Mixed blessing?

Suppose the UK has vast quantities of readily accessible shale gas – what then?

If the Cabinet do not have the wit and imagination to reconcile our industrial needs with the fact of North Sea oil, they would do better to leave the bloody stuff in the ground.

Sir Michael Edwardes on North Sea Oil in 1980

Do we have the wit and imagination to reconcile our energy and social needs with a shale gas bonanza? If the gas is there in abundance, are we likely to use it wisely? 

What would count as using it wisely?

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

A Climate of uncertainty

Many years ago I was chatting to an accountant who had been given the job of costing a range of standard analytical techniques used to assess pollution in natural waters.

I still recall the look on his face when I told him that the true value of an ammonia result of say 1.0 milligrams per litre (mg/l) might lie somewhere between 0.9 and 1.1 mg/l and occasionally would lie outside that range.

He was astounded. At first he couldn’t believe that a value of 1.0 mg/l of ammonia might not be exactly that. Even worse, it was unlikely to be exactly 1.0 mg/l even if that was the result reported and paid for. I had to draw a bell curve for him and explain the role of statistics in such analyses.

In the end he realised he’d learned something about chemical analysis and we moved on. What I didn’t mention was another word I could have introduced him to :-

Assuming...

Assuming the sample was taken from the right place.

Assuming the sampler used the standard protocol.

Assuming the analyst didn’t mix up the samples on the analyser.

Assuming there is nothing unusual to affect the analysis.

The natural world is exceedingly complex and the environmental sciences are riddled with measurement uncertainty and analytical pitfalls. Inevitably we always have to deal with that thoroughly human aspect of real life – we have to assume certain conditions which could affect our analytical results, measurements and our conclusions.

Suppose you are to conduct a limited survey of lead in a stretch of trout stream lying between two bridges. You have a sampling protocol borrowed from the Environment Agency and a contract with an accredited analytical laboratory where your samples are to be analysed.

Everything goes well, your samples are collected by a student and the analytical results are as expected for a trout stream. All seems hunky dory.

Apart from one result.

This single result shows an extremely high lead concentration in a single sample taken from the downstream bridge. So you have that particular sample reanalysed. After reanalysis the result stands – one high lead result is confirmed.

What do you do?

Report it and the entire stretch of trout stream comes under intense suspicion for intermittent contamination by lead. Yet the result appears hopelessly anomalous. You check with the student who took the samples. No problems there – all sampling protocols were followed.

After some soul-searching you leave the high result out of the final report. It’s too anomalous and too contentious. Frankly you don’t believe it because human error is hardly unknown in such cases, from contamination to mixed-up samples. 

This is key – you don’t believe the result. You are convinced it is due to human error.

After your report is published, you discover that a field adjoining the trout stream was spread with sewage sludge in the nineteen seventies. The sewage sludge may have had a high lead content from lead in petrol and road runoff into the sewers. The anomalous lead result occurred shortly after a heavy storm so there may have been runoff from that field.

Oh dear.

This little story is pure fiction and the high lead result could still have been due to human error. The problem it highlights is common in all environmental analysis - even satellite temperature measurements of the atmosphere.

When studying the natural world, we have our expectations and very often anomalous findings are due to human error, process malfunction or instrument failure. So one way or another, anomalous findings tend to be left out of the picture and the picture itself migrates towards a consensus.

There are often political pressures behind those expectations too. Good scientists know this and cope with it, but the potential for deceiving ourselves and others is considerable and insidious.

A few decades ago, climate scientists had a far more complex problem to deal with and many flunked it. They failed to cope with climate complexity and the pressures their assumptions eventually brought on their incautious heads. We should not be particularly surprised.

The much trumpeted climate consensus means all our assumptions are correct. Oh dear – have our energy policies been bent to breaking point over something so naive?

