A small supplement on LNG supplies
Posted by Heading Out on March 10, 2006 - 2:33pm
Electricity produced by LNG-fired power plants would indeed be uncompetitive with that from other sources David Hurd, Deutsche Bank's managing director and head of oil and gas research in Asia, told the (Beijing oil and gas) conference Thursday.The increase in relative cost meant that China was no longer interested in buying the 100 million mt Australian LNG from the Gorgon field some of which is coming to the USA, and Platts reports that the volume slated for China was then sold to the Japanese for around $3.8 to $4.0 per million Btu.According to his research, coal-fired plants can produce electricity at a cost of $35/MWh, compared with $38.9/MWh for plants supplied by PetroChina's 4,000 kilometer west-east pipeline and $42/MWh for LNG-fired plants. The calculation for LNG power plants is based on the FOB price of LNG term supplies from Australia's North West Shelf to CNOOC's Guangdong terminal, which Hurd put at $3.03 per million Btu.
That price was settled a few years back when LNG was still a buyer's market. But things have turned 180 degrees since then as LNG prices have risen along with by persistently high international oil prices.
A multitude of technical, environmental and political problems have also hit operations and expansion of existing LNG trains as well as various new LNG trains around the world, giving prices another push, Hurd said.
Benchmark spot US natural gas prices rose to historical highs above $14 per million Btu in late 2005.
China, meanwhile, according to Platts, is negotiating with Indonesia about the price it is paying for LNG from that source
CNOOC is currently renegotiating the price formula of Indonesia's Tangguh LNG Supply for its Fujian terminal project, a contract which it inked back in 2002. At the time, the agreed formula was linked to a cap of $25/barrel on crude oil prices, against which long-term LNG contract prices in Asia are normally linked. But with crude prices much higher over the last two years, CNOOC has conceded to renegotiating the price cap clause.(The Chinese seem to be beginning to recognize that they are now in a buyers market). Interestingly in this regard, the US is also anticipating that it will get LNG from Indonesia for the new terminal that is being built in Mexico and slated to come on line in January 2008.
"The LNG market (is) moving away from China" as Chinese buyers continue to stick with their purchase price expectation of $3 per million Btu, Deutsche Bank's Hurd said. "Even if five (LNG terminals) would be built (in China) by 2010, three of them will be empty" without LNG supply, he said.
Indonesia has seen its Asian market for LNG threatened by competition, that has, until recently, kept the price down. However, as it looks to an increasing price for its product, it must also recognize that its fields are depleting. The US Embassy reports that the two production fields (Arun and Badak in Bontang) have problems. For the Arun field
90 percent of Arun's gas resources are now depleted and committed reserves will run out entirely in 2018. The Block A gas field in North Aceh remains undeveloped pending an agreement between operator ConocoPhillips, partner ExxonMobil and the GOI on revenue sharing terms. . . . . the GOI requirement to provide low cost natural gas to national fertilizer plants has reduced LNG production and caused state-owned Pertamina (which operates Arun) to defer 6 cargoes to Japanese and Korean buyers from 2004 to 2008. The GOI convinced buyers to defer an additional 9 cargoes for 2005.For the Bontang field
Bontang currently produces about 20 mtpa of LNG. It began experiencing LNG shortfalls in 2004, causing the GOI to ask its Japanese buyers to cancel 41 LNG cargoes for 2005. Maintaining Bontang's production has its own set of challenges:Given the problems with these fields it is a little worrisome that the new field at Tangguh, slated to deliver LNG to both Korea and China is falling further behind schedule according to the US Embassy report, and this may be due to local protests though the management contract for construction of the processing facilities has just been signed. This delay may force power plants to close in China.
- the three gas providers (Total, VICO and Unocal) have experienced underproduction or inconsistent production due to maintenance, accident or low field performance. . . . . despite LNG shortfalls, the GOI diverts gas from Bontang's producers so that Pertamina can sell subsidized gas to a national fertilizer plant group and two small Japanese-owned plants.
India meanwhile, which has also been facing problems with guaranteeing supply, has now arranged a supply from Qatar which will help fill a current 50% shortfall in anticipated supply needs. At the same time, BP is arranging for LNG supplies to the UK and US from Nigeria. Perhaps those will cover the problems that may, by then have arisen, with Indonesian production. But it will also mean that the Chinese are likely to have to rely more on coal, and less on natural gas.
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Sinopec has won the right to explore for natural gas in Saudi Arabia's al-Khali Basin,
China's relations with Iran, while rooted in centuries of history from the "Silk Road" and the voyages of Zheng He, have recently blossomed as a result of China's growing energy needs. China has signed a US$100bn deal with Iran to import 10 million tons of liquefied natural gas over a 25-year period in exchange for a Chinese stake of 50 percent in the development of the Yahavaran oil field in Iran. China has also expressed a desire in direct pipeline access to Iran via Kazakhstan.
