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What can liberate UK shale gas – regulation, reward or reassurance?

New Energy World Network

Ted Hopcroft

15 July 2013

 

In less than a decade, shale gas development has seen the US revert from a significant natural gas importer to a potential net exporter.  And US natural gas prices have plunged, falling well below half of their level in 2008.  In view of this, the news of large-scale shale deposits in the UK has been greeted with much hope that shale gas development could be the answer to replacing the dwindling supplies of North Sea gas.  It’s a ‘game changer’ according to some analysts, who predict that shale could allow the UK to continue to rely on its own sources of gas, minimising the security-of-supply risks of importing gas from continental Europe and LNG from around the world.
 
The development of shale gas in the UK should certainly be regarded as positive.  If developed to its potential, it will provide important new gas supplies, in turn supporting economic development and creating jobs.  However, it is our firm belief that the UK will not experience a shale gas boom anything like that seen in the US  and North America – at least not soon.  While UK-produced shale gas ultimately may have a real impact on our energy supply, management of both technical and public environmental concerns will need to be addressed. 
 
Firstly, technical environmental concerns will require careful consideration.  The US shale gas boom has been enabled by a process known as hydraulic fracturing, or ‘fracking’, which involves inserting a combination of water, sand and chemicals at high pressure to fracture the shale and release the gas. Developers need to address concerns over the impact of this process on water tables and water quality, and while reviews in the US have been inconclusive, there has been some concern that this process may have led to environmental degradation. The small-scale earth tremors associated with prior efforts to employ fracking in the UK have also undermined public confidence.  Together, these concerns around fracking have resulted in a lack of community support in the UK.
 
Perhaps more importantly, public concerns with drilling and producing activities, and their impacts on the UK’s landscape, may prove an even greater hurdle. Shale gas wells require heavy drilling equipment, which can transform rural countryside. Further, the addition of gathering pipelines, gas processing plants and other transportation infrastructure will present visual challenges and hence further public concerns.
 
Any development that results in a visual impact will stir controversy – as seen in the current community opposition to wind farms in Wales.  At present, community opposition makes it extremely difficult to create new critical infrastructure; and it is improbable that communities will accept farm land being widely used for gas production in a way that leaves a very visible footprint.  Given that Britain is a small and densely populated nation, it is difficult to see how large-scale shale development could realistically occur.

But we cannot afford to ignore shale gas, so how should these issues be addressed? Firstly, we should recognise that the UK can benefit immediately from the technological advancements and knowledge that has been developed over the past several years in North America and elsewhere, so effectively, it starts ahead of the curve.  Further, the UK has the opportunity to examine the relative merits and shortcomings of regulatory regimes that have been adopted elsewhere. Clear baseline environmental conditions will need to be established so that environmental impacts can be properly assessed. Environmental regulations will also need to be sufficiently stringent and informed by the experiences of other international jurisdictions, to assuage the concerns of local communities.  A further key issue is the need to provide certainty to investors. In the North American experience, the private sector drove the technology/knowledge advancements and absorbed the financial risk of developing new and unproven shale resources. Their participation was successful because, in large part, they had regulatory line of sight, as well as certainties about the structure of royalty and taxation, which together provided certainty and incentivised their involvement in exploiting the shale reserves.

Encouragingly, there is evidence that the structure of shale gas deposits in the UK could potentially allow for more gas to be developed per well than in much of North America.  The deeper structure of the UK shale formation is said to allow for multiple fractures, in turn releasing more gas.  While this is positive, it still remains that a significant amount of development will be needed before shale gas in the UK could alleviate our concerns around the security of gas supply, as alleged by its proponents.

There is clearly a significant task in winning the hearts and minds of the British public. It will be interesting to see how the recently announced community benefits scheme, which includes £100,000 for communities situated near each exploratory well, and 1 per cent of revenues from every production site, affects attitudes to more modest development. There are real opportunities to educate and manage communities.

Finally, some shale gas proponents have pointed to Centrica’s recent investment in the UK shale gas sector as a positive sign that it will undergo a significant expansion. Centrica’s investment of £100 million for a 50 per cent stake in Cuadrilla Resources is indeed a very positive sign that shale gas will play some role in Britain’s future gas mix; however compared to the investments occurring in the North Sea, the Centrica investment is not huge. Sam Laidlaw, the CEO of Centrica, noted at Davos, that shale gas would not be “the game changer we’ve seen in North America”.

Over the medium term, UK shale gas is unlikely to replace declining North Sea gas and other sources.   However, that does not mean our future gas supplies are in jeopardy.  Further investment and engineering innovation is continuing to produce good supplies of gas from the North Sea. The scale of development of the international LNG sector means there are a variety of LNG options. In addition, there are other continental European gas options which will alleviate the concerns over security of supply.

It’s clear that developing shale gas in the UK will require stringent environmental regulation and widespread community engagement from both government and project developers. And, while there exists a potential that the UK’s shale resources will play a significant role in meeting the country’s energy needs, those hoping for a shale gas revolution in the UK in the near term should not hold their breath.

 

Ted Hopcroft is energy and regulation experts at PA Consulting Group


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