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Natural gas depletion and what it will mean this winter

by Jerome a Paris Mon Nov 21st, 2005 at 10:02:33 AM EST

From the diaries ~ whataboutbob

The UK will only have enough gas this winter if it's not too cold:

A wholly predictable energy crisis looms

Crisis, what crisis? The Government can hardly be blamed for the weather but it is responsible for the country's energy policy. Having denied for months that we are in danger of running out of gas this winter, there is a sudden sense of panic in the Downing Street air now that the temperature has begun to drop.

click on all graphs for larger versions

New Zealand may lose 25% of its power overnight:

The Maui gas field has been responsible for 25% of New Zealand's electricity generation. When it runs out in a year or two, not only will a multibillion dollar infrastructure become essentially obsolete overnight but New Zealand will have lost 25% of its electricity generation capacity.

Maui Gas: Experience the Depletion Cliff

Production this year was 21.6% less than the 2003. Production in 2004 was 33.5% less than in 2002. In 2002 the Maui natural gas field produced a volume of gas higher than it ever had in its past. This illustrates the depletion issue with such clarity that even a flat-earther should recognise it. The volume of gas produced in the June 2004 year was the lowest level recorded for a year since 1986.

Maui gas production is in free fall. In peak oil terminology we are over the cliff. Within a year, maybe two tops, Maui gas will be gone. We are not the only nation facing natural gas depletion. The great Canadian natural gas fields, which power much of the United States, are on the production plateau. Major blackouts have already plagued the US over the last couple of years caused by peak surges in electricity consumption. As Canadian gas production hits the cliff it is almost certain that the US will experience severe and lasting electricity outages.

The Maui gas field has been responsible for 25% of New Zealand's electricity generation. When it runs out in a year or two, not only will a multibillion dollar infrastructure become essentially obsolete overnight but New Zealand will have lost 25% of it's electricity generation capacity.

In North America:

Gas production is still somewhat stable, but this comes increasingly from new fields that get depleted very quickly:

(from this presentation (pdf) on the Californian power market)

Essentially, more and more wells need to be drilled to maintain production - the industry is running ever faster just to stay in place.

(both images from this transcript of a 1999 Oil&Gas Journal article)

So, in the best case, production is stagnant, while demand keeps on growing:

Note: YTF = yet to find. As shown above, new gas fields are increasing small and drained increasingly quickly, so that hypothesis that production will remain flat overall may be increasingly optimistic with time.

Now, back to the Independent article about the UK:

Those who warned of trouble ahead, such as the CBI's Sir Digby Jones, were accused of being scaremongers. Now we know that Tony Blair was sufficiently concerned to convene a secret meeting with industry representatives nine days ago to discuss just such an eventuality.

Ministers wanted to find out how much big industrial users could cut their consumption by in order to keep the home fires burning and, second, what impact the resulting decline in output would have on the economy.

Consultants have now been hired to crunch the numbers.

The National Grid reckons that in the event of a Siberian-style winter, the like of which Britain experiences only once in every 50 years, industrial consumption would need to halve for the best part of two months. Even a one in ten type winter would require a 30 per cent reduction in demand for 40 days. The Met Office, for its part, reckons there is 65 per cent chance of a colder than average winter this year and a 35 per cent chance of it being a severe one.

So basically, whether the country has to go cold or to stop working will depend on the weather, because there is simply no way to import gas easily.

Gas is an infrastructure business: it can be transported either by pipelines (doable if the gas field and the consumers are at a reasonable distance from each other, and on the same landmass) or by LNG (on sea, but on a cargo by cargo basis, i.e. smaller volumes). LNG trade is slowly beginning to connect what were previously totally separated markets in Europe and the USA, but the volumes in play are still pretty small, and North America currently gets 99% of its gas from North America.

