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WHOLESALE ENERGY PRICES: JANUARY – MARCH 2018:

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Crude prices paused for a breather amid confirmation of a surge in North American exports of shale.

US oil production broke through the symbolic 10 m/bd, the first double-digit figure since the early 1990s.  However, this headline event did little to knock the crude market, with prices remaining flat over the period. Its impact was tempered by a rise in compliance levels across other oil producing countries in respect of Wider OPEC’s November 2016 Accord with OPEC itself, exporting 32.25 mb/d which is a ten-month low. The oil market is also being underpinned by heightened geopolitical concerns which are now, if anything, more heightened then they were last year. The final success of the ‘anti-dissident’ crackdown and purge in Saudi Arabia remains far from clear. There seems to be no consensus among analysts and observers as to when or how the ‘end game’ (which is not clear either) will play out or how robust any favourable  outcome will be.

Any flare-up or renewed uncertainty in this respect will immediately rekindle prices. Although, the medium-term oil supply outlook remains comparatively stable otherwise, at least for the time being.

Natural Gas

The gas market saw the curve rising just 1%. Although, spot  prices charged above one pound a therm at one point amid a conflagration of adverse factors all coming together at once. These included import problems at the Nyhamna Gas Terminal Plant serving Langerled pipeline to the UK;  technical issues with Dutch export Balgzand Bacton pipeline itself; a spike in energy demand throughout the North West European corridor amid freezing weather conditions and some market nerves heightened perhaps by enforced N Grid gas curtailments (if only temporary) and an appreciation that the UK finds itself in its first winter without any long-duration gas reserve facility of its own to fall back on.

This follows the closure of Centrica’s Rough offshore storage platform, as discussed in January’s edition of Energy Highlights. Overall, however, the forward gas market looks well-supplied in the medium-term, notably in respect of LNG supplies. That said, the UK’s own long-term import dependency is set to rise, past 90% by 2040 according to the latest National Grid research. Forward gas demand may well be curbed by government legislation restricting domestic gas and space heating use into the next decade.  Moreover, an early demand-call from the power generation sector also looks unlikely. Carbon prices meanwhile rose by over 80% over the past nine months, breaking €10/tonne CO2 at one point.

The unfavourable regulatory outlook for new-build gas-fired power stations could keep a lid on prices. Although government policy could always change; indeed the treatment of specific gas-fired generation is known to be under review in Whitehall circles, even if the question is seldom aired very publicly.

Electricity

Despite the cold snap, the electricity market slipped back. The annual base-load power contract fell by 7%  on the back of improving plant availability and very few reported outages during a critical demand period.

That said, the current state of the wholesale electricity market perhaps belies the impacts pending on prices downstream. In particular, on smaller industrial and commercial customers who have no exemption from the new (somewhat paradoxically-named) ‘Energy Intensive Industries Exemption Surcharge (or EII) that comes into effect in Q2.

The EII will not be introduced as a tax in name, although that is precisely what it is. The EII will instead be introduced as an ‘uplift’ to existing surcharges, namely the Renewables Obligation, absorbing circa 60% of the new levy; the Feed-in-Tariff and the Contract for Difference surcharges, absorbing circa ca. 20% a piece. Most of the energy intensive users’ exemption surcharge will fall on the non-energy intensive users  with no exemption from this (once conceived) ‘carbon tax’. This, combined with other increases in transmission and distribution network charges, as already penned and indexed to inflation, will cause the median commercial electricity bill to rise by circa 25% in just three years from now, according to provisional calculations (my own – happy to compare notes with any reader on that question).

This expected rise in bills also assumes no rise at all in wholesale power prices between now and 2022, which is far from a given. Enhanced efficiency, optimised energy management, embedded generation and possibly electric storage may become more commercial as a consequence, as end users look for ways to side-step potentially significant future price rises.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: NOVEMBER – DECEMBER 2017:

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

The petroleum market continued to charge upwards. Dated Brent prices closed the two month period 19% higher. In the last two years, since the January 2016 Edition of Energy Highlights, world oil prices have risen over 80%. Whilst the so-far successful accord between OPEC and non-OPEC producers has certainly had an impact, shale has yet to have the dampening effect which some in the market had asserted it would.

