Energy and Climate Change CommitteeWritten evidence submitted by Nick Grealy, Publisher, No Hot Air (ISG 16)
I would like to discuss the impact of shale gas on global natural gas and LNG prices and the potential for a single global gas market.
What are the estimates for the amount of shale gas in place in the UK, Europe, and the rest of the world, and what proportion is recoverable?
No one can furnish entirely reliable estimates of how much of UK shale gas is recoverable ahead of further exploration but I make these general comments:
There is no secret sauce recipe for shale extraction that can be used in every shale field—or even within one.
Although there are obvious similarities between shales, they are as heterogenous geologically as any of the countries and cultures they lie beneath.
Equally, to extrapolate potential failure for UK, European, Chinese etc, shales based on not being entirely analogous to North American shales is misleading
Given that natural gas today is the result of plant and marine fossil decomposition circa 450 million years ago when the earth was one super-continent, it is not unreasonable to assume that shale gas is widely distributed worldwide
As North America is one continent out of six, there is potential for far greater shale gas and oil resources awaiting discovery globally.
We cannot put the production cart before the exploration horse. The concept of exploration rests on revealing the unknown. Only then can we have a realistic discussion of gas resources and their overall impact.
What have been the effects of shale gas on the LNG industry?
1. UK Energy Policy has rested on what has become an outdated and inaccurate view of global natural gas prices becoming and remaining both volatile and increasingly high .These conclusions in turn are often used to provide price rationales for investments in among other sectors: Renewables, New Nuclear, Carbon Capture and Storage, Gas storage, Severn Barrage and energy efficiency measures for example
2. I underline here my personal belief that the science behind both climate change and safe shale gas development are equally valid and compelling.
3. The key National Grid and Ofgem conclusions in the above report are that a link between oil prices and natural gas will remain in all scenarios.
4. Barclays and Cambridge Econometrics in the same report come to the opposite conclusion. Unfortunately recent statements from the Secretary of State for Energy and Climate Change and the Director General of the CBI, continue to reflect a view that underlying gas prices will be permanently volatile.
5. Gas pricing is fundamentally complex with multiple variables. As such it does not give itself to simplistic narratives.
6. Consumers are smarter than media or politicians give them credit for. Media and politicians are so pressed for time that they often rely upon cheat sheets or commercial briefings of complex subjects. Consumers (voters), also have busy lives surrounding the economy, their communities and families. In my experience, they still have the time, and intelligence, to understand that most subjects are complex and that the easiest explanation can most often be the most inaccurate.
7. I would point to the University of Nottingham/YouGov poll of 2012. http://www.nottingham.ac.uk/news/pressreleases/2012/july/fracking.aspx to provide a more accurate background of actual voter awareness of shale gas in a UK context for example.
8. Shale gas has been almost invariably described in UK media reports as “controversial” when described at all in a mediaverse that concentrates on competing technologies. That makes it unsurprising that by April 2012 only 45% identified shale correctly and over 70% of those who had heard of shale identified it with earthquakes
9. Significantly, the poll still showed a 53/27% majority in favour of shale extraction with 20% don’t know.
10. Modern marketing and polling techniques show that a more measured, if more time consuming, discussion of complex subjects often leads many consumer/voters to change initial opinions.
11. Recent events in September 2012 provide compelling evidence that the oil gas link may suddenly collapse sooner than many predictions dating even from earlier in 2012.
12. The displacement of LNG production earmarked to the United States to other markets is well known.
13. The LNG market in the short term has been marked by reactions to the closure of Japanese nuclear plants post Fukushima
14. If the Fukushima events had not occurred we would have already seen a collapse in world gas prices based on the subtraction of North American imports from the LNG equation. The closure of Japanese nuclear may not be as permanent as once feared. A knock on anti-nuclear effect in Germany, France, Switzerland and other markets also provides a bullish signal to markets.
15. Short term shortages of tanker capacity currently provide a driver outside of any dearth of gas resources themselves.
16. The potential of LNG exports from the USA is growing beyond the initial Gulf Coast projects that earmark production to Asian, European and South American markets.
17. Projects on the eastern seaboard include regulatory requests for LNG exports from Cove Point Maryland and Elba Island Georgia. Eastern Seaboard LNG exports would naturally be closer to Milford Haven than Qatari LNG imports by up to a week.
18. The Philadelphia Energy Solutions project has also posited a potential LNG export plant aimed squarely at North West Europe.
19. Surging production from the Marcellus Shale would provide significant feedstock to Cove Point and Philadelphia.
20. Production from the Haynesville and Fayetteville Shales could be transported overland to Elba Island, which would in turn have several days advantage to NW Europe over Sabine Pass or other Gulf of Mexico cargoes.
