Tech Talk - Coal prospects

Last week was the annual Society of Mining Engineers annual meeting, this year in Salt Lake City, with the title “Leadership in Uncertain Times.” To illustrate the point it had some 6,000 members or more in attendance, as I hear and was quite successful from that point of view. However, through the grapevine I also heard that some of the mining companies are less optimistic of the future, with job offers made for this summer being withdrawn in several cases.

There is a considerable question as to the future of coal, as the title reflects, and this has as much to do with concerns over the construction or not of additional coal-fired powered stations around the world and the changing market as older plants are withdrawn from service. Some of the reason for uncertainty can be seen in the predictions from the EIA for the domestic coal market over the next year or two.

Figure 1. The decline in coal production in the United States over the past two years. (EIA)

The EIA note that last year was the first that production had fallen below 1 billion tons in the past 20 years. It does however forecast that production will increase this year by 3.9% before falling 1.5% in 2015. In both years however it will remain above that billion ton mark. I have written recently about the recent report “Warning Faulty Reporting of US Coal Reserves,” (in which the conclusion is drawn: “Rather than having a “200 year” supply of coal, there is now abundant evidence that the US is rapidly approaching the end of economically recoverable coal.“)

The two stories are, to a significant degree, discussing different topics, although the beginning of the Clean Energy report also discusses the rising price of domestic coal, and why – as it rises – so the switch to other fuels can be anticipated to continue. However, in that regard it is worth noting this other graph from the EIA.

Figure 2. Spot price of coal by basin over the past three years (EIA )

For those who forget 1 MMBtu (million Btu) is roughly equivalent to 1,000 cu ft of natural gas. The EIA also record natural gas prices and, in comparison to the coal price, that of natural gas – for equivalent energy – is considerably higher.

Figure 3. Natural gas prices (Henry Hub) (EIA )

Why then does the Clean Energy Report suggest that coal costs are going up, when as the plot above shows the spot price has been remarkably stable?

Figure 4. Cost of delivered coal in the US from 2004 – 2012. (Clean Energy)

Notice however, in this case, that the cost is for delivered coal, and the cost of that delivery is what has been going up over the past few years. (And you wonder why Warren Buffet invested in railways?

Figure 5. Changes in Railroad freight costs since 1981. (Association of American Railroads)

If you look at the plot you will see that the cost per ton-mile has increased fairly steadily over the past four years from just above 3 cents to 4 cents a ton-mile, which explains a significant part of the increased fuel costs. Railroad income has risen, since 1981, from just under $3 billion to $12 billion.

So what is the future likely to be? Well there is an additional source of income to the industry, outside of the US power plants, and that is through exports. Yet here the story is not really that different. Since 2005 the value of coal exports from the United States have tripled. This is not just a volumetric increase (which has happened with steam coal) but includes an increase from higher prices for metallurgical coal. (Powder River steam coal at 8,800 Btu sells for around $12.35, while the 13,000 Btu Northern Appalachian coal goes for $68.65 a ton. (This is one of the discriminating factors within the coal market that the Clean Energy Report fails to fully discern). Exported coal saw a steadily rising price from 2007, when it averaged $70 a ton through 2011, when it was priced at $148 a ton before falling to $118 in 2012 and to $96 in 2013. Roughly 46 million tons went to Europe in 2013, down from 51 million tons in 2012, while roughly 22 million tons went to Asia (down from almost 26 million tons). Of this about half the European and a third of the Asian coal was steam coal needed to feed coal-fired power plants.

The problem that the industry faces is that this downturn in both domestic and export demand that became evident last year is likely to continue into the next few years. In the case of Europe pressure to close coal-fired power plants continues, despite increasing concerns that the existing base is approaching a point where supply will no longer be able to meet demand. The Sunday Times carried a story this Sunday about Npower and their owner RWE, which produces 10% of the electricity in the UK, but which is writing off hundreds of millions of dollars as it devalues its current power stations, which are being closed by regulation, even as it fails to build replacements, which it is reported to find unattractive in the current political climate. Last December the NPower CEO noted that over the past year the spare capacity in the UK had fallen from 15% to 5% and if that continued this year (and there are more scheduled closures) then by next winter the reserve may be gone and the country may see the start of blackouts that will continue for some years.

In the same vein the United States is also cutting coal-fired production. An article in Motley Fool points to the trend over the next few years.

Figure 6. Projected coal fired power plant closure effects (EIA via The Motley Fool)

However this projection is possibly a little disceptive, since it does not foretell what might happen if “clean coal” can get a grip on the industry. As TMF points out:

But EIA's retirement projections may be too high. While air emissions standards will result in heavy fines, utilities may still foot the bill because of coal's relatively cheap production costs.

With natural gas prices up 50% this year to a four-year high, energy companies are scrambling to find cheaper energy. According to data compiled by Bloomber, an average natural gas plant makes $3.04 a megawatt-hour off its fuel, compared to a whopping $31.58 for coal-fired plants.

While coal might seem like a no-brainer bet, "clean coal" is far from a sure thing. Southern Company has been working hard to bring its 582 MW Kemper County, Miss., clean-coal plant online, but the $5 billion project is currently 65% over budget.

A Department of Energy report estimates that clean coal costs are roughly double that of coal, but companies like Southern Company are hoping to reinvent coal's future.

Unfortunately building new coal demand, when set against the destruction of current plant in both the US and Europe, will take some years and thus, while the future for coal might, in the long term be strong, in the shorter term one can understand why coal companies might be hesitant to hire new engineers. The reduced demand will, inter alia, lengthen to time that current supplies last, though I perhaps need to address that issue in a subsequent post.

Tech Talk - The evil in the hearts of men.

It was Edmund Burke who said "The only thing necessary for the triumph [of evil] is for good men to do nothing," and with a hat-tip to Bishop Hill who drew my attention to the testimony, I think I had better say something.

