Bishop Hill A very slow motion car crash
Nov 23, 2013 Climate: Parliament Energy: grid 
Last week Dieter Helm gave evidence to the House of Lords Economic Affairs Committee as part of their inquiry into shale gas. This was powerful stuff from a very clear-thinking witness and some of his comments were devastating. Here are his thoughts on the impact of US shale on European coal prices:
The immediate price impact [of US shale] to drive down the price of coal in Europe. The coal burn has expanded very substantially in Europe, and since the coal burn has gone up a lot in Britain and the coal price has gone down, you might have expected that electricity prices would be falling in the UK rather than going up.
On the effect of government policies on energy intensive industry:
It is not so much that energy-intensive companies in Europe are leaving Europe; it is just that no investment is being made in energy-intensive activities across the whole of Europe.
On the potential for a worldwide shale gas revoluion
...it is a complete illusion to think that in the medium term [shale gas] is a US phenomenon.
On the government betting the house on rising gas prices
I personally have no particular reason for believing that the gas price is going to go up in the medium term. There are quite good reasons for thinking that it is going to go down. It is abundant in supply, and I think one should be very sceptical about this Government and the last Government embarking on policies that require them to assume that the oil and gas prices are going to go up and then pursuing those policies and not being willing to contemplate the consequence of that not being the case.
And his overall assessment?
...we have a major energy crisis to get through between now and [2018]...[in] the [Energy] Bill at the moment [it] is almost as if the underlying fundamentals of what is happening in our energy market are happening on another planet...It is a very, very slow-motion car crash.
And if he were Secretary of State what would he do about it?
I would probably emigrate as quickly as possible;
Reader Comments (171)
Euan, I really like the cut of your jib in your last post. I think we need nukes like white on rice. And your observation about jobs per unit of energy is actually brilliant: If we could get a *lot* of energy with only one or two jobs, the energy would be so cheap we could do some really cool stuff that is only pipe dream now. Have you ever read Vernor Vinge, by the way?
Euan, Nukes are great, but they have a particular function in the grid, and excel at baseload provision. We need other (reliable) sources too such as gas and coal to provide flexibility. I reckon around 30GW of nuke would be about right, against the 7-9GW we currently use.
One of the main reasons we need the gas is for domestic heating. There seems a desire in DECC to move everybody to electricity for domestic heating, but in doing that with 'renewables' heavy they're going to near triple the price of electricity and God help anyone who's already struggling to pay their gas heating bills this winter. Gas is currently one third the price of electricity per kWh even with relatively high recent prices. Can you imagine telling people that they're going to be changed over to electricity at 6 times the price or more?
Re: Nov 25, 2013 at 9:31 PM | euanmearns
"I am a pretty raw capitalist. But i recognise that a lot of the energy infrastructure that sustains us was built by The State. And for good reason. The investment required is so large that companies will not take risks when policies may change every 4 years."
Spot on Euan. We're currently in the grip of Crony Capitalism and being driven by politicians with policies defnitely not in the best interests of the UK but rather those of the UN. What company is going to risk investment in a market dominated by government policy which can change at a whim and is susceptible to the loudest lobbyist as long as it backs those policies being pursued.
The solution, small government which will reduce the power of the lobbyists and true Free Market Capitalism. Something our politicians are fighting tooth and nail against - trying to fund their respective parties through diktat rather than popular support!!
Hi CL, it's late and I've had a few. The 2050 calculator in itself points to central control. But it is useful to see how the impact of different decisions we make may have upon our future. My current pathway is the cheapest compared to those that DECC compare with. Its based on nuclear + a lot of storage, that I envisage along the Great Glen.
I'll look at your pathway afterwards - interested to see how they compare without one influencing the other. And the UK is not going to run out of gas, simply run short of gas that sends prices up.
Stephen Rasey
You see one of my enduring doubts about UK shale gas. In the US the locals benefit directly from shale gas. Private ownership of the mineral rights encourages them to develop shale gas extraction on their land.
In the UK the locals get the downside of shale gas without the benefit.
rhoda, michael hart
You do seem to have trouble understanding my position.
