re-export to Europe. During winter 2009, Centrica shut in production at it’s Morecambe Bay field as it found spot imports were more competitively priced, even during the severe winter period of January 2010.

• Spot LNG trade has led to a fraying of the oil/gas pricing link that many observers see as permanent and unavoidable going forward. The severe winter at both ends of 2010 saw this trend moderate slightly, as European buyers were still buying spot gas at rates closer to oil indexed prices from Russia and Algeria. There are also short term issues surrounding LNG shipping capacity which are unlikely be permanent going forward.

• The essential point is that even without any physical UK or European gas production, the UK’s energy security is positively affected by the revolution in LNG, which in turn is strongly influenced in the short term by shale resources

• Observers who note that LNG makes the UK open to gyrations in global markets are technically correct, but not in practice. There is literally nowhere else for LNG to flow to except Europe.

• Asian demand is mostly met by existing suppliers, and there is developing, but as yet insignificant Asian spot demand.

• Asian demand is dominated by the mature markets of Japan, Korea and Taiwan. All three markets have limited potential to expand import needs so that new import sources from Australia, Qatar, Peru, Sakhalin (Russia) are already sufficient to satisfy import needs

• The common view in commodities that Chinese and Indian demand is pushing up prices does not appear to be happening in LNG. Import capacity in both countries, while growing is still far less than the export capacity of Qatar and planned Australian LNG projects.

• China will be the first market in Asia to have multiple sources of gas supply from domestic conventional and coal bed methane supply, LNG imports and pipeline imports from Turkmenistan today, Myanmar from 2012 and proposed Russian (Siberian) fields. LNG imports will therefore be just one part of the Chinese natural gas mix. It is unrealistic to assume that Chinese and Indian demand will have anything except short duration impacts on European imports and prices.

• What is especially significant is how both China and India threaten to leapfrog Europe on shale gas production. Both countries are said to have massive shale resources and the political will to access them. The US State Department has been engaging countries worldwide with it’s Global Shale Gas Initiative.

• The initiative is open to all countries and it would be useful if the Committee could ask the FCO how they have responded to the US initiative.

• Shale gas development in China and India is already at least as advanced, if not further, than in Europe. The implications are that shale will at a minimum lessen their need for LNG imports, placing further pressure on prices and displacing LNG to other markets.

• Schlumberger announced in January 2011 that their estimate of Indian shale resources stood at 300/2100 TCF, compared to the largest existing Indian gas resource of 8 TCF in an off shore field.

• Despite projected increases in LNG imports to Brazil and Argentina in 2010, the total volumes involved are still relatively small compared. Additionally, Argentina recently announced shale gas deposits officially put at 257 TCF or over 8 Trillion Cubic Meters. For comparison a find of that size is 100 years of present UK consumption. I am told off the record that the actual discovery is at least three times higher and it is instructive that Exxon Mobil announced exploration in an area next to the initial discovery.

• Significantly, it now appears that North American shale production will be exported from 2014 onwards, providing perhaps a stronger link in the Atlantic Basin between Henry Hub and NBP prices. There have already been two cargoes re-exported from Louisiana to Texas during winter 2010/2011.

• Naturally, to ensure European and UK energy security we must study the prospects for shale gas reserves in the European continent and the UK.

• Such estimates are problematic at present. But it is reasonable to consider much of North America’s experience as at least analogous to Europe. Similarly, geologist estimates have been consistently cautious in the United States. The Marcellus Shale was estimated at being 15 TCF as recently as 2006, but present estimates point to over 500 TCF.

• The best approach therefore for UK energy policy going forward would be one of wait and see. The speed at which shale is developing should mean that even a delay of little as one to two years is a far more prudent option that provides little risk.

• The larger risk is of the UK locking itself into structures based on out-dated realities.

• The sudden emergence of super giant gas fields in several North American locations has led to a true paradigm shift in that the key issue in North America is not supply but the creation of new demand to soak up the increased production.

• North America uses coal as the dominant form of generation, but gas is now the cheaper option in many markets.

• Many NA observers also point to the potential for creating demand by replacing diesel with natural gas in the transportation sector. The freight sector is responsible for up to 40% of transportation related CO2. It is not unreasonable to expect that natural gas either in LNG or Compressed Natural Gas form can remove 10% of total transportation CO2. The associated costs will be far lower than those for the development of electric vehicles and the time frame would be far shorter. NGV use will also lead to lower transportation costs and significant improvements in air quality as LNG emissions contain no particulates or SO2 as contained in oil.

