Tech Talk - Natural Gas, China and Russia in the post-Crimea time.

The recent takeover of Crimea by Russia has given China a strengthened hand as it continues to negotiate with Gazprom over the supplies of natural gas for the next few years.

It was not that long ago that Gazprom was riding high around the world, as it supplied large quantities of its own and Turkmen gas to Europe, and was negotiating to sell more into China and Asia in general. Then Turkmenistan and China arranged their own deal, and with the construction of a direct pipeline between the two countries, suddenly the market was no longer running entirely Gazprom’s way. They could no longer mandate that Turkmenistan take the price that they offered at the time that Russia controlled all the pipelines that carried the gas to market. And with that change, and the changing natural gas market, so Gazprom’s fortunes have started to teeter.

At the same time the anticipated Russian market in the United States, which would have been supplied from newly developed Russian Artic reserves such as those in the Shtokman field are no longer needed, as the American shale gases have come onto the market in increasing quantities. The world has, in short, become a somewhat less favorable place for Gazprom and the Chinese have hesitated to commit to a further order of natural gas, in part because they anticipate getting a better deal for the fuel than Gazprom would like them to pay.

Russia would like, and is anticipating, that the deal for some 38 billion cubic meters/year of natural gas, starting in 2018 will be signed when President Putin visits China in May. (In context Russia, which supplies about 26% of European natural gas, sends them around 162 bcm per year). Negotiations over the sale of the gas have dragged on for years, having first started in 2004 but the major disagreement continues to be over price. At a time when Norway is seeing a peak in production and Qatar is moving more of its sales to Asia, Russia had seen an increase in European sales, and has been able to move that gas at a price of $387 per 1,000 cubic meters (or $10.54 per kcf/MMBtu. The price of such gas in the US is quite a bit cheaper.

Figure 1. Natural gas prices in the United States. (EIA )

Russia would like to get a price of around $400 per kcm ($10.89 per kcf) with the slight extra going to pay for the pipeline and delivery costs. Whether the two countries can come to an agreement on the price may well now depend on how vulnerable Russia really is to any pressure on its markets from other sources of natural gas. Japan, for example, is now considering re-opening its nuclear power stations, as the costs for imported fuel are having significant consequences on their attempts at economic growth.

Similarly there is talk that the United States may become a significant player on the world stage by exporting LNG as it moves into greater surplus at home, thereby providing another threat to Russian sales. Part of the problem with that idea comes from the costs of producing the gas, relative to the existing price being obtained for it, and part on the amount of natural gas viably available. Consider that, at present, some of the earlier shale gas fields, such as the Barnett, Fayetteville and Haynesville are showing signs of having peaked.

Figure 2. Monthly natural gas production from shale fields (EIA)

While production from the Marcellus continues to rise, there is some question as to whether the Eagle Ford is reaching peak production although that discussion, at the moment relates more to oil production. However given that it is the liquid portion of the production that is the more profitable this still drives the question.

And in this regard, the rising costs of wells, against the more difficult to assure profits is beginning to have an impact on the willingness of companies in the United States to invest the large quantities of capital into new wells that is needed to sustain and grow production. A recent article in Rigzone took note that the major oil companies are rethinking their strategies of investment, with some reorganization of their plans in particular for investment in shale fields. This raises a question for the author:

Another question for the industry is who will supply the risk capital for exploratory drilling, both on and offshore, if the majors pull back their spending? Onshore, for the past few years, a chunk of that capital has been supplied by private equity investors who have supported exploration and production teams in start-up ventures. They have also provided additional capital to existing companies allowing them to purchase acreage or companies to improve their prospect inventory. Unfortunately, the results of the shale revolution have been disappointing, leading to significant asset impairment charges and negative cash flows as the spending to drill new wells in order to gain and hold leases has exceeded production revenues, given the drop in domestic natural gas prices. Will that capital continue to be available, or will it, too, begin demanding profits rather than reserve additions and production growth?

Before investors put up the money for new LNG plants they need to be assured that there will be a financial return for that investment. Given that it takes time for such a market to evolve, and given the need that Russia has to sustain its market and potentially to increase it, the volumes that the US might put into play are likely to be small, with little other than political impact likely.

If Russia recognizes this, and feels relatively confident that Europe must continue to buy natural gas from Gazprom, particularly with the current move by Europe away from other sources of fuel such as coal, then they are likely to be more resistant to bringing the price down for their Chinese customers. On the other hand if China thinks that it might be able to get a better deal from Iran, were sanctions to ease, or from other MENA countries, then – thinking perhaps that Russia needs the sale more – they might toughen their position and the price debate may continue.

It will be interesting to see if it resolves within the next few weeks, and if so, at what a price.

Gas shortage in Murmansk

Now that the Drumbeat has disappeared with The Oil Drum, I must needs seek a little more diligently to find the stories that are of interest. One that seems to have slipped the general press is the shortage of gas in Murmansk.

The shortage was sufficiently severe that the "eternal flame" at the war memorial was allowed to go out, as domestic supplies ran short. The region has pinned great hopes on the development of the Shtokman field, but this has been postponed.

The situation is sufficiently bad that trains are being used to bring in natural gas from St. Petersburg, and while a solution has been promised for tomorrow (Sept 10th) there is no explanation as yet as to the answer forthcoming. I'll update the story s I find out more.

OGPSS - An update on Russian plans and the OPEC MOMR

The Arctic is a less forgiving place than many folk care to recognize. Shell have just moved back the date on which they plan to restart drilling in the Chukchi Sea and won’t be going up there this year. At the same time, last August, Gazprom announced that the development of the Shtokman gas field off the Russian coast and also in the Arctic had been put on an indefinite delay. Yet the region still shows considerable promise. ExxonMobil and Rosneft have agreed to exploration in the Chukchi, Laptev and Kara Seas, with the latter considered as possibly having the highest potential.


Figure 1. Location of the Kara and Laptev Seas. (Google Earth)

The blocks that will be explored are South of the island of Novaya Zemlya, in relatively shallow water. They lie north of the Yamal Peninsula, and the Shtokman field is on the other side of the island.


Figure 2. The locations of the East Prinovozemelsky blocks south of the island of Navoaya Zemlya (Rosneft)

Rosneft estimates that the reserves that are recoverable are 6.2 billion tons of oil, and a total of 20.9 billion tons of oil equivalent when the natural gas content is included. The first wildcat well is scheduled to be drilled in 2015.

