Infrastructure for Business. Britain s shale gas potential

Transcription

1 Infrastructure for Business Britain s shae gas potentia

2 Infrastructure for Business 2012 #3

3 Britain s shae gas potentia Britain s shae gas potentia Written by: Dan Lewis, Chief Executive of Future Energy Strategies ( and Energy Poicy Adviser to the IoD Corin Tayor, Senior Economic Adviser at the IoD Edited by: Corin Tayor, Senior Economic Adviser at the IoD 3

4 Infrastructure for Business 2012 #3 Contents EXECUTIVE SUMMARY 5 INTRODUCTION: WHY BRITAIN NEEDS SHALE THE US SHALE BOOM A TRAILBLAZER FOR THE WORLD A GOLDEN AGE OF GAS BRITAIN S POTENTIAL THE ENVIRONMENT 36 CONCLUSIONS 46 4

5 Britain s shae gas potentia Executive summary The UK has not had many positive energy stories in recent years, but the discovery and expoitation of the country s potentiay huge shae gas reserves coud prove to be just the boost the economy needs. The IoD beieves that the UK has a major opportunity to deveop a cheap and reiabe domestic source of energy, creating jobs, reducing the need for gas imports and improving the environment by repacing coa in eectricity generation. Cheap gas-fired turbines powered by UK shae resources coud aso prove to be the perfect compement to renewabe generation, providing power when the wind isn t bowing and the sun isn t shining. The IoD hopes that the Government s forthcoming gas generation strategy wi be simiary enthusiastic about what coud be a vita part of Britain s future energy mix. NB: A figures in the executive summary are referenced in fu in the appropriate section of the main body of the report. THE US SHALE BOOM The UK is not the US, but there can be no understanding of the shae gas opportunity without a grasp of how unconventiona production has transformed America. Production Since its 2005 ow, US natura gas production has increased by 28%. Shae gas production has accounted for the buk of this rise, increasing from 0.39 triion cubic feet (tcf) in 2000 to around 5 tcf in Shae gas now accounts for 23% of a US natura gas production, or 22% of consumption. By 2035, shae gas is expected to account for 49% of US natura gas production. Prices We need not be resigned to constanty rising power prices. US natura gas prices are now at a 10-year ow, contributing to a fa in peak whoesae eectricity prices of 24-39% in the first six months of Shae gas is not the ony reason for this fa, but it certainy heps. US natura gas prices are now de-indexed from oi prices. When oi prices began to increase again in 2009, natura gas prices continued to fa. Natura gas prices in the US are around a third of those in the UK. Industry US industry now benefits from some of the owest natura gas prices in the word, eading to production moving back to the US, especiay in the chemica industry. 5

6 Infrastructure for Business 2012 #3 By 2020, up to 3.6 miion new jobs coud be created in the US energy sector and the wider economy from the shae energy boom, boosting GDP by %. In the manufacturing sector aone, shae gas coud save US manufacturers up to $11.6 biion a year in natura gas costs by 2025, whie one miion new manufacturing jobs coud be created. Exports The US Energy Information Administration expects the country to become a net exporter of LNG by 2016 and a net exporter of natura gas overa by LNG import terminas, constructed before the shae gas boom, are now being refitted for export. Environment US CO2 emissions have faen by 450 miion tonnes over the ast five years, more than any other country. Between 2007 and 2011, US eectricity generation from coa fe by 13%, whie eectricity from natura gas rose by 20% and eectricity from renewabes rose by 26%. Natura gas and renewabes can compement each other. An increasing number of vehices are switching from diese to natura gas, which emits up to 90% fewer particuates and other poutants, heping to improve air quaity. Shae oi potentia US unconventiona production is not imited to shae gas. Shae oi production is forecast to increase more than four-fod by 2020, from 0.7 miion to 3 miion barres a day. Conventiona deep water production is aso forecast to increase rapidy. Rising US production coud transform goba oi markets, perhaps re-ocaising oi prices. West Texas Intermediate and Brent Crude oi prices have aready started to diverge. A GOLDEN AGE OF GAS Gobay, there are arge reserves of unconventiona natura gas; unconventiona production is ikey to account for an increasing share of goba gas production; and natura gas wi become an increasingy important energy source, as demand for coa and oi fattens out. Gas and renewabes are ikey to be the biggest energy growth stories over the next few decades. Reserves The Internationa Energy Agency estimates technicay-recoverabe gas reserves at 27,000 tcf, incuding 12,000 tcf of unconventiona reserves, of which shae accounts for 7,000 tcf. Shae reserves aone are sufficient to account for 60 years of tota goba natura gas production. These reserves are widey distributed, with amost every region of the word, apart from the Midde East, possessing arge shae gas deposits. Production There is of course a difference between technicay-recoverabe reserves and those that are economic to extract, but production forecasts are simiary impressive: 6