Back in the days when I left school the United Kingdom, and most of Europe, was finally emerging from the brutal impacts of the Second World War. That recovery was helped immeasurably by the coal mining industry where thousands of men labored underground across Europe to ensure that adequate power was available to supply the needs of their various countries as industrial capacity was restored. As an eighteen-year old indentured Apprentice I laid on my back in 20-inch high coal to shovel the 15-tons of my ordained shift onto the conveyor, and braced the roof over my head with hand-sawn timber props to hold it for the following week, as we moved the longwall face forward. I was paid just over four pounds a week, but they did allow me, on Wednesdays, to go to the local Technical College in Ashington where I studied from 8 am until 8 pm. In the good weeks I could then go home, but in the alternate weeks I was either on foreshift, which meant that I went to college directly from the mine, or nightshift, when I went from the college to the mine and worked the following shift. I was woken more than once from an exhausted sleep having fallen into the corridor on the bus. Men died in those mines that I worked in to ensure that Britain had the power that it needed to recover and rebuild.

I thus find myself seriously affronted when this industry (and myself), are called evil by some academic from Oxford, no matter how illustrious his qualifications. In his testimony before the House of Lords Committee on “The Economic Impact on UK Energy Policy of Shale Gas and Oil “ last week, Professor Dieter Helm said

Of course one would want to make sure that regulators are on top of any environmental consequences that might flow from drilling, but I find it truly extraordinary that people want to ban fracking in a context where they are not prepared to ban coal mining, and indeed across Europe actually promote coal mining. When one thinks about the relative environmental impacts of the alternatives, coal mining is truly evil in comparison. I find it extraordinary that people are legally allowed to mine coal if you want at the same time to have a blanket ban on shale gas extraction.

It is almost a throw-away line, a necessary genuflection to the politically correct views of the day, a glib reference to transient effects long recognized and ameliorated by the coal industry over the past decades.

In those days of my youth, back in 1962, I walked into Newcastle to take the first bus of the morning from the terminal to the mine some 11 miles away at Seghill. It drove past pit heap after pit heap, and the impacts that Professor Helm is I believe referring to were real, and evident. The mine I worked in was over a hundred years old, and my father had been manager there when my brother was born. You walked stooped for part of the way to the face, since the roof of the passage was low, though the temperatures were pleasant, year round. Coal moved by conveyor and mine car, once hand-loaded from the blasted face, and supplies came in on carts hauled by pit ponies – another unforgettable memory. Hundreds of men worked at each mine, with a typical stint being a 10-yard length along the 200-yard measure of each longwall. We were not evil, the industry was not evil – it was vital and necessary. And it has changed.

Instead of walking there are now mine cars that haul workers to the face, electric trams have replaced ponies, and machines now do the work that muscle did back in those days. Where then is the evil? Is it that we are removing material from the ground? But unless you wish to go back to human densities of 70 people per hundred square miles of the hunter:gatherer era this must happen, for if they aren't grown resources must still be mined from the earth.

Yes there are transient effects, but if instead of dwelling on the ugliness of the excavation on some cold wet day when the shadows are right to emulate some hellish landscape, one were to go back five years after the mine has moved on (presuming that this is some surface site) then those wounds from current mines have gone. Laws require, and company self-interest demands, that land be restored. In parts of the world that can realize unexpected benefits as the land becomes more productive than it was before. You can no longer find much negative evidence of the underground mines in the area I worked in.

But the intent of this post is not to pat myself on the back, nor to run off on a rising rant, but rather to point out a problem which this broadly prevalent and stridently negative attitude is generating. Early this morning I received a call soliciting funds for the Footsteps Program at the University of Leeds, where I was awarded my degrees. But I had to gently break it to the young student calling that I could not participate because the University had done away with the Mining Engineering program through which I obtained my degrees. Further they have turned over the building, donated to the University by the industry and its workers for such studies, to the Art Department.

Leeds is not alone, the Royal School of Mines, merged now into Imperial College, London no longer offers mining courses.. The Welsh School of Mines, now the University of South Wales, no longer offers mining courses – there is but one place in the UK, at what was Cambourne School of Mines but is now the Penryn campus of the University of Exeter, where such a course still exists.

This image of the industry as an evil entity is ironic given, as Professor Helm pointed out:

Practically now, in Europe and the UK, we are switching from gas to coal. We have gone from about 28% of our electricity generated by coal a couple of years ago to about 40% today. Germany is bringing 7 to 8 gigawatts of new coal on to its system. Coal stations are being built across eastern Europe. The coal burn generally has gone up across Europe. Germany has gone from nuclear to coal and from gas to coal. This is a really serious environmental development across Europe.

For many years the rational pursuit of energy policy in many parts of the world was hindered by the demonization of nuclear power. It has taken that industry many years to work through the opprobrium that hindered realistic discussions of costs and benefits, and it is only now that some of the green community are beginning to recognize the irrationality of some of their earlier arguments. Yet the vilification of that industry cost it an entire generation of management and engineers who were persuaded to avoid such a career and who starved the industry of a strong supply of graduates. Now that engineers are needed there not that many with long experience, since the generation running the industry is retiring.

And here we are seeing a growth in the demand for coal, and yet – in part because of the demonization of the industry – there are but limited places where qualified engineers can be found, and at a time when advanced levels of technology will be called for as deposits get leaner, deeper and more difficult to extract there are even fewer places that can carry out the needed research into excavation technology.

Sadly academia and government seem to be unwilling to face the reality of the future that these circumstances will bring. Because the situation cannot be reversed in a year or two, as the knowledge base fades (as it now rapidly is) so it will become harder and harder to meet global needs. But no doubt academia will find a way to blame that on us miners, the few of them that will remain.

Someone told me once – “if you want to find gratitude, you’ll find it in the dictionary, between chump and sucker*.” But, one might have thought that for those who claim to predict the future, perhaps the occasional thought of self-interest might burble its way through, but not, I suppose, at Oxford.

*the statement has been modified for a general audience.“

Ideology versus Reality in the UK

This is but another gentle cough! And for those not familiar as yet with the way I write, it is, in the culture in which I was raised, generally considered more polite to gently cough and quietly explain why someone is wrong, rather than engage in the confrontational breast-beating and name calling that seems more prevalent in scientific argument in these latter days.

Which brings us to the new “news” out of the UK. The argument that a nation’s government must, in the end, deal more for the benefit of its voters, than to its political views has been one of the underlying cynical views I have held for the energy future for a long time. Telling a nation that they need to do something “for the good of their grandchildren”, does not go very far when oil prices are rising and they have a cheaper, indigenous source of energy – which is, quite frequently coal - that will allow them to feed themselves, and their children, and thereby provide a path to the generation of said grandchildren.

