OGPSS - Of Egyptian Bread and Oil

The turmoil in the Middle East shows little sign of ending in the near future, and the potential lack of enough cheap fuel for the population is a warning that the levels of unrest may continue and even get worse. There is, however, some hope for enough local supply in the near term to help with some of the indigenous problems. Consider, for example, Egypt which has the largest population of the countries in its immediate vicinity, a population that has grown 200% in the last 50 years.

Figure 1. Growth in Egyptian population (Trading Economics )

By last December Egypt was populated by some 83.66 million folk, with little sign of change in the growth rate. Over that time, energy demand has grown, while domestic supplies of fuel have not kept up. The most significant change, perhaps, is in oil consumption, with recent data, as previously noted, showing that the country has now switched to one that must import oil to meet demand.

Figure 2. Egyptian oil statistics (Energy Export Databrowser )

The EIA puts consumption at 811 kbd, set against a production of 555 kbd of petroleum products and, for natural gas, the country produced 2.1 bcf , which can be set against a consumption of 1.8 bcf, but the balance there also is trending downwards as recent levels of discovery and development have failed to match the increase in domestic demand.

Figure 3. Trends in Egyptian natural gas statistics (Energy Export Databrowser)

The developing need for oil imports is made more difficult by the subsidies that have become an accepted part of the Egyptian economy, including not only fuel, but also bread. Fuel subsidies are reported to be at around $17.4 billion and about a fifth of total state spending. Bread subsidies though a similarly critical part of picture, run only at about 20% of the fuel cost. To help manage costs and encourage domestic production, the Morsi government had cut back on foreign purchases of wheat, but this has now been reversed with the take-over even as the new government works to transition away from the subsidy burden. With the change, foreign governments are now also more willing to provide fuel, the United Arab Emirates (UAE) will send around a million barrels of oil this month, and Kuwait, Saudi Arabia and the UAE are promising more aid packages.

This may help with the short–term problem, which has too many political entanglements to allow any solid predictions for longer term help from outside the country, but there are potential sources of increasing domestic supplies from both the Western Desert and the Nile Delta itself.

Egypt has been supplying natural gas to Jordan, Syria, Lebanon and Israel through the Arab Gas Pipeline with flow starting in Arish, and the leg to Ashkelon being underwater.

Figure 4. Route of the Arab Gas Pipeline with projected extensions. (hydrocarbons technology)

Because of the connection to Israel the pipeline has been the subject of a number of terrorist attacks (the latest a couple of weeks ago) . However these more often affect the flow of gas to Jordan, rather than to Israel, because of the pipeline locations, with the pipeline being vulnerable in the Sinai where it is flowing south to Taba. This problem has led Jordan to consider importing natural gas from Israel and the recently found offshore natural gas deposits being developed in that country. Flow from the Tamar field started on March 30th tapping into the estimated 8 Tcf therein, while flow from Leviathan is anticipated in 2016.

The possible presence of oil-bearing strata at a lower depth in the Levant Basin has led Noble to plan an offshore well to go down 31,200 ft to a potential field holding perhaps as much as 1.8 billion barrels of oil. However Noble estimates the chance of success at 25%.

The recent success in finding these resources within the Levant Basin suggests that the potential for other discoveries in future years, with significant possible impacts on the local economies.

Figure 5. Location of some of the discoveries and developments in the Levant Basin (USGS)

The problems limiting future exploration in the region tie in with the conflicts and internal disruption that seems to spread to most of the countries in the above map. But in the more immediate short term Egypt is reducing exports in order to meet the growth in domestic demand, while importing natural gas, currently as a gift, from Qatar.

In the longer term, as the Israeli fields come on line, it might be possible to change the direction of flow of the Arish-Ashkelon pipeline to carry Israeli gas into Egypt. There are thus potential technical solutions to getting fuel to Egypt to meet their growing need.

However this does not address the underlying problem of how Egypt is going to be able to pay for that fuel (not to mention the bread). Even with a potential glut in global natural gas prices, without a stable economy Egypt is not going to be able to pay its import bill. This was evident towards the end of the Morsi government, when a lack of cash, or hard credit made it more difficult for the country to assure itself of enough imported oil to meet demand. The continued turmoil will keep away the tourists that could provide the economy with enough funds, while the lack of international recognition of the current regime is currently keeping the IMF from providing any help.

A couple of hundred years ago deriding the people’s need for bread reputedly led one ruling family to the guillotine. In the time since the people have also come to expect that they can also get fuel. Until both demands are satisfied it may be more likely than not that rule in Egypt will remain unstable, with the presence and influence of the competing mobs making rational decisions less achievable and the situation worse. (And they are also blowing up pipelines in Iraq.)

OGPSS - Oil producing countries around 1 mbd, Kazakhstan, Qatar, Indonesia and Azerbaijan

In this series of posts I have been taking a quick look at the current oil and natural gas production from the world’s top oil producers, using initially the table that the EIA developed for 2008. In just four posts (the top tier at above 3.1 mbd; the upper second tier, the lower second tier and those at about 2 mbd ) I have now reached the final few that produce above 1 mbd. As it is I have slightly re-arranged the order since back in 2008 India was producing more that Azerbaijan, but while Indian production stayed the same, Azerbaijan production has now risen above 1 mbd, so I made the switch.