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

CO2, water vapour, sunlight, climate change, global warming

My brother has kindly forwarded the following video by an Australia-based British scientist whose former field was geology. It shows that when you combine atmospheric CO2 levels with the variable luminosity of the sun, you do indeed get a good fit with the graph of the Earth's temperature over the last 500 million years.

Though water vapour can also contribute to the greenhouse effect, its role is limited because beyond a certain limit, the excess falls to earth as precipitation. However, a warmer atmosphere can hold more vapour.

It seems that we are in a "fool's paradise" period (my label) because although atmospheric CO2 has risen significantly, much of the additional heat stored in the system has been absorbed by the oceans, and at the same time there has been a temporary weakening of the sun's radiation. When the sun's energy emission resumes its long-term upward trend, and if the ocean warming crosses some point where new things happen (e.g. the release of deep-sea dissolved methane?) we may get climate change with a vengeance.

Yes, the Earth has been much warmer in the distant past - when humans did not exist. Life will probably continue, but maybe not on terms that favour our species and civilisations.



All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Utilities, Energy and the New Dirigisme

Once upon a time, oil was the only energy-source that enjoyed anything approximating a free market.  Gas and electricity meant monopolies or, if investor-owned, a regulated rate of return, steady but low.

Then came liberalisation, and gas and power took off as traded commodities in competitive market structures.  The sector divided into merchant (unregulated) activities and 'true utility' (wires and pipes, where so-called natural monopolies prevailed).  The trade-off for residual monopoly remained a more-or-less regulated, low-ish rate of return.  Some companies had characteristics of both merchant and utility in their portfolio; others had cleaner business models and were one or the other, with the utilities being conventionally viewed as annuity streams or 'defensive' stocks.

Endless debate ensues as to whether this can all work out as well as the open-market theorists claim: FWIIW, I am squarely in that camp, and the development of a global gas industry is its best evidence.  However, just as things were working out nicely in electricity too, along came the baleful decarbonisation agenda, and with it an avalanche of regulatory meddling.  The EU's Emissions Trading Scheme was an attempt to execute some of the new policy goals via market mechanisms, but as a result of various entirely avoidable errors it hasn't really worked.  So meddling it is.

There is a school of thought that goes: bring back the CEGB ! Advocates of this include those with no memory, who have forgotten just how bloated and wasteful it was; and also those with long and fond memories, who recall exactly how bloated and wasteful it was, and they loved every minute of it.

However, governments no longer have the money for this malarkey and anyway, outright renationalisation is (currently) not allowed in the EU.  So we get dirigisme on an ever more detailed basis, as governments seek to determine exactly what new power plants (and other infrastructure) get built, and where, and by whom.

Which finally brings us round to the challenges for the likely builders of said new kit, and for those who might be considering investing in them.

The energy companies have, over a relatively few years, learned to play the game quite differently to the way they conducted themselves from the 1990s onwards.  Instead of taking a professional view on, for example, forward energy prices and spreads, and making their investment decisions accordingly, they have decided it's easier to demand subsidies, 'capacity payments' and various other featherbedding guarantees before they will invest in, well, pretty much anything these days.

Like governments, many of these companies are short of dosh, and so they demand high rates of guaranteed return.  Like monopolies, governments know exactly who is going to pay for all this in the end: it's us electricity-junkies that have nowhere else to go (until we surrender to death by hypothermia).  So they make the necessary arrangements, via a plethora of subsidies and schemes, for guaranteed high rates of return.

Guaranteed high rates of return - what's not to like ?  Shouldn't investors be flocking to join the game ?  There are several schools of thought, all wrestling with the following polar considerations:

• People will always need electricity, the energy companies have governments over a barrel, and this isn't going to change any time soon; so back up the truck and enjoy it
• This new 'system' is clearly dysfunctional, with regulatory risk abounding, not least because government is taking powers to make the 'utilities' their agents, not only of investment but also every facet of social policy which has an energy angle

It's even possible to synthesize these points and argue, (as does Liberum Capital) that in the medium term these guaranteed returns look so good for the energy companies ("at a perfectly feasible power price, SSE would be seeing 33% annual increases in EPS towards the end of this decade"), they are bound to get slammed mercilessly when the whole game comes unstuck.

