From the archive - "Gas is cheap" - or gas was cheap?
- 22 Mar 2012, 16:00
- Robin Webster & Andrew Walker
"Gas is cheap," declared George Osborne is his budget
announcement yesterday, in a nod to
new planned government measures to encourage investment in new
gas power stations.
The plans mean gas plants constructed over the next few years will
be allowed to emit carbon dioxide freely for the next three
decades. The UK is already heavily dependent on gas. In 2010,
43% of our entire
energy consumption came from gas - compared to just 15% for
coal.
The news that gas is cheap may come as a surprise to the analysts
at UK electricity and gas markets regulator Ofgem - or indeed to
any householders who received an energy bill in 2011. As Ofgem
said in an analysis released in October of last year:
"Higher gas prices have been the main
driver of increasing energy bills over the last eight
years...."
Would it be more accurate to say "gas was cheap"? The discovery
of natural gas in the North Sea caused the oft-mentioned 'dash for
gas' in the 1990s - a period during which gas prices fell markedly,
as illustrated in this graph by Ofgem:
However, as the North Sea gas began to decline, the UK was
increasingly forced to rely on
imports from Norway and the Netherlands. As Ofgem puts it:
Britain enjoyed a period of falling gas
prices until 2004/05. This is the year that Britain first imported
more gas than it produced itself. Becoming more reliant on imported
gas has meant that British gas prices have become increasingly
influenced by global events..."
Future gas
But what about the future? It's undoubtedly true that subsidies
designed to increase uptake of green energy cost money. So isn't
gas the cheaper option in the longer term?
The UK currently gets
about half of its gas from the North Sea, but if our gas demand
stays about the same, by 2030 that figure will be less than a
quarter. If we're going to be burning cheap gas, it's not going to
come from the North Sea.
In the States, however, gas prices have fallen dramatically over
the last five
years due to the exploitation of indigenous shale
gas.
Some parts of the media have been arguing we can do the same,
with claims that the UK could be "on the cusp of a new era of
clean, cheap shale energy".
Previous investigations have indicated that some of these claims
might be somewhat
overblown, although the debate is undoubtedly hampered by a
lack of hard data. Last month, Ofgem
released a report focused specifically on the impact of
unconventional gas in Europe. The report was undertaken by the
well-established energy consultancy
Poyry and is probably the closest we've currently got to a
relatively objective view on the subject. However there is one
major difficulty - it was actually completed in June 2011, and the
world of shale gas has moved on a bit since then.
With respect to the amount of shale gas which we might be able to
extract in the UK, Poyry relied on an
estimate from the British Geological Society (BGS) of 144
billion cubic metres of shale gas - or about 1.5 years' worth of
gas demand at current levels. The consultancy modelled three
different scenarios for what this might mean and displayed them
alongside declining conventional production from the North Sea:
Even under the 'Boom' scenario, the impact doesn't look that
significant.
Since the Ofgem/Poyry report was finalised in June 2011,
however, the energy company Cuadrilla announced that it has
discovered
200 trillion feet (or 5,600 billion cubic meters) in North West
England - quite a lot more than the BGS estimated for the whole
country.
What to make of this? As we have already noted,
only 10-20% of Cuadrilla's find may prove
recoverable. BGS is reportedly skeptical about
the accuracy of the estimate, and Cuadrilla clearly has an interest
in talking up its find in order to increase the chances of getting
a licence. The BGS is currently working
on a new estimation for the amount of shale gas available in
the UK, so it's fair to say that the estimate in the Poyry/Ofgem
report is out of date.
And of course, shale gas isn't confined to the UK and the USA,
but could be developed in many parts of the world. Under the
report's 'boom' scenario, for example, new sources of
unconventional gas become available from continental Europe, USA
production of shale gas increases and Australia exports liquified
natural gas (LNG) to China and the Far East.
The report's price projections for the different scenarios look
like this:
Again, this graph is somewhat inaccurate from the perspective of
2012 - a reflection of how tricky predicting future energy trends
actually is. In 2011 gas prices did not fall as predicted in the
graph above;
they rose. According to the Department for Energy and Climate
Change (DECC), gas prices were 63p/therm in 2011, not somewhere
around 30-40p/therm as projected.
Do the prices in the graph above count as cheap? In the
'restrained' and 'balanced' scenarios, it doesn't look like it. If
we compare the projections for the 'boom' scenario to gas prices
over the last twenty years, the answer is probably "cheap-ish" -
cheaper than we experienced in the last ten years, but not as cheap
as during the "dash for gas" in the 1990s:
Source: DECC -
Estimated impacts of energy and climate change policies on energy
prices and bills (November 2011) p17
The rider on this is that Poyry also point out that, due to the
probability of environmental concerns proving a "considerable
hindrance to the development of unconventional gas resources in
Europe", the 'boom' scenario is a "low probability outcome".
So where does that leave us? Frankly, it's pretty hard to say. If
the graph above tells us anything, it is that gas prices are a
pretty unpredictable beast. Over the last year prices in the UK
have been pushed up the Arab Spring
(which pushed up the price of oil) and the Fukishima disaster
(impacting on demand for gas). Even the most sophisticated economic
models probably wouldn't have captured that.
Shale gas has the potential to bring down prices the UK and
elsewhere in Europe - but Poyry lists 14 separate issues that need
to be addressed before commercial scale drilling could start. And
even industry seems to
agree that a significant amount of shale gas may not be a
serious possibility for 15-20 years in Europe.
So - is gas cheap? It does seem to come down to the government
spinning the roulette wheel of future prices. But having been
following this for a while, we hope they're feeling lucky.