patterns of behavior – natural gas prices up

Researching Gas Cogeneration for the built environment you will be told many different stories about feed stock prices. The more common story is we are over the costs blow-outs because of world shortage around 2006, so expect prices will go down. However, the opposite is likely to happen, the costs are going up. Why? The answer is complex. It depends on how you participate and where you participate.

CO2Land org takes note of ValueInvestorcanada.blogspot.com that has a very good article going through this argument from the perspective of an equity analyst. The premise of this article is rising gas prices would be good for people holding stock in gas suppy companies. The argument is based on American activites, being:

1 – Any energy company that can move capital spending away from natural gas drilling and into oil is doing so (Ed. a major driller doing just that).

2 – U.S. LNG import facilities are being converted to LNG export facilities. That will allow producers to get world prices, which are 4-6 times higher than North American prices.

3 – A continued shift from coal to natural gas as a source of power, for economics and the environment.

4 – At some point won’t the government get behind a plan to move to natural gas as a transportation fuel? Instead of having to rely on the Middle East, Venezuela and Nigeria to provide oil to the U.S. wouldn’t it make more sense to use natural gas which the U.S. has in abundance?

5 – Producers have hedges in place at the high rates they could get a few years ago. When those hedges expire they will only get a price for gas which might be below their break even level.

Then www.energyshop.com posts:

Dec 2012 – Driven by Oil Shale Economics, Natural Gas Prices Primed for Slow and Steady Rise – Forbes

“As long as oil stays close to $90 per barrel, it appears likely that the gas supply will continue to throttle back, and the supply overhang will continue to dwindle. In the meantime, demand is likely to grow in a variety of sectors, prices will rise, and a longer-term price equilibrium will eventually kick into place. Gas at $5 to $6 per mmBtu may well be in our foreseeable future. So, for now, drillers are generally going to prove up reserves and sit on them until the price of gas relative to oil makes it profitable to produce. ”

The last paragraph above clear shows a strategy is most likely to be based on profit. For those interested mmBtu as shown above can be interpreted as between 1.054GJ to 1.060GJ and 1GJ at 3.9 degrees C is 26.8cubic metres of natural gas. Source – Society of Petroleum Engineers (www.spe.org)

The Australian Experiences

In Australia we are seeing very similar patterns of behavior and we believe LNG exports to ASIA will be the price setter for energy prices in the foreseeable future.

We also note that cash strapped State Governments will seek to maximize the royalties from natural reserves including Natural Gas, Shale Oil, Petroleum and Coal Seam Methane extraction.

All of this will not be a surprise to most people, however the elephant in the room lies in how it is regulated and ‘allowed’ to get to your need. In Australia and in particular the Eastern Seaboard the federally based Australian Energy Market Operator (AEMO) has oversight, yet State based jurisdictions allow different treatments of price setting.

In more detail:

Victorian Wholesale Gas Market Data

A range of real time data sets from the Declared Wholesale Gas Market in Victoria uploaded from the Market Information Bulletin Board (MIBB) including price and withdrawals, ancillary payments, bid stacks, consumption, demand forecast, effective degree day, registered participants, heating values, gas quality data and more. Source – AEMO.

Short Term Trading Market

A range of data sets offering real time data from the Short Term Trading Market (STTM) system including ex ante market price, provisional market price, mos stack data, allocation quantity, schedule log, hub and facility definitions, total contingency bid & offer, default allocation notice, contingency gas price and more. Source – AEMO.

Viva la difference between the two market information sets as the STTM price represents a delivered price of gas to the Hub. That is, it includes both the commodity and the cost of transportation to the hub, unlike the Victorian Declared Wholesale Gas Market price which is a commodity price only.

Then come the area distribution effects on facility charges, the fees to distribute and that can include the trucking or reticulation. Other government changes and fees also.

The price you WILL pay, may change at any time.

Because of the range of commodity, transport, reticulation and delivery charges and government charges numerous bodies have argued it in itself brings about investment uncertainty. All well and good to talk about, however, one constant remains regardless to what is intended it is the opportunity to game that will not set but influence the price you will pay.

The Energy Users Association of Australia (EUAA), www.euaa.com.au , has presented several stories in January alone on the gas crisis that looms in Australia and now have a dedicated company page that features what is sees as the issues. The Australian Financial Review on 21, 22 and 23 January 2013 ran stories of a similar view from a number of sources. One story by Peter Roberts commented Western Australia’s reserving of 15% of gas supply for domestic use is under threat and it is further reported large Australian Companies cannot get supply contracts further out than 2 years, and those proposing new facilities are not able to secure any gas supply contract, or are finding it very difficult. In terms of what has happened around the country in gas prices since 2009 the following average gas price increases have been, despite adequate supply capability, Queensland 98%, NSW 79%, Victoria 80%, South Australia 78%, Western Australia 170%.