No one knows how far oil prices may have to run before marginal supplies (i.e. not covered by the Accord, US shale being just one option available) arrive en masse. Whilst prices will not necessarily reach this level, E&P studies suggest that only once oil prices are sustained over $75/bl will significant new developments come online.

The Brent market spiked higher in December amid outages at Statoil’s Troll platform and Forties pipeline, which shut-in over 70 North Sea platforms in total at one stage, including the ETAP, Armada and Buzzard fields along with Forties itself, removing 45% of UK winter supply. While the pipeline is back online now, attention at the turn of the New Year turned towards troubles in Iran, which buoyed Dated Brent cargoes above $65 /bl into the New Year.

Natural Gas

Natural gas prices, on the other hand, took most of last month’s events in their stride, despite much of the upheaval relating to the gas market itself. Day-ahead spot leapt to a 4 year high of 80 p/th at one point amid concern over supply, as the UK entered its first winter with no principal (long duration) gas storage facility following the closure of Rough combined with a major explosion at the sensitive Russian import thoroughfare at Baumgarten in Austria. Yet, this barely affected the forward curve in the end. The Annual Contract rose just 2% over the two periods and gas prices actually fell 4% over the year. This relaxed market might symbolize the abundance of global gas supplies relative to oil, and also national aversion to building new gas power stations, efficiency and de-carbonisation globally.

However, gas prices, through oil-indexed contracts and (to an extent still) fuel substitution, will at some point respond to rising energy commodity prices if that trend continues, even if the indexation-lag is pronged (which it often can be). It remains to be seen whether gas prices will remain so calm, even though the forward supply picture remains robust.

Electricity

Forward power prices rose 5% between November and January to finish the year unchanged at roughly £48/MWh. The spark spread has been rising, although whether this will trigger some of the stalled UK gas generation projects remains unclear, with government policy the most likely determinate there. As regards the wholesale market, the outlook for significant price rises in base-load electricity looks muted still. However, for commercial & industrial markets, the outlook is significantly more bullish, with a cocktail of transmission, distribution tariff, existing surcharge and new energy tax rises in the pipeline. These could increase the annual bills for commercial customers by 30% inside three years, notwithstanding changes to wholesale prices.

Despite rising commodity prices elsewhere, forward curve and prompt market prices were also subdued by sentiment on wind generation. A ‘£57.50/kWh’ headline figure made the news in October (although it doesn’t imply many new wind projects will be commercial at such a price) and high winds across Europe in late December also suppressed the day-ahead market. That said, the take-up of renewables combined with certainly lower costs have surpassed expectations, serving to soften forward prices. A cursory look at the ‘speedometers’ on www.gridwatch.templar.co.uk in recent weeks demonstrates just how significant wind output was, amid several Triad warnings in December itself, frequently testing the 9 GW level. This, together with robust nuclear output, compensated for the sudden and unexpected closure of Drax, the UK’s largest power station, despite the outage continuing into the New Year.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: SEPTEMBER – OCTOBER 2017:

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Crude prices rallied as OPEC and non-OPEC countries continued to show strong quota compliance, with just two cartel producers, Libya and Nigeria, bucking the trend. However, 0in oil trading circles, OPEC’s 1.2 million barrel per day curtailment in export volumes is still remaining on track. Refining inventories have been reported healthy amid a warm start to winter which has suppressed demand for heating oil and related petroleum products. Over the two month period, the Dated Brent contract price closed up by 20%. This spot price has almost doubled in the last two years although it is still just below half the peak it reached barely two years before that.

Traders will be looking for evidence that the ongoing ‘shuttle diplomacy’ in the run up to the cartel’s key 30th November meeting in Vienna is paying off. Given high compliance rates, notably amongst non OPEC countries, there is no reason to expect oil prices to soften with the wind now in the market’s sales.

Natural Gas

The forward calendar year NBP contact finished the period 6% up, with good supply availability and subdued demand both outweighing the effect of steadily strengthening oil prices over the year.

The UK gas market is now into its first winter without any high space (long-duration) storage cover to fall back on. This follows the closure of the Rough gas facility in the Southern Gas Basin. A sustained cold snap could put the market to the test if the UK then has to import (effectively accessing surplus storage overseas) through inter-connectors with Scandinavia and the Continent. Although such pipeline capacity may usually (though not always) be guaranteed on the day, the gas itself is not. Even if so, it will possibly be supplied at higher distress clearing prices than before.

