Industry

Shale gas: golden goose or expensive short-term hit?

Two contrasting speeches from yesterday’s House of Lords debate on fracking which focus on the financial benefits and threats of shale gas.

Summaries

Lord Truscott, an investor in hydrocarbons and a former energy minister, said the US shale success story was already unravelling and was not a model to be adopted in the UK. Shale was an expensive short-term hit that would not lead to energy security. It had led to a supply glut, resulting in falling investment and employment and small companies going to the wall. The world was now entering a period of dangerous volatility with huge peaks and troughs in hydrocarbon prices.

ViscountRidley

Viscount Ridley, an author and journalist and former chair of Northern Rock, said shale gas was a golden opportunity. Britain would continue to need gas for heating and as a chemical feedstock. 10% of the Bowland shale gas would give the UK 50 years’ supply. Opposition was based on myths popular among the upper middle class in grand rural areas – and in Russia. Environmental protection for fracking was greater than in any other industry. Regulation should allow the industry to learn, adapt and evolve.

Full text

Lord Truscott (Non-Affiliated)
Member of the House of Lords since 2004
Director of the advice consultancy Energy Enterprises Ltd, former director of Gulf Keystone Petroleum Ltd, Eastern Petroleum Corporation and African Minerals Ltd, former junior energy minister

Quite apart from the environmental risks in such drilling—and, although the degree of risk can be debated, there is always a risk when drilling for hydrocarbons, particularly given that we live on such a densely populated island—I think we should look at the broader picture.

What has been ignored so far is the picture of global demand and supply that we are witnessing. The Chancellor has said that we should try to emulate the success of the United States with shale oil and gas. However, what we are witnessing globally today is a supply glut.

Supply glut

The success of shale in the United States has partly contributed to that. Perversely, we are seeing that this glut is pushing down the price of oil and gas across the world—particularly oil—and the impact of that on a number of smaller companies is that they are going to the wall.

We are already seeing a decline in shale oil production in the United States and we should not forget that with shale oil we have seen quite a dramatic decline over a couple of years. So there is a dramatic fall-off in investment in the United States in shale, a fall in employment, a number of smaller companies going to the wall and all the majors have now announced that they are cutting back investment in major oil and gas projects. Therefore my fear is that we are entering a period of greater volatility as regards energy prices.

Dangerous price volatility

To a certain extent the success of shale in the United States has been quite limited, both as regards scale and duration, and we are now entering a period of quite dangerous volatility with regard to investment. Therefore, although consumers currently benefit from lower energy prices for oil and gas, that may well be short-lived. In addition, with the majors pulling back on major investment and with a number of smaller shale companies going to the wall, once the existing number of companies have cut back on production in the United States, in two to three years’ time we may well see the price of a barrel of oil go back up to $200.

Shale success short-lived

Therefore, if we look at the United States as a model for a number of the companies that are involved in shale—and a lot of the communities that will depend on that local investment—it appears that it is not seen as a wonderful model, so maybe it is not a model we should adopt for the UK. Shale takes a huge amount of investment to develop, and it has its environmental risks. In the UK it will take many years to go through the planning process, yet the success of shale can be relatively short-lived. In the meantime, we will have these huge peaks and troughs in the price of hydrocarbons.

We should look at the long-term planning. That is the difficult thing with shale at the moment: it is destabilising the market for oil and gas, with the majors cutting back quite dramatically. You can have shale production, but it is short term. If, for example, you invest in a major field, it can take 10 or 20 years to develop—Kashagan in Kazakhstan, for example—it needs billions of dollars of investment, and takes many years to develop, sometimes decades. Companies have to be able to plan ahead, as that gives medium to long-term relative stability to the oil price. If you are talking about shale, you are talking about a two to three-year timescale for the development of a field, which does not provide the sort of stability we are talking about.

Of course, we should also look at increasing investment in renewables as well. Shale is one thing you can look at, but you can also look at investing more in renewables.

What tends to happen is that in the United States, for example, a shale oil rig—a well—may cost $1 million to develop. You then drill in that well for a couple of years, and then you have to invest further in the next well in the same field. A number of shale oil companies in the United States at the moment face not getting the funding to invest in the next well, because it is very cash-flow intense.

Expensive short-term hit

Therefore if you want energy security, shale oil and gas is not the way to achieve it. It is a very expensive short-term hit, and it adds to the volatility of the price of oil and gas. In a way, the success we are seeing in the United States is already unravelling. I therefore wonder whether it is worth the cost as regards the overall benefit.

