Natural Gas

The Saudis counted them out. So did the Russians, even many domestic analysts said North American shale and tight oil and gas production would decline in the face of low prices an that investment would dry up and output would fall.

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Well, guess what? They have all been proven wrong. Sure, rig counts have dropped and there have been painful layoffs of workers, but the industry is surviving and against all the “experts” advice production of natural gas from the Marcellus and Utica shales of the U.S. Northeast is averaging 22.63 billion cubic feet per day in August, according to a Financial Times article.

Natural Gas Output Up

That is up 2% from July and the most since February’s all-time high of 22.78 billion cu-ft/d. Despite earlier U.S. government forecasts that combined gas output from the two shale areas lying beneath Ohio, Pennsylvania and West Virginia would decline, producers have managed to maintain volumes by tapping inventories of drilled but uncompleted wells and burrowing deeper, longer wells that yield more gas. Read more

Renewable energy technology has been split into two camps since it became a reality around the turn of the century.

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On the one hand there are the passionate environmental believers for whom the inflated subsidies were an irrelevance in the face of saving our planet, and on the other were naysayers for whom the arguments about global warming were a plot by the far left to raise taxes or run some kind of tree-hugging environmental agenda at the expense of business and consumers.

Neither polarized position was fair, of course, and the quiet majority in the middle have watched the technologies become progressively more efficient and costs fall dramatically while the extremes of global warming horror stories have been discredited, but the hard science of gradually rising carbon levels has been widely accepted.

Who Cares Why The Temperature is Rising?

In the process, a wider acceptance has gained ground that global temperatures really are rising and whether it is part of a natural cycle or man-made is not a risk we can afford to take. Ultimately, action to reduce carbon emissions will be cheaper than many possible downside scenarios if left unchecked and most people would accept we are making a mess of our environment and really should behave more responsibly.

Meanwhile, politicians have been plowing our taxpayer money into supporting wind, solar and a number of other “renewable” technologies, with some degree of success. Costs for the major energy sources — solar and wind — have fallen, partly as a result of technology improvements and partly due to economies of scale, to the point now where private firms are signing up to invest in major wind projects for a tariff of just $100 per MegWatt/Hour (€90 per mw/h). Indeed, in Europe all the extra power capacity added since the mid ’90s has been renewable.

Source: Telegraph Newspaper

Source: Telegraph Newspaper

The biggest hurdle renewables now have to overcome is not the cost of production, but the curse of intermittency. Where does the power come from when the wind doesn’t blow or the sun doesn’t shine? Read more

Source: Reuters/Energy Information Administration.

Source: Reuters/JKempEnergy/U.S. Energy Information Administration.

Consumption of natural gas by U.S. energy providers/utilities has steadily increased for the last decade.

BP’s Energy Outlook 2035 may not be an accurate view of the future Energy landscape over the next twenty years — with so many variables it would be surprising if it was — but it is the basis the oil major is pinning its own long-term strategy on so we can be assured it is well researched, and as a result is about as good as it gets as an exercise in energy market crystal ball gazing.

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Not surprisingly, the report states that power generation is expected to account for an ever-increasing share of primary energy consumption as the world continues on a long-term trend of electrification.

The Electric Share

The share coming from electricity rises from 42% today to 47% by 2035 and, as a result, power generation will become an increasingly important driver of how the global fuel mix evolves. The report points out that oil rose in the 1960’s, then nuclear in the 70’s and 80’s and, finally, natural gas in the 90’s and 2000’s.

The expectation going forward is, not surprisingly, that renewables will play an increasingly important role. The surprise is, rather, that they will not rise as fast or become as dominant as many would expect based on the current focus by governments and other authorities. By 2035 BP sees a more balanced and diversified portfolio of fuels for electrical power generation.

Surprisingly, with so much focus on carbon emissions and the rapid closure of coal-fired power generating capacity in Europe and parts of the U.S., the report sees coal remaining the dominant fuel, accounting for more than a third of the inputs to power generation, a share it holds at 44% today. With continuing global growth in coal use of 0.8% per  it is expected to remain a significant contributor with the gap between the shares of coal and of other fuels simply narrowing.