• The immense size of the US gas resource is leading many observers to feel that even if with increased generation and transportation demand, there will still be very large quantities remaining for export. The case of Canada is instructive as almost 60% of natural gas production is exported to the USA. The emergence of US shale plays means that the US no longer needs Canadian imports to meet demand. Canada is already advanced in planning exports from Horn River and Montney Shales of Alberta and British Columbia to Asian markets via a terminal at Kitimat BC originally intended to import LNG.

• The key issue going forward for natural gas is not managing supply, but creating demand.

• Using clean-burning natural gas as partial, but immediate, solution to contemporary energy problems, is a forward step, not a retrograde move. The substantial difference in fossil fuels between natural gas, coal and oil needs to be better communicated.

• Natural gas can provide currently viable, scalable, affordable and significant but partial decarbonization of the electric generation sector.

• We must be realistic: Other technologies aim for a full decarbonization at some point several decades away. Is it wise to bet on technology today for 2050?

• The greater environmental risks are likely to be those associated with not developing shale resources.

• Similarly, the greater economic risks of shale increasingly appear those associated with not developing shale resources.

• Shale gas has the potential to reduce energy costs during a time when global stimulus is again becoming necessary.

• Lower energy costs reach consumers and industry far quicker than tax or regulatory changes can.

• Lower energy costs serve the same purpose in stimulating economic growth or consumer demand as direct government expenditure or quantitative easing. They do so at no cost to taxpayers while reducing government expenditure through lower energy costs in government energy estate.

• Europe in general and the UK in particular risk being marginalised as China and India embrace shale gas potential as other nations deny it.

• Regulation is to be welcomed and will not add any significant costs to shale extraction. It ultimately helps the shale process by encouraging innovation and removes both risk and bad actors from the industry.

• Full decarbonization technologies are either unproven or expensive. They all have significant externalities. Do they work? Are they affordable? Do they provide a permanent fix for the problem? Do they simply grandfather waste and storage issues onto future generations? We risk making an expensive bet today on technology that might well be the electric typewriter, fax machine or videocassette of the future.

• It will be an expensive assumption that the oil/price link will continue simply because of history. Shale gas changes history.

• Should future hopes ignore currently available and cheaper options that, while they do not offer permanent solutions, will deliver partial solutions in much shorter time frames? Delaying partial de-carbonization also makes the cumulative impact of carbon more problematic still in 2050.

• Environmental challenges should not be confused with obstacles. We think that the natural gas industry can meet the environmental challenges introduced by shale gas. It has considerable incentive to do so.

• Community engagement will be key, as it is in any business. Fears have to be allayed for as large a part of the populace as possible, but community engagement means starting at the top and influencing government policy at the highest levels.

• Shale is a lot bigger than a narrow energy issue, it is a macro economic issue with significant government revenue and job creation potential.

• Gas is now a global market. Local issues in the UK or any other market are mostly irrelevant or short lived structural matters that cannot distract from the overall influence of global drivers.

• In the longer term, the influence of world markets may even fade as both natural gas and renewable energy become localised.

• The new method of natural gas extraction, can, with sufficient oversight, be replicated globally. 

• In a global market, it is of declining relevance where natural gas comes from.

• A new paradigm is being simultaneously created: Local energy is by definition sustainable energy.

• Diversity of supply is security of supply. A diverse supply gives no one supplier a dominant position that can be abused.

• Much initial exploration is, and has been, going on under the radar.  That shouldn’t be confused with inaction.

• Security of supply issues have evaporated in North America, and the potential exists for similar affects globally in as little as five to fifteen years.

• Today, I think we see a moderate risk of price spikes for the period 2014 onwards, but feel optimistic that even a year from now some of the issues will have been resolved positively. Absolutely no one yet knows with any certainty what will happen in 2014/2020. One thing we feel fairly sure about is that long term investment based on negative sentiment over rising power or gas prices is to be avoided. Paybacks should be calculated on a combination of rising network costs but lower commodity costs framed within a matrix of efficiently managed demand.

• The post 2020 era promises to be one of the most transformative energy events since the initial major oil discoveries in Texas and the Middle East a hundred years ago. Natural gas can provide valuable breathing space as a bridge fuel to a low/no carbon future

• I would summarise my views as we must have an energy policy based on the facts, and as Keynes noted, when the facts change, we must change our minds.

• Finally, natural gas cannot provide a perfect solution. But we cannot currently afford to make the perfect solution of no carbon at all the enemy of the good solution of secure, significant ,affordable and scalable carbon reductions through increased use of natural gas.

January 2011