7 Britain s shae gas potentia According to the Internationa Energy Agency, provided shae gas is deveoped at scae outside of the US, word natura gas production coud rise by more than 50% by 2035, with unconventiona production accounting for around a third of the tota. In this scenario, gas accounts for 34%, and renewabes 31%, of goba energy demand growth. BP s forecasts are simiar, with gas accounting for 31% of goba energy demand growth by 2030, and renewabes and nucear 34%. BP projects that shae gas and coabed methane wi account for 65% of North American gas production by 2030, with major potentia outside of North America as we. BRITAIN S POTENTIAL The UK may not experience a US-stye shae boom, but Britain s shae resources have enormous deveopment potentia. UK shae gas coud hep to support a ceaner, cheaper and more secure energy system. LNG imports from the US not viabe Pacific Basin gas prices are far higher than those in the UK, so the most profitabe export route for US gas wi aways be to Asia rather than Western Europe. With the costs of export (iquefaction, transportation etc) around $4 per miion British Therma Units (MMBTU) and US natura gas prices forecast to rise to around $5 per MMBTU, US LNG is ikey to be no cheaper than the UK s own Nationa Baancing Point gas price, which is currenty around $8-9 per MMBTU. The UK is therefore unikey to be importing US gas at scae anytime soon. As a country, we have to ook to our own resources. UK shae resources Estimates of UK shae resources are being constanty updated, as the UK is sti in the exporation stage, but the prospects ook very promising indeed: In 2010, the British Geoogica Survey (BGS) estimated the UK s onshore shae reserves at 5.3 tcf. The BGS is set to revise its onshore data substantiay upwards ater this year, possiby to as high as 200 tcf. Nexen s two shae gas rigs at Diy Creek in the Horn River Basin, British Coumbia in Canada. 7

8 Infrastructure for Business 2012 #3 The exporation companies themseves have far higher estimates from their onshore fieds: Cuadria 200 tcf; Dart Energy 66 tcf; Eden Energy 12.8 tcf; IGas 10 tcf. This adds up to around 300 tcf in tota. Offshore reserves coud be far higher sti. The BGS has said that they coud be 5-10 times arger than onshore reserves potentiay up to 1,000 tcf. Offshore reserves are, however, far harder to extract. Possibe recovery rates Recovery rates do vary by ocation and geoogy. In the US, shae gas recovery rates average 18%. There may be reasons to expect recovery rates in the UK to be ower, stricter panning requirements being one of them, athough technoogica improvements are increasing the proportion of reserves that are economic to extract. According to Cuadria, the Bowand Shae is around 10 times thicker than eading US shae gas pays athough it is sti eary days, extraction in the UK coud potentiay be quite rapid. An economic boost The UK is experiencing and wi experience a number of probems with its energy suppy: Gas production from the UK Continenta Shef has decined rapidy over the ast decade, from 103 to 41 miion tonnes of oi equivaent per annum. By 2030, production is expected to fa to just 18 miion tonnes of oi equivaent. The number of peope empoyed directy and indirecty by the oi and gas industry, currenty 440,000, wi therefore fa. Gas imports are rising rapidy. In 2000, net gas exports equaed 13% of consumption. In 2011, net imports equaed 49% of consumption. By 2030, imports are projected to increase to 74% of consumption. The UK s energy and cimate poicies are adding more to industria eectricity prices than comparabe programmes in competitor countries, putting UK industry at a disadvantage and making a rebaancing of the economy more difficut. By 2020, US poicies are projected to add nothing to industria eectricity prices, Chinese poicies to add 10 per MWh, German poicies to add 17 per MWh and British poicies to add 28 per MWh, of which 20 per MWh wi be accounted for by the costs of the renewabes programme. The proportion of househods in fue poverty has risen from 6% in 2003 to 16% in So far, most of the rise has been due to the impact of higher gas prices, but the atest DECC projections show that renewabes subsidies and other cimate and energy poicies are set to add 7% to domestic gas prices and 27% to domestic eectricity prices by Improved energy efficiency may reduce the bi impact, but fue poverty coud rise sti further. By 2020, the UK is set to ose around 20GW of coa and nucear generation, around a fifth of tota eectricity generating capacity. A new nucear programme is crucia, but wi not achieve scae unti some time after 2020, whie CCS, which is vita for coa generation to continue, is not yet proven commerciay. Deveoping UK shae does not sove a of these energy probems on its own, but it coud make a major contribution to mitigating their impact, providing a major economic boost: In the US, in ony a decade, shae gas production increased from virtuay zero to sufficient to meet over a fifth (22%) of US natura gas consumption. In the US, shae gas recovery rates average 18%. 8