While Gazprom and Rosneft share access to these offshore resources, Lukoil has found a site at Khatanga Bay in the Laptev Sea where it believes that it can be successful. Despite the difficulties, the need for Russia to sustain production is forcing the companies offshore into more difficult waters, it is where the future production lies, and the Russian economy needs the income.

The February OPEC Monthly Oil Market Report notes that Chinese demand has now topped 10 mbd on a quarterly average, the highest to date and growing at 6%. The greatest increase has been in the use of gasoline. Global demand is anticipated to top 91 mbd by the end of the year. Russia is anticipated to produce some 10.42 mbd on average this year. OPEC has, however, a few caveats:

The Vankor oil field is expected to average 435 tb/d in 2013, a minor increase from the level of 410 tb/d achieved by the end of 2012. Some operators provided that new technologies will be utilized to stop natural decline. On the other hand, the supply forecast remains associated with a high level of risk, due to technical, political, geological and price factors. On a quarterly basis, Russian oil supply is expected to average 10.43 mb/d, 10.42 mb/d, 10.42 mb/d and 10.42 mb/d, respectively. Preliminary figures indicate that Russian oil production stood at 10.46 mb/d in January, steady from the previous month.

As usual it is interesting to compare the OPEC production results for the last few months, based both on the reports obtained from secondary sources, and those numbers that the individual nations provide.


Figure 3. OPEC crude production based on secondary sources (OPEC February MOMR )

It is important to note that Saudi Arabia has dropped its production by around 300 kbd or so for the last couple of months. While I suspect that this to keep markets a little tighter and thus hold prices stable, others might suggest that the may have some slight difficulty sustaining the higher numbers.


Figure 4. OPEC oil production figures as reported by the producing countries. (sources (OPEC February MOMR )

Iran continues to have a disparity of around 1 mbd between the two tables, Iraq still seems to be struggling to get over 3 mbd, and Venezuela has a discrepancy of around 400 kbd. In short, not much new.

Turning back to look for just a moment at Gazprom activities, although they have continued to keep Lukoil out of the Arctic, they have also continued to seek resources abroad. The company has acquired territory in Iraqi Kurdistan and is reported to have an 80% stake in the Halabja project with reserves of around 700 mb. The field lies on the Iranian border in the Kurdish part of the country, and Baghdad objected to the deal going forward. It might, however, help raise Iraqi overall production. Gazprom has two other projects in the region at Garmian and Shakal, and one at Badra which falls under the control of the central government.

And, still in the Middle East, Gazprom is in talks with Israel to buy LNG from the offshore Tamar field and ship it to Asia to serve markets that it cannot easily reach with its pipelines. The intent is to use a floating liquefaction plant that will take gas from both Tamar and Dalit, at the rate of around 3 million tons a year with production starting in 2017.

Gazprom recognizes that, if it is to develop Asian customers it must provide LNG and so it has begun work on an LNG plant in Vladivostock with three trains, each capable of producing 5 million tons of LNG a year, from the Sakhalin, Yakutia and Irkutsk gas fields. With production aimed to begin in 2018, the market will, again, be in the Asia-Pacific region and may be one of the reasons to accelerate production from the Kovyktinskoye field. At the present time Gazprom has brought the Zapolyarnoye up to full production, and they estimate that this will produce 20% of Russian natural gas as the field moves to be the largest producer in the country.

And, while tracking down some of the information for this post, I did find a picture of a polar bear and cub in the region that ExxonMobil is venturing into. It was taken on the island of Novaya Zemlya. Hopefully environmental concerns won't raise the same sort of difficulties in developing these sites that they have in other places further East.


Polar Bear and cub on Novaya Zemlya on the Shores of the Kara Sea (the photo is on Google Earth and was taken at the red arrow in Figure 2 by

Oh, and before I forget the Alaska pipeline continues to run below 600 kbd with an average of 577, 604 bd. for January.

OGPSS - China's energy and a conclusion

Although Energy Policy has not been a significant issue in the current political debate over who should be the next President of the United States, this has not been a particularly good month for that future. In August the Alaskan pipeline pumped an average of 399 kbd from the North Slope. As winter approaches that number needs to be above 350 kbd to ensure that there are no solids built-up within the pipe, and each year the numbers fall a little closer to that limit.

Just this past week Shell has announced that they will not complete any wells in the Chuchki Sea this year, but will only partially drill a number of wells, and leave completion until next year. This despite the fact that the Arctic Ice acreage fell to the lowest level in 33 years, the time over which these measurements have been made. Further over in Russia, the promised development of the Shtokman field, which has been postponed several times in the past, has again been put back on the shelf. The arrival of increasing quantities of shale gas, and the loss of the market to China have reduced the need, in the short term, for these supplies. At the same time the Russian government is, again, seeking support from Western companies for developments in East Siberia and offshore. They are, apparently, still courting BP.

Overall US Crude production has stabilized, following the impacts of Hurricane Isaac, but is not following the steadily upward production path that folks such as Wood Mackenzie would anticipate. That would require that the curve continue upward at a gain of around 0.5 mbd/year, which would be around the overall average for the gain this past year, but as a continuing slope, passing through the current apparent plateau.

US Crude Statistics for the week of Sept 20th 2012, (EIA TWIP)

It is this halt in the increase in oil production that is, perhaps, of the most concern to China (as well as the rest of us), since, while it can be shown that China has been able to provide for its future intermediate-term demand for natural gas and coal , they must have less confidence in their ability to sustain their growing demand for oil. The presumptive reason for that lack of confidence should come from a realistic assessment of their growth in demand, relative to the supply and demand scenarios for the rest of the world, Figure 1 playing some part in that realistic analysis.

The disagreements between China and Japan over island ownership in the China Sea is continuing to roil the waters. While the issue is nominally over who owns the Diaoyu/Senkaku Islands, the aggressive position that China is taking not only here, but also with other nations that border on the South China Sea show no signs of diminishing. Following a meeting between Secretary of Defense Panetta and the Japanese Foreign Minister Koichiro Gemba, the Japanese have stated that the US recognizes that the disputed islands fall within the purview of the U.S.-Japan security treaty. China, in response, is sending hundreds of fishing boats into the region, as well as official government ships that will monitor events.