In term of what this means, the CEO Brickworks is quoted as saying his group now pays $8 GJ in Sydney (up from $4 GJ), Brisbane and Perth $12 GJ.

All writers expect the prices to rise more, and the reasons are given that transitions in the market are bringing conditions of uncertainty, and the export markets are getting policy priority. In another example it is quoted Japan is paying $15 GJ for Natural Liquid Gas (the form gas is transported).  The conclusion is therefore you will need to be very careful in how you evaluate your future gas price in your projects. In particular when considering fuel substitution focused projects such as cogeneration.

Co2Land org intends to look deeper into the price effects and predictions of the energy market and will post these accordingly.

 

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Co/trigeneration sequel – Balancing Energy in your Business

In its draft report on Electricity Networks and the Regulatory Frameworks the Productivity Commission encourages a standard approach to Embedded generation (12.2) and puts a focus on minor distributed generation such as PVs, VAWTs etc (13), and the disparities in tariffs. The general theme is to push toward time based pricing to assist technologies where it can be incorporated within a strategy of load lopping.

On 4 November CO2Land (www.co2land.org) posted “Balancing Energy in Your Business” and a quote from the story said “It might be time, if you have not already, consider curtailment opportunities, renewable generation, cogeneration or trigeneration (albeit some high profile projects may well prove to be an embarrassment for overblown claims), or combinations of technologies with emphasis on energy savings.” This sequel further explains the pros and cons of cogeneration and trigeneration. The message is fully understand it first!

Increasingly common, where gas connections are possible, is the embedding of co-generation and there is an increase trigeneration. A little 101 here:

  • Cogeneration: Also known as combined heat and power, cogeneration uses wasted heat from gas-fired engines to project into other processes such as generating more electricity or producing heating.
  • Trigeneration: Combined cooling, heat and power – goes a step further, simultaneously producing power, thermal energy and cooling. The cooling can be used for production processes or climate control.

Gas Today (www.gastoday.com.au/news/benefits_of_cogeneration_and_trigeneration/078333 ) ran a story on Benefits of cogeneration and trigeneration where the authors said: “Cogeneration and trigeneration are already well established in Australia, with a growing clientele of property owners and developers incorporating them into their new or existing buildings or plants. Flexibility in design makes these applications easy to adapt to different customer demands, and thus cogeneration and trigeneration plants can be found in various different locations, including:

  • Urban areas with office buildings or retail complexes;
  • Residential areas;
  • Industrial or manufacturing facilities, such as breweries, abattoirs and dairies;
  • Hospitals;
  • Education facilities including universities and schools;
  • Airports;
  • Government sites such as state and federal agencies; and
  • Data centres.”

However, with all good marketing efforts should come the balancing with ‘real’ stories. After reading a post of Dru Spork (Manager at Grocon in Sydney), he made the comment  “those with experience should be able to chuckle along with this”, and what did he mean? Pitfalls we suspect and what to avoid when sizing. Some common mistakes and problems are:

  1. Design size for load lopping rather than operation. This can mean the unit is insufficient to handle the building load if isolated from grid connection.
  2. Total reliance on standards measures (AS3000) design ratings and not correctly sizing to match operation. That is not measuring correctly the actual equipment selections coupled with absorbed power/run power modelling.
  3. Not considering the ‘what if’ on the power requirements when other energy efficiency initiatives or technologies are introduced. Will there be a need to run the generator?
    The economics are very important for the business case and overblown estimates could mean a stranded asset. Consider:
  • The Capex investment for different load operations.
  • Modelling the generator operation modeled at say 100%, 75% and 50% load (to predict available electrical load) and match this to absorber performance at 100%, 75% and 50% – rather than checking the quality of the heat output and how this works with the absorbers.
  • Determine building heat load in the operational model.
  • Be prepared for battles with the electrical authorities over fault levels and approval procedures (project approvals can take around 18 months).
  • Empty buildings do not need power. The operations modelling of the generators assume occupation and operations of the building.

CO2Land org considers it is not uncommon that such projects fail and it tend to be because the introduction was not planned as well as it should have been. When talking to Ahmed Abdoh, he said “that is why we in Carbon Training International offer the only nationally recognised course in Cogeneration and Trigeneration that can help how to take the right decision on size and type. check out our course on www.co2ti.com . The primary material of the Course is the work of Winton Evers (Ecoprofit Management) and Ahmed Abdoh (CO2Planet) moderated by Bill McGhie (CO2Ti).

We also ask you to consider, you will get noise complaints from the adjacent buildings when operating, you will not get $120 per KWH value every day for generating, for these projects a ‘too analytical’ engineering report is a good report!