With global energy consumption expected to rise by approximately 50 per cent between 2008 and 2035, according to the US Energy Information Administration, shale gas has been held up by many commentators as something of a silver bullet. Certainly, the US experience of shale shows the unconventional gas in a very favourable light. In just over a decade it has grown to account for around 22 per cent of the country’s natural gas production, a figure that is predicted to increase to around 46 per cent by 2035. Furthermore, it had a positive impact on gas prices in 2011/12, resulting in prices plummeting to $2 per MBtu (mil ion British thermal units) compared with about $9-12 in Europe and about $15 in Asia. Using its reserves of shale gas, the US could become the world’s primary gas producer by 2017.
Here in the UK, the government last month gave the go-ahead for shale exploration to resume and is putting in place supportive financial incentives. But the reality is that shale exploitation here will bring as much of a challenge as it does a benefit.
The most significant challenge, and one that is possibly too obvious to have been considered, is the fact that the UK is minute when compared to other nations with significant known, extractable reserves of shale gas, namely China, the US, Canada and Australia. UK population density and the resulting Nimbyism will put the brakes on our paper potential (around £1.5 trillion worth, according to a recent report from the Department of Energy and Climate Change (Decc) .
The negative publicity resulting from last year’s minor earthquake in Blackpool following fracking off the coast should be considered a taster of what could come. The public will not want fracking taking place locally if there is even a tiny risk of earthquakes or other environmental damage, unless they simply own the land but don’t occupy and stand to benefit from granting rights to access it. With the additional powers afforded by the Localism Bill, it is going to be a battle for the industry, and government, to win hearts as well as minds.
Aside from public support, a number of other key elements will have to be in place for fracking to flourish. The regulation around the industry is tight and this rigour, particularly around environmental permitting and health and safety, will add hugely to the cost of exploration, never mind extraction. Tight regulation is essential if we are to make fracking for shale a more palatable operation for locals, yet will make shale extraction far more expensive to undertake in the UK than it would be in, say, China or the US. In turn, this greater capital cost will push up the unit gas cost, bringing into doubt the value for money of the investment.
Then there is planning to negotiate. Any company wanting to undertake fracking will have to negotiate and consult with all affected landowners, but the definition of who is “affected” has yet to be tested and established and is more complex than that required for other energy installations. That said, drawing from existing models for onshore gas and oil extraction and storage, an energy company would have to negotiate deals and secure permission from a large number of parties with an interest in land, whether leasehold or freehold owners, which has the potential to make project planning extremely protracted and costly.
Therefore, public consultation is going to be a critical part of launching a shale gas extraction project. It needs to take a positive approach to all those in the affected area, focusing on managing fears and minimising its impact on existing geological formations, the water table and the potential to cause earth movement or, more significantly, earthquakes. It needs to be supported by watertight evidence and investigation into the scale, scope and make-up of the area and a full risk assessment.
Note that even if an energy company owns land outright, it does not have the automatic right to drill. Licences to do so will have to be awarded under the government’s licensing rounds, known as petroleum exploration and development licences. The last round closed in February 2008 and 93 blocks were offered. The latest, 14th, round was the subject of a Strategic Environmental Assessment and is now pending applications following a consultative process.
Even given successful land negotiations, Coal Authority consent needs to be obtained. And once successful public consultations, environmental and planning permitting are completed, Health and Safety Executive and Decc sign-off is needed to the final technical design and geotechnical suitability before test wells can be sunk. Only after this can the all-important development capital be raised for commercial well development, and finally extraction.
All these requirements will be supported by the government’s plans, announced in December’s Autumn Statement, to establish an Office for Unconventional Gas. Importantly, this will provide a single point of contact for investors and help simplify and streamline the regulatory process. Furthermore, the statement included plans for the government to undertake a consultation on a tax regime for shale.
Yet even given slicker regulation and financial incentives from government, the challenges versus benefits equation will come under intense scrutiny. Ultimately, energy companies will base their decisions to frack or not to frack on economics and what poses the best balance between investment, availability and supply.
The wider political landscape could also have a strong impact on shale’s fortunes. Certainly, shale has come into sharper focus with the upsurge in Scottish nationalism, since the UK’s offshore fields are central to the independence debate.
Miles Thomas is director and head of operations at Savills Energy
This article first appeared in Utility Week’s print edition of 11th January 2013.
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