“We will send monitoring ships in waves, and have them remain around the Diaoyu Islands at all times to display our will to defend our sovereignty,” the Chinese official said. The official added that the Fisheries Bureau will also work closely with the State Oceanic Administration.

According to the Fisheries Bureau, as of Sept. 19 more than 700 Chinese fishing boats were operating within 127 nautical miles, or 235 kilometers, of the Senkakus. Of these, 23 were within 60 nautical miles, or 111 km.

The official said commercial fishing boats will enter waters close to the islands at a time to be decided “based on the situation,” indicating that it will depend on Japan’s response.

Figure 2. Chinese fishing boats off the Senaku/Diaoyu Islands (Asahi Shimbun )

We are coming to the end of the period where increases in global demand for oil could be met by developing new reserves, or by expanding the production from older fields. Yet, while driving across America this past week, the amount of investment being made in repairing the interstate highway system, and expanding the number of lanes bringing cars into the cities shows that there is continuing commitment to automobiles and truck transport in the USA. (And as an aside there appeared to be more trucks on the road than I remember seeing in the past 3 or 4 years).

With a slow but significant re-growth in the American economy, certainly helped by the low price of natural gas, there remains a serious lack in viable alternative fuels to replace oil for use in transportation. Thus the demand for oil in America and Europe will continue to be sustained. It will continue to rise in those countries such as Brazil, Russia, China and India where automobile use has yet to fill the potential market. For the next few years Brazil and Russia can probably meet demand from their increased use of internal supplies, albeit by reducing exports. India and China, and their ilk, cannot.

Conflict over resources is, of course, not by any means new. Maschner and Reedy-Maschner have documented such conflicts in the Pacific Northwest during early arrivals of native peoples from Siberia, and conflict and warfare (as evidenced from skeletal remains) is pervasive throughout human history, from some of the earliest of times. (Stone weapon points found in mastodon skeletal remains are also found associated with some early human skeletal remains, showing that the tools were likely causes of the death of both).

The problem, however, that comes in the future is not just that the more powerful nations of the planet will need more crude oil resources than they can provide for their peoples on their own. It is that it will become more difficult to identify places where it is practical to carry out an invasion that will then provide the needed volumes for a given country. Evidence of recent conflicts (Iraq is a prime example) show that conflict makes resource recovery more difficult and delays levels of production that might be achieved if the conflict did not occur.

Perhaps the Chinese use of fishing fleets is an attempt to achieve its goals, without going to physical war. If so, it is unfortunate that the locations in which it can be deployed are likely to be few. Yet, at a time when most of the rest of the world appears unwilling to face the coming limitation on a vital resource, or to recognize that a problem might even exist, the Chinese awareness of the situation and their pro-active positioning of themselves to assure reserves ahead of other nations is beginning to be a greater concern.

OGPSS - Future Russian production from the Arctic

In the past few weeks I have been looking at the potential for sustainability in oil and gas production in Russia, now producing at a predicted recent peak of 10.36 mbd, when condensate is included. But the question increasingly becomes whether or not Russia can sustain these levels through this decade, as has been assumed by those suggesting that there will be no supply problems in the near future. In order to sustain this level of production, against falling volumes from the current major sources in Western Siberia (estimated as 300 kbd in 2010 ), Russia is so far relying on bringing new fields into production in Eastern Siberia and Timan-Pechora (as well as some increase in condensate as natural gas production continues to increase). However these developing fields, as a broad generalization, are at a size of about 500 mbd each, with an anticipated maximum individual production level of around 150 kbd. (Prirazlomnoye for example, which is coming on line has 526 million barrels in reserves, and will be producing at 132 kbd).

Prirazlomnoye drilling rig representation (Gazprom).

Since the high flow rates will likely not be sustained for long intervals, and declining production in Western Siberia will continue, so Russia will need to continue major programs of development to find further fields to bring on line later in the decade and beyond. In addition the declining production in other fields (which might increase overall decline in existing production to 5% or more, i.e. above 500 kbd) will add further pressure to sustain current levels, particularly given the criticality of oil and gas income to the Russian Government.

With much of the land already surveyed, the potential for large fields lies mainly offshore, and particularly in the various national continental shelves and the disputed underwater territory between them in the Arctic. It is a region where there are multi-national concerns and involvement, with the USGS having previously estimated that it is home to about one-fifth of the world’s undiscovered, but yet recoverable oil and natural gas resources, an estimate, at the time, of 44 billion barrels of oil and 1,670 Tcf of natural gas.

Map of the Arctic showing relative location of some development sites (Google Earth)

From the US perspective the US Bureau of Safety and Environmental Enforcement ((BSEE) seems finally willing to let Shell begin exploratory drilling in the shallow waters of the Chukchi Sea, although there has been a challenge to the recently awarded air Permit from the EPA. At the same time that the USGS is set to issue a new report that projects that shales on the North Slope may hold as much as 80 Tcf of natural gas and 2 billion barrels of oil, with initial drilling to prove the reserves anticipated to start this year. But those developments are on the other end of Russia, to the majority of current developments.

The recent discoveries by Statoil off the Norwegian coast and in the Barents Seas(at Skrugard-Havis, and Aldous Major South, show the potential that still remains in the North. Roughly a third of the world’s largest gas fields lie north of the Arctic Circle with Russia having significant reserves among them.

World’s largest gas fields (can you name the others?) (Shtokman )


Russia is therefore moving toward a planned program of development of the resources off its own continental shelf, where it is expected to be able to produce up to between 0.8 and 1.6 mbd of oil production and 18 to 20 bcf/day of natural gas. Part of the problem, however, is going to be cost. The new program is expected to cost some $216 billion, at a time when the investments in developing the current projects in Yamal and Eastern Siberia are also demanding large investment, if those goals are to be met.

Definitions of regions offshore (pertinent in future debates over who owns what in the Arctic) (Extended Continental Shelf Project)

TNK-BP are spending $12 billion to develop the Russkoe, Suzunskoe, Tagulskoe, Russko-Rechenskoe, and Messoyakhskoe fields in the Yamal region, with the hope that these can contribute at the end of this decade, and into the next, at a total level of around 300 kbd. Suzunskoye is targeted to begin production in 2016, running at around 100 kbd once on line. Russkoye is projected to start in 2017, and produce 150 kbd of a heavier oil. Tagulskoye and Russko-Rechenskoe will come on line in 2019. Messoyakhskoe is a joint project with Gazprom and (at $17.3 billion cost) will not come on stream until 2024, at 320 kbd. These fields will, however, feed into the pipelines that head East, to China, Japan and Korea.