Centrica’s application to withdraw 0.9 billion cubic meters from the 3.2 bcm Rough facility – for site integrity and pressure reduction reasons – has been approved by the UK Oil and Gas Authority and this could keep the market well supplied in the interim. However, the volume is still quite modest and the withdrawals will be phased over time. The impact on the market will be limited, if not discounted already.

With crude prices back above $50/bl for some six months now, the oil markets could soon be nudging gas prices up through long-term contract indexation, especially with increasing reliance on inter-connector supplies given contractual indexation to petroleum product prices is generally more dominant on the Continent than it is in the UK.

Electricity

The annual base-load power price headed back up towards £45/MWh, rising 4% over the period. Although, electricity trading is increasingly becoming ‘a tale of two markets’. Whilst wholesale prices are increasing and may perhaps continue to increase gradually, industrial and commercial tariffs are continuing to climb quite steeply, amid higher transmission, distribution and balancing charges, as well as higher taxes and subsidy-related surcharges applied to industrial and commercial users.

Transit costs and taxes aside, a third factor driving industrial and commercial prices is the increase in renewables generation.

Transmission and distribution networks are known to be struggling to offset the intermittent export supply, current-harmonic and voltage-stability problems which renewable exports onto the system induce. The significant infrastructure investment needed to manage this will be passed on to the end user and increases in producer price inflation will also be an influencing factor. The consensus of recent market research suggests that in less than three year’s time, commodity electricity will account for less than 30% of a typical I&C user’s bill. Five taxes and subsidy surcharges and three grid-system fees will make up the remainder, bar a trace profit for the supplier. Therefore, the rising cost of mains electricity alone could well incentivise more end users to self generate where this is feasible. Fundamental changes to the power market and its subsidy framework to facilitate this trend have been tabled and concrete proposals may be available to report on in the New Year.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: JULY – AUGUST 2017:

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Forward and spot markets across energy commodities increased over the summer. This was led by crude, which rose over 7% with the futures market buoyed by reports of progress in quota compliance amongst OPEC and OPEC-Alliance producing countries. The geo-political concerns highlighted in July’s issue are also taking hold. Although Latin American tensions have eased, those in the Korean Peninsula remain foremost in peoples’ minds. Indeed, the oil market may be driven higher if more investors view hard commodities as a safe haven.

The refined products markets rose ahead of crude prices amid reports of increased military stocking (chiefly jet-kerosene). Meanwhile, US storms and emergency draws on the Strategic Petroleum Reserve, and also served to drive crude and petroleum products prices up.

Long term hopes for shale took a knock in confidence with an announcement from BHP Billiton that it was selling investments in the US to stem losses on its fracking venture. This news was compounded by comments by the CEO of Total, perhaps the one energy major with the most significant shale involvement, asserting that oil prices will need to stabilise well over $80/bl before any significant new investments can be justified.

Natural Gas

Gas finished the period up more than 3p per therm.

The spectre of North American refiners converging on the Rotterdam spot market drove up European prices for all petroleum products, notably middle distillates. This had a knock-on effect on gas, which is often contractually-indexed to heating oil. It is also a naturally interchangeable refinery product which is frequently blended with kerosene at refineries, hence the strong price correlation notwithstanding the supply basis. This factor and the rise in energy prices across the board perhaps best explains the recent run in gas prices, a market which is otherwise very well supplied, with talk of some LNG cargoes hitherto destined for South Asia now being diverted to European terminals.

Petroleum markets aside, the effects of the weakness of Sterling vs. the Euro, with the determining €/MWh price converting into p/therm, needs to be considered too. The North European gas market is essentially a single, inter-connected supply pool, with the UK price at the National Balancing Point (NBP) essentially ‘set’ by trans-European deliveries cleared in and out of the Title Transfer Facility (TTF) in Holland. A sustained or further weakening in Sterling could put upwards pressure on prices in the UK therefore, especially if regional European spot markets start to tighten once winter takes a hold or we see outages at key power stations requiring an uptake in gas or coal.