My anticipated example for this has been, for a while, India and the sub-continent of Asia, where indigenous coal can be a much cheaper resource than increasingly expensive foreign oil, and natural gas which is often politically more difficult to acquire through trans-continental pipelines. And so I was caught a little by surprise, although, based on Euan’s excellent previews it was something which had to happen, but which I did not yet expect, and that is a volte face from the British Government.

The underlying premise to which I have tried to adhere has been one of realism, rather than ideology. As a research scientist for most of my life I have had, too often, to go to meetings where I have had to admit that experimental results did not exactly follow my predictions, and that, as a result, the underlying theory has had to be changed. But that does not mean that the overlying premise changes, only the nuances of the argument. (And for those few interested, the work dealt with how things break.) And in the current case the overlying premise has always been that a nation has to ensure its fuel supply at a viable cost to the nation.

It is something that, inter alia, drove Japan into war over 70 years ago, and now that reality is becoming evident to Her Majesties Government, it is apparently a realization that is beginning to strike home over there too.

In April 2012 coal took over from gas as Britain’s dominant fuel for electricity for the first time since 2007, driven by a collapse in the international price and a rise in the cost of gas. In addition, the tax the Government levies on companies emitting carbon currently stands at £16 per ton, rising to £30 a ton in 2020. But analysts warn that at the current prices this would have to rise to more than £40 to make such coal generation uneconomic. . . . . . Under the Energy Bill, 12 of Britain’s existing 18 coal power stations that could stay open will be exempt from the Government’s emissions performance standard (EPS) that sets limits on CO2 emissions for all new power generation.

The political cost of supporting a coal-based economy have yet to be determined, and the unrelenting assault on coal-fired power has been so widespread and unrelenting that this will not be an easy sell, but this step is something that may well be an indication of where, ideology aside, reality will move to define the future.

In essence the relief of the burdens on the existing power plants will strengthen the base-load capacity (usually provided through coal and nuclear power) and will take some of the strain from the commitment to renewable energy (which is often wind-generated in the UK) and thus work to ameliorate some of the criticism from such folks as the Institution of Mechanical Engineers. (There is no longer any criticism from the Institution of Mining Engineers, since that went the way of the dodo, some years ago.)

OGPSS - future natural gas supplies and Cyprus

This post began as a view on the developments in Cyprus, and I am grateful to Gail for the suggestion, and it is my fault that it morphed a little from that simple original objective.

One of the problems that one faces in marketing natural gas is that there is so much of it coming onto the market that it makes it difficult to set a price for future production. Even when the fields and reserves are estimated to be large, having some confidence in the price that the gas will bring helps provide confidence, in turn, with investors that there will be a positive return on the cost of bring that gas to the market. However, once that initial commitment is made to invest the money, then the need for a return often drives an expeditious program to bring in revenue, even if the market is already reasonably well supplied. Prices may then fall, and the investment becomes a losing one.

The current cold weather in the United Kingdom, and the threat of gas rationing has raised the price some 30% this month and the market appears lucrative. But the UK market, in the short term, can be rescued by 3 tankers of LNG from Qatar with more available if needed. (Provided it is ordered soon.) And then, though there remains a need to refill storage, the crisis will be over for now, and the price will likely fall back. (Although likely not completely since the UK is in process of shutting down coal-fired power stations to comply with EU edicts and natural gas is the replacement fuel of the moment.) Looking further down the road Centrica, a major energy supplier in the UK, has agreed to a 20-year agreement with a US supplier to buy LNG from the US (out of the Sabine Pass terminal). This would take a fifth LNG train, at a facility where the first train is expected to come on line in 2015, and the second in 2016. Each train has a liquefaction capacity of 4.5 million tons pa or 220 bcf of NG, and customers have already been found for the first four trains – again for a 20-year period. The UK supply is therefore not anticipated to start until 2018.

In the meantime Qatar has no plans to increase production in the face of the overall growing glut in supply, although it potentially could. And this availability of alternate supply is not good news for the Big Daddy of natural gas exporters, those in Russia. Russia has already seen Turkmenistan sell its natural gas to China directly, rather than through Russian middlemen. To date this has reached 1.7 tcf with further expansion in the works.

To make the situation more volatile the natural gas discoveries in the eastern end of the Mediterranean over the course of the last five years have been found to be of increasing size, as exploration continues.


Figure 1. Relative location of the gas fields (the green region) being explored in the Eastern Mediterranean (Google Earth)

Three of these fields, Leviathan, Tamar and Dalit are in Israeli waters, while the fourth, Cyprus A, belongs to Cyprus.


Figure 2. The location of the different fields that are being developed by Noble Energy in the Eastern Mediterranean.

In terms of relative size, Cyprus A is at 7 tcf, Leviathan was initially projected at 17 tcf, Tamar at 9 tcf and Dalit is at 0.6 tcf. Since the original projection Leviathan has now been increased to 15 to 21 tcf, with a likely value of 18 tcf.

The Russian natural gas heavyweight, Gazprom has not been neglectful of these developments, occurring as they do in a region where it would not be difficult to challenge their supplies into Southern Europe. Thus Gazprom has been the high bidder in a project to float an LNG plant over the Tamar field and to liquefy that gas so that it can be sold into Asia. The goal for the start of that project is in 2017.

Turning to Leviathan, which is expected to come on line in 2016, with 750 mcfd being supplied to Israel. The interesting question is what to do with the rest. There is talk of a pipeline to run up into Turkey and thence on into Europe. This would have the advantage of further diminishing the European dependence on Gazprom and Russian gas, but there are some political problems. One is that the pipeline would run through the Greek controlled waters off Cyprus, another is that Turkey gets most of its natural gas from Russia and Iran, and they would be displeased. (Though it would help Turkey over the difficult problem of Iranian sanctions).


Figure 3. A pipeline to send the natural gas to Turkey (Mining.com)

When one looks at the Cyprus field, with these ramifications going on in the rest of the global gas market, it becomes a little more evident why Russia has not been willing to dash into the financial scene and bail the Cyprus economy out by buying a future stake in the Cyprus natural gas.