Closer to Murmansk Exxon Mobil and Rosneft are exploring blocks in the Kara Sea anticipating that it may ultimately cost $500 billion to develop reservoirs in the difficult conditions with moving icebergs but for now expect that initial exploration and development will cost in the $10’s of billions.

Perhaps, of these fields it is the Shtokman natural gas field, which lies under the Barents Sea, 550 km north of the Kola Peninsula which has drawn most attention. Currently expected to start production in 2016, costs may well run over $15 billion.

Location of the Shtokman field (Shtokman Project)

Shtokman was discovered in 1988 (the name comes from Professor Shtokman who gave his name to the research vessel that found the field and contains an estimated 85 Tcf of natural gas, as well as around 400 million barrels of concentrate. It lies under 1,000 ft of water, with the interesting occasional problem of visiting icebergs that can weigh up to 4 million tons apiece. Planned to come on line in with an average production of 2.3 bcf/day, the supply (as the above map shows) half the supply is anticipated to feed into the Nord Stream pipeline for shipment to Western Europe, while the rest is converted to LNG and will be shipped out by tanker. Gazprom has recently increased the area of its license rights for the field, with a new date for commitment set for this month.

The current intent is to use a series of buoyed risers to connect from the wells to the surface, so that, should an extra-large iceberg appear the Floating Production Unit (FPU) can detach and move out of the way – should tugs not be able to divert it.

Artist’s concept of the layout for development of the Shtokman field (Shtokman Project)

The pipeline shipments are planned to begin in 2016, but the LNG shipments (some 7.5 million tonnes a year) will not start until 2017. The project is a joint venture between OAO Gazprom, Total S.A., and Statoil A.S.A.

The USGS has noted that there are considerable regions in the Arctic that have, as yet, been poorly explored. In 2005 they produced this map of the then state-of-knowledge:

Status of oil and natural gas evaluations around the Arctic (USGS)

From this they produced two maps showing the location of possible undiscovered deposits. The potential undiscovered oil deposits are shown below:

Potential oil discoveries and size remaining in the Arctic. (USGS)

The point however, is not that there is going to be no more oil, it is just, as the production schedules above illustrate, that it is going to be slow and expensive to develop that which remains. Over the next decade Russia will have to bring three or four new fields on line each year at around 100 – 150 kbd each, if it is to sustain production at current levels. It is somewhat difficult to see them being able to hold to that schedule, even for a year or two.

British future energy supply - some problems with the numbers

As I travel around the UK there are the odd sign of the coming General Election. Relative to the activities that one would see in the USA they are, however, indeed relatively muted, and the signs, even on the motorway, are no larger or long lasting than those that have, on occasion, decorated our front yard. But with the slurring remark about a voter by the current Prime Minister the entire MSM has become convulsed about the story. Having, in my distant youth, worn a live mike to the bathroom, I am entirely sympathetic with the poor politician, though he should be experienced enough to know better. But it does drive items, of what are really more important news, much deeper into the papers.

Even without that issue taking the space it now does, I had to meander back to page 40 to catch what should be, in reality, a much greater concern for the British public.

Britain could be forced to close 14 power stations if a proposed European directive becomes law, a move that would drastically cut power supplies and endanger energy security, the Confederation of British Industry has warned.

The timeframe is 2016, and the issue is to do with compliance with EU regulations on power station emissions, or closure. Those arguing for compliance with the anticipated regulation see no real problem, and expect the demand can be made up with supply from renewable sources. As a Greenpeace spokesman noted:

"Britain is gearing up for a six-fold increase in the amount of energy we get from clean sources in the next decade, so these CBI scare stories show that the French and German energy monopolies they represent are now seriously worried that the clean tech industry will effectively squeeze out dirty coal power in this country."

And here, of course is the rub. The CBI would have you believe that a quarter of the UK's electric generating capacity is threatened. While GreenPeace argues that increasing renewables negates the concern.


For a little check on these statements the UK Department of Energy and Climate Change (DECC) has issued projections for the generation mix that the UK can anticipate in coming years. Clicking through on Table D, the generation mix table, one finds:

Source Dept of Energy and Climate Change)

There are a couple of things that become obvious from this table. Firstly the current UK Government recognize and buy into the need to reduce overall current traditional power sources. There is the recognized roughly 25% reduction on coal power use (note that by 2017 it is too early to expect any impact from CCS). However it is also remarkable that the supply of natural gas to be used in power stations is anticipated to rise 42% by 2017, something which neither of these two debaters have brough to public attention. At the same time nuclear power generation is anticipated to drop by almost 50%, while renewables only increase by 46%, which is a whole lot less than the 600% that Greenpeace is stating.

The primary question becomes one as to whether or not the UK will be able to get enough natural gas to meet its demands and keep the pressure off renewables. At present there is a lot of complacency, given in part by agreements with Qatar over the supply of LNG. The agreement with Qatar will supply, though the Milford Haven terminal, some 20% of the UK need , which will then be re-gasified and fed into the national grid. But 20% of the national need still requires that the other 80% come from somewhere, since the volume will not even cover the rise in demand to meet the DECC projections.

One of the things I did today was to visit the Lancaster Maritime Museum (in the UK), and they have an exhibition on the gas that comes to the UK from off the coast here. Because of that supply natural gas has been the greatest supplier of energy to the county. In 2006, the latest year with figures available, the supply was for 13,669 GWh of natural gas, 12,545 GWh of petroleum products, 585 GWh of coal and 423 GWh of renewables. (no nuclear). Since 2006 the supply had grown relative to UK demand, now supplying 10% of the national need at a level that is expected to be sustainable for 40 years. What I found interesting was that this NG was coal based, rather than the conventional petroleum (i.e. algae) based origin of the majority of the natural gas in the North Sea. But that is still only 10%.

Now Rune, Euan not to mention Jerome and Rembrandt have posted regularly on the problems that Europe is going to face on natural gas supply. The doubts about the Russian ability to get Yamal and Shtokman into production on time continue. At present Shtokman is being pushed further back while Yamal is given greater priority. The Stern Report quoted the 2007 Gazprom report in seeing a steady increase in Russian supply.