Electricity

Wholesale power prices saw the strongest gains of all, with the annual 2017 base-load contract and the spark spread rising 6% and 11% respectively.

Nuclear power stations in France and Benelux, which represent the backbone of the Continent’s supply, had come under increasing safety/decommissioning authority scrutiny, with considerable uncertainty and lack of information on the long-term future of key generators unnerving the forward market.

Industrial electricity prices in the United Kingdom, meanwhile, increased further, partly in unison with steep rises in domestic tariffs and rising input wholesale costs. The impending Energy Intensive Industry (EII) exemption surcharge will soon be affecting end-users on both new and existing long-term contracts from next April. There is some consternation amongst buyers, not just in relation to the justice of the tax itself (which exists chiefly to pay for a tax exemption for larger energy-intensive buyers) but to the uncertainty it is causing as well. Whilst the surcharge will apply from April 2018, buyers still remain in the dark as to what the actual tax rate will be – a case of Whitehall ‘delaying’ bad news, perhaps. Some suppliers have been offering premium-rated ‘insured tariffs’ in response to these end-user concerns.

But perhaps the real ‘elephant in the room’ is inflation. Not so much headline RPI or CPI, but leading-indictor of Producer/Factory Gate prices, with some industry trade associations telling us that such indices are already heading into double figures. Were this to be the case, there are contractual clauses and statutory measures in place to trigger automatic rises across wholesale, industrial and commercial prices. The same inflation-related factors affect the gas market, and in both cases, EUA carbon prices (up by more than 15% over the two month period according to Gazprom Research) could also chase industrial energy costs higher, unless such inflation can be kept in check.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MAY – JUNE 2017:

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Brent crude fell $51.75 to $48.85/bbl amid concern that OPEC and OPEC Alliance states have still been struggling to remove the slack from the oil market, also rising exports from Libya (adding over 1 mbd) and from Nigeria (over 1.7 mbd) to world supplies. Neither oil producer is covered by the production accord.

Oil prices fell by just over 5% which seems a comparatively modest fall put in perspective and against recent newswires and headlines on the subject.  Looking at the price upside, markets will be concerned at growing global oil consumption, notably in the automotive sector, the prospect of faltering supplies and the possibility of deeper OPEC Alliance cuts, which may well happen if it is now clear that the existing cuts do not go far enough.

On the downside, the market will be looking at future output increases in Libya, Iraq and North America. Shale exports are clearly having an impact, although longer-term questions about the sustainability and commercial viability of sub $80/bbl production projects outside Africa and the Middle East  are likely to remain. Ongoing political troubles in South America and the South China Sea may also rattle petroleum markets in the weeks ahead. Furthermore, with derivatives now accounting for most of the open positions in the forward markets, physical prices may  be very sensitive indeed to general shifts in perception, even if the market looks calm at the moment with the 15 Day Brent contract seemingly stuck between the same £45/bbl  ‘floor price’ and £55/bbl resistance level mentioned in the last edition of this update.

Natural Gas

Gas prices barely moved over the period, up just 2%. The main news last month was the announcement that Centrica will permanently shut its Rough facility. This is a converted North Sea gas field which, as most articles reported, accounts for 75% of the UK’s storage  capacity. While that percentage is perfectly accurate, in terms of the ‘high-space/low-deliverability’ storage (i.e. the type the market needs to balance on a seasonal basis and to provide cover for prolonged emergencies) the true percentage cover  which is provided by Rough is even higher, possibly over 90%.

The closure of such a strategic asset should be a concern therefore.  The last 15 years have seen new investment in onshore salt-caverns, although these are generally ‘low-space/high-deliverability’ assets. Although they are more flexible, the emergency cover they can provide is limited. They are also likely to be more expensive, certainly once competition hitherto provided by Rough is withdrawn.  The closure of Rough may therefore expose the UK gas balancing market to  technical and market developments relating to these smaller storage facilities, the LNG market and inter-connectors.

Consequently the risk-premiums in I&C contracts may rise (due to higher balancing risks), as will valuations of swing flexibility in North Sea gas sales agreements. From a North European perspective, the gas market does look well enough supplied for now. However, the Russian-Ukraine corridor, South East Asian LNG supply, demand and geo-political developments all need watching in the weeks ahead, as well as the oil market itself.