This limited number of countries includes those whose production is waning, as well as those to whom we might look for improved output to meet the rising demand. That, I would remind you, has been predicted to be about 1.4 mbd more this year than last, providing of course that the recession continues to recede from the global markets, a question that rising prices for oil might throw in doubt. With civil war in Libya appearing more likely, there is a significant possibility that the 1.6 mbd that the country produces might disappear from the scene for a while. So where can the make-up to a total of an additional 3 mbd come from? Well let’s take a look at what these four countries are doing and see whether they are going to be able to help.

First let’s look at Kazakhstan, which was producing 1.43 mbd back in 2008. And to begin with, where is it? South of Russia, and North of China it lies on the Eastern shore of the Caspian Sea.

Kazakhstan (EIA)

In 2005 Kazakhstan began sending oil to China through a pipeline and while some of the oil is locally produced it also provides a conduit for Russian oil flowing to China. The pipeline was originally planned to carry 10 million tons of Kazakh oil, and, by now, the same amount of Russian oil. However it was only at the end of last year that it reached the first target, (200,000bd) with the second now reset to 2013 but now dependant on Kazakh oil from Kashagan, rather than from Russia.

The country depends on pipelines to export its oil. The EIA notes that as production has increased, now at around 1.6 mbd, it will depend both on pipelines and barges across the Caspian to connect to that market.


There is still considerable potential for the slope of the production curve to continue upwards. Chevron has announced that the Tengiz field, which is now at 567 kbd will, in the next phase, ramp that up to 780 kbd. That oil flow to Russia through the Caspian Pipeline Consortium pipe At Kashagan, which will in time produce up to 1 mbd, development is slowed as it faces Government resistance to the high costs of the next phase of the program. Given that the field, located offshore in the Eastern Caspian is the main bulwark for the planned expansion of Kazakh production through 2020, postponing that development may reduce export capacities. There is other news that is also not positive, production from Karachaganak, currently the second largest field dropped 4% last year . Smaller production gains are anticipated from other fields in the country, such as the Tethys Petroleum development, which is going to use a radial drilling method that I might post on in some future time. But it is questionable whether any dramatic gains in production will be available to meet increased global demand in the short term. The target of a 3 mbd export level by 2020, set by the Prime Minister will depend on ironing out some of the current contract difficulties.

Kazakhstan has also participated in the natural gas pipeline that runs from Turkmenistan to China and which was opened in December 2009. That pipeline has increased the marketability of the products, and while all natural gas used to flow to Russia which thus had a considerable say on volumes and prices, the existence of alternatives is causing the Kazakhs to rethink the relationships and distribution of profits.

Qatar (Middle East Political and Economic Institute)

Qatar lies in those Middle Eastern countries whose long-term production might be threatened by domestic unrest. Within the past decade an increasing portion of the country's resource is being devoted to internal consumption:

Qatar is more widely written of in terms of its vast gas fields and potential, rather than for its oil, even though, in 2008, it averaged 1.2 mbd of production. In January of this year OPEC reported that Qatar produced 813 kbd of oil. However, with the large natural gas production the country also produced around 380 kbd of non-crude liquids to provide the overall 2008 volume. It is through an increase in the latter volume to 590 kbd that has raised overall 2010 production to 1.4 mbd.

Source Energy Export Databrowser

It had been viewed as one of the more stable countries of the region, back in 2006. That ranking puts it just ahead of Oman, and Oman has now seen some disturbance and death. (And receiving support from the UAE to meet those threats, suggesting that they are perceived as deeper than reported.) Qatar has the second highest per capita income (at $95k) but it should be remembered

The royal family, the Al-Thani, has a history of internal conflict and competition over political power. The last three leadership transitions—in 1949, 1960 and 1995—came about as a result of forced abdications, due to in-fighting within the ruling family. However, this ruling family has maintained social peace in Qatar for decades.

Qatari political stability is baffling.

The production of natural gas from the country is increasingly going into liquefied natural gas (LNG ) and the significance of the production can be seen from the EIA report

RasGas and Qatargas have 13 LNG trains currently online, with a total LNG liquefaction capacity of 3,400 Bcf/y (69.2 MMt/y). Five of these trains were added in 2009 and 2010. RasGas III, Train 7, with a liquefaction capacity of 380 Bcf/y (7.8 MMt) of LNG began operations in February of 2010. Qatargas III, Train 6, came online in November of 2010 with the same liquefaction capacity. The 7.8 MMt train is considered a mega-train, and is currently the largest operating size in the world.

In March of 2011, Qatar will complete its monumental cycle of LNG infrastructure expansion with the inauguration Qatargas IV, Train 7 (80 Bcf/y (7.8 MMt)), which will bring the total capacity to 3,750 Bcf/y (77MMt/y). Qatari government officials have noted that they do not anticipate building any more LNG facilities in the near-term future.

Qatar growth in LNG production (EIA )

Whether those decisions will affect the slope of the increasing levels of production will have to await the test of time, but with 70% of production going into the LNG market, that still leaves room for growth elsewhere.