For example, while China has voiced its commitment to the non-proliferation regime, Chinese companies have been the subject of numerous sanctions for the transfer of ballistic missile technologies to Iran. Since the mid-1980s, China has sold Iran anti-ship cruise missiles such as the Silkworm (HY-2), the C-801, and the C-802.
How will China react to an American attack on Iran? Will they feel more or less secure? Should they even care?
Sure one can argue that whoever is in charge in Iran will sell oil if China is willing to pay, but is it as simple as that? Wouldn't regime change in Iran to an overtly pro-American leadership mean that the United States could ultimately control the supply of oil and gas to China? Should the Chienese be concerned that it seems the United States is slowly encircling China, with the potential to control it's access to vital energy sources like oil and gas? Where exactly are we heading with all this?
You're right too about the politics of the whole thing. It's not as if we can measure or quantify it. Here at TOD we've had so many models, graphs and numbers, which are used to explain the physical nature of Peak Oil. How much have we really got, where and for how long etc. We're measuring the past, now and trying to measure the future. That is hard enough to do even though we're dealing with the physical world. But politics is far harder to understand in many ways.
Individual human beings are hard to understand and lots of them together seem to be even more difficult to understand. What concerns me about much of the politics is not partisanship or mere sectarianism, or Left and Right, or Republican or Democrat. These are essentially labels we use in order to define social reality as we perceive it.
What concerns me in this respect is people who appear to believe their own political rhetoric to the point of fanaticism. Such people exist across the spectrum and they scare me. Factor in "religion" "faith" "fear" and our collective, emotional response to war; and one has got dangerous brew on the boil at the moment.
while i hope for a power down scenario to win out it has become increasingly clear that it was thought up without considering the human factor.
in other words while it, along with capitalism and Communism, which all work on paper always fail in real life.
In that environment, the Chinese will become even more desperate to secure their oil supplies. This will take more oil off the free market due to the bilateral deals China has and will continue to negotiate. It will also raise the bidding from the standpoint of military tension. In that world, I can see China offering, say, Iran it's own nuclear umbrella. Saying in effect that China will guarantee Iran's nuclear ambitions in exchange for a bilateral oil deal.
The implications of these changes in mindset are orders of magnitude more important than considerations of potential energy substitutes or whether or not (when in my view) the US makes a tactical air strike against Iranian nuclear assets. Not saying all aspects of the discussion are not useful and important. Just that when one considers the millions of bpd of oil that may come off the free market from exporting countries when their mindset changes from the current maximum production to the future minimum production consistent with a given export revenue objective - and when China sucks even more supply off the free market - all other considerations will pale .
The other consideration which I find fascinating and little discussed is the implication of the prospects for a no-growth economy or even a decline in GNP implied by PO on the multiple accorded to corporate earnings in the stock market. I find it hard to believe that when a no-growth mindset begins to take hold, there will not be the largest decline in stock prices in history.
That, of course, will have the effect of lowering demand for oil, as a number of writers have pointed out. On the other hand, even if you postulate that a reduced post-peak supply of oil is able to satisfy a much-reduced depression-effected demand, the fact that oil supply has peaked will still be in the market's mind, so all slack supply will be used for inventory build. Therefore I doubt the price of oil ($250/b? - $500/b?) will be reduced, even after a depression.
To me, it is the impacts of the change in mindset that will have the most vital and least discussed impacts on the market for oil and on societies around the world.
Let's suppose that oil countries confronted with peak oil will want to export the minimum oil consistent with a certain income. Let's suppose further that they already know about peak oil, and know that even small cuts in supply will drive price up to levels that will give them lots more money.
The function of oil consumption vs. oil price is highly non-linear. One of the major features is that if the oil price goes too high, major economies will implode, and then the whole demand/price curve shifts majorly downward. Oil exporting countries don't want that.
A few years ago, people were thinking that $60 oil would cause a problem. Well, apparently it hasn't ... yet, at least. But $120 oil would cause a problem ... right? Well, maybe not, at least not for the US; energy is still only a fraction of our budget, and we could eliminate a lot of waste. And as long as the US economy doesn't implode, China can still sell us stuff, so they won't implode either. And with US and China going strong, the rest of the industrialized world has lots of markets.
