Is fracking cracking the renewable industry? How big a threat is shale gas to renewables? Infrastructure Investor: Renewable Energy Forum 2012 London, 30 th October 2012 Dragoș Tâlvescu on behalf Karen Sund
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Shale gas has brought big changes to the gas market Very large production increase in the US Leading to low prices that are impacting the use of gas in the country Large demand shifts are impacting other parts of the energy mix Less use of coal, lower emissions, less need to subsidise renewables? Some opposition, but also much support Environmental concerns: Water, noise, methane emissions, and more Politically attractive: Low energy prices, lower emissions, less vulnerability to imported oil, employment and more Now the rest of the world would like to repeat the success Europe: Keen to reduce imports, especially if expensive China: Expected to have even more reserves than US Rest of world: Many countries with large reserves Is this a threat to renewables? Perhaps, depending on policy and point of view Impacts main assumptions on the best energy mix for countries Page 3
US: Welcome to the shale gas show! Watch, and learn! Easy, in hindsight, to understand low US prices Higher production Lower consumption Very limited export (Alaska) Growing production and record low US prices Second order impacts now: Less LNG needed This goes to other markets, accepting lower prices Less coal needed This goes to other markets lowering global prices Perhaps most important: Export of ideas and technology bringing more shale developments? Data: Energy Information Administration Page 4
$/mmbtu More production combined with recession: Low prices 20 18 16 14 12 Japan (CIF) Germany (BAFA) US (Henry Hub) UK (NBP) 10 8 6 4 2 0 Japan and Bafa (Germany) are average import prices mostly old oil linked contracts New contracts are at lower levels, and spot based Page 5
In the US, cheap gas replaces coal, mainly Low gas prices partly from bottlenecks Production growing faster than demand Limits to export Coal now exported Gas replacing coal generation has in the last 5 years reduced CO 2 emissions by 450 million tons 100% 90% 80% 70% 60% 50% 40% 30% Electricity Generation in US (in %) Natural Gas Coal Renewables & other Outlook Growing gas demand Growing gas exports Higher prices, but less than EU 20% 10% 0% Nuclear Source: EIA, 2012 Page 6
Many reasons for shale investments and production US: Low entry high upside expected Lower CAPEX, but higher OPEX than conventional gas Lure of high prices gave many investments a few years ago Some of these, especially small producers, need cash flow Growing liquids production even more popular politically help income US now larger producers warning production cuts Politicians: Extra value given to local/ domestic production Benefit to overall economy: Trade balance, energy cost, employment Benefit to energy system: Local production relieves infrastructure Benefit to geopolitics: Less dependence on OPEC, less overall vulnerability China, EU and others would like this, too especially in recession This could impact support to renewables, if only «domestic» source Page 7
China next shale revolution? With growing economy and energy demand more is welcome Less strain from competing private investors fighting over falling demand With less liberalised markets decisions & infrastructure easier Overall targets of growth, lower vulnerability, competing sources Renewables, unconventional gas both domestic and seen as good As with renewables, technology will be developed and exported Lowering costs for others While growing own production, happy to import cheaper LNG from US Over time replacing more imports possible (Impact Russia, and others) See great potential in replacing oil geopolitical value Already several profitable ventures in CBM and shale At times more profitable than US investors Page 8
Many strong opinions on EU shale opportunities Initially: Shale will be impossible in Europe Countries not as ready for gas injection as the US Pipeline systems in many countries could also benefit shale Population is too environmentally conscious «only want renewables» Seems coal is acceptable even open pit mining Landscape is too densely populated no space (also ownership challenges) Less space needed than several other energy sources No entrepreneurial thinking or available technology Recession brings creativity technology is simple and global Now: Debate on potential, threats, benefits and more complex! Relative environmentalism: Many energy forms have challenges Difficult for voters to compare nuclear, coal, gas, shale, renewables Perception often different from reality increasing uncertainty Different stakeholder views: Investors, governments, TSO, voters Page 9
