Why we can’t depend on a shale gas boom in Britain

One of the more depressing developments in government in recent days has been the series of resignations from the Department of Energy and Climate Change. Several senior climate advisors have quit the government, with rumours that progress on renewable energy or climate change is being quashed by the treasury. There appears to be something of a battle going on between those who want to encourage more renewable energy, and those pinning their hopes on new shale gas resources.

We know George Osborne favours shale. “We don’t want British families and businesses to be left behind as gas prices tumble on the other side of the Atlantic” he told Parliament last year, and he has put in place tax incentives to encourage drilling. The government’s current energy strategy ties Britain’s energy future to gas, and there are a growing number of voices talking up the potential of shale.

Among the more optimistic views is that of MP Peter Lilley. “Shale gas has reduced America’s gas prices to a third of what they are in Europe, increased huge tax revenues, rebalanced the economy, created tens of thousands of jobs, brought industry and manufacturing back to the country’s heartlands, and given rise to a real prospect of American energy self-sufficiency by 2030,” he writes in the Spectator. “Britain may well have comparable shale resources.”

The idea that Britain has ‘comparable’ resources to the US is, I’m afraid, a fantasy (see graph below). There’s certainly plenty of gas down there, but the gas market in the US is very different and so are the rules around drilling. The vision of falling energy prices and job creation is compelling, but here are four reasons why we shouldn’t be holding out for a shale gas boom in Britain.

1. We don’t know how much gas there is
It’s very hard to estimate shale gas reserves. An initial estimate by the British Geological Survey mooted a figure of 150 billion cubic metres, which sounds like a lot but is actually only 1.5 years of supply at current consumption rates. That was not a survey of the resources, just a guess, and their actual survey is likely to be ten times that amount. Cuadrilla, the only company currently drilling in Britain, estimates 5.67 trillion cubic metres, but that is ‘gas in place’, not gas that is recoverable or economically viable. The International Energy Agency estimates around 1 trillion:

The thing is, you can’t tell how much gas you’ve got until you start drilling. We may have vast resources. We may not. Poland, for example, began drilling and after two years has had to revise its estimates downwards by 80%. Likewise the much hyped Marcellus Shale in the US, which turned out to contain a third of the gas hoped for.

As drilling begins, we may find resources beyond our wildest dreams. Or we may find water, like Exxon did in Hungary 2009. The point is, we shouldn’t be developing energy policy based on the assumption of shale gas.

2. Britain is more densely populated
The second reason why we can’t depend on a gas boom is that it will be much more complicated to drill in Britain than it is in the US, and the main reason is population density. It’s all very well drilling in Texas, where you have 34.8 people per square kilometer. There are plenty of remote spots where you’ll be able to drill without bothering anyone.

Lancashire, on the other hand, has 475 people per square kilometer. That’s a lot more people who are going to be upset about fracking in their community, more people who will protest, block planning permission, or who will need to be compensated.

3. There’s less incentive for land owners
In the US, the rights to oil or gas lie with the surface landowner. If you own land that has gas resources, you own those assets and can exploit them yourself or sell the rights to them for your personal profit. It’s in your interests to find gas on your land, which will boost its value and make you a fortune. In fact, much of the money in shale gas in the US has been from land, buying and flipping the rights to drill, rather than drilling itself.

That market dynamic doesn’t work in Britain. Since the Petroleum Act of 1934, all oil and gas found in Britain belongs to the Crown, not to the landowner. Landowners are compensated for the loss of their land, but don’t get any royalties from the gas extracted. That may be worthwhile for some, but the gold rush into shale that the US has seen is impossible to replicate under our current laws.

4. It is unlikely to bring prices down
Perhaps most importantly given the rhetoric, there is no evidence that shale gas will bring energy prices down. That’s because Britain’s current North Sea production is declining, so any new shale gas would just be replacing lost production. We’d still need to import gas from overseas, and that means we’d still be dependent on international gas prices. UK shale gas will also be more expensive to extract than it is in the US, for the reasons discussed above.

An LSE study concluded as much on price: “As long as the UK remains a substantial net importer of gas, it is reasonable to assume that its wholesale gas prices will largely depend on prices charged by foreign suppliers. Although domestic shale gas production could benefit the economy by generating jobs and tax revenues while displacing imports, it is unlikely that gas consumers would see much, if any, benefit in terms of reduced gas and electricity bills.”