I always reckon that those who live by the subsidy, die by the subsidy.  But maybe there is good money to be made in the meantime ... what do we all think ?


This post first appeared on the Capitalists@Work blog


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Securing Energy Supply (4) - How Is It To Be Done?

"Safety and certainty in oil lie in variety and variety alone"

The reliable delivery of oil, gas and electricity represents a set of significant engineering challenges – but they have been solved.  However, disruptive and malign political forces are in play.  We have seen that the security and reliability of our energy supply is at the mercy of factors as mundane as strikes, protests and ill-conceived energy policy, as well as the more dramatic interventions of blockade, sabotage and war. A chilling prospect in every sense.

How, then, do prudent policy-makers go about securing our energy supplies ?  There are several tiers of defence and we will conclude this series by surveying the field.

Some reliability measures are put in place primarily against ordinary contingencies such as plant failure, extreme weather etc.   They may also serve against more sinister forces.

Over-capacity:  if one power plant in 20 is statistically liable to be out of order at any one time, there is a natural argument to have 21 or 22 plants in service.  Engineers being people who like building plants anyway, this solution to unreliability is very congenial to them, and when possessed of monopoly powers as many energy utilities used to enjoy, are inclined to follow this approach to excess.  Liberalisation of energy markets is characterised by reductions in the margin of over-capacity when economic factors start being given proper consideration: some assert this can go too far, a thought which we return to at the end of this piece.

Storage:  holding a strategic inventory of a vital commodity is as old as Joseph’s advise to the Pharaoh on how to prepare for the seven years lean.  This is easily organised for oil and coal; less easily for gas; and with currently-available technology near-impossible for power on any scale (aside from pumped-storage of water for hydro-electric generation where geology and geography permit).

Diversification:  as Churchill knew (see the quotation above), ‘variety’ or, as we would say, diversification of sources, is a key measure against insecurity of supply.  A century ago he was addressing the problem for the British Fleet, newly converted from coal-burning to oil, and relying almost exclusively on supplies from distant Persia.  Whatever the reason for having concerns about the reliability of any one source, it is a good idea to have several.  

The UK is among several European nations that have achieved a good measure of diversification in energy supplies, but several instances of risky concentration can be identified.  France is hugely reliant on its vast nuclear sector for electricity, and if there were to be a systemic problem (perhaps a catastrophic design fault) that caused their reactors to be closed, they would be in significant difficulties.  Famously, a number of eastern European countries are heavily dependent on Russia for their gas.

Interconnection:  when supplies are interrupted from one source it is important to be able to access as many other sources as possible.  For this purpose it is obviously best to be connected to as many other supply-chains as economically possible (a concept we shall return to below).  For oil this is generally very easy, as ships and trucks can easily be re-routed.  For coal it can be slightly more problematic, as there are many different types of coal, and coal-burning plant are often configured for specific grades.

Gas and electricity are restricted to largely static infrastructure.  Switching to an alternative supply route can be difficult, and is rarely possible unless inter-connections for the purpose have been built in advance of problems occurring.  The EC actively promotes developing new cross-border gas and electricity connections, and uprating existing ones, and European interconnection is improving all the time.

Free trade and other regulations: closely bound up with diversification and interconnection, anyone wanting to access an emergency source of supply (other than one they already own) needs to be confident that they can buy what they want from those who have it – provided they are willing to pay, of course. 

This requires a market to exist – which shouldn’t be an issue; but in gas and electricity, it cannot be taken for granted.  Even oil and coal have at various times not been fully tradable.  Gas and electricity were historically, though erroneously, viewed as ‘natural monopolies’, and anyone needing to buy (or sell) at short notice might have had nowhere to go.  In western nations, gas and electricity ceased to be statutory monopolies well over a decade ago, but in some areas there are distinct deficiencies in the workings of the ‘market’ – generally because of blocking actions by former monopolies who have lost little of their de facto dominance, and none of their overbearing arrogance.