Electricity:

The forward baseload contract finished the period unchanged at £43.00/MWh.  New delays were  announced for the proposed 3,200 MW Hinkley Point C  nuclear power station and the plant now looks unlikely to generate at full capacity until 2027, by which time all of the UK’s remaining reactors, bar Sellafield, may have closed.

Progress on the next new-build site, the 3,600 MW Moorside plant, looks to be in jeopardy altogether, with primary shareholder Toshiba facing  possible insolvency and minor partner Engie (formerly Gaz de France) pulling out of the project altogether.  Power prices are being held down by low oil and gas prices for the time being but the long term outlook is less clear. To ensure the system has adequate volume, National Grid and central government have  embarked on quite an extensive portfolio of new inter-connector projects to import from grids on Continental, Scandinavian countries and potentially Iceland, which has a 1,500 MW wire hoping to get the go-ahead soon.

There are already eleven major inter-connectors, rated between 1,000 MW and 2,000 MW, planned under construction or already live. But whilst the system may have the capacity spare, this is no guarantee that sensibly-priced electricity itself will be available to fill any short-fall. The UK’s price-dependence on European and Nordic power exchanges looks set to increase. The landscape will be different with the current inflation-adjusted Strike Price for the first new-build reactor at Hinkley Point C already weighing in at £110/MWh, much higher than the existing baseload market prices.

Barring a renaissance in gas-fired or other indigenous generation, forward power prices look poised to shift higher. Significant increases in trend are perhaps most likely in the balancing market prices rather than baseload, with the latter fast becoming ‘the residual’ commodity by comparison. As we go to wire, there are reports that half of France’s nuclear power plants are in shut down. It is not clear why or when plants will re-start. Twenty units offline cannot be explained by maintenance although there is a host of possible reasons to explain what has happened and no report yet of any sharp movement in European power prices.

By Dominic Whittome

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2017: PART I: CRUDE OIL & NATURAL GAS

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Oil prices finished 2% down as the market remained pensive about the upcoming OPEC summit in April.

Although ‘OPEC Alliance’ countries (producers co-operating with latest output cuts) will not be attending the Vienna talks in a formal capacity, behind-the-scenes dialogue has been ongoing all the while.

With Iranian and Russian ministries having met up in January to discuss Russia extending its production cuts into next year and Saudi Arabia sending their foreign minister to Iraq (which was included in its latest production agreement) with a view to including Iraq in possible future production ceilings yet to be agreed.

Traders have been pointing out that there is no evidence to show that last November’s accord between OPEC and OPEC Alliance countries made any impact. Although it is true enough that crude prices have flat-lined since November (having jumped in the weeks running up to the accord), conversely there is also no sign the accord has not worked. The agreed cuts were modest, the first in over nine years and also the first of their kind in that they included several non-OPEC producers.

OPEC ministers are possibly playing a long game, with modest but universally-orchestrated limits in output, to be increased methodically rather than in any way likely to destabilise the market, and we would need to wait and see if and what OPEC ministers decide on in April before one can second-guess the success or otherwise of last November’s accord. The pace of oil price recovery has, however, been muted. This may or may not be connected to the delays to the public listing of Saudi Aramco, ostensibly due to ‘complexities in the structure’ of the company flotation plan.

The mooted delay (up to 18 months) may reinforce scepticism about the expected speed of any oil price recovery, if this reflects the kingdom’s pessimism of the accord holding together. The value of the share offering is estimated at over £2 trillion and clearly very sensitive to prevailing oil prices. If market estimates are correct, the new company is valued at 20 times the capitalisation of the next largest oil major, ExxonMobil. It is conceivable that there have been worries that the oil market might not recover in time and these may have played a factor in the delay, although that itself is pure speculation. The Vienna meeting April could though be a turning point, in either direction.

With this week being CERA Week in Houston, perhaps we can expect the annual splash of shale stories over the next few days.  While shale drilling should place a price ceiling on any sustained oil price recovery, as pointed out in past issues of Energy Highlights, shale plays are generally short-term and expensive. Oil prices could comfortably ratchet up to $75/bbl or beyond before shale and higher-cost conventional oil output starts to kicks-in. Either way, the oil market will never loose its capacity to take people by surprise.