9 Britain s shae gas potentia If, over the next 10 years, the UK is roughy haf as successfu on both measures as the US has been over the ast 10 years, it woud mean that shae gas coud account for around 10% of 2011 UK gas consumption, and that around 10% of the UK s onshore shae reserves prove to be economic to extract. If, in this way, the UK is haf as successfu at deveoping shae gas as the US, the benefits coud be enormous. Note that the foowing are very indicative cacuations, designed to provide an appreciation of the big picture surrounding UK shae: In 2011, the UK consumed 2.9 tcf of gas. 10% of 2011 UK gas demand is therefore 0.29 tcf. If 10% of the 300 tcf of onshore reserves estimated by the exporation companies were economic to extract, then 30 tcf woud be sufficient to meet 10% of current UK gas demand for 103 years. 10% of 2011 UK gas demand is equa to 8 miion tonnes of oi equivaent, 8% of tota UK oi and gas production in The UK oi and gas industry provides direct and indirect empoyment for 440,000 peope. Assuming that jobs are directy proportiona to production, then an extra 8% of 2011 production woud generate 35,000 extra jobs, heping to offset job osses from a decine in conventiona oi and gas production in the UK. Between 2011 and 2022, conventiona UK gas production is forecast to decine by 13 miion tonnes of oi equivaent. If shae production rose to 8 miion tonnes of oi equivaent, it woud offset 60% of the projected fa in conventiona production. 8 miion tonnes of oi equivaent aso represents 20% of projected UK gas imports in This woud be sufficient to keep gas imports at the 2011 eve of 49% of demand, rather than imports rising to a projected 59% of demand. THE ENVIRONMENT It is impossibe to tak about shae gas without discussing the environmenta concerns. Using gas in pace of coa for eectricity and in pace of petro and diese for road transport woud ead to big improvements in air quaity and a reduction in CO2 emissions. The process of extracting shae gas, however, has been heaviy criticised on environmenta grounds. But if carried out carefuy and under thorough reguation, hydrauic fracturing ( fracking ) is no more dangerous than conventiona hydrocarbon extraction. Air quaity and carbon emissions In 2011, the UK used 42 miion tonnes of coa in eectricity generation, emitting around 90 miion tonnes of CO2. Were this to be repaced with gas, which emits around haf as much carbon, the UK coud save around 45 miion tonnes of CO2, around 8% of the 2011 tota. Athough UK shae is unikey to be sufficient to repace a coa-fired generation, it coud make a major contribution to decarbonisation in its own right, as we as supporting the further deveopment of renewabes. According to DECC s projections, around 25GW of renewabe generation wi be added to the grid by 2020, much of which wi be in the form of intermittent sources such as wind and soar. UK shae gas can support this deveopment, ensuring that the ights stay on when the wind isn t bowing and the sun isn t shining. Natura gas emits far fewer particuates and other poutants than coa and diese. Using natura gas in pace of coa for eectricity generation and switching over buses and other vehices to natura gas coud reduce the 29,000 annua deaths from poor air quaity in the UK. 9

