Getting a better idea of the cost v benefits of shale
As I’ve written before, there is no doubt that shale gas, or unconventional gas as it’s also known, has the potential to offer a significant economic benefit to homes and businesses in the UK. I’ll emphasise ‘potential’ though, as there is also no doubt that there are still major uncertainties that must be fully understood before any of the UK’s considerable shale gas deposits can be economically recovered. But since I last covered this topic, some interesting developments have emerged that help us to view this potential more clearly.
On the upside, extracting the 1300 trillion cubic feet or so of gas already found in the Bowland-Hodder formation in northern England will evidently improve security of energy supply. Such a development would also support UK jobs and industry, deliver much needed tax revenue to the Exchequer and may also reduce prices in the wholesale gas market and even out price volatility.
Conversely, there is considerable environmental opposition, the technology is relatively new to these shores and therefore commercially untested in the UK, and – for a number of reasons – the economic question is as yet unanswered.
These uncertainties haven’t stopped some big players from taking an early stake in the game, however. A subsidiary of GDF Suez recently announced that it is to acquire a 25% stake in more than a dozen Bowland licences, for example. And there is evidence to support such a decision.
Shale gas has already prompted dramatic changes in some energy sectors, in particular in the US, and it clearly has the clout to transform global energy markets. A June study from the US Energy Information Agency revised upward its estimates for technically recoverable resources to more than 7,000 trillion cubic feet of shale gas worldwide. This figure could add 48% to global resources.
But one issue that remains in flux is the regulatory framework within which shale gas development would take place in the UK and Europe. The European Commission has already made some moves which could become precursors to the introduction of a Directive on unconventional hydrocarbon extraction, with a view to ensuring environmental integrity.
In its 2013 Work Programme, it included a new ‘Environmental, Climate and Energy Assessment Framework to Enable Safe and Secure Unconventional Hydrocarbon Extraction’. As the name suggests, this initiative aims to deliver a framework to manage risks and address regulatory shortcomings. Among a number of studies launched under this banner, one – a public consultation garnering some 22,000 responses – recently reported its analysis.
About half of the respondents think that there could be major benefits and the other half think that the challenges and drawbacks could be equally significant. However, despite this rather polar response, a broad consensus emerges that the current regulatory framework is not well adapted and that the EU should take some action.
Elsewhere, the European Parliament’s MEPs voted through a proposal in October that could make environmental impact assessments mandatory for all new large hydraulic fracturing (ie fracking, the process that extracts the gas) explorations and developments.
So, taking the UK as an example, it seems that despite the government’s ambitions to encourage the development of the country’s shale gas resources, European-wide legislation could rightly enforce responsible development – and may even introduce unnecessarily bureaucratic burdens on prospective developers. If misjudged, this could easily stifle a nascent industry and effectively bury a vital resource in the battle to moderate energy prices.
Considering the uncertainties and opportunities of shale gas, the House of Lords Select Committee on Economic Affairs is currently holding its inquiry on the economic impact on UK energy policy of shale gas and oil. Among others, it heard evidence from Bloomberg New Energy Finance, which indicated there is a significant potential for UK shale gas – but at a cost 50% to 100% higher than that seen in the US.
Citing factors that will push up the cost in the UK, such as higher land prices and the lack of gas infrastructure, the Committee heard that even under the most favourable case, the UK will not be self-sufficient in gas. Continued reliance on imported gas will inevitably mean that UK gas prices remain tied to European and world markets.
It is clear then that there is indeed a vast global reserve of oil and gas within shale formations that is now potentially available to be extracted. If developed on a large scale – and that’s dependent on an appropriate regulatory and economic environment – this will have an impact on energy markets. Just how far this impact will reach is the, no exaggeration, trillion dollar question. What can shale gas deliver for the UK and at what cost? Well, the jury’s still out.