Source Energy Export Databrowser )

Indonesia left OPEC in May 2008, since it had become an oil importing country. (This also saved them the $3 million annual membership) Recent production has been down around 1 mbd (similar to that of 2008) but a recent dispute over cabotage may cut this dramatically. Cabotage is the requirement that fuels be transported in domestically-owned vessels, and Indonesia proposes to ban the use of foreign-owned vessels next May. This will affect both oil and gas production with cuts that threaten to be about 157 kbd of oil, and 2.5 bcf of natural gas.

At present the country is third in LNG exports after Qatar and Malaysia. The world’s largest buyer of LNG is the Korea Gas Corp (KOGAS) and they have agreed, with Mitsubishi to build a new processing plant in Indonesia to help supply the Japanese and Korean markets. With an estimated reserve of 112 Tcf , the country has the potential to grow this export, though it is quite likely that this increased production may end up in China, which is looking at increasing imports to over 9 Tcf over the next 5 years.


Domestic demand for energy continues to grow, and Indonesia plans to build a second LNG receiving terminal on Java, using domestically produced gas to meet the demand.


And that brings us to Azerbaijan, on the other side of the Caspian from Kazakhstan. Baku, the capital, has hosted oil development since the late 19th Century . In 2008 the country produced 876 kbd of crude, at the time just below India. However ,with the increased development of the Chirag, Azeri and Guneshli oilfields the country is hoping to exceed (if only slightly) the 1 mbd mark this year. However it did fall a little short of predicted volumes in this past year. Current plans are for production to continue to increase, with a target of 1.25 mbd in 2014. The difference between those numbers and that of the EIA figure for the country comes from the inclusion of other non-crude liquids.


The majority of the oil is shipped through the Baku-Tbilisi-Ceyhan pipeline with smaller amounts being sent to Georgia.

Natural gas production is expected to continue to grow with the development of the Shah Deniz field., to the point that additional pipeline capacity is being planned. The plans call to treble capacity, but may require some $3 billion of additional investment. The pipeline carries a flow, at present, averaging 770 mcf/day. One of the issues as Shah Deniz increases total production (it is considered the 9th largest gas field in the world) concerns how the natural gas produced will get to its customers. One of the ongoing options is the Nabucco pipeline. The planned increase of 565 bcf by 2017 can be shipped by possibly three pipelines, but the Nabucco needs a volume of about twice this, and so is currently looking for an additional supplier to make up the numbers. That search has been going on for a while.

Looking at the numbers that I have just gone through, it is clear that the world is going to see an abundance of natural gas likely continuing through the decade. In the shorter term, however, there does not seem to be that much capacity for an increase in oil production. For while countries such as Kazakhstan and Azerbaijan can increase volumes over the present, the increases are not that great, when compared with the need. (The slopes look good, but the vertical scale less so).

But on the other hand the aggregation of a hundred thousand here, and a hundred thousand there can add up to a significant volume in the end. So I will continue this set of posts, looking next at those countries which just can’t quite make that 1 mbd.

Revolution - the threat to American imports

The countries of the Middle East and North Africa (MENA) are currently in the middle of a series of popular uprisings. While it is not possible to see the outcome in any of these countries at the moment, it is certain that some are likely going to end with a set of different governments and philosophies. This is not just of academic interest, since the countries involved produce collectively a significant amount of oil and natural gas, a lot of which is exported to North America and Western Europe. Looking just to the oil imports to the United States, and the natural gas imports (LNG) and averaging the volumes for October and November 2010, since there can be some wide variation month-to-month I came up with the following table, using the EIA information.

Average imports into the United States from MENA countries, averaged from October and November 2010 (EIA).

The largest concern at the moment is likely with Libya, since they supply Europe with needed oil.

Libya, a member of the Organization of Petroleum Exporting Countries, produced around 1.6 million b/d of crude oil during 2010, of which approximately 1.5 million b/d were exported, mostly to Europe. Therefore, unlike Egypt the situation in Libya has the potential to have a big impact on global oil supply. Latest news that has emerged is that oil output has stopped at Libya’s Nafoora field as workers have gone on strike.”

Algeria, as I noted in my last Tech Talk, plays a similar role in the supply of natural gas

The part of the Algerian gas in the gas balances in some European countries is significant. 86% for Portugal, 61% for Spain, 49% for Italy, 26% for Belgium, 25% for France and 21% for Turkey. Today about 97% of Algerian gas exports supply the European market next to Russia, and Norway, one of the main suppliers of the Europe. Algeria accounts for 29 percent of European Union gas imports and 15% of gas consumption

While it is too early at this stage to determine what the outcomes of the different struggles will be, it is realistic to expect some disruption of the current production in at least some countries, and the possibility of a reduced investment in future production, as the economies of the nations are restructured. And the consequence of that will be an increase in the price - Did somebody mention $147 a barrel?

OGPSS - The trade in LNG

Just before the Christmas break the United Kingdom was going through some concerns over natural gas supply. Stored gas levels were falling and the National Grid posted a “Gas Balancing Alert” for only the second time since they were instituted. But there is no more urgent talk of such a problem – what happened?

Well the answer is that rescue, in the form of Liquefied Natural Gas (LNG) tankers came trundling over the horizon. Just this week the UK opened an expansion of the terminal at the Island of Grains that can now accommodate larger tankers, at the rate of 5 a week. LNG from the tankers to this terminal can now supply up to 20% of the national need for gas. But that is a little late for the past crisis (due to scheduling problems the first tanker won’t dock until next week) so where did the LNG come from, and where did it go ashore?

