Shale Gas

Charlie Elphicke is the Member of Parliament for Dover and Deal and Christopher Pincher is the Member of Parliament for Tamworth.

The Battle of Balcombe, the tussle between experts and the tug of war across the media about exploring for shale gas captured the news agenda during the summer.  It also helped raise public awareness of the issues around energy supply in a way which few dry research papers can and contributed, although some of the combatants may not be happy about it, to the vital debate about UK energy policy in the next 30 years.

Of course, the background to the debate has not changed.  The United Kingdom still faces the fabled “energy trilemma” of decarbonising our energy supply, making that supply as secure as possible from external pressures whilst limiting the impact on consumers’ bills.

The problem with which successive governments have grappled is that no component of the trilemma is independent of the others – changing policy to deal with one affects the policy dealing with the others.  To that extent UK energy policy is like a balloon filled with water.  Squeezing one side of the balloon only causes it to bulge on the other side.

So what does a government do?  Does it abandon attempts to reduce carbon emissions which are widely accepted to be harmful to the planet? Does it live with the greater level of risk that flows from an insecure supply of oil and gas, perhaps as a result of an over-reliance on one source provider?  Does it face its electorate with the grim news that power bills could rise still further?  Or does it try to resolve the trilemma – and empty the balloon of its water?

It need do none of these things.  It is possible to cut our CO2 output as part of the international mission for lower emissions whilst at the same time reduce our reliance on expensive and potential unpredictable hydrocarbon supplies and ease the burden on consumers.

Shale gas presents this opportunity.  And it does more.  It offers the UK the chance to invest in immature low carbon technologies which are home grown and which can then add real value to the UK if they can be properly developed and sold abroad.  It offers local communities the opportunity to directly benefit from the natural resource buried thousands of feet beneath our feet.  And it offers the government an asset against which it can borrow (if necessary) but which will in any case offer foreign investors confidence in the stability of UK PLC.

Here is how.

Most people accept that unabated carbon emissions is bad and reducing the level of those emissions is good.  The UK is committed to playing its part in that reduction.  But when faced with the question whether we choose between hitting our carbon emission targets and keeping the lights switched on, even the then Chair of the Committee on Climate Change, Lord Turner, admitted to the Energy Select Committee that he would have to choose the maintenance of energy provision.  We have to be sensible about our emissions reduction and what we can achieve given that our own production contribution to global CO2 emissions measures just 1.5 per cent.  Indeed, if we were really sensible we might consider switching the measurement of UK carbon output from what we produce to what we consume.  The UK imports vast quantities of goods from South America, the Indian subcontinent and the Far East all produced by carbon intensive industries – in 2010 alone India approved plans for 173 new coal-fired power stations.  Chinese coal burning has actually increased since 1971 as her export economy has burgeoned (see schematic below).  British consumers walk around with big carbon footprints stamped on the shirts on their backs and if we took that into consideration, we would more accurately reflect the impact Britain has on carbon emissions rather than by just targeting home grown emissions.  On that basis our real contribution on CO2 emissions would be some 30 per cent.  We might also encourage British consumers to play a much more proactive role in reducing our carbon footprint by their own purchase decisions.

The schematic below demonstrates the scope of Chinese fossil fuels generation on emissions

Chinese PowerChinese power production by generation type, World Bank.


But how can shale gas production reduce our emissions?  In the same way as the switch from coal to gas has reduced US emissions by half.  In the five years to 2012, the move to gas cut CO2 emissions by about 215 mega tonnes per year and was the single biggest factor is US carbon reductions.  By contrast, other clean energy sources – biofuel, hydro, biogas, geothermal and solar PV together contributed a cut in only 30 mega-tonnes of carbon.  As British coal fired stations shut down at a soberingly smart rate, we will need to fill the gap they leave with cleaner technologies which can be quickly installed and, crucially, will not further expose us to international energy price volatility.  British shale gas could provide that gap filler.

That shale gas is a home grown product (though the US is set on exporting its own excess supplies with one of its first four major customers being Britain’s BG Group), also helps tackle the trilemma.  Since the start of the century Britain has been a net gas importer.  And in 2011, for the first time since 1967, we imported more gas than we produced.  Our North Sea conventional supplies are dwindling as production has now fallen by 13.3 per cent and we are ever more reliant on energy shipped to us from Norway, from Qatar and from the European interconnectors.  That reliance has built into it a growing risk that our security of supply can be interrupted by foreign suppliers or out-bid by our energy competitors.  Russia’s gas dispute with Ukraine has twice in the last six years seen the taps turn off, with potentially catastrophic consequences for East European consumers.  Glencor’s LNG and oil tankers are known for starting out for one destination and ending up in another as the international energy price changes and the bidders for the power win or lose out whilst the ships are at sea.  Demand for oil and gas from the energy hungry new economies continues to grow in addition to our own needs which have doubled since 1970.  And as what Harold Macmillan feared most, “events”, take place in Libya or now Syria, the risk of energy price spikes in an already crowded market loom large.  Like so many of the most hard to reach homes, the UK urgently needs insulation from these risks and the best way to provide them is to develop local sources of reliable energy, and the cheaper and the cleaner the better.

Shale gas reserves, if fully explored and exploited could provide us with that reliable source.  The British Geological Survey now accepts an estimated onshore reserve in the region of 200 trillion cubic feet of gas.  Cuadrilla, the foremost exploration outfit in the UK estimates as much as 300tcf on shore with a possible 1000tcf off shore.  Even with recovery estimate of 15 per cent, the most conservative estimates of our reserves will supply us with 60 years of secure supply assuming the current trajectory of gas consumption.  Such as supply could help protect Britain from fluctuations in the price of international hydrocarbons and make it much easier for generators buying fuel to plan their costs and thereby manage their prices.  We could benefit from lower prices as the US has done since their gas revolution in the last decade.