(The graph below, and all others below except the last one were pulled from a BG Group presentation which can be downloaded from here: LNG - the Supply Chain (Ziff's North American Gas Strategies Conference, Calgary) and which I recommend to all)

LNG trade to the UK or to the USA, the only possible source of additional natural gas, depends on the availability of (i) LNG import terminals and (ii) LNG production facilities.

Today, there are 5 terminals in service in North America, and 4 under construction (essentially those that will receive Qatari LNG). Beyond that, a number of projects are under way, but it's not clear whethere they will be permitted and where they will get they LNG from (most of the projects from the countries listed above Qatar in the above graph are still tentative as of today).

So, if all goes well, some volumes of LNG will get to the US market from 2009 or so - not enough to cover the expected shortages then - nor earlier. Higher Henry Hub (HH) prices will attract "spot" LNG to some extent (i.e. uncommitted volumes that some producers have available) but that it never going to be a significant portion of that business which requires very heavy investments (Qatar will have spent 55 billion dollars to bring its LNG export capacity to 9bcf/d in 2010) - and thus long term contracts for most avialable volumes to underpin these investments. But that spot LNG market will drive prices up.

So far, winter has been pretty mild, and thus Henry Hub prices have not gone up further - they are now back at their post-Katrina levels:

But this is unlikely to last if the winter becomes harsher than usual, and some areas may find themselves, like in the UK, with the choice between cutting off residential users or cutting off industrial users. Price mechanisms would likely cut off industrial users, but would create a political backlash as retails prices go through the roof. The other option is rationing. either way, the economic consequences will not be benign.

In recent years, gas-fired power plants have been built in many countries, starting with the USa and the UK, on the basis of plentiful - and cheap (expectations were for 2-4$/mbtu gas prices) natural gas. Suddenly, gas is neither cheap, nor plentiful, and it's going to be a painful experience - call it a grand rehearsal for peak oil...

So, the question for us at EuroTrib (rather than for me as a UK resident) is what is the stopgap policy on energy for progressives?

It's clear that different energy sources need to be explored, but whilst renewables may come online quicker than nuclear, they still take a while.

In the short term, conservation is all I can think of, but it's a limited thing to say to the elderly poor who can barely afford to stay warm as it is.


by Metatone (metatone [a|t] gmail (dot) com) on Sun Nov 20th, 2005 at 02:21:52 PM EST
I am afraid the most rational policy might be one "not unlike" triage.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Nov 20th, 2005 at 03:48:11 PM EST
[ Parent ]
"not unlike" triage...

Hm. Well that certainly equates "rational" with a certain  brutal (if perhaps short-sighted) efficiency. Perhaps the progressive left is ready to take on the neo-cons after all.

by Metatone (metatone [a|t] gmail (dot) com) on Sun Nov 20th, 2005 at 05:18:06 PM EST
[ Parent ]
The neocons want to survive themselves while enjoying access to the most resources possible, all the rest of us be damned.

'Triage' is about ensuring the survival of the most people possible, and some unsavoury decisions need to be made on the basis of individuals' likelyhood to make it through the crisis.

I know it sounds callous, but if the UK really runs out of power, what are you going to do?

On the other hand, one can save electricity and gas by insulating one's house better and using more warm clothes and thicker blankets. What we won't be able to do is walk around in a t-shirt inside our gas-heated homes during the winter in temperate latitudes.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sun Nov 20th, 2005 at 05:28:03 PM EST
[ Parent ]
Does anybody know how the situation is for continental europe?
by srutis on Sun Nov 20th, 2005 at 05:10:17 PM EST
now imports pretty much 100% of its gas, but it comes from a number of sources. Two thirds come from Russia and Norway in equal part by pipelines, the rest comes from the Netherlands (pipe again) Algeria (LNG), Nigeria (LNG) and Egypt (LNG) from next year.

All of that supply comes under long term contracts.

