Bishop Hill On geography
Aug 12, 2013 Energy: shale Cuadrilla commissioned Poyry to carry out an analysis on the impact of shale gas on bills. It found that European shale gas (including gas outside the UK) could moderate bills by 2-4%, compared to where they would otherwise be. As a Cuadrilla spokesperson put it, the research showed the impact of UK shale appeared ‘basically insignificant’.
From 2021, gas prices are between 2% and 4% lower if Lancashire shale gas production proceeds as projected.
From the Poyry report cited by Damian Kahya.
Perhaps I'm missing something.
Bishop Hill
Damian Kahya's post has now been updated. He has heard from Poyry and the 2-4% figure is for worldwide shale, including Lancashire, but based on the estimates of Lancashire shale as at summer 2012. I guess this means prior to the new BGS estimates of the size of the Bowland resource. I'm slightly bemused why it would be worldwide shale.
Reader Comments (47)
Would you invest in a company if it planned by its actions to reduce its saleable products price by 20%.
2-4% price reduction from one field producing 50% of the UK's requirements seems very low, maybe for that very reason.
"Pöyry used its own estimates on the costs of developing
shale, which is consistent with the recently
published estimates by the European Commission."
Translation: Don't trust anything we say.
this tries to explain http://www.carbonbrief.org/blog/2013/06/understanding-cuadrillas-shale-gas-predictions
Well I think the first few paragraphs explain what is wrong with this report.
The EU estimates of the cost of developing shale will have been duly inflated by their determination to prevent shale from happening.
The EU estimated cost of developing shale will not include tax breaks now available in the UK.
However as we all know, if (as is planned) gas is used as a back-up for renewables then gas powered plants will charge more because they can not run their plants efficiently.
It is sadly the case that shale gas in the UK can never be as cheap as it is now in the US (unless the gubment exceeds all previous levels of incompetence), US prices are indeed unsustainable in the long term but that will change soon and prices there will rise to maybe $6 - $8 per (whatever the unit is :P).
If the gubment follows the US and allows a free for all in terms of fracking then we might still get those low prices.
I don't think Cuadrilla is about to offer bargain basement prices. Why should it when the main competition, renewables, are subsidised up to the hilt? Subsidised prices (i.e. guaranteed high prices for the foreseeable future) drive up the price of the competition. That's the mistake in the government's thinking it can favour one source of energy while leaving the others unaffected. Markets don't operate that way. The price of one product always affects the prices of substitutes and one sniff of a gravy train alters the playing field altogether. This is why none of the big generators will commit to installing new gas or nuclear capacity. Lose-lose for the consumer. However, I would rather pay through the nose for gas and nuclear than for unreliable renewables any day and there is always the balance of payments benefit, the security of our own on-shore energy supply and the jobs thereby created to take into account
At this rate the pressure groups and bureaucrats will ensure the only fracking will be Caudrilla in Lancashire.
It was only in April this year that Tim Yeo was representing his committee's view in warning that shale gas might not lower prices*. At the same time a group called Carbon Connect, a steering group of industry and academic experts chaired jointly by Mr Hendry, a Conservative MP, and Baroness Worthington, Labour's Energy and Climate Change spokesperson in the House of Lords was saying the same thing. What has changed? I wonder if many of our betters had previously been making the same mistake as Greenpeace have done here.
Just think what effect on prices there will be if fracking comes to Yorkshire, Lincolnshire, Northamptonshire, Buckinghamshire the Cotswolds, Somerset, Wiltshire, Dorset, Hampshire, Sussex, Surrey, Kent. south Wales, Staffordshire and Cheshire. That could be another 30% or more off prices.
* I'm sure they'll find ways to keep household bills high. If shale turns out to be a gas bonanza taxes and duties will probably rise to compensate and the money will be thrown at windmills.