21. If New Brunswick shale gas reserves were proved commercially and politically acceptable, the Canaport facility in New Brunswick would enable LNG cargoes to reach Milford Haven as little as 36 hours later than Algerian LNG cargoes to the Isle of Grain.
22. In many areas of South Texas, natural gas is locally valueless. This has led to substantial flaring of natural gas associated with oil production. That supplies an economic incentive to transport natural gas out of the area at prices substantially below Henry Hub prices. In this scenario, LNG export plants would have low to zero, or even negative feedstock costs, but could remain profitable from the margin on liquefaction.
23. The US has such a surfeit of natural gas that the prime driver is now creating demand through generation, natural gas vehicles and supplying chemical sector demand. However, long term predictions are that production will be so great that a large-scale export program will also be needed.
24. Previous energy security objections based on potential rises in US gas exports are receding in the face of actual production.
25. A US Energy Information Administration report http://www.eia.gov/analysis/requests/fe/pdf/fe_lng.pdf predicted relatively low impact from exports on Henry Hub prices of less than seven percent.
26. The US chemical sector is becoming less concerned over any potential for price rises due to exports.
27. US gas prices are essentially too low for many producers and a slight increase in prices would be a desirable outcome.
28. One can expect that whatever the outcome of the November Presidential election, approvals for exports will not be subject to any further delay.
29. To put the US in perspective, there are plans for over 100 mtpa of exports from both coasts, greater than that of Qatar. It is unlikely all the projects will come to fruition, but even a 40% rate would enable the complete replacement of all present Qatari LNG into Europe by US Atlantic Coast exports.
30. Qatari LNG has two great insecurities. The closing of the Straits of Hormuz would mostly be a severe, but short term driver. Far more serious would be any attack by Iran on Qatari fields and/or liquefaction trains.
31. US exports would be essentially risk free, have shorter and thus cheaper transportation costs and could provide gas as cheap as Qatar in every scenario down to “free” gas.
32. US exports based on shale production and shorter transportation would likely have a lower CO2 footprint over Qatari supply.
Whatever the impact of United States policy on exports, it is clear that no such constraints apply in the potential for Canadian LNG exports. Despite the note above about New Brunswick, this section depends entirely on British Columbia potential.
1. Canada had net gas exports to the US of 62.6 BCM in 2012, a value of roughly C$6.5 billion.
2. Albertan gas into the upper Mid-west and North East/New England markets is being displaced by Texas shale gas and Marcellus shale gas. Marcellus gas also has a substantial transportation cost advantage into the largest North American market
3. The Marcellus impact is aggravated in that gas from Pennsylvania, even at this early stage, is displacing Albertan gas into Ontario and Quebec, the largest Canadian gas market.
4. Thus, Canada has a strategic imperative to find new markets
5. This is happening as Canadian shale gas discoveries in British Columbia’s Montney and Horn River Basins’ join with shale production from Alberta and Saskatchewan emerging shales to replace declines in conventional Alberta production
6. In 2012, Apache Resources described the Liard Shale in northern British Columbia as “the best and highest producing shale in North America” Other companies such as Nexen and Encana note the basin extends even further north into the Yukon and Northwest Territories.
7. Significant Japanese, Korean, Chinese and Indian investments are being made in the area and BG Group is planning a 40BCM plus pipeline into the British Columbia coast to export shale as LNG to the key markets of Japan and Korea. That gas will have a transport advantage of at least a week compared to Australian, Qatari and US Gulf Coast LNG. Total planned export capacity from Canada is currently 60 MTPA.
8. Energy security is therefore not a consideration in the Canadian context.
9. Export terminals in Alaska, Oregon, Washington and Pacific Coast of Mexico have also been proposed.
Along with the above shale gas, there have been significant discoveries of conventional off shore natural gas in Mozambique and Tanzania, which would naturally displace Qatari gas in Indian markets.
Further significant discoveries have been made in Israeli offshore gas fields.
In addition, there appear to be significant shale resources present in Argentina, Australia, South Africa, Algeria and India.
The emergence of a new paradigm of natural gas abundance makes any UK concerns over security of supply and cost appear unfounded and anachronistic.
There are many important rationales for investment in UK renewables and nuclear generation, but there can be no doubt whatsoever that any prospect of expensive gas prices should no longer be one of them.
1. The wall of natural gas coming onto world markets in the short, medium and long term range changes the whole conversation from concerns over supply to a question of creating demand.
2. There are still those, in the UK renewable and nuclear industries, Gazprom and among Qatari and Australian LNG exporters, clinging to a belief that Chinese gas demand will be so tremendous that it will counter the shale gas abundance trends.