Natural Gas

The forward-year gas contract finished the first two months of the year off 10%, closing below 45p per therm. This reflects the view held by most traders of a fundamentally well-supplied market with a spate of further LNG export projects set to come online this year and next, many landing at European terminals.

Notable supplies include projects in Australia and South East Asia, although shale gas from the Americas will have a role will to play too. The UK market recently saw shale gas imports from the Peruvian jungle due for landing at Milford Haven shortly before going to press, and this healthy looking forward supply-picture has been helped along by Japan.

The country has gradually been releasing more and more gas on to the world spot market: the LNG contracts it had bought up in the immediate aftermath of Fukushima. This may have contributed to (or certainly given the impression of) an ‘LNG glut’.

The demand-side also paints a weak picture, with limited demand-call from generators and industry. However, there are some bullish signs on the horizon too. Geo-politics have recently turned adverse, with under-the-radar conflict areas in Russian-Ukraine and even the South China Sea among the potential supply-area worries.

However, any sustained uplift in gas prices is perhaps most likely to occur as a result of an indexation and long-term contracts issue. Indexation to crude prices still has the propensity to push prices up, with much of the piped and LNG sold across Europe still covered by these clauses. Within these contracts, even where oil and petroleum product indices may have seen their price-impact reduced or possibly removed altogether over the last 20 years, these price escalators indices have in most cases simply been substituted for producer price indices, which have recently been rising faster than oil prices themselves.

In fact, over the last five months alone, UK producer prices have been rising at annualised rates well over 10% according to estimates provided by industry trade associations. These will ultimately soon be reflected in official government statistics and will later directly influence gas contract prices, where the indexation effects can be lagged for six to nine months or, in unusual cases, even longer.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

For a PDF of this blog click here

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CUADRILLA FRACKING APPEALS OPEN IN BLACKPOOL

A Public Inquiry into four planning appeals under s.78 of the 1990 Town and Country Planning Act have opened in Blackpool in Lancashire, against the decision of Lancashire County Council to refuse to permit drilling at two well sites in Little Plumpton and Roseacre Wood, hydraulic fracturing those wells and flow-testing the shale gas, and associated monitoring works. The appeals are listed to last for 5 weeks.

They are the first appeals to consider the Government’s shale gas policy, and have all been recovered by the Secretary of State for his personal determination. The appeals have raised a number of interesting, and inevitably controversial, issues.

First, there is the application of the presumption in favour of planning permission contained within paragraph 14 of the National Planning Policy Framework (NPPF). The Appellant argues that because the development plan does not expressly provide for hydrocarbons expressly, in line with the PPG, it must be either absent, silent or out-of-date. However, absence and silence have been interpreted as a high threshold, see Lindblom J in Bloor Homes East Midlands Limited v SSCLG [2014] EWHC 754 (Admin.). As to whether a policy is “out of date” by reference to paragraph 215 NPPF, the Inspector will have to resolve whether a given policy is inconsistent with the corresponding parts of the NPPF.

Second, there is a significant conflict in the expert noise evidence, between whether to use the British Standard for construction and open cast sites, or to use the British Standard for industry and commercial sources of noise – in short whether the drilling and fracturing operation (nearly 2 years) is akin to a construction site or an industrial site. There is also dispute as to the extent to which the WHO Night Noise Guidelines (2009) replace the WHO Community Noise Guidelines (1999) on Lowest Observed Adverse Effect Level (SOAEL) and Significant Observed Adverse Effect Level (LOAEL), or indeed whether LOAEL and SOAEL in WHO Guidelines are targeted to, less intrusive, anonymous (transport) noise, rather than noise with a specific character, as the appeal schemes are said to be.

Third, there is debate as to the weight to attach to the Joint Ministerial Statement on Shale Gas “Shale Gas and Oil Policy” (16 September 2015) (“WMS”). However, that debate may ultimately be somewhat redundant as it appears to be common ground after the first week of cross-examination of the Appellant’s witnesses, that the WMS is not encouraging unsustainable (by reference to the NPPF) shale gas exploration. Thus an exploration project which conflicted with the NPPF judged objectively, as a whole, would not derive any support from the WMS.