Source: BP Energy Review 2016

Source: BP Energy Review 2016

As a result — and not what the climate change lobby would be hoping to hear, total carbon emissions from energy consumption will increase by 25% between 2013 and 2035 (about 1% per year), with the rate of growth declining from 2.5% over the past decade to 0.7% in the final decade from 2025 to 2035. Read more

There was a lot of talk last year about coal resources needing to be left in the ground if the world was to reach it’s 2-degree-celsius reduction environmental targets.

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The suggestion was that legislation was required to force power generators to switch to less polluting energy sources and, while in the meantime tougher emissions standards have played their part, the market has been much more active than government in encouraging change.

Could 2015 be the beginning of the end for coal-fired power in the US? Source: Adobe Stock/Snap Happy

Could 2015 be the beginning of the end for coal-fired power in the US? Source: Adobe Stock/Snap Happy.

A recent US Energy Information Administration report covered by Reuters states that generators produced 101.86 million megawatt hours (MWh) of electricity with gas in November versus just 87.78 million MWh with coal, the lowest monthly level since May 1980 when monthly coal use was 84.88 million MWh.

How Coal Lost Ground

After more than one hundred years during which coal was the dominant fuel for power generation, some analysts think that when the final data for December is in, 2015 will prove to be the year natural gas took over. Read more

We wrote recently about the probability that coal assets would become increasingly uneconomic if climate change related legislation such as emission caps and carbon taxes heaped costs on the industry that have, so far, been avoided.

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Well, an article in the Financial Times gives a glimpse of the future as envisaged by Amber Rudd, the UK government’s energy secretary. Speaking to the BBC hours before a speech on UK energy policy, Ms. Rudd announced a major review of the subsidies the UK pays for electricity produced from natural gas in an effort to encourage the replacement of the UK’s coal-fired power stations with combined-cycle, gas-powered technology ostensibly with a view to reduce carbon emissions

Coal vs. Natural Gas

Rudd would say later in her speech that she wants all coal power stations to shut down by 2025. The UK currently produces 21% of its electricity from coal-burning power stations, but those stations produce some 75% of the electricity industry’s CO2 emissions. However, a third of these power stations are expected to close by 2016, so that they meet EU air quality legislation.

Coal cars may not be lining up in the UK soon. Source: Adobe Stock/Carolyn Franks

Coal cars may be a thing of the past in the UK soon. Source: Adobe Stock/Carolyn Franks.

Coal creates roughly twice as much carbon dioxide as gas when it is burned for power. According to another FT article this week, research presented by the American Petroleum Institute shows that in the 25 US states with the highest rate of carbon dioxide emissions from their power generation, switching completely out of coal-fired generation and into gas would more than meet their targets for reductions set under the EPA Clean Power Plan.

For once, where the UK leads the US may follow if the current administration can build a head of steam behind emission reductions following next month’s summit in Paris. We say “may” with caution though. The US coal lobby is infinitely more powerful than the UK coal mining industry and, with an export market dwindling fast, can expect to put up a fierce resistance to the suggestion coal-fired power generation should be abandoned en masse.

Auctions and Emissions

In the UK, Rudd at least recognizes it is not sufficient to heap emission limits on power generation and expect the industry to sort itself out, switching from coal to other options. A recent auction for peak power provision ended up set to hand hundreds of millions of pounds in subsidies to highly polluting diesel generators, which are cheap to build and can undercut the prices offered even by gas plants.

The auction process could be rebalanced to take emissions into account, but that would not, in itself, encourage the industry to invest in new gas plants. For that, the market needs a guaranteed price which only the government can provide, much as it did for a recent new nuclear power plant project. Investors just aren’t willing to make 25-30 year commitments in such a volatile wholesale electricity market as the UK.

No guesses who will end up paying the price of the governments drive to be the “greenest government” ever, as usually consumers will foot the bill for subsidies, but at least with natural gas they have plants capable of meeting base and intermittent peak load in a relatively less polluting manner and, unlike renewables, with total reliability of supply.

Under Vladimir Putin, Russia bet its future on its abundant natural resources, believing it was irreplaceable as an energy source to the economies of Western Europe.

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Russia pumped oil and gas, nickel, aluminum and other commodities at the expense of building its manufacturing base. With few exceptions, manufacturing suffered at the alter of a strong ruble and, for a time, was flattered by a strong domestic economy playing catch up after years of Soviet waste. The following graph of real effective exchange rate against exports of non-oil goods shows how the strength of currency correlates with falling exports of manufactured goods.