And those lower prices will be good for energy users whether they are domestic consumers or power hungry businesses.  Shale gas in the US has seen the sliced the wholesale price of power in two.  Compared with European energy costs, the difference was even more stark; at the beginning of 2013 US gas sold for about $2 per bcf, five times less than the price in Europe which stood at $10 per bcf and seven times less than in Asia.  Shale gas gives the US economy a significant competitive edge when competing on price of production with the rest of the world.  It also helps hard pressed households manage their bills more effectively and that feeds back into the wider economy.  In Britain the increase in gas prices since the middle of the last decade has taken its toll on British households.  The Asda Index suggests the single biggest factor in downward pressure on average disposable income is the increase in energy costs.  The schematic below shows how gas and electricity prices (the latter partly driven by increased gas costs in generation) have risen markedly since the 1990s whilst other utility bills such as water have remained steady.

The schematic below shows just how much energy prices have been increasing compared to e.g. water costs.

Chinese Power2

And the effect has also been felt on social policy.  Despite the last Labour government spending over £25billion on measures to help the fuel poor between 2000–2010, the number of households in fuel poverty actual increased.  The measures were swamped by rocketing energy prices.

Similar green energy policies, designed with the sensible aim of reducing carbon emissions, will likely have their own impact on already increasing energy prices.  DECC’s own figures suggest that by 2030 gas prices will be 10 per cent higher and electricity prices some 45 per cent higher for a medium sized business as a direct result of energy policy.  So as US energy costs fall, those burdening British businesses are set to rise further.  Unless action is taken to help lock in a stable energy price (and the Chancellor moved to reduce the burden on energy intensive industries in his last budget) British competitiveness and British jobs will be further threatened.  And if that means British energy hungry businesses relocate to the new economies of South America and the Far East, it almost certainly means that far from cutting our contribution to CO2 emissions, we will be actively encouraging more carbon from less efficient, less clean but fast growing producers.

To lock in a stable energy price and avoid this scenario, we need urgently to focus on increasing our supply of secure home grown energy.  Shale gas development can and must play a major part in this initiative.

The question that concerns the non-environmental lobby is the age old cui bono – who benefits?  Too many people think it is just the fracking company, or maybe also the Treasury, but no one else.  We need to demonstrate clearly that winners from this important national asset spread far and wide and definitely include local communities.  They must be at the very heart of the shale gas project.  One solution would be to use shale proceeds to develop decentralised, community generation providing cheap electricity to the locality. Lower bills will help lower the temperature of local concern as long as other environmental challenges are properly dealt with.  Additionally, investment from exploration companies in local energy academies, focussing on transferable engineering and scientific skills could benefit the regional economy and demonstrate their long term commitment to the local area.

It may also be appropriate to compensate communities, such as those in Lancashire and Suffolk with initial infrastructure payments proportioned from returns of a UK Shale Fund.

And that is the other potential benefit of shale, beyond its contribution to the resolution of our energy trilemma.  The funds that could flow to the Treasury from a fully fledged exploitation of our reserves are significant and long term.  They should be held separate from the Consolidated Fund in a Sovereign Wealth Fund built on the most appropriate model for maximising returns on capital and investment in new technologies.  For example, the Norwegian Oljefondet, the Government Pension Fund (although technically it is not a pension fund as its revenues derive from oil tax receipts) uses the proceeds of their vast oil wealth to invest in Norwegian businesses as well as lobby its holdings on environmental and social policy.  Founded in 1990, today it is the largest Sovereign Wealth Fund anywhere in the world with a total value of $729billion.  By 2030 the Fund could be worth $3.3trillion – that is more than the entire current US Federal Budget.

Of course, building up a Sovereign Wealth Fund to scale takes time.  It requires discipline so that Parliament and the Treasury resist the temptation to raid the bank.  And it requires a regular and assured flow of funds to augment the capital base quite apart from the investment returns.  Yet 60 years or more of shale gas supplies provides us with a more than adequate basis for beginning.   With careful management and investment decisions, the Fund could continually grow its base whilst investing in new green technologies for base load low emission generation, as well as tidal current, gas storage and CCS.  It could act as a lever to kick start private investment and sector confidence to build up domestic generation capacity without recourse to tapping the Consolidated Fund.

The Norwegian fund has a self imposed spending cap which means it spends no more than 4 per cent of the funds capital in one year which, at £20billion ($31billion), is more than the UK raises through Capital Gains, Stamp Duty and Inheritance Tax Combined.  A UK Shale Gas fund, developed over time, could provide a sustainable financial legacy for future generations, an asset against which Britain’s credit worthiness and financial stability can be assessed.  It could drive investment in as yet immature clean technologies which are British based and which will add value to the British economy and Exchequer.  And it could directly benefit local communities whose households and businesses labour under ever higher power bills.

The challenge of cleaning up our energy sector, securing our energy supply and keeping the lid on consumer prices is not straightforward.  Nor is it quick – unless you pursue the wider quasi-nationalisation methods of Ed Miliband by freezing prices whilst letting costs soar so threatening investment, security and the poor old taxpayer with an even bigger bill.  However, the potential offered by the efficient and extensive exploitation of our shale gas wealth should not be ignored as too difficult.  It can and should play an important role in our energy mix, smoothing out the spikes in prices to give consumers and business a more stable, predictable bill.  And it can provide a welcome and long term revenue stream to the Treasury which it would do well to invest carefully.  The Battle of Balcombe will inevitably become yesterday’s news.  A shale gas mini-revolution could become the tomorrow’s opportunity for energy policy in the UK.