There was an alternative proposal (H/t Gail) for the pipeline to run instead through Cypriot waters and then on up into Europe directly.


Figure 4. An alternate route for the natural gas to reach Europe. (John Galt )

With Cyprus in a financial mess they offered their natural gas to Russia, as part of the security for immediate help. In the end Russia did not bail out the Cypriots. At the same time that Cyprus was talking to the Russians they were also talking with the European Union, and it appears that perhaps the threat of Russian control of Cypriot gas helped expedite an EU rescue move.

There is, I believe, more in this for the EU than for Russia. The benefit to Russia would come more from controlling a relatively small amount of competitive natural gas, at a time when they are trying to maintain the market for their own. And while they likely did not anticipate the hit that Russian bank deposits are taking, the overall cost to them does not translate into an adequate return on the investment that they would have had to make to keep Cyprus stable.

On the other hand this has benefits for the EU if it can further expand the availability of an alternate source of supply to that from Gazprom, then they can possibly lower future projected prices for natural gas. Set against which is the history of Gazprom sitting on the sidelines waiting for an investment opportunity later in the game, and then stepping in and gaining control for a lower price. It will be interesting to see how this one plays out.

Political will amidst climate uncertainty

I don’t expect that there will be many tsunamis in Germany over the next century, nor, apart from the occasional man-made earthquakes that can come from potash mining, do I expect the country to suffer any major damage from an earthquake. Seriously, I rather suspect that the German government has the same view of the future. But that has not stopped them from deciding to close all nuclear power stations within the next eleven years, using the recent events in Japan as one of the justifying reasons.

Germany gets about 25% of its current energy supply from nuclear power, and about 17% comes from the sustainable sources such as solar and wind. But the problem, in part, is that these become unreliable sources in winter, with lower wind speeds and shorter, darker days. Yet, without a balance sheet having been presented that will show where the lost power will come from, the decision has been made, on apparently political grounds, that nuclear must go.

There comes a time in the affairs of Government when a commitment is made to a policy that makes it virtually impossible for those in charge to later reverse the decision. This decision by the German government is one such probably irrevocable decision, and it seems that the step that the British Government recently made in their commitment to a “green” anti-carbon future for the UK, is another.

A limit on the total amount of greenhouse gases to be emitted by the UK between 2023 to 2027 has been proposed to cut Britain’s emissions by 50% from 1990 levels.

The ultimate goal is to get the emissions down 80% by 2050. The evidence that these “green” technologies will support existing levels of power and production is becoming more debatable. Thus the powers-that-be anticipate that there should also be a cut in energy demand from the general populace. In the case of Germany this target is about 10% of their current consumption.

The commitments to turn away from existing technologies with the capacity to supply energy at an acceptable financial price, and instead to rely on wind and solar, technologies that are not as consistent in providing power when needed, comes at a time when there has been enough experience with sustainable power that the advantages and disadvantages are becoming more evident. Though, before discussing that I should explain that, writing as I do about coming shortages of oil, the reality is that the world is going to need whatever energy supplies it can find in the coming years and that includes energy from wind, solar, geothermal and hydro.

But there is a growing question as to the real practicality of some of the “green” solutions being proposed, and also questions on their cost. One such, for example is the book “The False Promise of Green Energy”. This epitomizes a growing body of criticism that takes a hard look at the costs and energy actually produced by the “green revolution” and concludes that they not nearly as beneficial in reality as they have been made out to be. I don’t agree with a lot of the philosophy that drives the Foundation that published the study, leaving the energy future to the marketplace to find answers to me indicates a failure to understand the size of the problem that is developing. Nevertheless the book does raise some legitimate concerns over the drive to commit to the “energy solution of the day.” For a while at the end of the last Administration in the United States, cellulosic ethanol was going to be that White Knight. Mandates were to provide a market to justify the investment in large plants required to have any increment on national supply. Well it turns out that those getting the money were more optimistic than realistic, and those targets have been scaled back.

Today the solution of choice still remains wind power. The cost has come down, and particularly on-shore, the reliability of the plant has gone up. Unfortunately the other partner in the success of the technology is a natural one, and the consistency and strength of the wind to drive the wind turbines has not been as good. The John Muir Trust examined the record,, and reported last January,

The research found over 395 days, the wind farms could have produced 17,586,000 MW hours of energy running at full capacity. In reality, 3,881,900MW hours was generated, equivalent to 22.07 per cent.

And over the past two years, wind generation across the sites fell below 20MW on 123 separate days for a combined duration of 25 days. For a total of nine days, output dipped below 10MW, barely enough power to boil 3,300 household kettles.

More recently the Telegraph has noted

The Coalition has drawn up plans to open more wind farms in an effort to meet Britain’s European Union target of providing 15 per cent of its energy from renewable sources by 2020.More than 3,600 turbines are expected to be installed in offshore wind farms over the next nine years.

But statistics suggest that the winds that sweep across the British Isles may be weakening. Last year, wind speeds over the UK averaged 7.8 knots (8.9mph), a fall of 20 per cent on 2008, and well below the mean for this century, which stands at 9.1 knots (10.5mph).

If the current power systems (often nuclear and coal) are to be done away with, as the current European Governments seem set on achieving, then they should, were they morally responsible, also indicate the sources, costs, power and true likelihood of being able to replace existing power plants with a viable alternative. Those answers are often given in general terms and rely on projections (such as, for example, that wind will produce 30% of nameplate capacity) that are now being shown to be wrong. This seems a more certain way of destroying the future of our children than the threat of carbon dioxide level rise, though one would have to look hard to find many that recognize this reality. Politicians have grasped an approach and now use the threat of climate change to justify policies that cannot be easily undone.

The same is equally true about the opinions of the validity of the models that are used to justify these decisions. Changes in the reliability of the models, as data is acquired and time passes are often largely not to be admitted. For example, one of the more prevalent aspects of the global warming argument is that the accelerating rise in sea level is going to lead to the swamping of land around the globe well within this century. That later prediction has largely been based on models, but a series of buoys was placed around the world to give a more accurate assessment of the rise in sea-level. As this data has become more widely available and over a longer time, so it has been possible to discern the trend.