LNG tankers arriving at the Island of Grains and at the LNG terminals at Dragon and South Hook fed additional supplies into the grid.

Flows of LNG were at a total 100 million cu m/d Tuesday after South Hook ramped up 10 million cu m/d to 55 million cu m/d, Dragon was at 15 million cu m/d and Isle of Grain contributed 30 million cu m/d to the system. That is a total increase of 25 million cu m/d on levels Monday.

LNG is also going to be backed up by fresh deliveries in the next week, with UK port data showing three fresh LNG cargoes expected to berth at South Hook from Qatar in the next week, including the Umm Al Amad expected sometime Tuesday, the Mozah on December 23 and the Aamira on Boxing Day.

(The UK used 468 million cu.m. on Monday Dec 20th).

There is a growing global trade in LNG, and while most of this is committed to long-term contracts there is sufficient flexibility in the system so that when, unexpectedly, a nation may run short or a strike close a port, a tanker may be diverted. The South Hook terminal is 67.5% owned by Qatar Petroleum, and is part of a supply net that takes LNG from the Qatargas 2 train, and sends it to the Welsh terminal where it is re-gasified and fed into the National Grid. Dragon, which is also at Milford Haven, is a smaller terminal, and came on line in August 2009. The term “train” is used to describe a single processing line that produces LNG within an overall plant. Thus, for example, when BP expands its facility in Indonesia, the new plant will be called Train 2, to distinguish it from the existing line, which is train 1.

LNG tanker at the Dragon terminal

Once natural gas is produced from a well it must first be processed, and the non-gas liquids (NGLs) as well as water, carbon dioxide, and other contaminants removed so that a dry commercial gas can be sent on. Where the customer is not easily served by a pipeline (such as the case with gas from Qatar being supplied to the UK), the only viable option is to send the gas by ship. Given, however, that gas in its natural state is of low density, it is most practical to cool the gas down to the point where it liquefies. By lowering the temperature to -260 degF the gas turns into a liquid, and occupies 1/610th of the volume. This makes it much easier to store and transport, though it requires that the liquid be kept at that low temperature for the duration of the voyage.

Because the process involves three steps, liquefying the gas, transporting it in special tankers, and then feeding it through a re-gasification plant into a distribution network, the investment in each requires some assurance of a pre-existing market and agreement between the parties before the investments are made. Thus, for example, NTPC in India is now negotiating with Qatar on the supply of LNG in the future as insurance that, when a pipeline is laid from the re-gasification plant at Kochi to power plants at Kayamkulum, that a supply will be available for it. As with the Welsh plant, this can, to a degree, be assured by having Qatar as one of the partners in the project.

The parties likely agree, when making such a deal, to a fixed-price over a considerable time frame. South Korea, for example, is paying roughly $10 per kcf, somewhat above the current rate, but it will have that price for 20-years. Such an agreement may, however, make it difficult for the buyer to initially find customers in the years when that is a high price, as CNOOC found.

Qatar is the largest producer of LNG, having just announced a capacity for delivering 77 million tonnes of the liquid a year, which it currently delivers to 23 countries. This trade has grown from nothing to its current level in 14 years, with production centered around the port of Ras Laffan. (A tonne of LNG converts into 1,460 cu m of NG, or 51,600 cu. ft).

There are seven separate plants (trains) at Ras Laffan with the last having come on stream last February.

Ras Laffan 3 Train 7 is the fourth 7.8 million tons per year LNG plant brought online by Qatar Petroleum and ExxonMobil joint ventures within the past 12 months. It matches the capacity of Ras Laffan 3 Train 6, one of the largest operating LNG production facilities in the world, inaugurated in October 2009. These mega facilities have sufficient scale to competitively reach markets around the globe. Qatar's giant North Field, which is estimated to contain in excess of 900 trillion cubic feet of natural gas, will supply both trains.

Once the gas is liquefied it is transferred to one of a fleet of ships. The earlier ones had the characteristic spheres on board, as shown above, and, for example, Train 1 at Qatar uses a fleet of 10 of these to carry LNG to Japan, with a round trip taking a month. The more recent fleet is 80% larger and more efficient, this 32-vessel fleet carries LNG from Qatar trains 2, 3 and 4.

While there has been a growing market for LNG around the world, and re-gasification plants, such as those in Wales, are being developed in many countries (note the 23 countries that are customers to Qatar) the availability of LNG, with new facilities being planned in countries such as Australia likely means that there will be a continued relatively cheap supply available for a number of years. The consequences to the profitability of domestic production, such as shale gas in the USA, may become more questionable as a result.

Availability and Profitability of Natural Gas and LNG

It is a little difficult to predict, just at the moment, which way the natural gas situation is going to swing over the next year. The number of different events that are contributing to the overall supply of natural gas seem, on the surface, to indicate that there will be more natural gas than is needed. But there is some question as to how much will actually appear, as the year develops.