Off topic but:
http://www.dailymail.co.uk/sciencetech/article-2389991/Global-warming-Scientists-discover-heat-INSIDE-Earth-melting-areas-Arctic-ice.html
What they mean is that they (Cuadrilla) are hoping that it won't bring prices down, as they want to pocket all the money made from shale gas. However, with proper government and regulator controls in place, retail prices will drop considerably, at the cost of the Cuadrilla management's bonuses.
" Pöyry .....
We have modelled these against a future
scenario that is consistent with a generation
mix and timings that achieve compliance
with the 2020 renewables capacity target ...."
But plentiful, secure, UK-controlled, low-priced clean natural gas is the game-changer after the lack of global warming makes the CCA superfluous.
Is this not the jam some American shale gas extractors have got into, that the price has fallen so far that they are barely making money anymore? Clearly Cuadrilla don't want to become one of them. Nor does HMG have much interest in dirt cheap gas because that would reduce that potential tax-take its salivating over. Nor do all the moral high-grounders want us to have cheap gas because its bad for us (and the planet and the grandkiddies) and they know best etc etc. Nor does 'Europe' want us to have anything so vulgar as a competitive advantage. So there are quite a few with a vested interest in keeping gas prices high. Another round opens in the British fight of the last 200 years, "The people versus the vested interests". Who will win this one?
The DECC projections are notorious for assuming ever-rising gas prices to support the claims for future "savings" with renewables. The Poyry report is a few years old so (without reading it), I doubt it takes into account the potential impact of US LNG exports.
Contracts have already been signed based on the US benchmark price - "Henry Hub" - plus agreed add-ons for liquefaction, shipping and re-gassing. The HH price is currently around $4/MMBTU and the add-ons cost ranges from $3 - 6. That puts US gas into our market for $7 - 10 compared to the typical price level of $10 - 12.
Thus US export potential will tend to put a ceiling on our prices. If the landed cost is towards the low end of the range, that ceiling could be around 30% lower than current levels.
There has been much negative comment about the sustainability of US gas prices which, in my view, do not take sufficient account of the rapid advances in technology and of the shifting production balance. The technology is developing very fast, yielding savings in all cost areas. Secondly drillers are going after oil first, gas liquids second and dry gas third. So there is a lot of gas by-product which is virtually cost-free since all of the money is in the other products. That does not look likely to change anytime soon.
Therefore shale gas will probably constrain UK price rises, if not actually lowering them. Sadly it may not be our own gas unless we get a bit of "action this day".
Re: Dung
> The EU estimated cost of developing shale will not include tax breaks now available in the UK.
It isn't really tax breaks, it is a reduction in the tax penalty imposed on oil and gas extraction.
Re: Gareth,
> Tim Yeo was representing his committee's view
There is an interesting time line for Tim Yeo and one of his interests.
On the 30th May, when he was still chair of the Energy and Climate Change Select Committee, he was appointed chairman to Albion Community Power PLC which is a renewable energy company.
On the 9th of June he stepped down as chair of the committee after allegations in the Sunday Times.
Three days later he resigned from Albion which meant he was chairman for only 10 days.
Obviously, being chairman of a renewables company and being chair of the Select Committee was not a conflict of interest.
Obviously, his appointment as chairman of Albion Community Power PLC had absolutely nothing to do with any influence he had as chairman of the select committee.
Obviously, his resignation from the board of Albion Community Power PLC had nothing to do with him no longer being part of the Energy and Climate Change Select Committee.
All timings are purely coincidental.
Correction: he was chairman for 13 days.
The price of a commodity such as gas is market led.
A producer of gas is unlikely to radically under value the price at which their commodity can be sold. Accordingly, gas prices are likely to substantially fall only if there is either (i) competition in the market such as other shale gas producers each vying for the same market share and thereby each seeking to undercut the other, or (ii) there is a glut of the commodity, and the over supply has to be dumped on the market failing which it would remain unsold and hence not worth anything to the supplier.
That said, there is no reason to consider that what has happened in the US will not also happen over here, provided that there is not a monopoly situation. I would be surprised if gas prices do not fall substantially.