Sea level change over the past eighteen years (U of Colorado )

If one looks at the second half of the plot (green and orange) it is possible to conclude that, if anything , the rate of sea level rise is slowing down. This despite the increased quantities of carbon dioxide that have been added to the atmosphere.

That view of this data by Dr James Hansen, the “guru” of the AGW world, has now been announced through the Goddard Institute for Space Science (GISS) in the form of a paper “Earth’s Energy Imbalance and Implications” . And while it lays the blame on the slow-down on volcanic activity and a solar minimum, nevertheless it recognizes the phenomenon

Although the accuracy of ocean heat uptake in the pre-Argo era is inherently limited, it is clear that heat uptake in the Argo era is smaller than it was during the 5-10 years preceding full Argo deployment, as discussed by Trenberth (2009, 2010) and Trenberth and Fasullo (2010).

Yet with this evidence of a stability in the ocean temperature, the IEA has just announced a major increase in CO2 emissions, which leads them to predict that the temperatures will rise, around the globe, by 4 deg C by 2010, and that many of us will drown.

It would seem that even as the science becomes less certain, so the politicians who cling to it, become more determined to implement an answer that may no longer be correct.

Incidentally I was down in Florida last week, and one of those I met with was bemoaning that the oranges that used to be grown in Northern Florida (Jacksonville) can now only be grown economically further south in the state due to the colder climates of recent years, ah!

OGPSS - The trade in LNG

Just before the Christmas break the United Kingdom was going through some concerns over natural gas supply. Stored gas levels were falling and the National Grid posted a “Gas Balancing Alert” for only the second time since they were instituted. But there is no more urgent talk of such a problem – what happened?

Well the answer is that rescue, in the form of Liquefied Natural Gas (LNG) tankers came trundling over the horizon. Just this week the UK opened an expansion of the terminal at the Island of Grains that can now accommodate larger tankers, at the rate of 5 a week. LNG from the tankers to this terminal can now supply up to 20% of the national need for gas. But that is a little late for the past crisis (due to scheduling problems the first tanker won’t dock until next week) so where did the LNG come from, and where did it go ashore?

LNG tankers arriving at the Island of Grains and at the LNG terminals at Dragon and South Hook fed additional supplies into the grid.

Flows of LNG were at a total 100 million cu m/d Tuesday after South Hook ramped up 10 million cu m/d to 55 million cu m/d, Dragon was at 15 million cu m/d and Isle of Grain contributed 30 million cu m/d to the system. That is a total increase of 25 million cu m/d on levels Monday.

LNG is also going to be backed up by fresh deliveries in the next week, with UK port data showing three fresh LNG cargoes expected to berth at South Hook from Qatar in the next week, including the Umm Al Amad expected sometime Tuesday, the Mozah on December 23 and the Aamira on Boxing Day.

(The UK used 468 million cu.m. on Monday Dec 20th).

There is a growing global trade in LNG, and while most of this is committed to long-term contracts there is sufficient flexibility in the system so that when, unexpectedly, a nation may run short or a strike close a port, a tanker may be diverted. The South Hook terminal is 67.5% owned by Qatar Petroleum, and is part of a supply net that takes LNG from the Qatargas 2 train, and sends it to the Welsh terminal where it is re-gasified and fed into the National Grid. Dragon, which is also at Milford Haven, is a smaller terminal, and came on line in August 2009. The term “train” is used to describe a single processing line that produces LNG within an overall plant. Thus, for example, when BP expands its facility in Indonesia, the new plant will be called Train 2, to distinguish it from the existing line, which is train 1.

LNG tanker at the Dragon terminal

Once natural gas is produced from a well it must first be processed, and the non-gas liquids (NGLs) as well as water, carbon dioxide, and other contaminants removed so that a dry commercial gas can be sent on. Where the customer is not easily served by a pipeline (such as the case with gas from Qatar being supplied to the UK), the only viable option is to send the gas by ship. Given, however, that gas in its natural state is of low density, it is most practical to cool the gas down to the point where it liquefies. By lowering the temperature to -260 degF the gas turns into a liquid, and occupies 1/610th of the volume. This makes it much easier to store and transport, though it requires that the liquid be kept at that low temperature for the duration of the voyage.

Because the process involves three steps, liquefying the gas, transporting it in special tankers, and then feeding it through a re-gasification plant into a distribution network, the investment in each requires some assurance of a pre-existing market and agreement between the parties before the investments are made. Thus, for example, NTPC in India is now negotiating with Qatar on the supply of LNG in the future as insurance that, when a pipeline is laid from the re-gasification plant at Kochi to power plants at Kayamkulum, that a supply will be available for it. As with the Welsh plant, this can, to a degree, be assured by having Qatar as one of the partners in the project.

The parties likely agree, when making such a deal, to a fixed-price over a considerable time frame. South Korea, for example, is paying roughly $10 per kcf, somewhat above the current rate, but it will have that price for 20-years. Such an agreement may, however, make it difficult for the buyer to initially find customers in the years when that is a high price, as CNOOC found.

Qatar is the largest producer of LNG, having just announced a capacity for delivering 77 million tonnes of the liquid a year, which it currently delivers to 23 countries. This trade has grown from nothing to its current level in 14 years, with production centered around the port of Ras Laffan. (A tonne of LNG converts into 1,460 cu m of NG, or 51,600 cu. ft).

There are seven separate plants (trains) at Ras Laffan with the last having come on stream last February.

Ras Laffan 3 Train 7 is the fourth 7.8 million tons per year LNG plant brought online by Qatar Petroleum and ExxonMobil joint ventures within the past 12 months. It matches the capacity of Ras Laffan 3 Train 6, one of the largest operating LNG production facilities in the world, inaugurated in October 2009. These mega facilities have sufficient scale to competitively reach markets around the globe. Qatar's giant North Field, which is estimated to contain in excess of 900 trillion cubic feet of natural gas, will supply both trains.

Once the gas is liquefied it is transferred to one of a fleet of ships. The earlier ones had the characteristic spheres on board, as shown above, and, for example, Train 1 at Qatar uses a fleet of 10 of these to carry LNG to Japan, with a round trip taking a month. The more recent fleet is 80% larger and more efficient, this 32-vessel fleet carries LNG from Qatar trains 2, 3 and 4.