Fourth, the weight to be attached to benefits. Planning permission is sought only for the exploration stage. It is a real possibility that following 6 years of exploration, shale gas is not commercially extractable at the proposed locations and thus the wells are decommissioned and plugged. Therefore, the decision taker can only place weight on the very small number of construction and security jobs that will be created to construct and maintain the wells, and the receipt of knowledge of the commercial viability of extracting shale gas at the locations. Placing weight on the benefits of a wider commercial shale gas industry in the North West is highly unlikely given that this would require at least a further planning application and may not even be a commercial reality.

Without question these appeals are a definitive test for the fledgling shale gas industry in England (readers will know that hydraulic fracturing is not presently permitted in Scotland or Wales). The seven planning barristers appearing in the appeals, including Prospect Law’s Ashley Bowes, reflects the scale of the financial stakes and the importance and complexity of the legal issues under consideration.

 

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article is not intended to constitute legal advice and Prospect Law and Prospect Energy accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article.

This article remains the copyright property of Prospect Law and Prospect Energy and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Energy

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A STEP CLOSER TO FRACKING?

Britain has moved a step closer to ‘Fracking’ with the news that a decision to block the extraction of Shale Gas in South Lancashire could now be overturned by the Secretary of State.

Although a local planning inspector at Lancashire County Council will still hear the Energy firm’s appeal in February as per the usual course in planning appeals, they will now only have the power to compile a report and forward suggestions. A final decision will instead lie in the hands of Greg Clark, the Secretary of State for the Department for Communities and Local Government, who has chosen to depart from the usual process because the prospect of extracting Shale Gas is a matter of “major importance having more than local significance”.

This follows Mr Clark’s September decision to afford himself a final say over planning appeals concerning Shale Gas, as s.62A of the Town and Country Planning Act 1990 allows him to do.

In June of this year, Cuadrilla’s applications to instigate ‘Fracking’ at two sites, Roseacre Wood and Little Plumpton, were rejected by Lancashire County Council’s Development Control Committee, with nine from the fourteen strong committee rejecting the proposals on the grounds that the sight of Fracking operations and the noise arising from them would cause an ‘unacceptable adverse impact” on the rural setting that was to host them.

As we previously reported, central government have appeared keen to promote ‘Fracking’ despite indications that support for the technique has reached an all time low. Moreover, with opposition to the extraction of Shale Gas often heard at local levels, the significance of this development cannot be underestimated. Groups such as Friends of the Earth have been quick to voice concerns that this development will help to sideline local opinions.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resources projects in the UK and internationally.

For more information, please contact Edmund Robb on 07930 397531, or by email on: er@prospectlaw.co.uk.

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FALL IN PUBLIC SUPPORT FOR FRACKING

The government are failing to win public support for Fracking, with surveys hinting at a sharp decline in public support despite efforts to create a market for Shale Gas.

YouGov and the University of Nottingham have studied public reactions to Fracking extensively since early 2012. The results of their latest survey, involving over 6,000 people, suggested that little more than one in ten people now support the technique. If its previous studies are to be believed, support for Fracking reached a high of nearly 40% in July 2013.

More correctly known as hydraulic fracturing, ‘Fracking’ involves pumping a mixture of chemicals and sand into rock fractures so as to extract gas and oil. The technique dates back to the 1940’s. In the UK, areas such as Nottingham, Derbyshire and parts of Leicestershire have long been known to have excellent potential for the extraction of shale gas.

In spite of this, ‘fracking’ has been suspended in the UK since 2011, when drilling in Blackpool was linked to minor earthquakes. Earlier this year, two planning applications, submitted by Cuadrilla, were also rejected by Lancashire County Council amidst vocal opposition, with the decision issued on the grounds that operations could cause auditory and visual pollution in a rural landscape. Opponents of Fracking also frequently contend that drilling has the potential to pollute drinking water.

Nonetheless, in recent years the government has appeared keen to change public perceptions; reducing the subsidies available for wind and solar energy whilst insisting that Fracking could be key to making the UK energy self-sufficient. Companies like Cuadrilla, GDF Suez and Ineos have recently been granted over 1000 miles of land to explore for potential fracking, whilst another 5000 square miles will be subject to consultation, given their proximity to protected areas.

