Bloomberg New Energy Finance. They Are Tossers, Ain\’t They?

My word, shale gas won\’t be a game changer at all. Nope, the people who support renewables tell us so.

Exploitation of the UK’s significant shale gas resources is unlikely to result in low natural gas prices, according to new research by leading energy analysts Bloomberg New Energy Finance. The cost of shale gas extraction in the UK is likely to be significantly higher than in the US, and the rate of exploitation insufficient to offset the decline in conventional gas production, meaning market prices will continue to be set by imported gas.

So that\’s that then, eh? Windmills it is for all.

Except, well:

Bloomberg New Energy Finance estimates that the cost of shale gas extraction in the UK will be between $7.10 and $12.20/MMBtu, against comparable costs for dry US plays of $4.54 to $4.83/MMBtu. These figures are based on capital expenditure estimates from leading oil and gas engineering companies that suggest that wells in Europe will cost 2-3 times their US counterparts, coupled with ranges in possible flow rates based on comparable US sites. It should be noted that these UK cost estimates exclude the potential additional costs of building local pipelines and processing equipment to get gas to market. In the event that the UK plays are not dry (i.e. they produce liquids that can sell into the oil market), the additional capital cost of infrastructure would be significant.

That last sentence is rather important really. For if they are indeed wet, if they do indeed produce liquids as well, then yes, there will be additional expenses. There will also be additional revenues which they have, amazingly, failed to take into account. And the revenues from a wet play can indeed be substantial.

Our cost range of $7.10 to $12.20/MMBtu is similar to the range of market prices for natural gas seen in the UK during the course of 2012.

SDomething which is interesting, whether true or not. They then go on to tell us that of course this won\’t mean a decline in UK gas costs.

But then so what? All the projections we have, the ones that are being used to plan windmills and the rest, assume that gas prices rise into the future. Prices staying static is actually a win.

Compared with the US, the UK has a higher population density, a stronger environmental movement and tougher local planning rules. In addition, the structure of mineral rights differs from the US, where subsurface rights are generally the property of landowners. In the UK, state approval will be required to exploit each new resource; even if this is expedited by the proposed Office for Unconventional Oil and Gas, landowners will have little incentive to welcome development. The net effect will be a slower development of shale gas in the UK than that seen in the US – a rate that will not eliminate the need to import gas.

And that\’s really very odd indeed. That the gas belongs to the Crown means that, if said Crown so desires, the permitting process can be fasdter than having to negotiate with individual land owners. You\’ve only got to have permissions for the drill pad, not from each and all of the land owners above the reserve.

Can\’t say I\’m greatly impressed with this.

12 thoughts on “Bloomberg New Energy Finance. They Are Tossers, Ain\’t They?”

  1. Hang on: it’s worse than that. The sort of things they are complaining about are fixed costs per installation – the permissions, the pipeline, the pandering to pinkos – but my understanding is that the shale layer is substantially thicker than in the US. i.e. you are likely to get more gas for each outlay of fixed costs.

    Or have they taken this into account?

  2. “Yes, Mr Getty”, said the Man from the Ministry, “You may well have struck oil, but I think you’ll find there’s no money in it.”

    If times really have changed that much, then there’s really no hope for us.

  3. I’d trust Cuadrilla’s cost estimates more.
    But I wouldn’t trust them much. There are still so many variables that even their estimates are just educated guesswork.

  4. Tim,

    I work in the oil industry for one of the majors. We’re big in shale gas in the USA.

    Something is emerging technically which WILL alter the economics of shale gas:

    When ‘fracked’ wells come on stream the flow rate falls off quite quickly. Much faster than for oil. This is known and critically impacts the economics of the well and of the industry.

    Not long ago some bright spark wondered what would happen if yuo re-frack a declined well. Answer: It produces again. Not at 100% of its original flow but at up to 75%. We don’t yet know what happens if you re-re-frack a well.

    A refracked well only needs to be refracked and not re-drilled of course.

    The positive economic impact of this is obvious. But not yet known to Bloomberg or more broadly. But it will become so soon.

  5. “You’ve only got to have permissions for the drill pad, not from each and all of the land owners above the reserve.”

    Actually, not sure if this is true. I think an onshore oil company, Star Energy, was found guilty of tresspass for drilling underneath Mohamed Al-Fayed Surrey estate. I think they were only fined £1 or sumat, but going forward my understanding is you have to get landowner permission to drill under their land.

  6. Stuart is right. Once you deviate your drill from the vertical and venture under third party land (as you inevitably will) you are trespassing unless you have the surface owner’s consent. This has been an unspoken issue in the onshore oil and gas industry for a while and I suspect most operators just trust to luck and hope that if caught out the damages for the technical trespass will be nominal.

    An oversight which if DECC had their wits about them could and should have been addressed by putting oil and gas on the same footing as sub surface coal mining.

  7. When the topic of fracking comes up on Bishop Hill, sooner or later someone called Vangel crops up and makes a series of lengthy posts explaining that fracking has been totally uneconomic in the USA and will be even less profitable in the UK.

  8. Tim – any knowledge on Bowland gas composition? Also, what sort of fractionation does the UK have? Ie, if it’s wet what’s the end-market for the purity NGLs? How’ll it be priced? NWE spot LPG? Thanks.

  9. Patrick at 12:54pm

    What an interesting post. So, basically you can refrack a hole a number of times and only stop once the cost of an additional fracking session is more than the value of the extra gas you can capture? This number, the number of fracks a hole can be subjected to is still to be determined? Fantastic.

    Off topic, but how do you guys establish the range or reach of the frack, do you have geophones to pick up the seismic activity?

    Gas Nerd at 5:18pm

    These are the only issues that interest me as well. How can I make money from the coming gas fracking revolution about to hit the UK. So, far, from what I can gather, most of the companies about to start fracking are funded by private equity firms. This is going to be game changer, and once the gas/wet gas can be characterised your technical questions will be answered.

    Just hope they do not lose too much of their revenue to Tim favourite hobbyhorse, the Carbon Tax.

  10. @ The JGM

    The amount of equipment and sensors that get put inside a well while it is being drille and after a section has been drilled gives a very detailed picture of what is going on down there. A pre and post frack comparison will give them a good idea of its success.

  11. On Bishop Hill, whenever fracking raises its head, a commentator called Vangel appears to spam the thread with multiple, lengthy diatribes about how un-economic fracking is and how no fracking company in the US is profitable. When pressed for data, he always retreats. Does anyone have facts?

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