For those who want everyone to believe that there is no longer a shortage of natural gas there are the additional LNG supplies that are now coming on stream. Just this week Yemen begins shipping its first cargo to Korea, with a second cargo from Belhaf soon to follow. The gas comes from a reservoir in the center of the country and had to travel some 320 km to the processing plant and terminal. The first train is committed to the Korean market. A second train is expected to be brought on line in a few months, to raise total production to some 6.7 million tons per year. While the market for this second stream was originally expected to be in the US, at present they are keeping it closer to home by intending to sell to India.

The USA had been seen as a sure market for LNG at the time that Belhaf was planned but that was before shale gas began to hit the scene. Now, the declining price in the American market, and the prevailing large quantities in storage, make that less desirable.

Moving around the coast to Qatar, business is good with three LNG vessels shuttling to the UK this month. With three LNG terminals – at Dragon, South Hook and Isle of Grain, the UK can now import up to 25% of its needs as LNG. That is helping to keep the price of natural gas lower in Western Europe and has a natural knock on to prices that those countries want to pay to such companies as Gazprom.


Qatar is simultaneously setting up to be a major supplier to China. The Chinese see that market being in the range of 40 to 60 million tons by 2020. They have just started taking delivery of an initial 2 million tons per year from Qatar.

Back in early 2006 when the expansion of LNG trains was planned for Qatar it was expected that the US would be buying up to 30% of its needs from Qatar and Qatargas Trains 3 and 4 each with a capacity of 7.8 million tons, were started on that assumption. Now, of course, with the increased domestic production from the shales there is no longer such a need and the question becomes one of working out where the new surplus of natural gas will go.

Part of this may go to Europe to replace the Turkmen gas that may not make its way West this year, since Turkmenistan and Russia (not to mention Russia and Ukraine) still seem to be at odds over the price and profit that they each might make from supplying gas West. Turkmenistan can now hold on, given that it is selling its natural gas to China, in almost the same quantities, but for a much better price. Russia is, however, starting to get natural gas from the new Achimov deposit. The declining market, due to the recession, has seen Gazprom sales fall, but they are now claiming some turn around in that situation. incidentally, those who wish to get some idea of why it might be hard to gain a good idea on Turkmen reserves and production should read Shaun Walkers story in The Independent.

Not that China is content to just rely on the new feed from Turkmenistan. It is also starting to import LNG from Malaysia through a new terminal at Shanghai, and will purchase the LNG from Qatar train 2. A third Chinese LNG terminal also began operation earlier this year.

Now that is all the good news about supply. The questions that remain relate to the production that can be anticipated from the gas shales in the United States. The problems of maintaining production from gas fields that can drop production by over 20% in a month, or 80% in a year are not yet recognized. One significant one, that Arthur Berman raised as a concern, is the ability of wells to attract enough investors to pay for sinking them. If the recovery rate from the wells requires a high price and sustained volume to attract those investors, then the availability of cheaper LNG from the Middle East may keep the price from reaching the levels that are needed. Another LNG terminal has just been approved for Port Dolphin in Florida, while there is growing support for a facility at Coos Bay in Oregon. But that is, in the short term, seeming to bring in natural gas into a country that already has enough. The EIA notes that the current price of natural gas (Henry Hub) is around $4.289/kcf - the threat of imports from abroad will likely keep it down at around that level this winter. The question then comes as to whether, at that price there is enough profit in the gas wells to continue drilling in the gas shales.

I suspect that the hype, for a short time, will keep that program running, but if you’re losing money on production you can’t make it up on volume. The rig count is slowly rising, but whether the resulting production will make money, and how long will the wells last are topics for another day. Though cold weather, short term, might help in reducing what continue to be record stocks of natural gas.

Indian Monsoons, hydropower, and the supply of natural gas to the USA

I recently wrote about the increasing volumes of natural gas that were coming available as LNG from countries such as Qatar, just as the development of the gas shales in the United States was creating a glut of gas in the United States. We have seen the impacts of the glut in the drop in prices, a fall that still continues and the long-term decline in the number of rigs being used to drill for NG. Interestingly, and a comment on the growing preponderance of wells in the gas shales, the number of horizontal well drilling rigs has fallen, this year, less than the number of vertical rigs. However there is now a slight resurgence in drilling (up 7 horizontal and 13 vertical rigs). Given the potential that a global surplus of LNG might bring more to American shores, undercutting the price of the shale-sourced gas that rise in the number of active rigs might seem a little odd. But there are a couple of thoughts that should be born in mind.

The first is that the world needs natural gas as an energy source, and this is particularly true in Asia, where the potential partial failure of the monsoon with 40% of India being declared drought areas, means that there will be less hydro power available than in normal seasons. So far the rains are 25% below normal (an event which I noted earlier has been tied to El Nino events. One of the ways that India is hoping to solve its chronic shortage of electric power has been by a greater commitment to hydro-generation.

Hydropower is viewed as more flexible than most other sources of fuel, which is important to India, where much of the demand is domestic.

As an illustration, if the approximately 150 million households in India were to turn on two 100 watt light bulbs at 7 pm, the power system would experience an instantaneous surge in demand of about 30,000 MW! Today, this peak demand is often met by households turning on small gasolene and diesel generation units, which, in addition to being polluting, are a serious health hazard in congested areas. And, with rising wealth, households are switching on a lot more than two light bulbs. Although hydropower plants are subject to daily and seasonal variations in water flows (which affects the production of electricity at that point in time), they are not subject to the fluctuations in fuel costs that trouble thermal power plants.