10 Infrastructure for Business 2012 #3 Hydrauic fracturing There are environmenta issues associated with hydrauic fracturing. They are not to be taken ighty, but they must be put into perspective. For instance, chemicas used in the fracking fuid have many industria and househod uses, and in these contexts aso need to be disposed of propery. In the ast 50 days, the UK experienced three earthquakes as arge or arger than the bigger of the two earthquakes caused by Cuadria in None of them caused any damage. Good practice can significanty reduce many of these environmenta risks. Mutipe casing of wes ensures that fracking fuid cannot enter the water tabe, whie proper site construction and disposa of fracking fuid wi ensure that there are no surface eaks. Rea-time seismic monitoring minimises earthquake risks. The UK has numerous reguatory bodies incuding DECC, the Environment Agency and the Heath and Safety Executive and reguations incuding the Environmenta Permitting Reguations, the Mining Waste Directive, the Water Framework Directive, the Water Resources Act, Borehoe reguations and Petroeum Licenses to monitor and oversee the driing process. Severa scientific reports on safety in the UK have aso been pubished, incuding by the Energy and Cimate Change Seect Committee, DECC, and the Roya Society and Roya Academy of Engineering. The findings of these reports incude: Carried out propery and under strict reguation, hydrauic fracturing is safe; Probems that have occurred have generay been due to non-compiance with industry standards, rather than the hydrauic fracturing process itsef; Environmenta issues are generay itte different from those of conventiona hydrocarbon extraction; Earthquakes caused by hydrauic fracturing are no arger than those that have been caused by coa mining for years. In the US, over 20,000 shae wes have been dried. The US Environmenta Protection Agency is currenty undertaking a major study on the safety of hydrauic fracturing, with a preiminary report due ater this year. According to a study by the Massachusetts Institute of Technoogy, the environmenta record of shae gas deveopment is for the most part a good one. Athough there have been probems at a sma number of wes, these are generay due to poor practice, rather than the nature of the process itsef. The UK, of course, has the opportunity to earn from mistakes made in the US. The Internationa Energy Agency has aso set out a number of goden rues for unconventiona gas exporation to address environmenta concerns. Foowing these goden rues woud add at east 7% to costs, but woud make significant shae gas deveopment outside of North America far more acceptabe. According to the major insurance broker Wiis, insurers are happy to provide cover to shae wes, provided good practice is foowed. According to evidence given to the Energy and Cimate Change Seect Committee by the British Geoogica Survey, extracting shae gas is no more dangerous than any other form of hydrocarbon extraction. Hydrauic fracturing is improving as an extraction technique wateress fracking, which has great potentia, reduces consumption at the wesite and reduces the risk of ground water contamination. The IoD s view is that the evidence shows that the environmenta risks of hydrauic fracturing shoud be paced aongside those of conventiona hydrocarbon extraction. The risks of fracking shoud not be put in a cass of their own. 10

11 Britain s shae gas potentia IoD MEMBER VIEWS Shae gas and the technique used to extract it attract strong views on either side of the debate. 1,095 IoD members were poed on the subject in Apri Their views are not unanimous, but are positive overa: 58% think that extensive deveopment of the UK s shae reserves woud have a positive impact on British businesses, compared to just 7% beieving that it woud have a negative impact. Just over a third (36%) thinks that the risks of hydrauic fracturing are significant. By comparison, 17% think that the risks are insignificant, 27% think that they are neither significant nor insignificant and 19% don t know. Amost haf (48%) agree that the benefits outweigh the risks, compared to 18% who think that the risks outweigh the benefits. Opinion is simiar across the regions. In a regions of the UK, more than 50% of members think that shae gas wi have a positive impact on business; ess than 40% think that the risks of fracking are significant; and at east 45% think that the benefits outweigh the risks. Overa, IoD members are in favour of carefu, we-reguated shae gas deveopment in the UK. 11

12 Infrastructure for Business 2012 #3 Introduction: Why Britain needs shae The Department of Energy and Cimate Change (DECC) wi shorty be pubishing a gas generation strategy. It comes at a vita time, when the UK coud do with some good energy news. North Sea production is decining; our mosty foreign-owned utiities are over-indebted, putting a major hurde in the way of a new nucear programme; fue poverty is a serious worry; the renewabes programme is adding far more to industria energy costs than comparabe programmes in our competitor countries; and there is sti a major question mark over carbon capture and storage, without which coa has itte future. Gas wi no doubt pay a major roe, not just as a bridging fue or a back-up to wind, but in its own right, providing reativey cean, cheap and secure energy. Gobay, we are poised to enter what the Internationa Energy Agency (IEA) has described as a goden age of gas. 1 But that may come as itte comfort to the UK, if it has to import the vast buk of its suppy. Fortunatey, Britain has huge quantities of gas sti to be tapped. And advances in shae extraction technoogy are bringing these resources coser by the day. Shae gas has the potentia to make up for a good part of faing North Sea gas production, generating oca jobs, keeping energy prices down, bringing in tax revenues and cutting carbon and improving air quaity by repacing coa in eectricity generation. The UK has a massive opportunity, if the Government chooses to embrace it. 1 Internationa Energy Agency, Goden Rues for a Goden Age of Gas,

13 Britain s shae gas potentia 1. The US shae boom a traibazer for the word The UK is not the US, but there can be no understanding of the shae gas opportunity without a thorough grasp of how unconventiona production has transformed America and traibazed a path for the rest of the word. PRODUCTION US gas and oi production has increased dramaticay in the ast few years, putting into reverse its previous decine: After severa years of reativey fat production that reached a ow in 2005, US natura gas production has increased by 28%; Since its 2008 ow, US crude oi production has increased by 15%. CHART 1.1 US crude oi and natura gas production, Triion cubic feet Miion barres per day U.S Natura Gas Marketed Production (triion cubic feet) LH scae U.S Fied Production of Crude Oi (miion barres per day) RH scae Sources: US Energy Information Administration, US Natura Gas Marketed Production and US Fied Production of Crude Oi 13