Of course we in the US don't want $120 oil. But if we could survive $120 oil, peak-aware exporters would give us $120 oil. So what do we do? We weaken the foundations of our economy until we can't survive $120 oil. Now the oil exporters have to keep producing enough to keep the price at $60, because if they let the price get too high, demand for oil will fall along with the global economy.
Chris
So, not GWB himself, but his administration, might be smart enough to pull it off. After all, they're smart enough to make half the American public think that Iraq was involved in 9/11. They're smart enough to get budgets and plans through Congress that misstate billions upon billions of dollars.
Chris
China has a much larger steel industry than we do and so synfuels are a simple problem for them. They even export coal. In the case of oil cuttoff from the Gulf they are much better placed to succeed then we are. Look at them as being about eighteen months from imported crude based fuel replacement at any given time.
Bush, Jr, did attempt to put a tariff/quota on steel imports before he got overrun. It wasn't much of an effort.
Also, where would we get the ore carriers and the freight cars needed to double output?
Hm, maybe I should buy another couple hundred pounds of rice and oatmeal . . . .
Some things can be done in parallel, for instance, you could build a tube mill for pipe and at the same time be holding classes for welders so that when the tube mill was built, the welders would be ready to weld it into a synfuel plant. Ditto building roads to make coal mines able to get the coal to the railroad spur being built at the same time.
But some things have to be done in serial. Like first you find a mineral deposit, then you analyse it from electrical, magnetic, gravity, and seismic surveys, then you core drill anywhere interesting, then if it is indeed interesting (ie, the surveys gave you a clue about the rock, the core told you if the anomaly you were measuring was what you thought it was), then you grid drill to find out if it's big and rich and friable enough (the mineral not only has to be there, it has to be recoverable after you grind it), then you grid drill to find out where you should start digging first, then you start digging and laying in the rail spur and building the smelter or whatever. A crash program to build a mine is five years. Usually it takes twenty if everything goes right. That's not a joke, that's the way it is.
Building a synfuel plant is a comparative cinch. Building a windmill farm or a solar field is even simpler.
The ships are huge, and navigating on Lake Superior in bad weather is not something you want to do with 90-Day Wonders.
Unfortunately I think adopting such a policy on their part, thought prudent and logical in many respects, would almost be like committing suicide and asking to be invaded by oil hungry nations - and we know who they are!
Five, ten or fifteen years down the line, Europe, China, India and Europe are going to be importing a lot more oil than they do now. We're talking about a roughly 25% increase in world oil consumption, unless we hit a deep recession, which will bring on a whole bunch of other problems we don't need to go into here.
Seen in this perspective, curtailing oil exports by Russia and OPEC as a matter of policy would be regarded as an act of economic warfare in my opinion. We would literally be being starved or strangled by these nations, and there is now way we're going to accept that. Were talking life and death here!
Small funny story. I got pegged a few years back to go on the very local radio (San Luis Obispo County area of California) anytime there was a gun fired. Russian submarine Kursk goes down, I go on the next day to talk about it and take questions (did you know the Kursk class submarine has a pet animal section on the sub?!). Chinese force down a spy plane, etc. Many years ago, I designed and published wargames, but since writing books, well that makes one an "expert."
Locally we had an oil expert, an owner of several commercial fuel stations, and when he passed on, I inherited his hat. My point is that oil and military action are very close.
And as Clausewitz said, "War is politics carried on by other means."
Now as to China and the Iranian situation. They may make an attempt to take back Taiwan if we are involved for any length of time in Iran. A three day air campaign will not allow them enough time to get ready. At minimum they will be very upset over having their oil and NG from Iran disrupted.
But this is not just money folks, this is about power, and if Iran thinks they can get a Nuke and thumb their nose at the USA, they will try with this current govt. It is scary, and as Secretary Rice said yesterday, Iran is viewed as the biggest single national threat by Bush's people to the USA. That perception, if Bush feels his job is to protect the USA is #1 (and it is), may lead him to do something about Iran's nuclear ambitions, just to set them back 5-10 years and let the next "watch" deal with Iran.
The other thing is twofold.
- Right now in Iran many of the young people, unlike most of the rest of the world, likes the USA. Remember this is a country that has laws AGAINST owning a satellite dish. But many people have them and put them out at night and the law is also ignored. We bomb Iran and we lose that support.
- A viable strategy in Iran is to appeal to the minorities. The Persians and the Luri people would stick together, while we would support the Kurds, Azeri, and other people which constitute about 41-43% of the total population. Of course supporting the break-up of Iran would bring chaos to the region and all sorts of oil disruption.