While there has been a growing market for LNG around the world, and re-gasification plants, such as those in Wales, are being developed in many countries (note the 23 countries that are customers to Qatar) the availability of LNG, with new facilities being planned in countries such as Australia likely means that there will be a continued relatively cheap supply available for a number of years. The consequences to the profitability of domestic production, such as shale gas in the USA, may become more questionable as a result.

The TWIP and changes in regulations

There has been some talk recently of the current Administration raising taxes on oil and natural gas companies. Specifically the suggestion is that Section 199 of the American Jobs Creation Act and Section 1.901-2 of the Treasury Regulations would be repealed. The API recently hosted a conference call on the topic, which I unfortunately missed. A report on the plan has recently been prepared by Dr. Joseph Mason at Louisiana State University , who succinctly describes the results as:

Section 199 was enacted by President Bush in 2004 to provide taxpayers benefits for production activities in the United States. The provision grants a “deduction equal to a percentage of the lesser of ‘qualified production activities income or taxable income.” Under the provision, labor- intensive corporations are particularly favored by being able to deduct a percentage of domestic production activity each year. The repeal would apply solely to oil and gas firms.

Dual capacity credit, (Section 1.901-2) on the other hand, allows companies to deduct taxes on incomes from abroad, offsetting relatively high U.S. taxes on foreign incomes.3 Hence, the dual capacity regulation is a way for American firms to compete efficiently against foreign competitors.

In repealing the dual capacity credit, however, the current administration would effectively double-tax firms conducting business in many foreign countries.

With the Australian intent to raise taxes on energy producing companies being one of the causes that led to the collapse of the last Government, this has not deterred the Prime Minister who is now re-committing the Government to a carbon tax. In short, given that governments around the world need to find some new pockets from which to extract the funding to keep their budgets closer to balanced, the energy industry seems to have been chosen as the sacrificial lamb.

In which regard it is interesting to note that the TWIP this week has been looking at the earnings of major oil and natural gas producers. It notes that average earnings were up over the same period last year, albeit still well below the 5-year average. Crude prices are up again, and the major companies have been increasing capital expenditures, with the increased availability of funds again. The oil and gas expenditures for the majors, for example, is not only up over last year, but is 19% over the average for the 2005-2009 timeframe.

Generally in the energy business, industry has to invest an increasingly large amount of money to find and then develop new fields of production. New resources are harder to find, and more expensive to develop, even when things go according to plan. Unfortunately the business is also one where impacts take some time to have an effect. Oil shipped in from the Arabian Gulf takes time to get to the United States, as a trivial example, but more germane, it takes years to find new fields, and then more years to develop them. The problem is that this usually slow response to change means that the impact of changes in the rules don’t always immediately appear to have the consequences that ultimately show up.

I have mentioned before (and will again) the dangers that the UK faces in long term energy supply as power stations are condemned to closure without a surety that there will be power in place and available to meet the evolving gap that this will lead. The world, at present, seems to believe that all will be well thanks to Russia, Turkmenistan and their neighbors who have a plethora of energy to offer. What is usually neglected in that review is the pipeline construction heading from those countries to China. The problem, of course, is that everyone assumes that the energy will be available, not recognizing the growing number of customers who are all bidding for volumes that will not meet global demand over the intermediate time interval. And the frequency with which gas pipelines seem to rupture as it crosses some of those borders is quite remarkable. The latest, between Kazakhstan and Russia occurred early Wednesday.

We are all, I fear, sadly complacent.

Turning just briefly to some of the graphs in the TWIP, and their possible meanings; Refinery inputs have leveled out, a little above last years numbers:

(Source TWIP)

Domestic crude is hovering around where it was at this time last year while imports have fallen from 10 mbd down to about 9.2 mbd since the middle of the summer, but this is a recognition of the change in driving as go go into the Fall. The drop in demand, that was holding off a little when I last commented on the numbers a couple of weeks ago, is now well under way.

(Source TWIP )

Since this is the first year that the EIA is showing ethanol numbers it is worth noting that while ethanol production continues to climb:

(Source TWIP )

the volume in stocks has been declining, though since this is the first year that the record is displayed, it is not yet clear how the seasonal trends will impact the shape of the curve.

(Source TWIP )

Given that, at the end of the month, the EPA is expected to rule on the use of E15 (i.e. 15% ethanol in the mix) ) it is perhaps not wise to make too many comments on the current shape of these graphs, since they are likely to change under that influence.

The anticipated benefit (apart from lowering the amount of crude that has to be imported) is based on an anticipated reduction in pollutants and better burning of the fuel in the engine. It remains to be seen what the unanticipated consequences are.

Since this is the political season our mayor dropped by our service club the other day to comment about the horrors of trying to run a budget as more and more mandates come down from the Federal Government, often written years ago, but only now showing up (so that he was careful to say that both parties share in the blame). His main theme (other than that we are not as bad as we might be, but that street repairs can only fix shorter stretches) was that many of the consequences only show up much later than the legislation, and regulation, and by that time it gets very difficult to correct initial mistakes.

Secure and timely energy supplies are a critical part of the success of industrialized nations. We need to remember that.

The UK - new Government, new Energy policy?

The new British Government has moved in, and Chris Huhne is the new Secretary of State for Energy and Climate Change, Charles Hendry is the new Minister of State for Energy while Gregory Barker is the new Minister of State for Climate Change. (Interesting set of pre-government employments). This post will look at the new policy statement, relative to the recent Ofgem Discovery Report.

(Saturdays on this site are usually devoted to issues of Climate Change, just to make a little break from the usual focus on energy, although the two are quite closely related. Because of the spill in the Gulf, and some travel before that, I have drifted away from the practice, but hopefully by next weekend things will have quietened down enough that I can return to analyzing the behavior of state temperatures over the last century.)

