Shale gas – an opportunity (almost) lost?

The shale revolution has driven down US energy bills, freed up household income and made North American businesses more competitive. Have Scotland and the rest of the UK already missed the boat?

 

Steven_Ferrigno_Allegro-2
Steven Ferrigno, Allegro Development

You’d have to have been hiding in a cave with a candle not to have heard something about The Shale Revolution these past 12 months. One headline calls it the future of affordable energy. Another says fracking is the embodiment of environmental evil. Battalions of activists, lobbyists and journalists have mobilised for and against.

That’s because shale gas is turning out be as disruptive as the internet, but with potentially game-changing benefits for Scottish and British businesses, governments, and anyone with a household utility bill to pay.

Look at what’s happened in North America in just three short years: natural gas prices have plummeted, coal has been pushed aside as an electricity source, a rejuvenated manufacturing sector is humming along on the back of low energy costs, and now abundant natural gas looks to make the continent a net exporter of fuel in the next 5-6 years.

If that happens the UK could find itself awash in cheap LNG imports – dampening enthusiasm for investments in any homegrown shale production industry. But we won’t have to wait that long to see the risks in letting America extend its lead. With so much gas available, coal has been discarded there for power generation and utility companies here have been eagerly buying it up. Our carbon emissions rose 4.5 per cent last year as a result of cheap coal displacing gas as a power source. US emissions, meanwhile, have been going steadily down.

On almost every level the UK has been missing the boat on shale. The question is, can we ever catch up?

What we’re missing

Conservative estimates point to UK reserves of ca. 736 billion cubic metres of recoverable shale gas, roughly equivalent to 10 years of supply.

Whilst that may not seem like a transformative number, a report by the Institute of Directors suggests that shale could bring investment of as much as £3.7 billion per year, creating something in the order of 70,000 jobs, many of them in areas hard-hit by the economic downturn.

Media attention has focused on the Bowland shale formation in the north of England, but Scotland has its owngas_burner_allegro_blue_II potential shale formations across the Central Belt and Fife, and significant reserves of coal bed methane (CBM), another type of unconventional gas. Exploration in Scotland has been just as slow to develop as in the rest of the UK however, mainly down to opposition from environmental groups but also due to the emphasis Holyrood energy policy places on renewables.

With the recent saving of the Ineos facility in Grangemouth, it’s worth remembering that Scotland built the world’s first commercial oil refinery in 1851, driving a global export industry on the back of petroleum extracted from the shale underneath West Lothian.

At the height of the original UK ‘shale oil boom’ (ca. 1912), Scotland actually accounted for 2 per cent of world oil production.

In the context of household energy bills which have literally doubled over the past 10 years, anything that slows the rate of further price increases would be welcome. UK households remain the most costly to heat in all of Europe due to poor maintenance and insulation.

Shale gas could also deliver relief to struggling householders by helping mitigate the worst effects of fuel poverty – an issue of such magnitude that the Church of England felt it necessary to intervene in the shale debate recently, warning opponents against taking a narrow view and advancing the possibility that Shale production could minimise fuel poverty.

The environmental arguments in favour of shale have been buried in the heated debate around fracking, but they are significant and transparent.

Shifting to a higher proportion of gas use in energy production will help curb our carbon dioxide emissions. Limiting gas production or consumption, on the other hand, pushes us inevitably back to coal.

With the amount of coal-generated electricity rising in some European countries at an annualised rate of 50 percent, we are already seeing a ‘new golden age of coal’. The result? Despite decades of political and industrial effort to move the renewables agenda forward, the International Energy Agency (IEA) reckons coal will account for 25-30 percent of the global energy mix in 25 years’ time – exactly what it was 25 years ago.

imageWhat’s holding us back

There are a number of factors which have held back domestic shale production in the UK. Some are political, some are related to the structure and operational realities of the UK energy industry, and some are down to simple geology. Politics and green activism, however, may be the biggest hurdles to overcome if any of shale’s North American benefits are going to be replicated here.

Environmental worries around fracking have so dominated debate that very little discussion about economic prospects has been able to surface. Public outcry has made Westminster and Holyrood hesitant to unleash exploration. The overall response to shale from our offshore-focused energy industry, meanwhile, has been muted or at best ambiguous. We are only now seeing signs that it is waking up.

Has the penny finally dropped?

Westminster has belatedly launched the licensing regime for shale exploration, alongside tax incentives for local councils to speed up approvals.

Total is the first major to jump behind that opportunity. In Scotland a licence to prospect for CBM has been awarded to Berwick-based Greenpark Energy for a site near Canonbie. Singapore-based Dart Energy, meanwhile, has applied for permission to extract CBM from a site near Airth – and has already signed a five-year deal with SSE to supply gas from 2015. A good start, but more needs to be done to keep this momentum going.

As an energy sector stakeholder I have a four-point proposal:

  1. Don’t stop now. The UK has taken the lead in Western Europe by directly supporting shale exploration but there are already signs of a push back in Brussels. It has to be resisted.
  2. Reassure UK voters that shale gas points us in a greener direction, even if it isn’t a perfect solution in and of itself. An industry consensus on codes of conduct for exploration such as those outlined in the IEA’s ‘Golden Rules for a Golden Age of Gas’ would go a long way to seeding public confidence
  3. Counter junk science. The environmental concerns about fracking have been overblown and the industry must make a concerted communications effort to debunk the myths around shale exploration with hard facts and evidence
  4. To energy companies, utility companies, energy-intensive businesses and derivatives traders, the next 5 years will be a chaotic time in the market so understanding and managing the risks of shale investments in your portfolios needs to be a top priority

Whether or not a UK shale gas production could ever replicate what’s happened in North America is simply unknown. Exploration needs to happen now if we’re going to find out.

 

Steven Ferrigno is Managing Director, EMEA for Allegro Development Corporation, www.allegrodev.com. He is based in London.

 

 

 

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