Anticipated future Russian natural gas production.

But notice where the majority of the gas will have to come from after this year - Yamal. And is the investment being made to produce that gas, and won’t an increasing percentage be consumed by the growing Russian economy? There have been some questions over this past year as to whether the necessary investment has been made. And if not, given the quantities of Turkmen gas, and that of other adjacent states that may be heading to China rather than Europe, then additional supplies might not be available in a timely manner.

Which brings us back to the overall question. If there is not enough importable supply of natural gas to offset the decline in nuclear and coal –fired electric power production, then the increase in renewable energy sources that the British Government (as opposed to Greenpeace) anticipate will not be sufficient to meet the demand for power, within the likely term (if normal) of the next Parliament.

There is a widespread pessimistic anticipation in the UK, that the first thing that any new Government, regardless of party, will have to do is to carry out a drastic budget cut. With those cuts, and the lack of investment that they will also likely mandate, then that little page 40 story might get enough legs to move to page 1 before too awful long.

Oh, and why am I in Lancaster – well here is a 53-year old photo that might help explain it. And that may feed into another post, but we’ll just have to see about that.

Smithy House, St. John's Town of Dalry, 1956/7?

It has to do with the school uniform of the kid on the right.

P60. Pick Points

There seems to be a fair bit of chat in the blogs at the moment about the fate of the “cap and trade” legislation that has appeared in the House. It has drawn an editorial comment from the Houston Chronicle, and a column at U.S. News It is beginning to be viewed as only a first step, without likely passage this year. Kevin Drum feels that it is too weak to start with, open to abuse, and unlikely to get any stronger as it progresses through the process. On the other hand Grist is disappointed that it doesn’t deal with agricultural waste, the literal BS, which is specifically exempted. The intent is to have something to take to the Climate Change Meeting in Copenhagen in December, and the Huffington Post thinks it is better as a job creator than in dealing with climate change. At Climate Progress the feeling is that there aren’t enough votes to get it through the Senate. And Democrats from coal states are leary.

Despite the warm words for renewable energy, and the comforting thoughts of the legislature, in the real world companies out there trying to build market share are finding it tough going. Biofuel Energy is one of the latest that has to face this reality after losing $84 million in 2008, and without the needed margins between the prices of corn and ethanol, it is facing bankruptcy. The company produces some 230 million gal/year of ethanol. (15,000 bd). Renew Energy, another ethanol producer, went bankrupt in February. A calculation on relative profit has recently suggested that planting corn would yield $89 per acre, while soybeans would yield $108 per acre. Demand for corn is anticipated to exceed that which can be grown on 80 million acres this year, but the relative costs argue against planting corn after corn (as opposed to soybeans) and thus it is anticipated that less than 80 million acres will be planted. (Which will turn some of the economics around, but not favorably if you are trying to make ethanol).

Oops! The smooth relationship between Turkmenistan and Russia (er, Gazprom) seems to have just sprung a bump.

Ashgabat has expressed interest in participating in the US-supported trans-Caspian pipeline (TCP) project, which would become part of an export route to Europe that evades Russian control. But so far, Turkmen officials have made no firm commitments to the TCP route. The East-West spur is estimated to cost about $1.5 billion to build. The April 3 statement took repeated swipes at Russia, but gave no indication that Turkmen leaders were ready to embrace the US-backed TCP route. In not so subtle terms, the statement accused Russia of trying to bully Turkmenistan on energy-related issues.

It is not Gazprom’s week, since Moody has just lowered their debt rating, and with the slump in demand for natural gas, the company is talking about reducing its investment program. On the other hand it sold $350 million worth of bonds on Friday, and is now selling gas directly to Ukrainian industrial customers. However it is still expected that Turkmenistan will ultimately sign that contract with Russia.

After several months of falling numbers, the number of rigs exploring for oil and natural gas went up by 4 (to 1,043) this week, though it still fell a couple for natural gas (808 for natural gas, 224 for oil). Four wells, including three horizontals have just been completed in Illinois in what is claimed to be an innovative new layout (among other things the horizontals intersect the vertical) but the main plays continue to be in the gas shales. Even though activity in the Barnett shale, for example, has been cut 40% over last year, it still affects some 70,000 jobs, according to a recent report. Development is still going forward with the Marcellus Shale. Normally there would be some increase in demand over the summer, since about 25% of electricity is now fueled by natural gas, but with stocks high and lots of gas currently available, this may not help stop the falling gas price.

With the glut in natural gas, this may not be the best of times to note that Sakhalin finally shipped the first LNG cargo, bound for Tokyo on April 1, and (marking the change from Shell management) they toasted in vodka, not wine. The LNG market is revising some opinions about Shtokman and Norway would like to be considered as a place to build the tankers.

P58. Pick Points

Back in November 2007, with relatively little notice Con Edison ended a service begun by Thomas Edison in 1882. It was the transmission of electric power by direct current (D.C.) in New York. There was fierce rivalry back then between Edison, who favored D.C, and George Westinghouse who was pushing Nikola Tesla’s alternating current (A.C.).

Some 125 years later, Westinghouse finally and absolutely has prevailed as the world has moved to AC. Or has he? Back a couple of years ago I was at an ASPO meeting when Dave Rutledge (who is inter alia a Division Chair at Caltech) mentioned the resurrection of DC power transmission. At first I thought this was a mis-speak so I asked him about it afterwards, and no I had heard him right.

So there I was, today, half-listening to Dr Chu build up to explaining what the Helios Project at the Berkeley Lab was all about, when I heard him comment on the Smart Grid, and the benefits of transmitting current across the country using D.C. lines rather than AC. Unfortunately the feed I was watching (this was from last July) did not have a timer on it, but this was about a third of the way into the talk.

Dr. Rutledge had mentioned that one of the places that uses D.C. is in Denmark, and sure enough, cables between Norway and Denmark do transmit power using D.C., and they are adding more.
In modern systems high voltage D.C. lines are less expensive and suffer lower transmission power losses than A.C. lines, but require more expensive transformers to raise the voltage to the high levels required. One of their advantages, however, is that they make it easier to integrate remote generating capacity into a network. This will become more important as renewable energy sources dotted around the country start to be available for integration into a new Smart Grid in greater numbers.

