UK Shale Gas Or Not, UK Gas Prices Will Come Down

  • Date: 26/11/12
  • Nick Grealy, No Hot Air

A key rationale for the UK government energy strategy is gas prices will be expensive.This from the BBC’s Roger Harrabin:

Prices won’t be certain either. There’s a popular notion that gas will be a cheap source of power. The truth is, it’s impossible to predict whether volatile gas prices in the 2020s will be cheap or expensive.

Nevertheless we can see from mulitple other sources that the UK government is making a dangerous bet that they will increase. A root cause is the outdated notion that a shale boom will have no discernible impact outside North America due to a combination of apart from bad geology, environmental opposition in “crowded” Europe and the fundamental continuation of the oil gas link which will lead to increasing gas prices. On oil, one has to consider surging US oil production is going to have a moderating effect on oil prices.Oil is far more likely to fall than rise for structural reasons as not only US, but also Chinese, Australian, Canadian, Argentinian and Russian shale oil hits markets as Iraqi oil production also surges post 2015. We’re not running out of either gas or oil anytime soon. But to go back to the link, two recent stories show that the oil/gas link is simply falling to pieces. First from Europe, where until now, Statoil has provided a lot of oil linked gas to Europe based on long term contracts, but new contracts are linked to spot markets:

The gas is priced at competitive terms related to German and NW European hubs. The gas will be delivered through existing pipeline infrastructure from the Norwegian Continental Shelf, with the bulk of the deliveries going to Germany

Meanwhile the Gas Exporting Countries Forum is meeting in Equatorial Guinea, and given the host’s predilection towards shooting people, are trying to pretend that nothing has changed:

While some members have asserted at past meetings that the price of their commodity should be at parity with oil, they disagree on how that can be achieved. Qatar’s Emir Hamad Bin Khalifa Al Thani said at a summit last year that the group shouldn’t try to limit output while Iran’s Oil Minister Rostam Qasemi called for the group to develop a “market management plan.” Qasemi canceled his attendance at the Malabo meeting, state-run news agency Mehr said yesterday.

“We still consider this oil indexation the fundamental basis for our policy, as well as long-term contracts,” Bokhanovsky said after the meeting. “We consider this linkage could represent some kind of guarantee for the sustainability of the world economy.

The world economy? Or their portion of it? An example of how important the subject is to UK Gas prices is a comment:

“Oil-indexation is facing some challenging times,” Thierry Bros, an analyst at Societe Generale SA in Paris, said in a Nov. 12 e-mail. “Nobody in Europe or in Asia wants to sign such a contract any longer. So GECF members, like all other gas sellers, will have to adapt.”

Thierry is giving testimony on gas prices to the UK Energy and Climate Change Committee thisTuesday.The overwhelming view from the written evidence is a breakdown of the gas oil link is in the cards and the only disagreement is on the time frame. Notably even DECC is covering bases:

Lower gas prices would reduce the overall costs of our energy supplies. They would necessitate higher incentive payments to make nuclear and renewable generation and renewable heat competitive, but reduce the incentives needed for gas CCS. Low gas prices would also encourage switching from coal.

The UK Government, and from them groups like the CBI and Instiute of Mechanical Engineers, needs the kind of reality check on global gas prices that the majority of witnesses will provide. I say majority, because who knows what Paul Stephens of Chatham House will tell them, but I think that they were desperately seeking some balance and to find at least one nay sayer. Considering that Stephens hadn’t submitted any written evidence, this can be the only explanation for his presence Tuesday. Stephens isn’t exactly an anti (more like a pro nuclear), and it’s hard to figure out what his angle will be this time around, but in the past he’s been a supporter of the view, discredited by reality, that shale gas  is some sort of mirage. Some big mirage as the next example shows. The other rationale for the continuation of the oil link is how the world’s largest LNG consumer will either stick to, or get stuck on, long term contracts linked to oil. Further proof the theory is past it’s sell by date comes from the Japanese government itself:

Congress could still block efforts to expand exports of America’s newly abundant supplies of natural gas, but there’s no question where Japan stands on the prospect of ships carrying liquefied natural gas from the U.S. arriving at its shores.

“From all the aspects, U.S. LNG is a very, very shining treasure … for us,” said Hirohide Hirai, director of policy evaluation and public relations at Japan’s Ministry of Economy, Trade and Industry.

Hirai, former director of the petroleum and natural-gas division at the ministry, told National Journal this week that he is confident the United States will take advantage of the increased trade opportunity by allowing LNG exports to Japan.

Hirai said that his conversations with U.S. officials, energy lobbyists, and consultants about the growing natural-gas market in Japan have left him confident that LNG exports will get a “green signal” from the U.S.

“There should be some noises, of course,” Hirai said, but he added that when he spoke to Energy Department officials about gas exports, “they didn’t say no.”

It’s interesting how oil/gas link defenders say one rationale for it continuing is the US won’t allow exports. I’ve been pointing out the potential of US gas exports for years, and let me assure you, they’re coming. As Hirai San notes, there will be noises, but the overwhelming volumes of US shale gas production make exports inevitable. Preventing US gas exports would be no different than telling US farmers they can’t sell wheat in international markets because it would increase costs to US consumers. Short of a famine, that won’t happen and it won’t happen now

As I pointed out a few weeks back, not only would Europe see lower prices for LNG thanks to lower Asian LNG prices, but US LNG exports are just as equally aimed at the UK as exports on the North Eastern coast become as likely as those from the Gulf of Mexico.

We’re now promised that the Gas Strategy will be pubished on the same day as the Autumn Statement, no news to me, but one can’t depend on UK government policy running to plan. Could this be  chance for the Chancellor to pull at least something cheerful out of the hat on a day where otherwise it would be gloom as usual?  We should hopefully, allegedly, also learn then, or sooner, about a go-ahead for Cuadriilla to resume fracking and an independent geological assessment of the resources of the Bowland Shale.

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