By ALEX RUSSELL and
The UK government, under Labour, Conservative and Coalition control, has over the past 40 years relentlessly pursued a fiscal policy of maximising short-term revenue take from the oil and gas reserves lying in the UK continental shelf (UKCS).
Little or no thought was devoted to scheduling the timing of the exploitation of these mineral resources or to the need to invest the taxes gathered in, for example, a sovereign wealth fund to ensure future generations would also benefit from the rape of the North Sea’s black gold (http://www.newstatesman.com/politics/2013/04/thatcher-and-north-sea-oil-%E2%80%93-failure-invest-britain%E2%80%99s-future).
In this respect the contrasting policy approaches of Norway and the UK to developing their respective ownership of minerals in the North Sea have produced alarmingly different economic outcomes for which future generations of citizens of the UK may hold Westminster responsible.
An example, from a long list of similar asymmetric economic outcomes, occurred in 2012 when £348 million was spent from Norway’s £483 billion (current value) oil fund to take a 50% stake in a shopping centre in Sheffield, just one of many such ownership grabs of UK assets, whilst increasing its wealth by selling gas to the UK to keep our homes warm and lights burning bright (http://www.bbc.co.uk/news/business-19871411).
Few objective oil and gas analysts would disagree with the above sentiments.
But the points merit restating as the lessons of the past appear totally lost on Prime Minister David Cameron and Chancellor George Osborne and to some extent on the UK oil and gas industry. This lack of appreciation of the need for a long-term energy strategy combined with a well embedded delusional acceptance of what constitutes economic value is vividly illustrated in their declared intent to rush headlong into exploitation of the gas and oil locked in the UK’s on-land shale deposits.
Westminster has made it clear it is hell bent on fracking apart the shale deposits that lie across the length and breadth of England in the first instance, but no doubt also over all other parts of the UK in due course.
Over 1000 square miles of England have been earmarked for fracking activity in as short a time frame as possible (http://www.theguardian.com/environment/2015/aug/18/1000-sq-miles-england-opened-up-fracking-new-round-licences).
The arguments put forward in support of this approach are so nerve chillingly weak that they cast doubt on the credibility of the motivations of Westminster and the fracking fraternity. They also might accelerate the almost inevitable march of Scotland towards achieving independent nation status.
What are the arguments put forward in favour of fracking apart the UK?
Basically, the Chancellor believes fracking will generate substantial fiscal income, generate thousands of new jobs and will be of less damage to the environment than importing gas from Russia.
Crazy time to frack apart the UK
Osborne is correct. If the UK’s plans for fracking become a reality, substantial tax revenues will be paid to Westminster over a number of years and many jobs will be created.
Alas, perhaps Osborne has acquired his business acumen through observing ex Chancellor Gordon Brown’s fund raising prowess in 1999 when Brown chose to sell 395 tons of the UK’s gold reserves at rock bottom prices (https://www.bullionvault.com/gold-news/gold_gordon_brown_sales_010920093). Gas prices today are at such a rock bottom price.
The UK’s shale reserves of gas and oil is like money in the bank. It will not deteriorate through time.
It is not the same as ceasing production in the North Sea for 10 years, say, then expecting to be able to resume viable production again. Fracking wells are small scale affairs usually drilled from rigs attached to the backs of lorries.
Unfortunately they are small scale because their life expectancy is small and the speed at which output declines is steep. In order to maintain production targets huge numbers of wells must be drilled. For example, across the US fracking plays there are possibly one million active oil and gas wells operating (http://www.fractracker.org/2014/03/active-gas-and-oil-wells-in-us/ ).
But the first major point here is that the UK can safely delay production from the shale deposits until gas prices increase and a worthwhile return is achieved. If the only rationale for speedy fracking to take place is that the EU might set future climate change targets that ban gas exploitation then, as a country fully onside with respect to stopping global warming, would that be such a bad thing? Would we not be taking a moral lead for once in the energy game?
The second major point is that the UK North Sea oil and gas industry is in its current dire plight precisely because the US over the past 10 years chose to implement oil and gas production through fracking as its main energy policy.
Directly and indirectly, fracking in the US has forced down the world price of oil and gas.
In addition to causing havoc to the economies of numerous countries including Nigeria and Russia, the US arguably has seriously damaged our biggest industry. Its solution appears to be that the UK should follow the US example and we should all become Olympic class frackers. Judging from the background of some of the successful bidders to the UK’s 14th annual licensing round, when we say ‘all’ we really mean everyone in the UK can have a go at fracking (http://energydesk.greenpeace.org/2015/09/04/investigation-new-kids-with-14th-round-blocks/).
But that issue can and should be discussed at another time. The point here is that if we go wholesale down the fracking route this will again drive down the price of gas, and probably oil, and further hasten the demise of the North Sea industry. The jobs created through fracking will be eclipsed by a huge factor in the jobs lost in exploiting the UKCS reserves of oil and gas.
Is this a case of Westminster promoting fracking jobs in England at the expense of North Sea jobs in Scotland?
Surely the arguments and British sentiment are that fracking should be postponed and the focus should be on saving the maximum number of North Sea jobs. The UK can reconsider fracking at a more appropriate point in the future.
Fracking saves the environment
The final argument put forward for commencing onshore fracking now is that it is better for the environment than importing liquefied natural gas from, say, Russia.
This view of the benefits of fracking surely gives the lie to the game. There will be vested interests pulling the levers of decision makers at Westminster, ‘twas ever thus. Again the topic is too large to discuss meaningfully in this article. But for the millions of countryside dwellers who will be inconvenienced by the army of fracking lorries that will create noise and pollution and the constant fear of water course and methane air contamination the ‘better for the environment argument’ is pathetically nonsensical. In addition Co2 emissions from fracking are 45 times greater than those from on-land wind power generation (http://www.theguardian.com/environment/2015/aug/20/bp-lobbied-against-eu-support-clean-energy-favour-gas-documents-reveal).
For observers in Scotland, the only logical conclusion to be drawn is that the Westminster fracking policy really has the potential to frack apart the UK!
ALEX RUSSELL is Professor of Petroleum Accounting, Robert Gordon University.
PETER STRACHAN is Professor of Energy Policy, Robert Gordon University.