A report commissioned by DECC into the impact of unconventional gas on UK gas prices is causing quite a stir in the press. The research performed by Navigant develops a high price, low price and base case model for UK gas prices. It suggests in its “low price scenario” that gas prices could fall to 50p/therm.
Energy Desk digs a little deeper to investigate how valid this might be…
1. Global shale growth will depress UK gas prices
The report predicts that Australian and Canadian shale production will both reach 100 bcm by 2030, whilst Chinese unconventional output could total 200 bcm per year. Annual shale output in the US is predicted to rise to 550 bcm.
The base case scenario predicts that from 2016 (when the US’s first Atlantic LNG terminal comes on line at Sabine Pass) gas exports will help decrease the price down to around 60p/therm in 2020.
Navigant also believes the US will have installed a further 2 Atlantic LNG facilities by 2030 and notes that the UK is planning to add 3 further LNG terminals to the existing 4. So there will be sufficient capacity on both sides of the Atlantic.
In the base case UK gas prices are predicted to increase between 2020-2030 to 66p/therm, in line with predictions for US gas prices.
For the UK to receive the exports, however, prices here would have to be higher than other markets - which is why the boom in Chinese shale is so important to this central forecast. If that happens, or if another boom market appears - perhaps Africa - without its own shale gas, things will look very different.
2. UK shale won’t impact upon price
The report suggests that even the most optimistic forecast for UK unconventional gas production by 2030 is 4.2 bcm/year.
This figure is dwarfed by current gas consumption which was 82 bcm in 2011. As such - and contrary to some press coverage - the data in this report doesn't really suggest UK shale will do anything to prices.
3. What if European shale doesn’t kickstart?
For all the speculation that European shale reserves could fuel the continent for a generation, none has yet been extracted.
Poland, which was once dubbed Europe’s shale goldmine, has found that little of its gas is actually extractable and seen three US gas giants quit the country as a result.
Unlike in the US, fracking is further constrained by the highly dense European population. The report states: “The general consensus is that it is unlikely that significant quantities of unconventional gas will come on stream by 2020.
Given the sluggish start of the European shale industry, the report’s production prediction of 100 bcm/year in its optimistic model is - by its own admission - highly improbable.
The baseline prediction (assuming limited unconventional European gas production) of 66p in 2030 seems much more likely, a somewhat unspectacular fall from today’s price of 68p/therm and even that assumes huge shale gas exploration in as yet untouched regions.
4. Oil price much more significant factor in short term
Navigant state that the most significant factor that will drive down the gas price in the short term will be the oil price; it is predicted to fall to $90 in 2019. (Although DECC data released yesterday says oil will be $118/barrel by 2019.)
The report’s pessimistic scenario, in which Chinese unconventional gas production fails to take off, shows that growing global demand for oil will subsequently pull up the price of gas in the UK to 81p/therm.