Thus the country is negotiating with the World Bank for increasing support for hydro projects. But they need rain.


Unfortunately, at the moment, power supplied from existing plant is down 10% from last year, while demand has risen. The water levels in the reservoirs, for example, should normally rise by about 5% over a monsoon week, last week it was only 3% . Given that hydropower provides about a quarter of the nations generation capacity this could put further strain on the national economy, where the back-up bill is estimated to be $26 billion a year, and the cost of the outages alone totals some $9.2 billion.

So where can additional power be obtained. One solution is through increased use of natural gas and Qatar’s RasGas has just agreed to increase LNG supplies by 50% starting in November, upping the tonnage from 5 million to 7.5 million tons per year. This comes at a time when India is developing its own gas supplies , but while they equate to 880 – 1,000 mcf/day, demand rose to 9,800 mcf/day last year (up 25%). Thus the increased need for the LNG cargoes, and the current purchase raises the shipping to 120 cargoes a year.

At the same time Turkey has been visiting Qatar seeking to improve its imports of natural gas (currently via LNG) but with the hope, down the road, of seeing the gas shipped by pipeline. The current target is some 140,000 mcf over the course of a year (average of 383 mcf/day). Some of that supply will come from production originally aimed for the UK where demand has fallen.

But if it also reduces the volumes that might otherwise be targeted toward the US this winter it will potentially stop the continued slide in US prices and help the industry, though not the consumer. Perhaps it is in that hope that rig numbers are beginning to creep up.

The second thought is that the production from gas shale wells is very short lived (60% production in the first year) and thus starting up new production to replace the older declining wells is a smart thing to do, and someone is probably tailoring that into their calculations as they place new well orders.

The Natural Gas Report for the week

Yesterday I was not all that cheerful about the omens foretelling the future of gasoline and crude in the near term. So today it is time to see what the latest in Natural Gas news is telling us, courtesy initially of the EIA.

This is the time where, as the Weekly Update noted, temperatures soar with the arrival of summer. With that comes increased power demands and increases in gas usage. However even the EIA is noting that so far the temperatures are more moderate than normal (they use data from NOAA), and this is impacting demand. Equally to the point the oversupply that came from the developments in the gas shales have yet to work their way through the system. Rig counts have dropped to 692 (picking up 7 from last week for the first increase in 29 weeks) from their peak last year of 1,606. Of the rigs in service some 391 are horizontal (counting both oil and natural gas), those most suitable to develop the shales. The result is that more natural gas is still being injected for storage, at a higher rate than normal, and bringing it significantly above the levels of both last year (632 Bcf more) and the 5-year average (482 Bcf more).

The industry also faces the potential for an increase in LNG shipments to the US. this year. Energy Trader, over at Seeking Alpha is currently very pessimistic about the situation, given the potential for LNG to be dumped into the United States as a world surplus develops this year. Prior to the development of the gas shales the world was looking at a situation where US supply would not be able to meet demand, and thus additional LNG capacity looked to be a very promising bet. Given the production from the shales, that bet is looking a lot less valuable and since the investments must still be paid off, deliveries to the US that undercut existing prices (given that shale gas is not that cheap to produce) may make this coming winter more of a buyers market than usual.

At the same time Alberta, with conventional gas deposits, is increasing the incentives to boost drilling for this gas, in the face of the gas shale developments.

The province will charge producers a flat rate of 5 percent during the first year of output from new wells, a government statement said. Drillers will also receive a royalty credit of C$200 ($172.64) for each meter (3.28 feet) of new well depth drilled.

The programs had been set to expire in March 2010, Energy Minister Mel Knight said in the statement. They will be extended to March 2011.

Companies including EnCana Corp., the nation’s biggest gas producer, are shutting wells amid a 70 percent decline in New York gas futures in the last year.

The question now becomes how quickly domestic production from the gas shales will decline, in light of their transient (about 2-year) life and the reduced drilling activity, and how much additional supply from LNG sources abroad will combat that decline. Within that puzzle lies the price that consumers are going to be paying for natural gas in the next couple of years. Opinions differ on what will occur. From the Calgary Herald

There are certainly positive signs that are driving the extreme contango in natural gas prices, when you look at winter contracts that are 50% higher than summer contracts. Commodity investors are looking at the collapse in U.S. rig activity which fell to 700 last week from 1600 last summer. They are betting on recovery in U.S. industrial activity. And they are looking at the disconnect between crude oil and natural gas futures.

However there are also signs that the commodity investors may be too early in their enthusiasm. Spot prices for natural gas (that’s the physical market) are well below the near-month futures prices, indicating that excess supply could continue to keep prices low for the rest of the storage injection season at the end of October. In Canada, spot prices are below C$3.00 per thousand cubic feet or US$1.00 per thousand cubic feet lower than U.S. spot prices.

On the other hand the Wall Street Journal sees the recent activity by Exxon Mobil, in starting three new LNG trains in Qatar, at a time when the world market is not capable of absorbing this increase (some 3 Bcf/day). The result:

So why would anyone ship LNG to the U.S.? In part, it's simple economics. Many projects were sanctioned and financed when lower natural-gas prices prevailed.