14 Infrastructure for Business 2012 #3 We wi return to the oi story ater, but the increase in US natura gas production has been argey accounted for by shae: In 2000, shae gas production, at 0.39 triion cubic feet (tcf) 2 accounted for ess than 2% of tota US natura gas production; In 2010, shae gas production had increased to around 5 tcf, 3 accounting for 23% of a US natura gas production, or 22% of consumption. 4 By 2035, shae gas is projected to account for 49% of US natura gas production, even as tota production rises towards 30 tcf. CHART 1.2 US natura gas production History 2010 Projections % Shae gas 49% Triion cubic feet Aaska 2% 26% 9% 9% 10% 21% Tight gas Non-associated offshore Coabed methane Associated with oi Non-associated onshore 21% 7% 1% 7% 7% 9% Source: US Energy Information Administration, Annua Energy Outook 2012: Eary Reease Overview PRICES Over the ast few years, natura gas prices have faen rapidy as Chart 1.3 shows. The recent decine in natura gas prices has been due to a number of reasons. Other than the staggering increase of shae gas production from amost zero to neary 25% of a US gas in under a decade, there were other more subte changes at work. A crucia part of this is a highy iquid trading hub Henry Hub which is ocated at the crossover point of many major pipeines governing gas markets on the East Coast of America. Combined with extensive gas pipeines that brought the gas in quantity to market fast, this sophisticated market acceerated the de-indexation of oi and gas prices. Were oi and gas to be priced purey according to their energy content, then oi woud cost six times as much as gas. And as Chart 1.4 shows, historicay, prices moved argey in ine because both gas and oi were somewhat interchangeabe products. The shock was that when oi prices started going up again in 2009, US Henry Hub prices 2 US Energy Information Administration, Shae gas is a goba phenomenon, 5 Apri US Energy Information Administration, Shae Gas Production 4 US Energy Information Administration, US Natura Gas Consumption 14

15 Britain s shae gas potentia CHART 1.3 Henry Hub Guf Coast natura gas spot price 14 $ per miion British Therma Units Jan 08 Apr 08 Ju 08 Oct 08 Jan 09 Apr 09 Ju 09 Oct 09 Jan 10 Apr 10 Ju 10 Oct 10 Jan 11 Apr 11 Ju 11 Oct 11 Jan 12 Apr 12 Source: US Energy Information Administration, Natura gas spot and futures prices started going down. At one point, oi became an amazing 50 times more expensive than natura gas. A over America, oi-inked gas contracts have been torn up. CHART 1.4 US oi/gas price ratio, WTI / Natura Gas ratio AVERAGE RATIO AVERAGE RATIO Oi contains 6x energy content of natura gas Source: US EIA Source: ICIS.com, cited in SeekingApha.com, 12 Apri US price reductions are not imited to natura gas. To the extent that gas is used as an eectricity source, cheaper natura gas wi aso feed through to eectricity prices. Between January and June of this year, average peak whoesae eectricity prices fe by 24-39%, at the same time as natura gas spot prices fe to a decade-ow. 5 Shae gas is not the ony reason for this fa, but it certainy heps. 5 Gas to Power Journa, 13 August

16 Infrastructure for Business 2012 #3 INDUSTRY The energy sector does create a significant number of jobs, but its main roe is to support activity and jobs in the rest of the economy. The extraction of shae gas and oi has added huge economic vaue much further downstream in a number of ways. Overa, US industry now benefits from some of the owest natura gas prices in the word. CHART 1.5 Industria gas prices, before tax, 2010 Pence per KWh (using annua average exchange rates) Japan Portuga Sweden Greece Germany France Luxembourg Ireand Itay Spain Netherands Begium Finand UK USA Canada Source: Department of Energy and Cimate Change, Energy Price Statistics, Tabe (Industria gas prices in the EU and the G7 countries) The chemica industry, which can now boast among the owest natura gas feedstock costs in the word, has been at the forefront of US re-industriaisation. Ethyene production, a mainstay of the chemica industry for use in many derivative products, depends on a feedstock of either naphtha from crude oi or ethane from natura gas. American shae gas is particuary rich in ethane, and the fa in US natura gas prices has uneashed a huge cost advantage for the petrochemica industry, which can now produce ethyene at a third of the price of Western Europe or Asia, as shown in Chart 1.6. The American Chemistry Counci projects that a 25% boost in ethane suppies (from shae gas) coud generate 17,000 jobs in the chemica industry, 395,000 jobs outside the chemica industry, $132 biion in US economic output and $4.4 biion in annua tax revenue. 6 But the benefits of shae gas are not restricted to ethyene production. Methano pants are moving back to the US or being restarted and a huge boost has been given to ammonia-based fertiiser production 85% of the cost of producing ammonia is dependent on natura gas prices. 7 In a recent report, Citigroup concuded that the benefits of increased oi and gas production in North America woud be huge: We estimate that the cumuative impact of new production, reduced consumption and associated activity may increase rea GDP by 2.0 to 3.3%, or $370-$624 biion (in 2005 $) 16 6 American Chemistry Counci, Shae Gas and New Petrochemicas Investment: Benefits for the Economy, Jobs, and US Manufacturing, March Citi Goba Perspectives & Soutions, Energy 2020: North America, the New Midde East? March

