Fuel for Thought – Mar 23rd23 Mar, 2012
UK government talks up gas: The role of gas in a decarbonising UK economy has been a contentious issue within the coalition government. In an attempt to clarify the government’s position, the Chancellor has announced measures in support of UK gas production and gas-fired generation in this week’s budget. Given the UK is rapidly increasing its dependence on imported gas, tax breaks for UKCS production make sense. However it is less clear what meaningful steps the government is going to take to support gas fired generation. Promises of consultation and a new ‘gas strategy’ to be announced in the autumn are evidence that the government is starting to appreciate the challenges facing gas generators. But in order to reduce the uncertainty gas plant investors face, the government will have to confront the shortcomings of its own Electricity Market Reform policies.
Polish shale gas estimates cut: Poland has been one of the most promising shale gas opportunities in Europe, due to healthy reserve estimates, active exploration and political enthusiasm for independence from Russian gas. The Polish government released a report this week indicating latest reserve estimates were around 10% of the previous level. However this still represents a substantial volume of gas (between 346-768bcm), having the potential to materially diversify European supply. Revising down reserve estimates is partly a sign of increasing exploration maturity and has been common with larger fields in the US. As important as total reserves estimates will be the results of test drilling to firm up the commercial viability of production.
Weakness in Asian manufacturing: Indications of the strength of Asian economic growth are something we watch closely as a key driver of global commodity markets, specifically coal and LNG. Preliminary PMI manufacturing data out of China this week, reinforces the evidence of an economic slowdown. The government is attempting a risky balancing act in constraining credit to deflate a property bubble. While it is still too early to tell whether China faces a hard landing, an external shock, for example from a resurgence of the debt crisis in Europe, would leave China in a very vulnerable position.
Picture of the week
The Xiaowan hydro dam on the Lancang (Mekong) River in Yunnan Province China. The 4,200 MW power station was commissioned in 2010 by Huaneng Power International at a cost of around 4bn US dollars.