In Exxon's case, valuable liquids also produced in its Qatari projects take the market breakeven price of the natural gas itself "towards zero," says Deutsche Bank analyst Paul Sankey. Factoring in processing and shipping costs, that gas can be landed in the U.S. for less than $2 per million British thermal units, reckons Noel Tomnay, head of global gas at Wood Mackenzie. The current Nymex price is about $4.

Competing markets also look oversupplied. Wood Mackenzie estimates annual demand in Asia east of India will rise by 1.3 trillion cubic feet by 2015. New projects targeting the region and close to final investment decision amount to more than two trillion cubic feet of capacity.

In Europe, the prevalence of long-term pipeline contracts limits the size of the market up for grabs. Wood Mackenzie estimates about 4.9 trillion cubic feet of discretionary piped and liquefied natural gas per year will compete for a market half that size over the next three years.

Now Chesapeake has said that they can live with $4 (per kcf) natural gas prices but have shut in some 400 million cubic feet of production a day since April, in an attempt to stabilize prices. So far it is not working, at least to the level hoped (though it may be helping). As the EIA report notes the Henry Hub price has now dropped to $3.80. (And the greatest price drop in the country was at the Questar pipeline in Utah, where the price dropped to $2.50 – down 10%).

We will have to wait to see how this all plays out.

Natural Gas - Liquid from abroad

Most frequently these days questions about the likely price and supply of natural gas, focus on the production that is likely from the gas shale deposits around the county. Natural gas drilling rigs are being shut down in large numbers, the count is now over 50% down, at 790 rigs, over last summer and new well numbers reduced, in order to lower supply levels to that closer to demand. (In passing it is worth commenting that horizontal rigs have not dropped as much as vertical, so that the numbers are now approximately equal). The assumption is that as supply declines, and demand stays relatively robust (this not being one of the global warming years – at least so far) the two will come closer to parity, and prices can be restored. At the EIA meeting, most of the audience seemed to anticipate that this would occur this year, and the latest Natural Gas Weekly Update notes that prices do seem to have reached, at least temporarily, some sort of floor.

One of the questions, going forward, however, relates not to the availability of domestic supply, but rather the supply that might be available from abroad. In the past, with almost all gas being supplied by pipeline, that was not much of an issue, but at present there is a significant growth in the availability of liquefied natural gas (LNG) as both liquefaction facilities and available tanker numbers increase. There is the potential, as this supply increases, and if global demand does not match this increase, given the breadth of the economic turndown, that LNG will be available into the American market at a low enough price that it will keep domestic prices, and thus production, constrained.

LNG facilities are not something that can be put in overnight. As the most recent example in Poland shows current new agreements will lead to facility construction and production that appears in around 2014. The Polish facility is planned to handle 2.5 million tons of LNG, and the company has just contracted to get 1 million tons of that from Qatar. Of course, if the permits are turned down (as happened with the Broadwater application this week, after the Department of Commerce joined the governments of New York and Connecticut in rejecting the plan) then those deliveries become moot, and New England gas prices may continue to stay high. (Depending on what happens with the Marcellus – but we will save that discussion for another day). At least that is a decision – down in Australia there is still some uncertainty over plans for a new liquefaction facility in Western Australia, though given the state of world supply, delays might not be all bad.


There are three major facility costs involved in creating an LNG supply. First the gas has to be cleaned, separated and condensed. This is generally done in facilities geared to produce a set volume a year (defined as a train) so that, for example, the facility at Point Fortin, in Trinidad, is made up of three trains, each of which can produce 3.3 million tons/yr of LNG, and one train that produces 2.4 million tons/yr.

To give some idea of scale LNG imports into Europe in 2008 totalled 44.8 million metric tons, with a capacity of 78 mill tons/yr. Most of the supply has come from Algeria (16 mill), Egypt (4.4 mill) , Nigeria (12.5 mill) and Trinidad and Tobago (4.4 mill). (Source Oil & Gas J Apr. 13, 2009 pp 38 – 48 – sub reqd).

The largest facilities for producing LNG are in Ras Laffan in Qatar. The current facility is being doubled to produce 77 million tons/yr by 2010. At the moment supply from the second train (Qatargas2) is scheduled to go the United Kingdom at the South Hook Terminal at Millford Haven, where it will supply some 20% of the national need.

The LNG has to be transported to the receiving terminals by carrier. There are at present some 151 LNG carriers in service, with an additional 51 under construction. They have a total carrying capacity of some 635 million cu ft. (Natural gas is condensed by a factor of 600 when it is liquefied). There are several sizes of carriers that are available, but they are usually divided into three classes. The largest can carry over 4.2 mcf of LNG (125 carriers); the intermediate between 1.75 and 4.2 mcf (15 carriers); and the smallest below 1.75 mcf (15 carriers). Almost all the new carriers are at the 5 mcf size.

There are eight U.S. facilities that can import LNG and while there are 40 more under consideration, industry analysts predict that at best only 12 of these might be built.
They are located in:
Everett, Massachusetts
Cove Point, Maryland
Elba Island, Georgia
Lake Charles, Louisiana
Gulf Gateway Energy Bridge, Gulf of Mexico
Northeast Gateway, Offshore Boston
Freeport, Texas
Sabine, Louisiana
There is also an export facility in Kenai, Alaska.