17 Britain s shae gas potentia respectivey. $274 biion of this comes directy from the output of new hydrocarbon production aone, whie the rest is generated by mutipier effects as the surge in economic activity drives higher weath, spending, consumption and investment effects that rippe through the economy. This potentia re-industriaization of the US economy is both profound and timey, occurring as the US strugges to shake off the ingering effects of the 2008 financia crisis. 8 CHART 1.6 Goba ethyene costs, January $ / metric ton Midde East Western Canada U.S Ethane U.S Weighted Average West Europe Naphtha Asia Naphtha Source: Citi Goba Perspectives & Soutions, Energy 2020: North America, the New Midde East? March v7dez5fymvm%3d Citigroup anticipate that, in the best scenario, 3.6 miion jobs coud be created across a very wide range of sectors as a resut of increased oi and gas production and ower prices, as shown in Tabe 1.1. A recent PwC report came to a simiar concusion, pointing out that: In 2011, 17 chemica, meta and industria manufacturers commented in SEC fiings that shae gas deveopments drove demand for their products, compared to none in The report aso projected that continued shae gas deveopment coud cut prices for industry and increase the number of manufacturing jobs: Lower feedstock and energy costs coud hep US manufacturers reduce natura gas expenses by up to $11.6 biion annuay by 2025; One miion new manufacturing jobs coud be created by 2025 through more affordabe energy and demand for products used to extract shae gas. 9 FROM IMPORTS TO EXPORTS Received opinion was convinced that America woud become a gas-importing nation at the turn of the century and possiby $100 biion was spent on constructing LNG import terminas with regasification pants. But the rapid expansion of US shae gas production has rendered many of these investments redundant. A new economic avenue is, however, opening up the export of surpus gas via LNG. This requires the construction of iquefaction pants for the gas to be offoaded to the 8 Citi Goba Perspectives & Soutions, Energy 2020: North America, the New Midde East? March PricewaterhouseCoopers, Shae Gas: A renaissance in US manufacturing, December

18 Infrastructure for Business 2012 #3 TABLE 1.1 Estimated breakdown of US jobs created in 2020 Empoyment sector TOTAL Tota Industria Tota non manufacturing Oi and gas extraction Other non manufacturing Tota manufacturing Petroium refineries Paper products Chemicas Stone, cay and gass Primary metas Iron and stee mis and products Aumina and auminium products Fabricated metas Machinery Computers and eectronics Transportation equipment Other manufacturing Non-industria non-agricutura goods and services Construction Utiities Whoesae trade Retai trade Transportation and warehousing Information Financia activities Professiona and business services Educationa services Heath care and socia assistance Leisure and hospitaity Other services Federa government State and oca government Agricuture, forestry, fishing, hunting Agricuture saaried Agricuture sef-empoyed Thousands of jobs 3,577 2,257 1, , , Source: Citi Goba Perspectives & Soutions, Energy 2020: North America, the New Midde East? March 2012, Figure tv7DEZ5FymVM%3D 18