Even where markets are working well on a good day (e.g. most of Europe), there can be issues when problems occur.  For example:  French regulations on ensuring the security of supply of La France used to be what many would deem to be irrationally strict; so that when a perfectly ordinary practical problem arose in the UK gas grid, even at a time when supplies were ample on the other side of the Channel, French operators would declare ‘problem ahoy’, and would start paying any price to fill their already well-stocked storage, safe in the knowledge that the regulators would endorse them passing through the costs of this fatuous operation to their customers.  What should have been a simple matter of UK spot prices rising to attract surplus gas from France and elsewhere, became a more serious problem than objectively necessary. 

Resolving this issue, while at the same time respecting every nation’s right to take legitimate security measures, has required harmonising regulations.  This can work well at levels where fairly effective supra-national bodies exist – the EU being one example.  Whether entities such as the WTO are genuinely effective for such purposes remains to be seriously tested.

Of the above measures, we can say that all of them are useful in times of purposeful external threats to security of supply, as well for dealing with run-of-the-mill contingencies.  Yet further steps may be contemplated against sinister possibilities.

Hardening infrastructure:  energy commodities being highly combustible and generally dependent on large, static infrastructure, they are perennially vulnerable to outright attack.  Most nations mandate at least some level of high security for these facilities, as inspection via Google Earth will readily confirm.  Since 9/11, ‘resilience’ measures have been stepped up considerably.

Diplomacy:  avoiding conflict always helps.  More positively, securing alliances designed to improve secure access to commodities is a major pre-occupation for many nations: the USA in the Middle East, and China in Africa come readily to mind.

Multi-national contingency plans:  following the AOPEC oil embargo of 1973-4, the International Energy Agency was given powers to mandate the holding of strategic oil stocks in OECD nations, and to direct the use of these stocks in emergencies.  The IEA’s direct interventions to allocate oil supplies during the embargo, coordinated in practical terms by Exxon, saved the targeted nations (in particular Holland) from even greater economic trouble than they suffered in the event.  

(Incidentally, in the mid 1990’s the IEA made a major study on how Europe would fare if ‘the single biggest source of supply’ – viz Russia – were to interrupt gas supplies for 6 months.  Even in those pre-market days, it concluded that with multinational coordination, no European nation would face complete ruin.  More than 6 months might have been a different story …)

Armed forces:  sometimes, passive and political measures are not enough, and the military may need to be deployed.  The navies of the trading world are, for example, constantly working against piracy in the Indian Ocean and elsewhere. More spectacularly, Western military interventions in Iraq have been attributed to the USA’s extended Middle Eastern oil policy – perhaps more easily asserted in the case of the first Gulf War than the second.

=   =   =   =   =   =   = 

The foregoing is a fairly pedestrian listing.  A more interesting line of enquiry stems from a simple classification of the various measures into two categories:  those which build towards self-sufficiency, and those which seek to make possible a system of mutual dependency.  In the former we would place over-capacity, storage, diversification, hardening, and armed forces:  in the latter, inter-connection, free trade, diplomacy, multi-national contingency plans and (to the extent we are part of military alliances) also armed forces.

There is a school of thought that values self-sufficiency above all other types of security.  In some spheres it may not be possible: for example, Belgium enjoys no indigenous natural gas resources whatever.  But in cases where it is possible, why would it not always be the solution of choice ?

The answer is that it might be much more expensive than mutual dependency – perhaps prohibitively so.  We hinted at an economic cost-benefit trade-off when speaking of desiring to be connected to as many other supply-chains as economically possible.