3. In the UK especially, the conventional wisdom continues to be one of surging Chinese demand for LNG making UK gas hostage to Chinese buyers. This is a hopelessly outdated idea which should be discarded entirely. Replacement of a 21st century Red Scare of Gazprom with a methane Yellow Peril saga has no place in UK energy, foreign or defence policy.
4. Space forbids a full discussion of Chinese natural gas market drivers, but LNG imports will play a declining role in China for a variety of reasons.
5. The most important of those, and even more important than any of the above long term, is the looming importance of Chinese shale gas production. China anticipates production of 100 BCM of shale by 2020 and some observers have a predicted an ultimate Chinese capacity for shale gas production alone of 500 BCM by the 2030’s—enough to provide surplus sufficient for China to make pipeline exports of shale gas to Korea.
6. Sources: http://www.bakerinstitute.org/publications/EF-pub-RiseOfChinaMedlockHartley-120211-WEB.pdf Research report: Shale gas could mark new chapter in China, Bank of America/Merrill Lynch August 20, 2012
7. Ever since the Netherlands introduced the concept of oil linked gas pricing in 1962, various actors have predicted both its imminent demise or eternal continuation.
8. I would suggest that the rapid and sudden fall of Communism within our lifetimes provides a template for how quickly what once seemed eternal truths can change.
9. Some say that the oil gas link will still take years, if ever, to unravel. However here are three trends in September 2012 alone that appear that the end of the oil gas link is far closer than some think—or hope.
10. Chief among those trends has been the September 4 2012 Anti Trust probe of Gazprom by the European Commission, which among several complaints specifically mentioned unfairly linking oil and gas prices.
11. Already this year we have seen adjustments to European gas contracts on take or pay and price discounts being offered by Gazprom to German generators. In addition the Russian gas export monopoly is fraying with contracts from Novatek to EnBW for supply at what we assume are either hub links or substantial discounts to oil linked prices.
12. This was followed in September by an International Arbitration Court decision in favour of Italian LNG importer Edison’s complaint against Qatar on a multi-year oil linked supply contract. It is hard to imagine that once the precedent has been set that other contracts would not also be re-negotiated downwards.
13. A few days later Centrica and Gazprom signed a deal for NBP priced imports directly into the UK via the Interconnector.
14. We appear to be a curious point: The Secretary of State for Energy and Climate Change, the Chairman of the Confederation of British Industry, the Chief Executive of the Office of Gas and Electricity Markets and the President of the Russian Federation are united in a belief in an eternal continuation of the oil and gas link as the European Commission fights against it.
15. Recent developments at an LNG Producer and Consumer conference http://www.yomiuri.co.jp/dy/editorial/T120925002392.htm in Tokyo showed that even Asian LNG customers are now giving significant pushback on the idea of oil linked prices.
16. The idea of Japan as oil linked price taker instead of informed consumer seemed to take producers unaware. The dreams of huge LNG exports based on shales in both the US and Canada aiming at high priced Asian markets, collided with consumers replacing shortage with choice—multiple choices.
17. The reality comes back to shale and at that same conference we heard a quote amazing from anyone but all the more so for its source:
“We are prepared to adjust to revolutionary thoughts. I do think we are hearing this message,” Thomas R. Walters, vice-president of Exxon Mobil Corp and head of its gas and power marketing arm, told a conference of LNG producers and consumers this week in Tokyo.
18. Energy actors in the UK need to also adjust to revolutionary thoughts. Shale gas is not a silver bullet, but a Black Swan:a high impact/low likelihood event.
19. UK Energy policy in the post Kyoto andStern Review era was never wrong. It was perfectly logical and defensible, at that time. The policy makers of the time were neither wrong or incompetent or open to criticism in any way.
20. But any energy policy must be based on the facts present today and that is what appears to be the problem in the UK in these days.
21. Professor Dieter Helm notes in his book “The Carbon Crunch” (Yale University Press October 2012) “It is just wishful thinking that we well be forced to decarbonize because we run out of fossil fuels, and more immediately, somewhat irresponsible to assume that oil and gas prices will go ever upwards”
Could shale gas lead to the emergence of a single, global gas market?
1. I believe that a global gas market will look similar to the oil market. North America is essentially an energy island in natural gas, but so it is in oil as well. The lack of a physical connectivity should not be an issue and the floating pipeline concept of LNG has connected Japanese buyers to markets for many years.
2. The oil market is far more liquid, but shale gas outside of North America will ultimately provide the gas volumes needed to create markets with churn levels needed for true price discovery.
3. The oil market today has multiple pricing points which generally operate at stable references to either the WTI for North America or the BFOE Brent Index in Europe.
4. This provides a template for the emergence of at dual hubs at the Henry Hub and a European Hub based possibly an aggregate of the minor European Hubs of today with the UK NBP.