EU Member States: Different attitudes and approaches Member State Poland UK France Germany Ukraine Sweden Bulgaria Romania Czech Republic Lithuania Policy status Attractive, stable business environment, growing exploration competition. The European pioneer, first produced shale gas expected in 2014? 10 bcm growth in 5 years Detailed study carried out, supporting drilling. Earthquake and water table contamination risks seen as manageable. Expected go-ahead this year Expert study from March 2012 in favour of exploration, already commissioned environmental impact study. Experimental hydraulic fracking encouraged. What will the Hollande effect be? Statoil just joined Wintershall, but Exxon has been drilling for several years. Cautiously positive and with potential to stop decline in domestic production Just signed agreements with majors to actively seek development of shale resources. Production first expected in 2017 Commercial gas found in Eastern Sweden, further appraisal drilling needed, but some production is likely. First domestic fossil gas, but strong experience in biogas Initial moratorium after public protests lasted 4 months. Conventional exploration is allowed to assess potential, but not yet drilling/ fracking New government passed moratorium after unprecedented local protests, awaiting green light from Brussels studies. Conventional seismic exploration still on, assessing potential Moratorium discussed seen as necessary because in-place regulation is out-of-date. Keen to avoid solar fiasco and creating climate of legislation instability Drilling well to assess potential of known shale play Page 10
With very high oil prices, the link to gas is gone Largest and most price elastic buyers: Electricity Gas generation less economic than most alternatives for several years Especially in Germany with oil link, layers of margins, T-o-P Subsidised renewables more attractive for some Historic and forward prices for oil, coal ad pot gas in Europe Data: National Grid, Energy Information Administration, Montel, 2012 Page 11
In the UK, gas looses shares to all other energy 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Electricity generation in UK (in %) Renewables and other Gas Coal Nuclear Data: DECC Page 12
Government perspective what is green enough? Difficult times take focus from climate to fuel poverty Much pressure on current gas suppliers to lower prices Nuclear is a large variable very different views Recession needs cheap energy and improved trade balances Coal is welcome Local energy feels better than imports Coal, renewables and perhaps shale Some new challenges are emerging with renewables Long term promises (beyond election period) Short term challenges balancing, strain on system, volatile prices Periods of negative prices will make investors choose other countries Difficult to live up to some of the political expectations? Where should support be placed and what do voters want? Page 13
Investor perspective what is low risk income? More attractive to invest in renewables Government support Guaranteed feed in/ «must run» Wind, hydro, solar, bio and more Gas seen as riskier all along the value chain Exploration always uncertain shale more so Development of feasible reserves depend on technology and price Several conventional projects now on ice Shtokman, and others Unconventional needs more local stakeholder management Often sceptical views partly due to being unknown Production and transportation regulation often missing Investments, uncertain demand (long term + daily), etc. Sale in market could compare with gas out of storage Demand and prices very uncertain Power generation CCGTs being closed down Page 14
Voters perhaps the most difficult to predict Great diversity in views and preferences Within societies, political parties, and in time Several points not necessarily consistent or well informed It would be nice to be green The energy must get cheaper Not in my back yard: Wind, shale, storage of CO 2 (CCS), more? Active house attractive for some in control + profitable BUT, most do not insulate, have a strong view or active voice Shale seen as a new «unknown» good for some, negative for others «The cheapest and cleanest energy is the one we don t use» Simple, but difficult to act on, it seems globally, nationally + voters. Page 15
Shale gas is changing the playing field for renewables Main concern: Cheap gas will weaken support to renewables Is the advertised Golden Age of Gas only a cheap GAG? Or will it bring about a Dark Age for Renewables? In winning the energy mix, other factors are also weighing in Energy independence, security of supply and employment Own/ local production usually preferred Relative environmentalism What is clean enough? Technology advancements Different learning curves Access to investment capital for specific risk profile Infrastructure solutions Enablers and bottlenecks Source: Illustration by Matt Kenyon. The Guardian, April 2012 Page 16
We are happy to discuss further! We offer strategic and commercial advice + partner selection Producers, TSOs, large buyers, governments Gas, electricity, environment and more Selected recent work Scenarios for European gas 2020 prices and flows in full energy picture Energy Karen Sund Dragoș Tâlvescu Meltzersgate 4 N-0257 Oslo Norway Economics Environment Page 17