If there is an economic trade-off to be made, how might one decide an optimal degree of self-sufficiency ?  This important question is reserved for another day, concluding here with the observation that we need our politicians to make their judgements on security of energy supplies carefully: for civilisation is energy-intensive.

 

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Securing Energy Supply (3): Geo-political Threats in War and Peace

We have considered the interruptions to our energy supplies that can arise from the 21st century problem of intermittency of wind-produced electricity, and from the more traditional local threats of strikes, protests and other nations’ willingness to interfere with cross-border trade on protectionist grounds. But we remarked that, however disruptive these have been and can be in future, they are mere nuisances compared to the prospect of strategic geo-political actions taken with the deliberate aim of depriving us of the energy upon which our civilisation has come to depend.

At the most apocalyptic and obvious end of the spectrum is war.

By the time of WW1, oil had become essential to industry and naval warfare and, unlike the equally vital coal, was frequently obtained via lengthy supply chains with shipping often a vital link. Thus, blockading Britain’s supplies of imported oil, as much as food and metal ores, was a major strategic goal of German war policy and, as later in WW2, they came close to succeeding with their Atlantic naval actions against British shipping.  As late as the end of 1943 - even with the USA having been in the war two years - the UK almost ran out of oil.  Both nations put in huge efforts to build up oil supply networks, including innovative operational techniques such as the PLUTO system under the Channel to sustain invasion operations in Normandy.

For Germany itself in WW2, accessing oil resources became a primary early goal, and its thrusts into the oilfields of Romania, and then towards the Caucasus, were undertaken for this purpose.  When the attempts to take Baku failed, it was forced to go to extreme lengths to develop synthetic fuels and lubricants.  Both Speer and Eisenhower asserted that Germany lost the war primarily because by 1944 it was unable effectively to fuel its armour and airforce. On the opposing side Russia undertook extraordinary efforts to maintain constant supplies of oil to its fronts at Leningrad and Stalingrad, under the heroic engineer Nikolai Konstantinovich Baibakov, the Soviet Union's last living Commissar.  

Control over energy supplies – or their destruction - was a central aspect in many other theatres of 20th century warfare, and would be again in future. Oil has been and remains at least one critical factor in Western military engagements in the Middle East; and China is acutely aware of its own dependence on imported energy. Self-sufficiency in oil is a long-standing American obsession.

There is a sense in which the vulnerability of energy supplies was not very interesting during the Cold War, when both sides were able to project vast destructive power at a distance. So what if the USA was well supplied with local oil ? These supplies were still vulnerable to Russian attack, and vice-versa, with large and totally static targets such as nuclear power plants and gas pipelines still more at risk. In such a scenario, ‘self-sufficiency’ is more of a logistical detail than a strategic guarantor of continuous energy supply.

But with the advent of ‘asymmetric warfare’ which is likely to characterise future conflicts, the whole question becomes altogether more interesting. If your major foes are unlikely to mount a direct physical assault on your domestic supply lines - either because they do not have the capability [Iran], or do not choose to conduct hostile operations in that manner [China], then keeping energy supplies local may very well offer significant advantages compared to the vulnerability of more extended, external lines of logistics which can be subject to a plethora of debilitating indirect actions and pin-prick attacks.  An act of unattributable piracy here, a small distant pipeline rupture there ... much more secure if your supplies originate close to home, and travel short distances across friendly territory.  We shall return to self-sufficiency in the next post in this series.

If war seems an extreme contingency for energy planning today (and you'll struggle to find much evidence of it being taken into account in current UK government energy thinking), then we surely cannot fail to give serious consideration to the great external political threats that have actually impacted on Western energy supplies in the past few decades.  At the less critical end of the spectrum has been the collateral disruption inflicted on European customers for Russian gas whenever their disputes with the Ukraine spilled over into actual interruption of supplies.  These short-lived but uncomfortable episodes have always happened in winter, and have seen serious short-term disruption for Eastern Europe and countries such as Italy, whose winter gas comes significantly or perhaps entirely from Russia, and whose strategic gas inventories are rapidly depleted.