19 Britain s shae gas potentia LNG tankers and takes a ot of time and money, but export permission has recenty been granted. Leading the charge to export has been Cheniere s regasification fast becoming a iquefaction pant at Sabine Pass. The target market is very much the Pacific Basin, where gas prices can be as high as $16 per miion British Therma Units (MMBTU). The costs of iquefaction, transport and regasification are estimated to be between $4 and $7, so this represents a very profitabe trade if US natura gas prices remain ow. 10 Forecasts for future exports are enormous. Cheniere aone has agreements with four goba buyers to export 2 biion cubic feet a day for 20 years equivaent to over 0.7 tcf a year. 11 Meanwhie nine other companies, incuding Freeport LNG, Guf Coast LNG and Cameron LNG, are seeking approva to export gas. According to the US Energy Information Administration, the capacity sum of potentia exports from these nine companies and Cheniere amounts to 14 biion cubic feet a day or over 5 tcf a year 12 about 1.5 times tota UK annua gas consumption. The US is expected to become an LNG net exporter in 2016 and a net exporter of natura gas overa in ENVIRONMENT According to the Internationa Energy Agency (IEA), US CO2 emissions have faen by 450 miion tonnes over the ast 5 years, more than any other country. 14 There are Share of eectricity generation CHART 1.7 US eectricity generation mix, % 50% 40% 30% 20% 10% Coa Gas Nucear Renewabes (incuding hydro) Source: US Energy Information Administration, Juy 2012 Monthy Energy Review (Net eectricity generation by energy source) severa reasons for this, incuding the recession, more efficient technoogy, increasing renewabe generation, and, importanty, the dispacement of coa by gas for eectricity generation: Between 2007 and 2011, eectricity generation from coa fe by 13%, but over the same period eectricity generation from natura gas rose by 20%. Eectricity generation from renewabes (incuding hydro) rose by 26%, but from a smaer base. 10 The Economist, LNG: A iquid market, 14 Juy Wa Street Journa, 9 August US Energy Information Administration, Project sponsors are seeking Federa approva to export domestic natura gas, 24 Apri US Energy Information Administration, Annua Energy Outook 2012: Eary Reease Overview, p Financia Times, 23 May

20 Infrastructure for Business 2012 #3 Over the same period, as a share of US eectricity, coa generation fe from 49% to 42%, whie natura gas generation rose from 22% to 25% and renewabe generation rose from 9% to 13%. As Chart 1.7 shows, the increasing importance of natura gas in eectricity generation is a ong-running trend, athough the fa in coa s importance has been particuary rapid in the ast few years. Renewabe generation has aso increased sharpy since In addition to eectricity generation, an increasing number of vehices in the US are switching over from petro and diese to natura gas a cheap way to reduce not ony CO2 but particuate matter, carbon monoxide, nitrogen oxides and other air poutants. 15 Today, neary 15% of pubic transport buses run on natura gas, 16 whie heavy goods vehices are aso starting to switch over. NOT JUST SHALE GAS Since the oi shock of the 1970s, Americans have become hypersensitive to the security impact of imported energy. Every President since has taked of reducing imported oi, especiay from the Midde East. The facts never quite fitted the resource nationaism argument however. As American oi production decined, imports rose, but they did diversify, with Persian Guf imports reducing steadiy as a share of tota imports. CHART 1.8 US crude oi imports and imports from the Persian Guf Imports as % of tota 70% 40% 60% 50% 40% 30% 20% 10% Imports as a % of tota (LH scae) Persian Guf imports as % of imports (RH scae) Source: US Energy Information Administration, US crude oi production and US crude oi imports Today, the US has a diverse and reativey secure suppy of crude oi, with we over two thirds coming from the American continent: 35% 30% 25% 20% 15% 10% 5% 0% Persian Guf imports as % of imports In 2011, 38% of US crude oi was produced in the US; 23% came from esewhere in North America (Canada and Mexico); 15 Compared to vehices powered by petro or diese, natura gas vehices produce around 25% ess CO 2 and up to 90% fewer smog-producing poutants. See, for exampe 16 See 20

21 Britain s shae gas potentia TABLE 1.2 US production of iquid fues projections m b/d 2011A 2015E 2020E Deepwater Shae oi Aaska Other conventiona/heavy Oi NGLs Tota petroeum Biofues Mandated TOTAL LIQUIDS Source: Citi Goba Perspectives & Soutions, Energy 2020: North America, the New Midde East? March 2012, Figure tv7DEZ5FymVM%3D 10% came from Venezuea, Coombia and Brazi (the three key South American producers). A further 8% came from Nigeria and Angoa, the main African producers; By contrast, ony 13% came from the Persian Guf. 17 And, athough the US sti imports neary 9 miion barres of crude oi a day, it is now a net exporter of petroeum products for the first time. In 2011, net exports of petroeum products averaged 439,000 barres a day. 18 Up unti this point, we have concentrated on the undeniabe impact of shae gas. But a possiby more disruptive change is around the corner. Shoud oi prices remain above $50 a barre, widey thought to be the break-even price for US shae oi, 19 then domestic production wi ramp up consideraby. According to Citi, US oi production coud increase from 5.8 miion barres a day in 2011 to 10.2 miion by 2020, surpassing its peak in the 1970s; Shae oi production coud increase more than four-fod from 0.7 miion to 3 miion barres a day; Combined with increased conventiona and deep water oi production, and expanding natura gas iquids production, tota production of iquid fues coud rise by over 70% by To say that this woud be a massive change woud be an understatement. It woud effectivey re-ocaise oi market pricing and signa the end of OPEC s abiity to keep oi prices high. We have aready seen this start to happen with the growing difference 17 US Energy Information Administration, US crude oi production and US crude oi imports 18 US Energy Information Administration, US net imports of petroeum products 19 See 21