I have no fundamental objection to shale gas, here or in the US. If shale gas harvesting goes ahead in the UK under a reasonable regulatory system I would be happy, if for no other reason that it would decrease gross CO2 emissions by displacing coal. It has certainly brought down US emissions.
What I object to is the widely held delusions on BH that UK shale gas extraction would be cheap, easy and pollution free.
None of these three is likely to be the case.
Euan,
It doesn't matter how many times you repeat information from a blogger if it isn't true.
In the USA, in 2012 and 2013, unconventional multi-stage frac wells drilled in factory mode, are running between $8-$10 million per well. They can deliver between 0.2 to 2.5 million bbls of oil or 4 to 10 BCF/well. Do the math! The most pessimistic results (min reserves / max cost) is $50/bbl oil or $2.5/MCF gas, marginal, but profitable. On a mean estimate it is closer to $15/bbl or $1.5/MCF (for this exercise, 1 MCF is about 1 million BTU).a
Range Resources (Marcellus, and other plays) showed their completion statistics:
Year - # of completions.
2010 - 744
2011 - 1274
2012 - 1834
2013 - 1421 Completed stages YTD as of mid august.
This profile is not of an industry losing money with every well.
Stephen,
The source someone helpfully posted the other day is this one:
http://breakingenergy.com/2013/08/06/how-much-does-a-shale-gas-well-cost-it-depends/
The Baker Institute at Rice University carries weight - I've not yet checked the original report. The sources I rely on include 2 CEOs of oil cos who are actually drilling this stuff. And reports like this one from the WSJ - which is no rag (but it is a year old - prices have gone up since):
"We are all losing our shirts today." Mr. Tillerson said in a talk before the Council on Foreign Relations in New York. "We're making no money. It's all in the red."
http://online.wsj.com/news/articles/SB10001424052702303561504577492501026260464
Well costs are also coming down - I imagine in part because drilling activity is tailing off in USA. I don't have time to do your math but accept you are acting in good faith - so how do different sources reach such radically different conclusions about the cost of shale gas? From your post I'm guessing you are looking at net cost - i.e. cost of well compared to volume of gas and oil produced. Have you included lease costs (i.e. what has to be paid to the land owner), financial costs (i.e. interest - all this is running on debt) and tax?
I've been told that the viability of shale is quite heavily geared to interest rates. Lots of folks here seem to think that it is rich folk's savings that pay for all this - I don't know for sure but I'd guess its over 95% debt that finances shale drilling - leaving the energy system joined at the waist to the finance system - energy not money runs industrial society and the two must converge one day.
The disparity in views on the financial cost of shale of shale is dwarfed by the range of views on energy cost, i.e. the energy return on energy invested, where I have been given numbers that range from 1.5 to 85. Neither of these extremes are likely to be correct.
Much of this discussion is moot regarding the UK since I believe most are agreed that the cost of shale gas in the UK (if we ever drill and find any) will be way lower than current and future retail gas prices.
Entropic Man,
Burning gas instead of coal reduces the rate of CO2 emissions in the short term. Can you explain how burning over 6000 tcf of shale gas will reduce CO2 emissions in the long term?
Baker Institute, founded by the very conservative and pro-energy James A Baker, former high level Regan and Bush Admin Secretary of nearly everything, has succumbed to the hijacking that seems to take over any NGO: it ends up being a lefty forum. Living close to the Institute, I stay on their mailing list but have pretty much stopped going.
Even Houston is being infested by the NGO lefty parasites.
Euan Mearns
Given the short-termism on display in Poland and Westminster, I am happy to accept short term CO2 savings in the short term.
Euan
For a quick primer on balance of trade/balance of payments issues, I refer you to a speech made by Enoch Powell in 1987:
http://groups.yahoo.com/neo/groups/gang8/conversations/topics/7617
The ideas are thrashed about on Wikipedia but they are spread over several separate articles on the balance of trade, the balance of payments, mercantilism, current account etc
You should also bear in mind that the USA have been running huge current account deficits - because China and the rest of the world are prepared to finance them - and also that Australia has been running current account deficits for 20 or so years while achieving high growth.