We are also seeing the impact on businesses, both large and small, in the hydrocarbon sector. Ask any of the majors at the moment whether they are happy about where they are as regards medium to long-term planning, or go to Saudi Arabia and ask people what they think about the impact of shale oil and gas development in the United States and on the global market. You can say that they are game-playing, but nevertheless, it is destabilising. Is that the way we want to go? Is that a great success story?

I am not so sure that when we look back on the development of shale in the United States it will look as successful as we all initially thought it would be. Therefore from that point of view, is what happened in the United States the right way for the United Kingdom to go? I am not so sure.

Viscount Ridley (Conservative)
Member of the House of Lords since 2013
Author, journalist and columnist for the Times and Wall Street Journal
Former chairman of Northern Rock (2004-2007)

Unlike the noble Lord, Lord Truscott, I think that the people whom we should be concerned about are not those looking for oil in Kazakhstan or the Saudi oil companies but the people who are struggling to pay their heating bills this winter. That is what this is all about: trying to get the cost of gas down.

We need gas and, whatever happens, we will continue to need gas, as the Minister said on a previous amendment. We need gas for heating and will continue to need it—84% of British homes are heated by gas. Where there is fuel poverty, it is nearly always associated with electric, rather than gas, heating. We need gas as a chemical feedstock for the chemical industry; we need it to make fertiliser to feed the world.

Golden opportunity

So we have a golden opportunity. We have found one of the biggest gas resources ever, right under an area with high unemployment—the north-west of England—and not far from a concentration of our chemical industry. Some 10% of the Bowland shale gas could give us 50 years’ full supply of the gas consumption in this country. As we have heard, because of the community benefits funds being offered, it would offer great public benefit. It would lower our carbon dioxide output because it is certainly lower than imported gas, some of which comes in the form of liquefied gas, which has a carbon cost associated with it. It is certainly lower than coal in terms of its carbon emissions.

Upper middle class myths of shale gas

Much of the opposition to shale gas—some of which we have heard today—is based on myths that are popular among the upper middle class in grand rural areas. The myths are also very popular in Russia and are frequently repeated by Vladimir Putin in press conferences, because he does not like the idea of us getting our own cheap gas. We should listen to the words of the US Secretary of Energy, Ernest Moniz, who said a year or two ago,

“I still have not seen any evidence of fracking per se contaminating groundwater”.

He said that after tens of thousands of wells had been drilled and millions of fracking operations had happened in them.

It is clear that the opponents of fracking will do anything to delay and raise the cost to try to kill this industry. In that light, the amendment of the noble Baroness, Lady Worthington, is unnecessary and mischievous. It is just trying to put another hurdle in the way of shale gas by insisting that every resident nearby be written to. As has been said, it opens the way to legal challenge on everything.

Have we killed the golden goose already?

As it is, with all the regulations we have put around shale gas, it still may be touch and go as to whether we have killed the golden goose already. However, it looks as though we have not, yet—there is still an opportunity to have this wonderful, indigenous resource and to lower the cost of gas for people in this country.

We have put in place far greater environmental protection than for other industries. The situation with earthquakes and shale gas is that, if fracking shakes the ground, it has to do so 40,000 times less than the quarrying industry is allowed to do. That is completely mad: they are both earthquakes. I welcome the government amendments in lieu, which would adhere to the principle adopted by the oil and gas industry on environmental practices for many years: that is, the industry since Piper Alpha has always pursued the idea of goal setting rather than box ticking. It has already accepted or adopted many of the practices that are listed in these amendments.

Flexibility to learn, adapt and evolve

Crucially, the amendments also allow flexibility, so that the industry can learn, adapt and evolve as it is going on. That is why it is crucial to leave some flexibility in the Bill with respect to the definition of groundwater areas, protected areas and so on. As we demonstrate the safety of shale gas, we can adjust as we go on.

Finally, on the subject of trespass, I welcome the Green Party’s embrace of an extreme version of private property rights, of the kind normally associated with the libertarian right. However, the party goes too far, because imposing an offence of trespass on something that happens a mile and a half beneath your feet is like imposing an offence of trespass on British Airways for flying over your head. We sorted out that issue in the 1920s and decided that it was not a sensible use of the law of trespass. We should do the same with this.

Speeches are from Hansard. We have inserted sub-headings and edited from the reocrd interventions by other speakers]

Our report on the debate

1 reply »

  1. Exactly why are the anti shale worry about big oil losing money becoz of shale producing a glut of new supply. I thought they would be happy to see them lose money. If it bring lower fuel cost and they lose money while energy user save money that is good news isn’t it?

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