The changing dynamics of global energy markets – Chatham House, London, November 2013

Earlier in November 2013 in St James’s Square (London), Chatham House hosted an excellent seminar on global energy challenges. A gathering of industry professionals came together to listen to some honest, open and quite frank opinions on the status of energy markets and our hopes of meeting climate change targets.
Many different subjects were discussed, from the shale gas revolution in the USA to Arctic exploration for fossil fuels.  One thing was clear, utilities and energy companies like regulatory certainty ie rules, but prefer market solutions to daily operations and capacity building. Rigid systems like FITS for renewable and contracts for differences are essential stimulus packages for decarbonising Europe’s power station fleet, but when vast renewables force fossil stations like gas-fired power to load-follow, suddenly the economics of thermal stations becomes unattractive (unless you have a take-off agreement or CfD of course).  So in the current circumstances, cheaper shale gas has to be a good thing surely?
The chief problem is that in parts of Europe, the effects of the US shale revolution have impacted coal prices more than gas prices. Currently, gas plants are making no money, not a single cent, to pay for the fuel, the O&M, let alone repaying the banks that lent the money to build the new gas plants.
In competitive markets where the price of electricity is being depressed by solar and wind power, there is simple no money to build gas-fired plants that operate for too little of the year. Where does this leave Europe? At the same time, the fossil fuel generating companies have to develop new decarbonised capacity (CCS) under the same competitive pressures as before with few such stimulus packages capable of offering the same terms and generosity as they appear to do for renewables.
Will shale gas spread quickly across the globe and create a golden age to save us? Politicians seem to pin a lot of hope on shale gas, the US being quoted as the prime example. The universal feeling seems that over the long term, gas is plentiful, but it probably won’t be at prices much lower than today. Yet for now, shale resources have given the US economy a massive boost and a greater comparative advantage over Europe. What is unclear is how pricing and volumes of gas trade will develop.
The delinking of US oil prices from world indices, the fact that shale gas is slow to develop elsewhere around the world remains uncertain. The EU will increase its dependence on imported gas, so relationships and diplomacy with Russia will be more crucial. The world LNG market may well create a new pricing structure, but LNG terminals are expensive and will not necessarily make gas cheaper, even if shale industries develop worldwide.
In road transport fuels, LTO (light tight oil from shale deposits) is good for gasoline supplies, but less good for those of us who have switched to diesel cars. Refineries geared towards diesel production in Europe could struggle to maximise operations lighter crudes.  If there is more gasoline in the world, what will it do to the fuel economy of the passenger car fleet if we all switch back to gasoline.  We can only imagine, but based on trends of car usage and ownership, the trend for oil products demand is up.
Many other issues such as renewables achieving grid parity (or not), and the devaluation of fossil fuel reserve assets all had a mention. But one theme linked all the discussions, which was that risk plays a massive role in shaping the energy investments of the future. Much of the burden seems to fall on the energy utilities to satisfy political aims, supply affordable energy, and build expensive generating capacity. All this, and provide a high degree of security of supply, all free of carbon, whilst keeping customers and shareholders happy. An inconvenient truth is that there are few that are better placed to do this than the massive energy companies that exist today.