It is, in part a con trick. Can China pull the plug on the US? The UK might be in a weaker position.
http://en.wikipedia.org/wiki/File:Cumulative_Current_Account_Balance.png
@Euan 9:41 am
</>From your post I'm guessing you are looking at net cost - i.e. cost of well compared to volume of gas and oil produced.
No, it is gross completed cost of the well.
What I quoted was from the URTeC 2013 (Unconventional Resources Technology Conference). Engineers and geologists talking to 4000 other engineers and geologists. And in particular, most of the numbers came from a panel discussion called "Making it Work"
As for your comment, "I don't know for sure but I'd guess its over 95% debt that finances shale drilling "
Come on.... use some reality checking. Unconventional well have a steep hyperbolic decline curve. As a result, they have to payout in the first six month or it is time to go find a more profitable play. So it is free cash flow that pays for the drilling and facilities.
The pace of activity is head-spinning. An oil company division can make and plan for 1 to 4 deep water wells per year. An onshore unconventional company division can spud 1 to 4 wells per DAY. The Range Resources drilling manager said one of their KPI's is oriented around, "How do we know we had a good DAY?" Not a good month, not a quarter. How good were the last 24 hours, and what is the trend over the past week?
"Groundhog Day. Everyday we do the same thing but get better at it." - Range Resources Mgr.
Companies are making decisions based upon 3-month cumulative production maps.
Drilling Costs are $146/ft, down from $216/ft in 2012Q1
A 27,000 ft (3 mile lateral) drilled in 28.8 days.
One thing to keep in mind about the unconventional plays. They are 3D. Companies will concentrate on the richest interval, but ususally there are several profitable intervals that will be developed in sequence. Continental Resources said that their acrage in the Bakken, they are currently, "Eating the icing from the oreo." The Middle Bakken is their current focus, but the the upper and lower Bakken are worth going after, too. Pioneer Natural Resources in the West Texas Permian basin has 13 identified profitable intervals, with the Sprayberry and Wolfcamp the current focus of interest. It might be decades before they get around to the last half of the intervals.
Debt pays for drilling rigs and lease hold. And it is certainly possible to overextend yourself in debt by overbuying the leasehold when you predict $8/MCF and have to drill it at $4/MCF. People can and do "lose their shirts" if they over spent or bought land in an uncompetitive play.
It is balderdash to maintain that no one can make money fracking gas wells at $4/MCF. Yes, they'd like their competition to quit so that they can get $6/MCF, but they can make money at $3/MCF and breakeven drilling to hold leases at $2/MCF to be developed later when they sell forward gas at higher prices. There are too many people involved with daily drilling, production, and sales reports for viability of the industry to be in question.
Stephen, first of all I want to make clear that it is not my intention to call into doubt the viability of drilling shale. Nor do I doubt that some companies are making money at $4 / MCF. What I am trying to bring clarity to is the notion that since US nat gas prices averaged $2.65 in 2012 (BP) that shale gas is "cheap". There is an intruiging story here. US rigs drilling gas peaked at 1606, August 2008. Then came the crash but in the crash recovery everyone switched from drilling tight gas to tight oil. Last count for November 2013 is 369 rigs drilling gas in USA - down from 1606 (all stats from Baker Hughes). Now we know tight gas wells have high decline rates and yet with gas drilling in free fall production has continued to rise = huge back log of wells drilled being hooked up. If you were able to cast any light on this I'd be intrigued to know about it.
I appreciate and realise that drilling costs are coming down, and that in recent past at least better "shale" has been drilled and that completions are improving. But this will reverse at some point when the resource has been high graded.
I'm also just trying to bring a sense of scale and reality to the European / UK shale debate / anticipation. We have 2 land rigs drilling in the UK. Not 2000.
At some point the backlog of drilled wells will be on and at that point I'd expect a spike in nat gas prices in USA. I spent most of today looking for "reliable" data on actual development costs of shale in USA. Not found anything yet that would persuade me to change my mind - but one thing is clear, there is a vast range in break even prices, from $2 to $9.
@ diogenes, thanks for the explanation which I partially understand. I am a geologist, not a macro-economist. So Japan had a trade surplus with the UK and built car and microelectronic factories in the UK - great! The deficits we have now are with Norway, Russia and Qatar on energy (again from memory, I don't have time to double check everything I write here) and China and probably S Korea on manufactured goods. How are these trade imbalances being balanced on the capital account?