The challenge (Ofgem)

The policy statement for the new Government in the UK includes the following objectives for the Department:

• We will push for the EU to demonstrate leadership in tackling international climate change, including by supporting an increase in the EU emission reduction target to 30% by 2020.
• We will seek to increase the target for energy from renewable sources, subject to the advice of the Climate Change Committee.
• We will continue public sector investment in carbon capture and storage (CCS) technology for four coal-fired power stations.
• We will establish a smart grid and roll out smart meters.
• We will establish a full system of feed-in tariffs in electricity – as well as the maintenance of banded Renewables Obligation Certificates.
• We will introduce measures to promote a huge increase in energy from waste through anaerobic digestion.
• We will create a green investment bank. • We will retain energy performance certificates while scrapping HIPs.
• We will introduce measures to encourage marine energy.
• We will establish an emissions performance standard that will prevent coal fired power stations being built unless they are equipped with sufficient carbon capture and storage to meet the emissions performance standard.
• We will cancel the third runway at Heathrow.
• We will refuse permission for additional runways at Gatwick and Stansted.
• We will replace Air Passenger Duty with a per-flight duty.
• We will introduce a floor price for carbon, and make efforts to persuade the EU to move towards full auctioning of ETS permits.
• Through our ‘Green Deal’, we will encourage home energy efficiency improvements paid for by savings from energy bills. We will also take measures to improve energy efficiency in businesses and public sector buildings. We will reduce central government carbon emissions by 10% within 12 months.
• We will reform energy markets to deliver security of supply and investment in low carbon energy, and ensure fair competition including a review of the role of Ofgem.
• We will instruct Ofgem to establish a security guarantee of energy supplies.
• We will give an Annual Energy Statement to Parliament to set strategic energy policy and guide investment.
• We will deliver an offshore electricity grid in order to support the development of a new generation of offshore wind power.
• We will encourage community-owned renewable energy schemes where local people benefit from the power produced. We will also allow communities that host renewable energy projects to keep the additional business rates they generate.
• As part of the creation of a green investment bank, we will create green financial products to provide individuals with opportunities to invest in the infrastructure needed to support the new green economy.
• We will work towards an ambitious global climate deal that will limit emissions and explore the creation of new international sources of funding for the purpose of climate change adaptation and mitigation.
• Liberal Democrats have long opposed any new nuclear construction. Conservatives, by contrast, are committed to allowing the replacement of existing nuclear power stations provided that they are subject to the normal planning process for major projects (under a new National Planning Statement), and also provided that they receive no public subsidy.
• We will implement a process allowing the Liberal Democrats to maintain their opposition to nuclear power while permitting the Government to bring forward the National Planning Statement for ratification by Parliament so that new nuclear construction becomes possible. This process will involve:
– the Government completing the drafting of a national planning statement and putting it before Parliament;
– specific agreement that a Liberal Democrat spokesperson will speak against the Planning Statement, but that Liberal Democrat MPs will abstain; and
– clarity that this will not be regarded as an issue of confidence.

The big change, of course, between being in Opposition and being the Government is that the coalition how has to make the system work, as well as meet the objectives that they have now outlined.

There are some tough hurdles in the above that will now have to be reconciled with the actual state of British energy supplies, and the relative costs of providing energy to a nation that is on the downside of the curves for the provision of oil and natural gas from its own resources. The Prime Minister has stated that

So today, taking our lead from 10:10, I commit us to a ten percent reduction in carbon emissions across central government in the next twelve months. You’ll be driving this forward. But I have also made sure all Cabinet ministers are involved, developing plans to show how they will meet their share.

“And the public will be involved too - because we're going to publish the energy use of government headquarters in real-time, so people can hold us to account for our performance.

And lest you miss which is viewed as the more critical aspect of the new Secretary’s job, let there be no doubt, since he stated his goals.

Climate change is the greatest threat to our common future. We have a very short period of time to tackle the problem before it becomes irreversible and out of control.

“A lot of progress has been made, but we must now go further, faster and turn targets into real change.

And

Together we have the opportunity to make this the greenest government in our history. And to put energy security, for too long a second order issue, at the heart of the UK's national security strategy.

In the United Kingdom Ofgem (the Office of Gas and Electricity Markets) regulates the monopoly gas and electricity companies in the UK, and is intended as a consumer watchdog. In March it produced a “Discovery Report”, which notes some of the concerns that had then risen with regard to future energy security. It shows, through this figure, the need for adequate lead time for many of the changes that will come about as domestic supplies fall.

The challenge (Ofgem)

Specifically they note:

• The potential need for additional gas storage and gas ballasting facilities (to address gas quality issues) around the middle of the next decade as our import dependence passes significant milestones (as based on our Dash for Energy scenario);
• The possibility that additional combined cycle gas turbines (CCGTs) will be needed before 2016 to offset plant closures associated with the Large Combustion Plant Directive (LCPD);
• The need for low carbon alternatives, such as new nuclear or plant fitted with carbon capture and storage (CCS), to be deployable at scale to replace closing nuclear plant and large volumes of fossil fuel plant expected to close from 2020 under the terms of the Industrial Emissions Directive (IED); and
• The (at least) doubling of our wind deployment rate by the end of this decade that will be needed if the 2020 renewables targets are to be met.

They note that this is going to require significant investment, which may be a problem given that the UK is currently anticipating making major budget cuts to overcome the deficits left by the previous government.

The report calls for an investment of 200 billion English pounds by 2020, which, in context, is larger than the current UK budget deficit of 163 billion pounds, about 11% of the GDP. That deficit is leading to current plans for cuts of up to 6 billion pounds in the public sector. The first budget to more comprehensively address this will be announced on June 22nd.

In regard to the availability of funding the Ofgem report notes:

our assessment suggests that prices may indeed not rise sufficiently during periods of scarcity and we believe that this presents a material risk to security of supply. As a result, potential investors in new power stations could find it difficult to recover their investment costs and so may not build new plant. Some commentators suggest that this so called 'missing money' problem in electricity markets can only be addressed through separate mechanisms for rewarding capacity as have been implemented in the US and elsewhere. Others argue that capacity mechanisms are not necessary and lead to inefficiently high prices.

One issue that the report highlights that I had not previously considered is that of natural gas quality. There is a significant difference, apparently between that needed in the UK for existing appliances, relative to that obtainable, for example, from Russia.