While the wave energy program in Portugal is in hiatus, a project to further study its use in Hawaii is making progress with the system to be upgraded. There is a difference between tidal energy and wave energy, and in Scotland Aquamarine is picking the latter to be a better bet than the former. The wave energy program is known as Oyster. Further a new Israeli turbine is being developed which is claimed to reduce costs, and there is a competing idea being developed in Ireland.

Gazprom anticipates that its exports will drop some 17% this year and that prices will also drop. It is therefore not surprising that they are looking more favorably at LNG and new projects that will open this additional avenue for sales. It does not seem that long ago that they were arguing the other way, with all their efforts being put into pipeline transmissions. This was particularly true for Shtokman development, though now this is where business is anticipated to gestate.

While the volcanic eruptions at Mt Redoubt are apparently calming down , they are generating a bit of a problem for the local oil production facilities

With oil terminal operations suspended at Drift River, Cook Inlet oil producers are running out of space to store crude. Chevron shut in two of the 10 platforms it operates Monday night, spokeswoman Roxanne Sinz said Tuesday. The Bruce and Anna platforms normally produce about 71,000 gallons of oil a day, Sinz said.

Production was reduced by about 21,000 gallons daily at the Dolly Varden platform because of ash, Sinz said. . . . .
In Cook Inlet, with Drift River out of commission and no means to move oil to market, only seven days of storage remains at the production facility at Trading Bay, while tanks at Granite Point to the north have about four more days of storage, Chevron's Sinz said.

When the space is gone, either Drift River has to reopen or the platforms must be shut in, Sinz said.
Cathy Foerster of the Alaska Oil and Gas Conservation Commission said some wells could be forever lost if they are not continually producing. But crews can continue to pump oil from those wells into other wells if there are no tanks to store the oil, she said.

At the news conference Tuesday, representatives from the Alaska Department of Environmental Conservation, the Coast Guard and Cook Inlet Pipeline Co., which owns Drift River, said their main concern continues to be the 6 million gallons of crude stored at the terminal. The facility was evacuated last week, but the pipeline company has sent crews to inspect it when it's been safe to fly.

And Russia is proposing a nuclear power station for Bangladesh . The facility would produce 1,000 MW and help meet the growing need (and shortage) of power in that country.

And in China they are getting the wires to build superconducting cables to move electricity. Superconducting cables can handle up to ten times the power of conventional cables and have additional benefits when transmission lines become congested.

P47. Pick Points

Half-a-dozen or so stories of interest:

Up in Canada Suncor expects to produce around 300,000 bd of crude from its operations in Alberta. But all is not well in those operations. The rise and then fall in petroleum prices has had a significant impact on the oil sands industry.

Companies financing oil sands projects out of cash flow have been relatively unscathed, besides suffering substantially lower stock prices and having to delay projects due to lower revenue. Companies financing oil sands projects on credit are up for sale at bargain basement prices. The most likely buyers of those credit-short companies are supermajors and sovereign wealth funds.

The Canadian and Albertan governments have lost substantial tax revenue because of rapidly rising project costs eating into corporate profits. Relatively more upgrader projects being delayed or cancelled compared to mining and in-situ projects contributes to less value-added in Canada and a lower tax base for those governments.

The article goes on to discuss the significant costs of a cap and trade rule for the oil sands, and the potential serious consequences to the industry if it chooses to ignore that coming freight train. The report anticipates a cost of $80 a ton for carbon from operations on the scale of the oil sands.

In order to help the industry the Alberta Government is slashing royalty rates. The Alberta Government has also set aside $2 billion for work on carbon capture and storage for the oil sands and coal. There are however some doubts that the effort will result in any significant benefit. The current article in National Geographic has stimulated debate on the issue. But it has also brought a note that, if America does not want oil sand crude, (or makes it difficult to buy through CCS legislation) then China is ready to move in and take the oil instead. In Australia, meanwhile, a company has suspended its work on underground sequestration due to the plunging prices of permits (the problem that Europe also has).

While wandering around the various websites looking for comment on the demonstration at the Capitol Power Plant yesterday (which was a lot less dramatic that the organizers had intended I suspect, and a lot less well attended, I came on a couple of other folk that had been watching the video feed. One of them was OpenMarket who quoted a couple of interesting reports about some of the downside of moving from coal to other renewable fuels. The Reports were: M. Harvey Brenner, Ph.D., “Health Benefits of Low-Cost Energy: An Econometric Case Study,” AWMA Environmental Manager, November 2005, and Adam Z. Rose, Ph.D., and Dan Wei, “Economic Impacts of Coal Utilization and Displacement in the Continental U.S., 2015” (Penn State University, supported by a grant from CEED, July 2006). These looked at the conditions that would occur with different coal future production levels. The results were along the lines of

An econometric model was applied to a hypothetical regulatory case study, whereby U.S. coal was replaced by alternative higher-cost fuels such as natural gas for the purpose of electricity generation. The model was used to estimate the premature mortality associated with increased unemployment and reduced personal income. The adverse impacts on household income and unemployment due to the substitution of higher-cost energy sources were estimated to result in 195,000 additional premature deaths annually.

Somehow I doubt if we will hear much of those findings.

Pemex is sticking to its target of 756,000 bd from Cantarell this year, even though apparently their own figures are showing production is dropping at 7% pa. They are having some success with the Tsimin-1 exploratory well that came in with 4,400 bd of oil, while the Cali-1 well in the Burgos project is producing at 9 mcf/d.

Russia is signing energy deals with Spain that include renewable energy collaboration. This might bring the Spanish oil company Repsol into working on the Yamal fields. Given that investors have been lukewarm to the latest news of Gazprom profits this agreement, and the promise of some Shtokman gas for Spain supplied as LNG starting in 2014, may be helpful, since it may bring in Spanish investors.

And a quick note on the coal situation in Bangladesh. Apparently the Chinese company that has been working on the Barapukuria coal mine has told the authorities that if the mine does not start this week, they would pull out. The operation is tied up in compensation claims.

More stories can be found at The Energy Bulletin and Drumbeat at The Oil Drum.