Euan...if we are running an overall trade deficit, thaqt means that those stupid foreigners are buying up UK government debt...ie financing our schools, hospitals,windmills...duck farms, etc.
Euan,
try this for a useful page on rig counts and graphs.
http://www.wtrg.com/rotaryrigs.html
Note how rig counts are affected by oil prices. These charts do not show gas prices.
It is true, there are more rigs drilling for oil than gas. What would you expect? Oil is at $80/bbl in the mid-continent and gas is at $4/Mcf or $24/bbl equivalent energy.
But this is a chart of gas prices in US, Europe and Japan.
US has fracking, Japan has Fukashima.
http://gailtheactuary.files.wordpress.com/2012/03/natural-gas-prices-in-us-europe-japan.png
From the Motley Fool, Nov. 26, 2013
"Why you don't need to sweat the rig count"
http://www.fool.com/investing/general/2013/11/26/why-you-dont-need-to-sweat-rig-count.aspx
Summary: companies are getting more resources with fewer rigs.
I'm also just trying to bring a sense of scale and reality to the European / UK shale debate / anticipation. We have 2 land rigs drilling in the UK. Not 2000.
Is there some natural law that prevents UK companies for building or importing rigs?
No one says the UK needs 2000 rigs. All of the UK is smaller than Colorado.
And Colorado has about 50 rigs going.
http://newsroom.coga.org/pr/coga/document/February_2013_rig_count.pdf
Just as all of the UK is not prospective, less than 1/4 of Colorado is prospective.
Hi Stephen, thanks for the links. Here's my chart of global gas prices - its awesome! I've added the costs from the Baker Institute report which shows clearly how $4.85 would be cheap for the UK (though our costs and taxes are likely to be substantially higher) but expensive for USA compared with 2012 average prices.
http://www.euanmearns.com/wp-content/uploads/2013/11/nat_gas_price.png
I've spent a long time looking for data on production costs and can't find anything concrete to refute what's in the Baker report. This from a publication by Weijermars et al.
http://www.euanmearns.com/wp-content/uploads/2013/11/break_even_prices.png
Also looking at Chesapeake's latest accounts they have realised prices of $4.78 and $4.96 for the last 6 months due to hedging. And the futures strip is in contango (I think) - US nat gas prices will be heading higher.
I don't think I agree with the Motley Fool article. Reduced costs are only part of the story. I suspect the main part of the story is a backlog of wells awaiting pipelines and hook up. I'm away to find and plot the gas production data, but just look at the decline in gas drilling since 2008 and in this time production has gone through the roof, despite first year declines of 40%. I suspect that drilling wells and NOT getting immediate cash flow is one reason some companies got themselves into trouble.
http://www.euanmearns.com/wp-content/uploads/2013/11/USA_rig_count_nov_13.png
Here's an Oil Drum post I wrote about a year ago called Drill Baby Drill. The awesome thing for me is how the US dwarfs the rest of the world when it comes to drilling. I agree that about 50 rigs should do the job in the UK - who builds them?
http://www.theoildrum.com/node/9795
@ diogenes - thanks, that's what I thought the answer was and explains how running trade deficit enables government borrowing to expand. Here's what energy imports are doing to UK trade balance, the chart provided by DECC
http://www.euanmearns.com/wp-content/uploads/2013/10/DECC_value_cost_FF.png
In essence we are getting all this coal, oil and gas and not paying for it - we are running up gigantic debt. In my book this is not good since, absent strong economic growth, we begin to struggle to service that debt. About 1/3 of current account deficit is now due to energy imports and that is simply getting worse year on year. This is one of the strongest arguments for the government to gets its finger out of its a*e and to do something about it - IMO.
agreed Euan...this is changing the structure of the balance of trade in a way that is hard to fix. If you are the US, you can get away with huge trade deficits....well they have so far....but it is a ponzi scheme. The UK can do things to address this imbalance...but it tends to mean abandoning windpoweras well as converting DRAX to run off imported wood. I wonder what Enoch would have to say.
prosalm e3d3fd1842 https://soc.cungcap.net/erimadme