The difference in gas specification creates a risk that gas cannot flow via the IUK interconnector to the GB market. Up until now, Fluxys, the Belgian SO, has been able to manage this risk to imports via the IUK by swapping higher calorific sources with lower calorific sources or by using linepack to keep gas within the GB specification. However, there is a risk that the high specification of new sources of Russian gas and the increasing specification of Norwegian gas arriving at Zeebrugge may make it more difficult for Fluxys to provide these services. This means that there is an increasing risk that flows could be curtailed on certain days to stop "out of spec" gas from entering GB.

To cut to the bottom line, the report notes that:

They lead us to conclude that, in the context of the risks identified in our scenario work, there are reasonable doubts as to whether the current arrangements will deliver security of supply and environmental objectives at affordable prices. . . . . . . Ofgem does not consider that leaving the current arrangements unaltered is in the interests of consumers.

That seems to be a realistic point at which to sit back, and see how the Government actually will overcome the problems – or at least try.

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.

The OFGEM Report - bad news which may be optimistic

As the year starts its move towards a close, there are an increasing reams of reports coming out that review aspects of the global energy supply. One of these came out in the UK last week. It is the report from the UK’s Office of Gas and Electricity Markets (OFGEM) on Project Discovery – which looks at four future energy scenarios for the UK.

The report recognizes that the UK has a growing problem. This is because there are two directives from the European Union, the Large Combustion Plant Directive and the Industrial Emissions Directive (pdf) that increasingly restrict the use of coal and oil-fired power plants, when, at the same time, some nuclear plants will also be closing which will lead to a reduced number of major power plants being available. New power plants take time to plan, permit and construct and the postponement of construction of the new power plant at Kingsnorth this past week merely underlines the coming problems.

And so OFGEM set out to see what the challenges and risks to the UK would be over the next twenty years. The report is the result of that investigation.

It looked at four scenarios based on two levels of economic recovery and two levels of investment in green technologies, which combine to the four scenarios examined.

The four scenarios OFGEM examined.

The scenarios had some underlying assumptions to allow dealing with the conditions that were imposed in the models. There is, for example, the assumption that investment for each scenario (which reaches 200 billion British Pounds (BP) for The Green Transition scenario) will be available and will allow the timely investment in power generating systems that meet the targets set. (As a source of reference the UK spent $8 billion BP in 2008 on utility capital investment for the green scenarios this will have to rise to 30 billion BP in 2019).

With an increased reliance on imported natural gas, where the domestic production falls short, there is also the assumption that this will be available – an area of concern in times of high demand in a severe winter. (And this winter may be one) This will, however, become more of an issue in the UK as it responds to the EU directives and loses a significant sector of its electricity generating power after 2015. The report notes that the market and the regulatory arrangements can well undergo severe testing as the nation moves out of the comfortable position it currently holds, with large gas reserve (by normal standards) and a robust gas infrastructure.

The investigation applied a number of stress tests, under the different scenarios, and evaluated their results. The results were summarized in the following figure:

OFGEM stress tests and their perceived results (Bacton is the UK gas import facility)

The designation 1 in 20 refers to the worst condition in the past 20-years with the peak day being the highest demand for energy on the coldest day; and the severe winter being a period of 60-days of exceptionally high natural gas (NG) demand.

While the rapid response and move to green energy both tighten the NG market, when there is not this initial high demand, then the evaluation is that the market will remain oversupplied, though tightening towards the end of the study period.

Perhaps the assumption that raises the greatest doubt is the one that crude oil prices rise to $130/bbl and then fall back, as upstream investments provide the additional supplies needed, to a price of $110/bbl. They cite the IEA and the EIA models as justification for these assumptions, which apply to the rapid growth scenarios. When there is a slower rebound of the economy, then oil prices are anticipated to stabilize at $90/bbl (and they point out that the EIA is predicting that it would actually fall to $50/bbl).

The peak price that they see for NG is 100p/therm under the rapid growth scenario, while carbon dioxide prices are set at 50 BP/ton by 2025 (assuming a global agreement at the meeting in Copenhagen this winter).

In assuming that adequate NG will be available it appears that they are assuming that all the gas pipelines projected will be funded and adequately supplied at full capacity (something that is currently quite questionable for Nabucco, as but one example – though Nabucco only becomes necessary under the rapid demand scenarios), though they also assume that LNG will be available to fill any shortfalls, and that NG will appear from the Yamal fields in the time and quantities predicted (either 2013 or 2014).

OFGEM assumed European supplies of natural gas

In all scenarios they recognize that there must be an increase in the amount of NG supplied from Russia, though, as noted, there is an assumption that there will be enough LNG to make up any shortfall. (Global demand is expected to double or treble by 2020 – to somewhere between 350 bcm and 700 bcm/year – and largely the USA takes care of itself).

As with many of the models of an energy future this one includes the caveat

provided the market participants respond adequately to market signals

but with those responses governed also by perceptions of future politics, and the potential limitations of future supply, that caveat may well cover a multitude of unpleasant outcomes. Yet this is recognized also realistically (but with no real current solution being available to provide an answer).

there are security of supply risks within each scenario, but as important is to consider the implications for security of supply resulting from the huge range of uncertainty that the scenarios cover. For example, by 2020 gas demand could be as low as 77 bcm/yr or as high as 113 bcm/yr depending on the scenario, low carbon generation could make up anywhere between 21% and 52% of the mix, the levels of investment required in the GB energy market (excluding upstream investment) could range between £96bn and £200bn depending on the extent of environmental actions. Together with more traditional risk factors such as commodity prices and project risks, this means that investors face difficult decisions before committing large sums of capital to new projects.

The way in which these events unfold in the UK is that report is now open to public comment with specific questions being identified that OFGEM is interested in getting answers to.

It will be interesting to see how this plays out, though I fear that some of the assumptions that have been made as the review progressed are a little optimistic about future supplies of oil and natural gas.

Although it has the highest investment cost, it appears that the Green Transition is perceived as giving the best outcome:

The Green Transition summary

While perhaps the dash for energy scenario projecting the worst outcome:

The Dash for Energy summary of outcomes

It will be interesting to follow the story, and see how Britain reacts, given that, as the report notes, while the time for decision is here, the conditions are still pleasant, and the urgency of the situation is not yet apparent.