While few imagine this is anything more sinister than a rather casual Russian attitude to the consequences for innocent bystanders, it has caused many nations to maintain higher gas inventories than would otherwise be necessary for operational reasons alone, and has been one of the reasons why countries like Poland are working hard to diversify their sources of gas (there are other reasons at work, too.  At the same time it is fair to point out that Russia has made, and continues actively to make large investments on pipelines that outflank the Ukrainian problem, first to the North and then to the South: they have no desire to be known as a politically unreliable supplier.)

By far the biggest political assault on the West's energy supplies was of course the OAPEC oil embargo, the 40th anniversary of which will be upon us soon.  Explicitly a hostile geo-political move, it was directed against selected Western countries - notably the USA and the Netherlands - in retaliation for the support given to Israel in the Yom Kippur war.  This disruption over several months (long after actual fighting had ceased) was colossal: and the economic effects damaging and long-lasting.  Of course, it also resulted in various large-scale initiatives at the global strategic level to prevent or counter such actions, which we shall consider in the next post.

So geo-political threats to security of energy supply falling short of outright war have been manifest in the past, including once on a truly strategic scale with immense consequences.  If these things have happened before - particularly when the Big One was triggered by volatility in the Middle East, which is hardly ever off the radar - then prudent politicians and planners must contemplate the possibility they could happen again.  And they do.

In part 4 we will consider the steps that can be taken to guard against threats to the security of our energy supply. 

[ Continues ]


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Feeding Frenzy at the Subsidy Trough

The EDF nuclear subsidy game rumbles on with another batch of orchestrated leaks. The stakes could hardly be higher.

And haven't the lobbyists and briefers been busy ! How convenient that the Telegraph can always be persuaded to publish their radioactive releases. From the EDF camp, we learn that unless HMG comes up with the readies (well, forces electricity bill-payers to come up with the readies), not only will there be no EDF nukes for the UK, the Japs will pull out too - along with every potential developer of UK infrastructure ! “'No big infrastructure investor will ever trust the Government again' if that happens, is the bleak verdict of one industry insider" - quoth the ever-helpful Telegraph. The whippers-in have indeed been out in force. Every b*****d wants a monster subsidy: who'd have guessed ?

So stick that in your pipe, David Cameron. And not just lots of readies are required, mind - it must be a 40-year deal, and government under-writing for the capital costs, and indemnity for EDF on cost over-runs. And to think all they wanted just a couple of short years ago was a carbon-price floor (already long-since delivered and banked, of course).

The government side wants it to be known that, err, they are prepared to walk away if they can't get a 'good deal' - such tough negotiators, eh ? - and will certainly keep the nameplate price lower than £100/MWh. But we all know this is fairly arbitrary when 40-year indexed-linked games are being played, and so much is on offer by way of guarantees. "The truth is likely to become much clearer in the next few weeks", opines the Telegraph. How very trusting.

Whatever we get to know about the dirty deal, it will go straight into the long grass of an EC State Aid review, and there will be no binding commitment from EDF for, oooh, 18 months minimum. So - no start-up until 2022 earliest ? Which means in turn that all the practical problems of keeping the lights on post the LCPD shut-downs will have to be solved without new nukes. Which means ...

It was not always thus.  A mere decade ago there was a parallel issue in UK natural gas: North Sea gas production was forecast to decline to the extent that new import sources would be needed from around 2005. The UK government had played a clever strategic hand several years earlier, but otherwise stood back and let the market work. Sure enough, the companies that make up the UK gas industry invested in sufficient new import pipelines and LNG import facilities to replace the declining North Sea production entirely, if needed (which it won't be for several years yet). Invested. Their own money, with no subsidies !

They did so because (a) there was a clear business case, and (b) there was no hint that subsidies might be forthcoming if they just held back a bit. Happy days.

[This post first appeared on Capitalists@Work]


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.