Finally, if there is a campaign/fight, see if the UAE seizes the three islands in the Straits of Hormuz that they claim belong to them and Iran has control of! Quid pro quo for the port deal going sour? . . . And yes, those islands have oil assets attached to them."By method and discipline are to be understood the marshaling of the army in its proper subdivisions, the graduations of rank among the officers, the maintenance of roads by which supplies may reach the army, and the control of military expenditure."
In short: not only is it not going to happen, we don't even want to try to go there.
As to another thread here, when US gas prices were $15/mmBTU this winter, LNG tankers were being diverted to Europe! Why? Their prices were higher. In fact, US LNG terminals have been running substantally before capacity for decades.
I also read here another insinuation that we are running out of uranium. This is not true. The mining companies had substantial oversupply from the 70's and haven't had any economic need to open new mines. A 50 year reserve is very high for heavy metals which is more typically about 10 years. We are seeing a price surge due to demand increasing faster than current capablity. This price signal will cause investment in new mines and further exploration.
Mining geologists tell us that there is lots of uranium yet to be found and many new ways and new places to look. Conventional uranium ore mining has huge room for expansion as we've just begun to exploit this resource - 50 years of commercial development versus 1000's of years for tin and lead - and the earth's crust has more uranium than either.
And this applies to the US too, even if not as soon. What about India? What about Europe? What about Japan? What are the options they are likely to turn to? Any informed speculation?
US wind capacity grew by 35% last year, and appears to have an ultimate limit of perhaps 1.2 TW average (4 TW installed capacity @ 30% capacity factor). Coal can grow a lot faster, but is subject to supply limits. Nuclear will come to the party late; the next generation of plants will start delivering around 2018.
I think wind is the most interesting. At 30% capacity factor, last year's 2431 MW of additions would generate an average of about 740 MW, roughly 3/4 of a major nuclear plant. If we project 35% compounded increases for a while, we'll see 4.4 GW added in 2007, 10.9 GW in 2010 and about 27 GW in 2013.
Average US electric generation in 2004 from nuclear was about 90 GW, and about 80 GW from gas (source). If wind progresses at 35% annually compounded, 2013 additions will knock off 10% of the gas contribution all by itself. That's late, but the total from build-out in 2013+ would be 13.5% through 2014, 18.2% through 2015, 24.6% through 2016, 33.2% through 2017 and 44.8% through 2018. That's roughly 36 GW total in 2018, when the next nuclear plants will come on-line; by that time, wind would be adding ~13 GW of average production (~42 GW capacity) every year. It would take nuclear a while to catch up, not the least because wind capacity would be at only a few percent of its ultimate limit.
Japan has at least one group bullish on nuclear (the bearish stuff seems to be pre-peak). I did a quick search for wave-power in Japan and found hints; I don't have enough useful consciousness left tonight to search for Japanese wind power data.
I expect that as we build more wind farms, we will build more wind farms, which will cause us to build more wind farms.
I'm in Silicon Valley and we absorb the idea of increasing returns from the air. That's what happened in electronics and magnetics and software and optics and genetics. It's what will happen with wind and solar.
Not at all what I would have expected. Southern SK is pretty good, but Manitoba gets pretty calm as you go north. Looks like the Dakotas and Montana are the best territory in the mid-continent.
I'm not sure about a material cost analysis or a risk analysis, but it seems doable enough.
This truly is the end of the world:
PEAK CHOCOLATE
From the Times: Saturday March 11th.
''...But now a shadow is looming over the worldwide chocolate industry -- the threat of a worldwide shortage of cocoa beans, caused by a sudden epidemic of chocomania in Asia.
With chocolate consumption increasing at a rate of 25 per cent a year in the Asia-Pacific region, and 30 per cent in China, chocolate makers fear that coco- bean growers will not be able to keep up with demand. The unstoppable growth of China has aroused fears of future conflicts over natural resources such as oil, gas and water. Now a new and unforeseen catastrophe presents itself: global chocolate wars...''
http://www.nytimes.com/2006/03/11/business/11charts.html?_r=3&adxnnl=1&oref=slogin&adxnn lx=1142169128-jU5cNm9jyVtR6d0shL8tVQ
<<At the moment, as can be seen from the other charts with this story, a United States natural gas future for delivery in February costs $10.48 per million B.T.U.'s, but a British future for the same time costs the equivalent of $14.99 per million B.T.U.'s. "If U.K. to U.S. price differentials remain this large," said Mr. Blanch of Merrill Lynch, "then very little gas will head to North America next winter." As more liquefied natural gas supplies become available, and as ports are outfitted to receive such supplies, such a disparity will become more and more unlikely. Whether it can endure for next winter will be seen over the next few months. Any trader who thought it was going to narrow could use futures or options to place that bet now.>>
This is the kind of story we'll be seeing more and more of...