Yet falling support has also been reported in research conducted by the Department for Energy and Climate Change (DECC), who interviewed over 2000 households in July and found a support rate of approximately 21%, 6% lower than in February last year. The DECC Public Attitudes Tracker seemed to suggest a public preference for wind and solar, finding that 75% of the public supported sources of renewable energy.

Although these results suggest they are facing an uphill struggle, DECC have made a clear commitment to Fracking; they have previously argued that it could contribute billions to the UK economy. As such, it would be surprising to see them give up their battle to convince the public right now.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resources projects in the UK and internationally.

For more information, please contact Edmund Robb on 07930 397531, or by email on: er@prospectlaw.co.uk.

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CUADRILLA’S FRACKING APPLICATIONS REFUSED BY LANCASHIRE COUNTY COUNCIL

Ashley Bowes, Prospect Law

For nearly a year and a half Lancashire County Council Development Control Committee heard extensive evidence from its own officers, the public and the applicant at a series of public hearings concerning two planning applications. Cuadrilla had sought permission for the construction and operation of four wells, drilled from a single large well-pad, with each well being subjected to hydraulic fracturing (fracking). The operation was expected to run 24 hours a day with fracking occurring for two months, followed by a three month initial period to test the flow of hydrocarbons (gas) and then 18-24 months of extended flow testing. They represented the largest appraisal of fracking in the UK.

The first site, at Roseacre Wood, was recommended for refusal on the grounds of its transport impact. The second site, at Preston New Road, although initially also recommended for refusal, was subsequently recommended for approval following further noise evidence from the applicant.

The scene was therefore set for a tense development control meeting on 23-24 June. On 24 June a motion to refuse the application was moved and seconded but, following an adjournment, was defeated on the Chairman’s casting vote. It emerged that in the adjournment the Council received telephone advice from David Manley QC to the effect that the Council would be acting unreasonably to refuse the application and would expose itself to costs at appeal. A subsequent motion was passed to make that legal advice public.

In response to which, Friends of the Earth sought advice from Richard Harwood QC and the Preston New Road Action Group sought advice from Ashley Bowes. Both barristers’ advice concluded that there were grounds to refuse the application on the evidence before the Committee.

At its reconvened meeting on 29 June, a motion to refuse the application was passed on Ashley Bowes’ suggested reasons, which read as follows:

“The development would cause an unacceptable adverse impact on the landscape, arising from the drilling equipment, noise mitigation equipment, storage plant, flare stacks and other associated development. The combined effect would result in an adverse urbanising effect on the open and rural character of the landscape and visual amenity of local residents contrary to policies DM2 Lancashire Waste and Minerals Plan and Policy EP11 Fylde Local Plan.”

“The development would cause an unacceptable noise impact resulting in a detrimental impact on the amenity of local residents which could not be adequately controlled by condition contrary to policies DM2 Lancashire Waste and Minerals Plan and Policy EP27 Fylde Local Plan.”

Cuadrilla has six months in which to decide whether to appeal. If Cuadrilla does choose to appeal against the refusals a public inquiry is highly likely, at which the Inspector will have to grapple with the competing expert evidence (especially on noise impact).

It is also likely that any appeal will be recovered by the Secretary of State for determination, in order to give a determinative policy steer for future applications.

Reacting to the decision the UK Onshore Oil and Gas urged the Government to take a “strategic review” of how the planning system deals with these applications. However, the Prime Minister appeared not to signal any imminent change to the system, responding at Prime Minister’s Questions on 1 July that: “those decisions must be made by local authorities in the proper way, under the planning regime we have”.

 

Introduction to Prospect Law and Ashley Bowes

Prospect Law Ltd is an energy specialist UK law firm which is based in London and the Midlands. Prospect Energy Ltd is its sister company providing technical expertise. The two firms provide advice on energy development projects and energy related litigation concerning shale gas, nuclear and renewable energy schemes for clients in the UK and internationally.

Ashley Bowes is a barrister who specialises in planning and environmental law matters at planning appeals and in statutory challenges and judicial review cases in the High Court. He is involved in energy related development projects around the UK.

 

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For more information, please contact Edmund Robb on 07930 397531, or by email on: er@prospectlaw.co.uk.