The new production coming on line in Qatar is more than the current market can absorb, and the Qatar CEO notes

“For the shorter term, I don’t think the UK will be able to take 16 million tons,” al-Suwaidi said. “Anything the UK cannot absorb, we will have to find a market for.”

Since their supply will build over the next three years, while gas shale production remains relatively high, this suggests that American prices will remain lower.

The consumption of petroleum products in Japan, the world's biggest buyer of LNG, is projected to fall 4.7 per cent in the year starting this month, according to the Institute of Energy Economics Japan, a government-run think tank. The global recession has reduced electricity use in Japan.

LNG producers probably will ship excess supply to North America, which might prevent a recovery in US natural-gas prices next year, Law said.

(Note that a metric ton of LNG is equivalent to 48,700 cu.ft. of NG. ) LNG is cooled to – 260 deg F ( - 160 deg C) reducing the volume by 600-fold as it turns liquid.

P51. Pick Points

Half-a-dozen or so stories of interest:

The energy lobby is not thrilled about the latest plans to increase taxes on the industry and is now forming a group to speak up for the industry. As an alternative North Dakota is thinking about putting 25% of the oil generated income into a trust fund. While Ecuador is going after some unpaid taxes that it claims Perenco, a French oil company, owes due to the “extraordinary profits” the company has made. Michigan’s Governor is asking for a gas tax to fix the crumbling roads in the state. The intent is to shift the rate from a per gallon, to a percentage of the price. Because state and federal revenues from existing taxes are no longer enough the Congress is also looking at ways to restructure the system to raise more revenue, one of the thoughts being considered is a mileage charge. Massachusetts has a similar problem, and are considering a 25% increase in the state gas tax (which would bring in about $650 million), as is Oregon.


Ugo Bardi has his post on “Fire and Ice” up on the main TOD board, (it was on TOD Europe before) and just for the historical record, it was I (not some guy from the USGS) who disagreed with Dave Rutledge down at ASPO 2007 – which did not stop the pair of us, with a group of others, adjourning to the bar to discuss the topic thereafter.

Speaking of conferences the MIT student Energy Club just held their conference at which the Swedish company Vattenfall said that they would be carbon neutral by 2050. Sweden has previously said that it will wean itself from oil within the next fifteen years . Sweden gets most of its electricity from nuclear and from hydro, so that the major use of fossil fuels is in transportation. I should be in Sweden this weekend (there will be a slight hiatus since it is a long flight and I am going to work) so I will post on what I hear.

At the start of an Energy Conference in Qatar the Exxon CEO has used their success with Qatar (they will have doubled the LNG production to 62 million tonnes this year, leading to the establishment of fourth and fifth LNG trains). Half the vessels for the 4th train are now delivered, and 5 of the 6 for the 5th train. The LNG is coming into a market that is currently seeing (outside of South Asia) a surplus of natural gas (hence all the rig closures in the US) and the LNG entry is likely to soften the market further. However if the predictions of a drop in US well production hold up, then the LNG will be coming on market just as it would otherwise tighten. China, which currently uses 13 million tonnes of LNG , with imports from Russia and Kazakhstan, is also aiming for a target of 60 million tonnes a year by 2020, with some of that to come from Qatar. A local shortage of natural gas is also causing Saudi Arabia to fast-track the development of two off-shore gas fields.

Development of the Arabiyah and Hisbah gas fields, which are not associated with oil production, would supply around 1.8 billion cubic feet per day, MEES reported. The projects were included in Aramco's expansion plan through 2014, it said.

"Bringing these fields on line would make sense," one industry source in the kingdom told Reuters yesterday. "They really need the gas."

Success offshore has not been matched with equivalent searches for natural gas on land, and particularly in the Empty Quarter.

Utility operators in the United States continue to be concerned over the future of coal, and are scrapping even more plans for expansion, part of the problem lies in the uncertainty over future regulation. Just this past week a utility in Montana has given up on the fight with local environmentalists and will now be installing a gas-fired plant, even though the costs may be higher. There are still, however, some 28 coal-fired plants under construction. To prevent more ash dam failures, EPA is seeking the necessary information on the sites where such impoundments exist. There may be as many as 300. Idaho Power, having seen the writing on the wall, has also changed its mind, and instead of a coal-fired plant will be installing a 300 MW plant in Payette county. The site is close to an existing gas pipeline, and an existing 230-kV transmission line. Now all they need to worry about is the long-term availability of the fuel.

A small note, it appears that having not had them built for very long, China has already filled the current round of tanks for their Strategic Petroleum Reserve and is thinking of adding more storage using tankers. (Which suggests they don’t think prices will stay down much longer, either). They currently have 34 days of supply in storage., but this may not count the 100 million barrels in the reserve. China is actively chasing after oil, and trying to ensure supplies when the price is right. And there are still those who think that the floor of the market has not yet arrived and that prices can sink some more.

And Pakistan has decided to go ahead with a gas pipeline from Iran, without having Indian participation.

More stories can be found at The Energy Bulletin and Drumbeat at The Oil Drum.