P43. Pick Points

Half-a-dozen or so stories of interest:

I wrote earlier today about the pickup in gasoline demand that EIA had reported, and this was also noted by other folk, and the resurgence has led to a rise in the price of crude to $42 a barrel. . EIA aren’t the only ones trying to explain the situation, the Canadians also have some words on gas prices. Then there is the Rolling Stone interpretation. But rather that the technical explanation others are just blaming the rise on inflation.
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U.S. production of crude has slightly increased in the recent past, and industry are urging Congress and the Obama administration to expand drilling offshore, because although renewable energy sources will provide some future volume, at present we still need to grow basic oil production to meet the existing need. However that argument is not strong enough to stop Interior Secretary Ken Salazar from withdrawing leases for oil shale production on federal land, while he works out a plan for higher royalty rates. The Administration is however offering a second round of leases but there is opposition from local mayors near the operations. The techniques used in getting gas out of shale in the US has proved quite successful in generating production from shales that were thought impractical, and so now the Europeans are considering using them over there . Gas from shale is still only 5% of production in the USA though it is expected to reach levels of up to 50% before too long. The Canadians are now trying it, and proving along the way that just because the technique works doesn’t means it will make money. On the other side of the country, however, shale production is already making money .

It does appear that the Shotkman field is finally going to start development, with the initial engineering work being awarded to Aker Solutions who with Technip France and SBM Offshore been awarded a 25 million EUR contract on the development of a concept definition and engineering design for the project floating production unit. Recognizing that a business opportunity lies out there Russian authorities are now ready to elaborate a new EU-Russia energy agreement, to regulate relations and help speed up progress in projects like Shtokman, the Russians say. Royal Dutch Shell however remain to be convinced. They need to be sure that they will receive production rights after exploration and development, and in Russia this is no safe bet even with a local partner.

One example of potential problem comes from the Karachaganak field, where Gazprom and the Kazakhstan Government are thinking of suspending the joint venture Of course not all projects fail for political reasons Chevron has just pulled out of Northern Taiga Neftegaz a venture with Gazprom Neft after reserves in the Pyakutinsky and Aikhettinsky fields in the Yamalo-Nenets Autonomous Area, did not meet the original projections of some 45 million tons of oil.

The latest scheme is for Total to join with Gazprom and fund a pipeline to carry Nigerian gas through the Sahara to Europe, some 2,580 miles away.

As the planting season starts in South Asia the Bangladesh Prime Minister has directed authorities to ensure power to agriculture to protect food production.
The ministry of power, energy and mineral resources has stated that 130 MW of additional electricity has been added to the national grid and 700 MW more will be added by June. However the demand from the people of Bangladesh is that the government should cut the price of fuel oils.
 This year the price is 10% up on the last Boro season when the price was Tk 40. Bangladesh is still trying to find ways to economically exploit its high quality coal reserve . The proven gas resource are widely believed to soon be exhausted. In the absence of a decision the energy deficit is widening. This summer will witness massive load shedding.

Iranian and Russian technicians are conducting a test run of Iran’s first nuclear plant, a major step toward full operations. Work on Bushehr started 34 years ago, during the reign of the shah with the help of the German contractor Siemens but was suspended after the 1979 revolution. Pilot operations at the 1,000-megawatt light-water reactor, built with Russian assistance under a $1 billion contract, have long been delayed and it's unclear when the reactor could be switched on. Wednesday's tests were a computer run to ensure that the reactor's processes work properly. For the tests, technicians loaded a "virtual fuel" of lead into the reactor to imitate the density of enriched uranium, said Iranian nuclear spokesman Mohsen Shirazi.

There is an interest to form strong bilateral relations between Bulgaria and Italy to move forward with the South Stream gas pipeline.

More stories can be found at The Energy Bulletin and Drumbeat at The Oil Drum.

P43. Pick Points

I mentioned in Monday’s post that I have an interest in algae, and so I will put up a couple of items that caught my attention this weekend. The first deals with the possibility of using wind power to provide some of the energy that algae need to foster growth Some of the European wind farms have been up for a while, and one in Denmark, that was installed in 1990, is looking at using some of the extra power to encourage algae growth. The algae, through the generation of biofuel, would thus act as a form of “battery” for the wind. One problem, however, is to ensure biological security, since the escape of algae species into a favorable place, such as in Hawaii, can have negative results, and require costly capture and remediation. The use of algae for flue gas cleanup has inspired a number of efforts, from Israel to MIT (who use it to make hydrogen), to Missouri . There is also the blog Oilgae, which carries the MIT report on the topic.


Developers of the Shtokman project are talking about using CCS as part of the strategy for development at the site. There is anticipation that the cost of the project will decline with the poor economy. More details of the loan from China to encourage a pipeline and oil supply to that nation are now emerging. The change in investment strategy has the advantage of getting a good price now for the oil, and securing it into the future. Russia is also trying to find a way to improve the efficient use of energy, with planning for a new law on the way, and an example of how it might be done, comes from a dairy. In the United States homeowners can look at the Home Energy Rating System which compares the energy use of a house with a standard. Based on the result that you get different approaches may be needed to lower the number (a 200 means you use twice the standard). Oregon is moving to have the state provide loans to encourage upgrading of homes in a way that would make them more energy efficient. As I noted in Monday’s post, this is something that we are seeing in an increasing number of states.

St Mary Land and Exploration is drilling horizontal wells into the Woodford, and Haynesville shale and while cutting the number of rigs back to 7, from 16 at the peak of last year, one or two of the rigs will shuttle between the Haynesville, the Eagle Ford and the Marcellus shale sites. The lateral section of the well is around 3,300 ft, and with 10 slick-water fracs will use some 3,000,000 lb of resin coated sand proppant. There is some move in Pennsylvania to require that drilling records for the Marcellus be made public (including production data) every six months. Other states such as Louisiana and Wyoming post such production on Web sites. Chesapeake, who is drilling both Marcellus and Hanesville is currently getting a favorable press. With natural gas prices projected as perhaps falling as low as $2 per MMBtu due to lack of demand and overproduction, this years prospects don’t look good for the industry.

Scotland is looking for new ways to develop marine energy, the target being some 60,000 MW. The current projects are based in Orkney, and the European Marine Energy Centre. The current targets are sites around Britain and Ireland that are capable of producing more than 1,000 MW each, largely from wave and tidal energy.