"We have modelled these against a future scenario that is consistent with a generation mix and timings that achieve compliance with the 2020 renewables capacity target and similar levels of deployment beyond."
What they seem to saying is that meeting the 15% renewables target by 2020 will add to costs; shale gas will reduce costs of non-renewables; the balance will be a small saving.
Poyry is a decent engineering consultancy. Their data are correct. However, the earnings from shale gas to a mixed-up Marxist EU will allow us to survive as they are ground into the dust.
Consumers want cheap reliable energy.
Cuadrilla and potential investors want to maximize profits from shale gas.
Greenpeace and governments have so far tried to prevent both.
The reports cited at the carbon brief appear to pay attention to the political realities.
Governments can be changed.
Even if true (which I doubt; why would the US experience be so different?) there's a world market for energy which the UK essentially buys and sells in; if UK shale drops world energy prices 4% that's Huge!
Or to look at it another way; if all other energy available in the UK is 20% more expensive to produce than shale gas, the gas can still easily be sold at a price 4% below the other sources. Result, a massive profit. Osborne takes a huge bite of this profit as corporation tax plus other taxes, then gets another chunk when it is paid out to investors, and uses it to cut personal taxes, helping us to pay our energy bills.
I doubt that North Sea Oil gave us substantially cheaper fuel; was it therefore not worth extracting?
2 - 4% in 2020 after doubling in energy prices between now and then could be a princely sum.
@Michael "Governments can be changed".
If they are changed to Red Ed's post Cold-War class warriors, or Clegg's idealistic loonies, do you really think that would be a change for the better?
Don, I was not offering an opinion as to which colour government I would prefer, but the matter will certainly influence my voting intentions.
ANY itinerant politician who might be passing through this blog should regard it as a shot across the metaphorical bows.
Unless there are competing shale gas producers Cuadrilla will be likely to charge prices near to the subsidised rates for wind and probably make a considerable killing. They would be foolish not to because like any enterprise they are in business to sell for the highest price the market will allow, not the lowest. The potential of shale to lower energy prices will not be realised while government uses taxpayers' money to keep ridiculously uneconomic, unreliable (and environmentally ruinous) energy producers such as wind farms in business because of fantasies about CO2 they have themselves been largely responsible for inventing. Unless politicians decide to desist from distorting markets in energy we are all on a hiding to nothing and the potential of this bonanza to turn a sick economy around will not be realised.
@Stephen_Richards yep smart thinking ..massive reserves for UK means only small change in the world market. The contradiction to that is US prices dropped so much, whilst UK ones went up.
- Predicting energy prices in 10 years time is a mugs game ..anything could happen
There are many variables on both sides including
SUPPLY SIDE could vary, how much shale other countries decide to open up, how much Russians release etc.
DEMAND SIDE depends on will state of world economy, how much of the world energy market goes to "fantasy green energy" etc.
- and how much the raving politicians let the the raving activists usurp democracy
3 words BIG GREEN HEDGE-FUND.. I left out the word mafia
I had the impression that the Bishop was pointing out that Poyry refers to "Lancashire shale gas production", whereas greenpeace claimed that "[Poyry] found that European shale gas (including gas outside the UK) could moderate bills by 2-4%".
Even if Poyry was intentionally pessimistic, the greenies massively exaggerated the pessimism, in a way not justified by the report to which they supposedly referred.
However, it will almost certainly be too late to save Lundy.
http://blogs.telegraph.co.uk/news/willheaven/100230696/how-a-gigantic-offshore-wind-farm-could-spoil-lundy-britains-most-beautiful-island/
Prices are set by the cost of marginal supplies which, in the European market, is the cost of Russian gas - unless UK output is so large as to force Russia to reduce its prices.
But either UK shale will reduce our gas prices or it will generate substantial tax revenues enabling other costs to be reduced. So we win either way.
bill on Aug 12, 2013 at 3:50 PM
"So there are quite a few with a vested interest in keeping gas prices high. ... Who will win this one?"