5. As liquidity increases, the development of an Asian Hub is inevitable, and if Europe does not embrace shale gas in any great quantities, the Asian Hub would supplant the NBP. The Asian Hub could be a virtual LNG pricing point based on North East Asian or Singapore location or physically based on a China National Balancing Point or Shanghai Hub. Nevertheless, the development of an Asian Hub, while to my mind inevitable, is still some time off.
What are the effects on investment in lower-carbon energy technologies?
1. The emergence of shale gas will obviously have significant affect on present technology. UK energy policy especially is going through a cycle of ignorance, denial and anger directed towards natural gas from many competing technologies, that needs to be translated into an acceptance of the new facts on, or more specifically, under, the ground.
2. Until that acceptance emerges we are still stuck in the past. Shale gas provides the only feasible way of cutting carbon quickly and cheaply. Shale gas need not be permanent. Shale gas shows the disruptive potential of new technology, but new technologies can disrupt shale in turn.
3. Gas is an important part of the progression towards a de-carbonised economy, but advances in fields such as enhanced solar, carbon capture, small scale nuclear, hydrogen and energy storage could equally disrupt gas in the future.
4. As many of the competing technologies need massive investment, supporters of them assume gas would need similar sums to “lock in” investments, blocking take up of renewables for decades to come.
5. Natural gas generation naturally lends itself to the adaption of smaller scale distributed generation. This would make large scale generation of any fuel as appropriate as main frame computers once were, but now are not, in today’s computing infrastructure.
6. Similarly, large scale investments in grid infrastructure to move carbon free energy around nationally are increasingly questionable. We already have an under-utilised existing energy grid in the gas transportation network. Flexible local gas and electric adjustments, and investments necessary to pay for them, would cost far less than an entirely new electric grid infrastructure, while having the benefit of being less visually intrusive.
7. In these respects, fear of a lock-in to gas have been overstated by other energy actors. Investment in smaller CCGT distributed generation would be far smaller, and could be paid off in years, not decades. If, as seems inevitable, improvements in energy storage and other technology arrive on the scene, there will not be huge gas related investments blocking their path, and certainly not any publicly funded or those based on consumer subsidies.
8. What we need to understand is that the future has not yet arrived and we need to use gas in the short term (up to 2030) simply because there are no other physically feasible alternatives, at any price, available today.
9. Predictions are difficult, especially about the future as the old saying goes. But it is vital we have predictions based on today’s reality, not wishful thinking over technologies that simply don’t exist at scale presently.
10. The perfect 100% zero carbon free future should not be made the enemy of the merely good natural gas present.
Should the UK consider setting up a wealth fund with the tax revenue from shale gas?
I suggest that it may be premature to do so at this time, although the fact the question can be seriously asked is encouraging in itself.
I suggest that whatever the revenues may be, any fund should contain four key earmarks:
1. A portion of the funds be set aside to compensate local communities for disruption, similar to recent proposals to compensate areas affected by wind turbines.
2. Part of the revenues should be set aside for a national or EU program for R+D in no/low carbon alternatives
3. Investment in insulation/efficiency for the domestic heating sector
4. Possible pump-priming for the development of a vehicle fueling sector
The first two should be a long term component, and the second two would need to be for less than ten years.
What is the potential impact on climate change objectives of greater use of shale gas?
1. Evidence from North America suggests that the replacement of coal with natural gas is accelerating and likely to be permanent.
2. The development of natural gas vehicles in trucking and marine shipping can also provide a low carbon alternative where absolutely no alternatives have been considered until now. NGVs are a win for energy security, energy prices and the environment. Electrification of trucking is physically impossible. Replacement of bunker fuel with LNG powered shipping is another easy win in a sector where, short of a return to the age of sail, no alternative presently exists.
3. What needs to be studied is the possibility of replacing coal generation on a global basis and what consequences that would have on UK targets. If China and other developing economies do so through gas and not coal, then this makes the need for UK/EU targets to be adjusted accordingly.
4. In turn we may also find that use of natural gas in generation and coal provides a way of meeting short term CO2 level targets, at which point we will need to study 2050 reality from viewpoint of 2025
5. Finally, we have to realise carbon reduction is a global issue and what the UK does or not do is entirely meaningless on a global scale while potentially very damaging in economic terms on the national.
6. If the United Kingdom chooses to continue to have the ostrich approach that concentrates subsidising other generation technologies, the repercussions are made even greater from foregoing the economic benefits that shale gas can provide.
7. If the rest of the world follows the path towards “A Golden Age of Gas” as the International Energy Agency has described, then predictions from some quarters of a booming UK Green Energy economy would be entirely fantastical.
October 2012