Fracking is a “massive opportunity to help families with their bills” according to the Prime Minister.
See also:
Fracking: It's economics stupid
A critique of the arguments in this blog
Who owns the rights to drill in the UK?
Where are drilling licenses issued? and which seats are included?
What's happening in Balcombe (Part 1)?
FOI documents reveal how the regulations were made (Part 1)
Fracking and Naturally Occuring Radioactive Materials (NORM)
Writing in The Telegraph, Mr Cameron called on households to back shale gas drilling, saying it would; lower bills, bring jobs and community benefits and ‘take up about the area of a cricket pitch’.
For households who have seen bills rising over the past five years thanks to rising gas prices, his claim that fracking could lower bills will be particularly appealing.
Nobody can predict the gas price (or they’d be very rich), but here are three reasons why fracking is in the UK is unlikely to have much impact on bills and one good reason why fracking elsewhere may be what pushes them down:
UK shale gas is unlikely to be cheap
It’s hard to say for sure – because we are so far from the production stage – but most experts including Bloomberg, the IEA, the EIA and Ernst and Young, appear to think that shale gas production in the UK is unlikely to be anywhere near as cheap as it was in the US. In fact, according to their analysis, the cost of extraction alone may be higher than the current wholesale cost of gas.
That’s partly because UK shales are deeper and geologically more complex than those in the US and because UK shale gas is more tightly regulated – as the Prime Minister himself observed. We also lack the kind of onshore oil and gas infrastructure which made shale gas in the US economically viable.
In fact, even in the US prices fell below the cost of production leading the world’s largest oil firm – Exxon – to complain that they were ‘losing their shirt’ on US shale gas. Like the UK, Poland also has quite deep shale gas reserves and used to have the largest resource in Europe. However since exploration started most US oil and gas giants have quit, complaining that the economics didn’t stand up.
Update: The economic fate of shale gas in the UK may be very different to Poland - precisely because the wholesale gas price may justify extraction costs higher than those seen in the US. So because gas extraction may not lower bills, doesn't mean it won't be economic, that depends on the global gas price.
The gas isn’t just for us
Gas is hard to export, you need either pipelines or terminals to liquefy it and put it onto tankers.
The US has almost no export facilities and a poorly integrated gas grid. That meant that when they found gas, it was sold locally and as supply overwhelmed demand, the price plummeted (until they started building export facilities).
Unlike the US the UK is part of a regional gas market – with our European neighbours. We have pipelines to Norway, Belgium and Holland and already export some of the gas we produce in the North Sea – only to re-import gas from elsewhere.
Cuadrilla, therefore, are going to sell their gas to the highest bidder – from anywhere in Europe. The UK may benefit from continuing to produce gas because UK bidders will not have to pay the same transport costs of those in the EU – but that is fairly marginal and not guaranteed.
Cuadrilla commissioned Poyry to carry out an analysis on the impact of shale gas from Lancashire on bills.
It found that bills could be reduced by around 1.7% compared to where they would otherwise be. As a Cuadrilla spokesperson put it, the research showed the impact of UK shale appeared ‘basically insignificant’ a view shared by Poyry in a recent update.
Update: We contacted Poyry to check their interpretation of the data (see below) they made the important point that the impact on bills is separate to the impact on security of supply and - of course - tax revenues which would benefit.
Some fracking isn’t actually for gas
The Prime Minister was clear that he wants fracking around the country – from the North to the South – but the exploratory drilling in the South East so far is actually for oil, not gas. Nobody, so far as we are aware, is arguing that finding more oil trapped in the shale rocks beneath the South Downs is going to lower bills or – indeed – fuel prices.
Global shale gas may lower bills – but so may action on climate change
If global gas production booms – and outweighs global demand – then gas prices will stabilise and may even fall.
A recent report for DECC by consultants Navigant suggested that just this type of scenario, including production in China on such a scale that the world's largest economy no longer needs to import gas, would stabilise gas bills in the UK.
The authors accepted, however, that this depended on shale gas being replicated at scale outside of the US. Aside from Poland’s troubles, early signs from China also indicate problems getting production started, not least due to the fierce competition for water in the region.
Another report by the IEA argued that global action to tackle climate change would actually lower the global price of gas – because there would be less demand for it.
That study went on to warn that new exploration for relatively expensive oil and gas may leave the assets ‘stranded’ by lower gas from existing sources of production such as the Norwegian North Sea.
In short there are good reasons why global gas prices may fall – but it’s harder to argue that UK shale gas production is in any way key.