A lot of Europe's gas comes from Russia, which has enough reserves and production capacity to expand, and has enough spare capacity in the pipelines to Europe (and is busy building new ones). Peak gas will strike at some point, but there are no real risks of short term disruptions. Italy and Spain also import from Algeria, both by pipe (Italy for now, Sapin soon) and by LNG, as well as from various places by LNG (Nigeria, Qatar, Trinidad)

Also France uses very little gas for power production, so demand is residential and industrial and thus quite predictable. The other big economies use a lot more gas in the power sector - it's replacing coal these days - also for carbon emission reasons.

(Note that the UK is connected to the European grid through only one single pipeline which does not have a very large capacity)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Nov 20th, 2005 at 05:46:31 PM EST
[ Parent ]
just not for very long...............and not always for the most number of folks.

Cycling on price is the history of the nat gas market.  Price spike, lots of exploration, price collapse, no exploration.  Unfortunately, starting to look like it's not just a matter of poking more holes in the ground this time.  There's just too many of us demanding too much energy.

The last cycle in the US on very cheap gas we had deregulated electricity production so anyone trying to rapidly exploit the shortage in electricity generation slammed together a nat gas turbine project to grab a quick profit.  I know folks that made hundreds of millions on projects that barely even ran.  By the time they got their plants up, the price spike was past and they could cover back the paper hedges and just take the profit.  

Without a PUC mandate for a rational balance of generation nor a mandated paying up front for more expensive coal or other generation (Dare I say Nuke??)  the market gives you solutions like this.  PUC's suck, but suck less than any other system in MHO (begging the pardon of Churchill). Suddenly windmills on the horizon may look awfully good to the NIMBYs.

There are some mitigating factors that will come into play.  First, fertilizer/ethylene production will move to remote gas locations.  US plastics production cannot compete using $11+ gas vs $0.75 in Saudi or Nigeria.  That will buy some time.  I read a number of producers are going back to waxed paper cartons to replace plastic containers as well.  I seem to remember getting a penny a piece to return empty re-fillabale soda bottles when I was 6ish.  Maybe we head back there as labor values drop off in the US.

I do agree with the fundamental thrust of your argument.  The era of cheap energy is rapidly drawing to a close.  But it will take a little longer than you think as there will be demand side destruction which always seems to be understated or ignored in these sorts of arguments.  Hence the Race to $50 oil rather than $100 this winter.

by HiD on Mon Nov 21st, 2005 at 12:19:50 AM EST
I too remember when they introduced "nonreturnable glass" as an "advance" in Spain. Looking back on it with my adult understanding of environmental issues I think that "advance" was a disaster.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Nov 21st, 2005 at 03:28:48 AM EST
[ Parent ]
Wohoo!!! Us Norwegians are learning Chinese pretty fast these days... KA-CHING!!!

Dub mentality
by Coug (me(AT]tommyb{DOT]info) on Mon Nov 21st, 2005 at 05:03:48 AM EST
I'm not sure about this, but I believe that New Zealand still has a methanol plant that uses natural gas as a feedstock, then exports its production.  Does anyone know if they have considered declaring force majeur to close that plant and conserve some of their remaining gas?

Also, I think that approximately 10% of NZ's electricity is used by a single aluminum smelter on the South Island.  Bauxite arrives on ships, is processed at dockside, and refined aluminum goes out.  If they have enough transmission capacity to move the electricity northwards, then closing this plant would help a lot.

It is disconcerting to realize that the imminent energy crisis will hit their export sector first.  But then, both of these plants are owned by foreign companies, and I don't know how much of the actually profit stays in NZ.

by corncam on Mon Nov 21st, 2005 at 12:44:34 PM EST
This points to a more general note that it will be politically easier to make industry pay first for higher energy prices (rather than the population). But closing such big discrete factories like an aluminium or a methanol plant will quickly have a macro economic impact on the country, thus not postponing the reckoning by much...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Nov 21st, 2005 at 12:55:01 PM EST
[ Parent ]

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