When supply exceeds demand, prices will drop.
To stop this, the government would have to distort the market to such an extent, as there are so many carbon based fuels available, that it will be impossible to control. They cannot run a bath, let alone understand a working market. They are all public sector 'command economy' drones.
Poyry are well known in the sectors of mainstream energy / energy-regulatory / green energy as the go-to consultancy for ... well, anything you want "proved", really. Or as Tim Probert says rather more colourfully: "Poyry are like the girl who'd show you her kickers for a bite of an apple"
@BIll,
"Is this not the jam some American shale gas extractors have got into, that the price has fallen so far that they are barely making money anymore?"
The 'jam' gas producers in the US have gotten into is 'wet gas' vs 'dry gas'. Natural gas liquids go for $10-$15/mmbtu(wet gas competes with crude oil) while 'dry' natural gas is going for about $3-$/MMBtu. (Dry gas competes with coal)
Big Money is chasing 'wet gas'...with 'dry gas' as a waste product.
"However as we all know, if (as is planned) gas is used as a back-up for renewables"
You have it backwards. The purpose of renewables is to reduce CO2 emissions. They do this by reducing the fuel burn of fossil-fuel power stations.
"They do this by reducing the fuel burn of fossil-fuel power stations."
Or, insanely, they start burning imported wood and produce 3x as much CO2.
Bruce
Not quite. Over a full 25 year cycle the CO2 released as the wood is burned is reabsorbed by the next generation of trees grown on the cleared land.
The overall CO2 release is only that used to cut, process and transport the wood.
"UK utility Centrica (CNA.L) recently bought a quarter stake in Cuadrilla Bowland shale licences."
http://uk.reuters.com/article/2013/07/05/uk-shalegas-idUKBRE9640DX20130705
Perhaps the most revealing information about Cuadrilla's strategy is that it has already sold 25% of its Bowland shale stake to Centrica and is in the market to sell off more.
This is not the behaviour of a company planning a long term production investment.
This is a gas-bubble company looking to make its money and move on before the production problems become apparant
From the beginning I've been saying that the UK shale gas development won't bring down prices. The current UK household price has a huge component on taxes and distribution costs for a start, which are fixed - the Chancellor needs the money and the distributors costs are fixed. The shale gas price can't be too much below that of the imported gas because what the market will bear, i.e. the imported gas cost, determines the price Cuadrilla will charge for its product. That is how the "market" works, and the government supports this as they get taxes on a percentage basis: the higher the cost, the more taxes it generates. The cost of shale gas, even in the States, is high, it is just masked by the LIQUIDS that wet shale gas co-produces: it is the liquids that are the profit in wet shale gas. The gas HAS to be disposed of because there is insufficient storage close by (in almost all cases). American shale gas would have to be priced at zero if need be, just to keep the liquids going. Finally, in the UK, the Bowland and other basins, the depths are less than in America, the pressure gradient is less, the basin is compressional (vs extensional in the States), the reservoir temperature is less than in America. All this means that recovery rates and volumes are less/dollar expended than in the States. American "$2/mcf" is a lie, misdirection, misinformation, fantasy.
The future may not be dark, but it is expensive.
Why such a low percentage? Because the market-rigging, market-destroying legislation (CCA, carbon floor price) forces us to pay silly money, ever-increasing subsidies for expensive , inefficient forms of electricity generation. We may have to persuade our political class that, for the first time in a century or more, they have made a mistake. Normally, they are too stupid to be wrong.
While this legal framework is in place, we can forget about 'bonanzas,' or 'tens of thousands of jobs created,' or 'the regeneration of British industry.'
It took 30 years to get the Corn Laws repealed. How long the green protection racket?
It has always been the UK experience that prices are quick to go up but rarely ever come back down. This is due to the combo of tax and cartels. Nowadays we have the green levy to pay for too. Also it would be foolhardy for cuadrilla to say that the cost of gas ois either going up or down. 2-3% is enough to placate investors and the public while counteracting the nonsense projections of DECC.