REER appreciation has adversely affected no-oil imports.

Source: London Telegraph

But now, a combination of falling commodity prices, particularly oil and gas, and western sanctions following Russia’s misadventure in Ukraine in 2014, have left the economy in a state of decline. According to the London Telegraph Russia is running a budget deficit of 3.7% which may not sound like much, but for an economy without developed capital markets it shouldn’t be running a deficit at all according to sources quoted by the paper. Read more

A quiet revolution is going on in the US power generation market, and it may be giving a lesson for those countries dithering over whether to allow hydraulic fracturing (fracking) of oil and natural gas deposits identified but not yet proven.

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According to the FT, April was the first month in US history that gas-fired electricity generation surpassed coal-fired generation, (although it came close in 2012 when gas prices were also very weak). By comparison, in 2010 coal provided 45% of US power. In April of this year 31% of US electricity was generated by natural gas compared to 30% for coal, and the trend continues.

Watts Up

In gigawatt terms, wind power is growing even faster than natural gas, flattening the latter in the league tables. US coal capacity dropped by about 3.3 GW during 2014, and the US Energy Information Association predicts it will shrink by a further 12.9 GW this year, while wind power capacity rose by 9.8 GW and gas by 4.3 GW.

Source FT

Source: Financial Times

The reasons are more complex than simply low natural gas prices, although that, undoubtedly, is a major factor. The Environmental Protection Agency’s failed attempt to force environmental compliance by the back door this year encouraged some coal-fired utilities to see the writing on the wall and either mothball plants or invest in new technology to accommodate the mercury emission and other pollution targets, raising costs.

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Most of the metals news today involves the world of oil and gas where low prices have stunted exploration but, apparently, not acquisition. Alcoa, Inc. also kicked off earnings season today, reporting its Q1 results.

Shell in Talks to Buy BG

Petroleum giant Royal Dutch Shell is in advanced talks to acquire Britain’s BG Group in a deal that would likely be valued at upward of $50 billion and would serve as the latest sign of how tumbling energy prices are shaking up the global oil-and-gas industry, according to the Wall Street Journal.

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The deal, should it come to fruition, would enable the two European energy giants to eliminate overlapping costs to help compensate for the toll lower prices have taken on their top lines.

Alcoa Slumps As Aluminum Glut Predicted

Alcoa, Inc. earnings dropped 4.8% in its first quarter report today as the biggest US aluminum producer forecast a global supply glut for the light metal in 2015. Alcoa traditionally kicks off earnings season in the US and stocks fell as investors weighed the outlook for corporate earnings.

Assuming a clear and acceptable agreement regarding Iran’s nuclear ambitions can be reached, the potential for foreign firms looking to invest in what has, until recently, been America’s arch-enemy is considerable. Indeed, according to an Economist article western firms are already beginning to do limited business with Iran in order to position themselves for the anticipated end to sanctions. Boeing said it had made its first sale to Iran since the Islamic Revolution in 1979, selling $120,000-worth of aircraft manuals and other data.

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Interestingly, although western firms pre-sanctions were most deeply involved in the manufacturing sector, Peugeot of France, for example, enjoyed a near 30% share of Iran’s automotive market before they left in 2012 due to sanctions. The commodities sector may hold the biggest potential opportunities for westerners looking to partner with local firms.

The natural gas market is a perfect example; although Iran has the world’s largest reserves it supplies just 1% of the global market, yet Asian buyers are actively seeking new suppliers. Iran has been starved of know-how in the form of the latest technology and funds for investment in gas collection, liquefaction and construction of export terminals, areas the west would be keen to participate in. Interestingly, miners are singled out by the Economist as another sector that could be an early target since much of the industry is already privatized, avoiding the bureaucracy of state enterprises. Iran has the world’s 9th largest copper reserves and the 11th in iron ore the report says, even though both commodities are currently in an over-supplied position and would require substantial investment to have any chance of making them globally competitive at current prices.

But massive challenges remain. Back to the car industry, car production, which used to account for 10% of GDP and employ 1 million people, fell by about 70%, according to industry sources quoted in another Economist article. A Mercedes-Benz factory in Tabriz that a few years ago was making 80 engines a day now produces just 2, inflation and employment have both been rampant these last few years and the economy which over the previous decade had been growing at an average rate of 5.1% a year dropped by 5.8% last year on top of a 2% fall the year before.

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