The State Governors are asking Presidential help in promoting biofuels hoping to see approval, for example, of ethanol blends above 10% and as high as 30%. (This was something Dr Chu was asked about last week).

Because of the global financial problems Russia and Kazakhstan are considering slowing the development of the Karachanganak project (which is reputed to have 47 trilion cubic ft of gas).

P36. Pick Points

So today was Power day at CERAweek, and the President of the Environmental Defense Fund was pressing for increased research and development for carbon capture and storage. But he recognized that there would no industrial participation until there is more guidance from the Administration. They have already given Congress a blueprint on how to enact a carbon cap and trade legislation, and urged action. He was opposed by the Marathon CEO speaking instead for a carbon tax as being more simple, since cap and trade is a market set up by the government., and would provoke more volatility (and price rises) in that market.


The CEO of Energy Future Holdings bragged on Texas’ position as a leader in wind technology, and its willingness to adapt the grid to input from renewables. Given the need for a heavy investment in new plant (sometimes just to replace old capacity not to increase it) the demands for the great amounts of capital this will require was predicted to lead to consolidation in the industry, according to the CEO of PPL Corp of Pennsylvania. There are currently some 200 companies invested in the power production business, and with the demand for new plants (which are planned to be about half coal and half natural gas) the money will have to come from somewhere (including the general public.)

Looking at the scene from Michigan the CMS Energy President noted that his coal plant fleet was an average of 50-years old, and while demand would not rise, plant needed to be replaced because of age. Trying to permit a new coal-fired power plant was like “swimming upstream.” They had a plant replacement planned for Bay City but this has been postponed two years to 2017, even though the new plant was over rock which would be suitable for CCS. Collectively the industry is beginning to accept cap and trade, and just hopes that the money goes into research and development, instead of social programs.

Nissan is anticipating rolling out an electric car next year, that will be generally available by 2012. The plant will go into Tennessee, and they hope to see 10% of the fleet sold to be electric by 2020., though this depends on an agreement for a charging network, and that hasn’t been resolved yet. That may put up pollution, since the power must come from somewhere Pacific Gas & Electric said that either drivers learned to plug in and charge in off-peak hours or the country would need a lot of new electricity generating plants. There may be meters that would control activation and thus help to solve the “plug-in time” problem.

The next topic was biofuels, BP felt that these would comprise 10 – 20% of liquid fuels by 2030. It will take a billion hectares growing sugarcane to produce the ethanol to replace gasoline totally around the world, In a recent report (Sandia and General Motors said that the country could produce 90 billion gallons of ethanol, by 2030 this would replace a third of the 140 billion gallons of gasoline being used – but five sixths of the total must come from cellulosic ethanol (which we don’t have ready even in the lab yet). “P.S.” they added, “send money.”

The economists on the panel felt that the recession though severe should turn around within the year. But the blame game on that has started.

With the Shtokman field now being scheduled for development, Total is committing to $200 million on engineering studies, while the main base for the operation may end up in Norway. Part of this recent surge in activity may because Russia is suddenly realizing it will have to increase incentives if it is to halt an anticipated drop in production. The intent is to change the tax structure so that investment in new fields will be encouraged, now it is not. Remember that in Russia oil revenue taxes provide 43% of budget revenues.

P35. Pick Points

Pickpoints will be a little abbreviated tonight, since the passage of the Stimulus bill has thrown all us academics into a frenzied search to find places and subjects that we can submit research proposals for. I am also committed to a presentation on some of my day jobs work tomorrow, and losing a completed presentation has been, shall we say a little time consuming.

So first what happened at CERAweek. The Marathon CEO saw a change coming in refineries, with there being fewer of them, that they would be more oriented to diesel (with a smaller relative market for gasoline) and that they need to be able to handle heavier crudes. The Tuesday night dinner speaker was the Saudi oil minister and he said that when Khurais comes on stream this year at 1.2 mbd, then Saudi Arabia will have a cushion of about 4.5 mbd that it can put on stream. (Bear in mind they have cut back production dramatically, and I bet they are counting Manifa, which they cannot refine until at least 2012).

“The unprecedented price volatility in conjunction with the complexity, breadth and the pace of the collapse of the financial system crashed over us like an economic tsunami, ripping us from our intellectual and experiential moorings, leaving many confused and uncertain about the way forward,” he said.

But the more telling quote (not looking at anyone, Dr. Chu) was:

“A nightmare scenario would be created if alternative energy supplies fail to meet overly optimistic expectations while traditional energy suppliers scale back investment due to expectations of declining demand for their products,” he said.

Saudi is now at around 8 mbd, and OPEC as a whole cut production 3% in January.


There were more than 2,200 at the meeting at $7,500 a head. That was not the reason many companies have been cutting expenses (and attendance had not dropped). The combination of low prices, tight credit and expensive operations has seen the natural gas rig count drop 30% since September, though horizontal drilling (needed for the gas shales) is up. It is now 37% of production. Part of the problem is that the drop in gas prices means a drop in the value of reserves, which may hurt lines of credit.

Chesapeake think the problem will correct this year; that the long term bet should be the Marcellus shale.; that for the industry to revitalize will take prices rising from $5 to $8 - $9; and that this may only happen after about 2/3 reduction in the rig count, dropping production by 10%.

German Ex-Chancellor Schroder said that Western Europe would need 200 billion cu m more gas in six years from Russia, half from a rise in demand, half from declining reserves. Schlumberger thought that the shale gas types of deposits that are becoming so attractive in America may have a huge potential world-wide for future energy ( he cited 688 shales in 142 basins).

The arrival of LNG into an oversupplied market may influence price by the end of the year was the lunch discussion. A 10 - 20% cut in capital spending in the power industry will have an impact when the economy tries to re-establish itself. The industry will also have to write off 2-3% of debt due to unpaid bills.

There is an interesting graphic to go with the Gazprom announcement that they are not delaying Shtokman, but it also appears that they are going to demand more up from from partners.

Interestingly Rigzone heard Chesapeake say that the Haynesville will be the largest gas field by 2020.

The final reports on damage from last years hurricanes in the Gulf is now in and 9.2% of oil production and 12.8% of gas production remains shut-in. Hopefully it will all be back up by the end of March.

One problem that is not often addressed in the future decline of oil, is that it is a source of plastics, now a German company claims that a form of liquid wood can be used as a substitute.