You are missing the fact that profits will rise!
> Perhaps the most revealing information about Cuadrilla's strategy is that it has already sold 25% of its Bowland shale stake to Centrica and is in the market to sell off more.
> This is not the behaviour of a company planning a long term production investment.
Cuadrilla Resource Holdings Limited was only formed in 2010 (although the group has been around since 2007) and owns the following companies:
Bowland Resources Limited
CuadrillCo Limited
Cuadrilla Balcombe Limited
Cuadrilla Bowland Limited
Cuadrilla Elswick Limited
Cuadrilla Weald Limited
Cuadrilla Well Services Limited
Elswick Energy Limited
It is a privately owned company.
In 2012 it made a loss of nearly £19m, 2011 a loss of £8m, 2010 a loss of £11m and so on. It made the losses because it isn't actually producing anything yet, it is still just exploring which costs a lot of money.
In 2012 its total assets was £74m and It has a called up share capital of £143m (up by 33% from 2011, 69% from 2010 and 122,131% from 2009).
Cuadrilla does not have the resources or infrastructure to utilise its entire Bowland Shale stake which is why it has sold some off (and will probably sell more). It would also be foolish of them to take on the entire risk themselves. The sale will enable them to grow bigger and utilise more of their license.
The shareholders in Cuadrilla obviously have confidence in the long term viability otherwise the share capital would not have increased by 122,131% over a three year period.
Poyry are described as "independent" yet they have a subsidiary called Poyry Energy Limited who describe their activities as follows:
It seems to me that nuclear, hydro and renewable are all competitors to gas,
TerryS
That is how the minor explorers work. They float a company and finance a drilling campaign. They don't have the money to develop the resource. Mostly the minors go titsup, and no-one (except the punters) cares. If the prospect comes in, they sell to a Major and the punters make a nice profit. The Major pays a margin, but undertakes no risk and no exploration costs.
2-4% reduction sounds very welcome indeed, if the no-shale alternative is another rise of, say, 30%...
"Over a full 25 year cycle the CO2 released as the wood is burned is reabsorbed by the next generation of trees grown on the cleared land."
3 times as much CO2 as coal.
The Poyry "report" is just a single scenario projection.
From the perspective of a 30+ year career in the Oil and Gas industry, latterly in strategic planning and development, anyone, or any organization, that would place any confidence in such a single scenario projection and use it to forecast future markets is a fool.
The "expert opinions" of the likes of IEA, and the many for profit "industry consultants" are just scenario projections, and frequently reflect only the current "internal memes" of the authoring organization. (In terms of the prevailing psychology think of Asch)
"An expert is someone who has worked hard to know more and more about less and less until he reaches the pinnacle of knowing absolutely everything about nothing".
If I had a pound for every "expert opinion" that I have seen fail I would be wealthy person.
"3 times as much CO2 as coal"
Bruce
Drax's own figures are 20 to 75 g CO2 per kJ generated for biomass, depending on the type and source of the material.
The Environment Agency qouotes 280g CO2 per kJ for coal power stations.
Where do you get your figure?
TerryS
You may remember similar share growth figures during the bioengineering bubble, the dotcom bubble, the South Seas bubble and (I kid you not) the tulip bubble.
Despite the assumptions of the economists, investers are not rational decision makers. Such overheating of share values is not usually a good sign.
> You may remember similar share growth figures during the bioengineering bubble
They were publicly traded shares. These are private shares. There are no gullible members of the public investing their savings here, the shareholders are all knowledgeable about the industry. If you care to spend the money you can obtain a current list of shareholders from Companies House.
The funding of Cuadrilla comes from the shareholders, not from producing gas (although they did manage a turnover of about 400k). Its business is the exploration and production of oil and gas. So far it has only done the exploration which has cost it over £100m. The deal with Centrica will allow it to continue exploration and, hopefully, start production.