22 Infrastructure for Business 2012 #3 between WTI (West Texas Intermediate) and Brent Crude oi prices this is perhaps not dissimiar to the de-indexation of Henry Hub gas prices from the oi price. The paradox, however, is that if oi prices were to remain owish throughout the 2010s from $50-$75, then many OPEC regimes coud fa as they have progressivey sought to baance their budgets at higher and higher oi price eves. 22

23 Britain s shae gas potentia 2. A Goden Age of gas The recent deveopment of shae gas has been undeniaby positive for the US. Looking forward, US shae gas production is set to continue its dramatic rise, whie US oi production is aso ikey to continue to increase, perhaps even surpassing its peak in the 1970s. But it is not just the US. Shae and other unconventiona gas resources have enormous goba potentia. RESERVES Estimates of natura gas reserves are constanty being updated. At the time of writing, the most recent goba estimates were pubished by the Internationa Energy Agency (IEA): 20 In 2010, goba natura gas production stood at 116 tcf, of which 16 tcf (14%) came from unconventiona sources. At end-2011, word technicay-recoverabe gas reserves stood at 27,000 tcf enough to suppy the word for more than 200 years at current production eves. Word reserves incude 12,000 tcf of unconventiona gas, of which shae accounts for 7,000 tcf. Shae reserves aone are sufficient to account for 60 years of tota goba natura gas production. As Tabe 2.1 shows, these reserves are widey distributed. TABLE 2.1 Remaining technicay-recoverabe natura gas resources at end-2011 Triion cubic feet Tota reserves Of which conventiona reserves Of which unconventiona reserves Of which unconventiona reserves Of which unconventiona reserves Of which unconventiona reserves Eastern Europe/Eurasia 6,145 4,626 1, Midde East 4,838 4, Asia/Pacific 4,520 1,236 3,284 2, OECD Americas 4,308 1,589 2,719 1, Africa 2,613 1,307 1,307 1, Latin America 2, ,695 1, OECD Europe 1, Word 26,557 14,868 11,689 7,346 2,684 1,660 Source: Internationa Energy Agency, Goden Rues for a Goden Age of Gas, 2012, Tabe 2.1 (converted to triion cubic feet) 20 Internationa Energy Agency, Goden Rues for a Goden Age of Gas, 2012, Tabes 2.1 and 2.6 (converted to triion cubic feet) 23

24 Infrastructure for Business 2012 #3 There is of course a difference between technicay-recoverabe reserves and those that are economic to extract and the atter wi aways be smaer than the former. The US Energy Information Administration (EIA) has revised downwards its estimate of technicay recoverabe reserves in the US, but at the same time it revised upwards the eve of proved natura gas reserves: In 2011, the EIA estimated that the U.S. had 827 tcf of technicay recoverabe shae gas reserves, but has now revised that figure downwards to 482 tcf; 21 At the same time, the most recent data shows that proved reserves of natura gas have increased from 284 tcf at the end of 2009 to 318 tcf at the end of 2010; 22 This increase is entirey accounted for by increases to proved reserves of shae gas, which have risen from 61 to 97 tcf over a singe year. 23 PRODUCTION Provided that enough countries agree to aow shae gas deveopment to proceed, and provided that extraction is undertaken in an environmentay responsibe manner, the IEA sees gas paying an increasingy important roe in the word s energy mix: By 2035, word natura gas production coud increase from 116 to 181 tcf, with 58 tcf (32%) coming from unconventiona sources; Natura gas coud increase as a share of word primary energy demand from 21% in 2010 to 25% in 2035; In this Goden Rues scenario, whie demand for a energy sources increases, gas and renewabes take an increasing share, with coa and oi diminishing in significance. In this scenario one third of the increase in primary energy demand is accounted for by gas, and a further one third by renewabes (incuding hydro and biomass). 24 CHART 2.1 Share of increase in goba primary energy demand, % 10.4% 10.2% Gas 34.4% 31.0% Renewabes (incuding hydro and biomass) Coa Nucear Oi Source: Internationa Energy Agency, Goden Rues for a Goden Age of Gas, 2012, Tabe US Energy Information Administration, Annua Energy Outook 2011 and Annua Energy Outook US Energy Information Administration, US Crude Oi, Natura Gas, and NG Liquids Proved Reserves, August Ibid. 24 Internationa Energy Agency, Goden Rues for a Goden Age of Gas, 2012, Tabes 2.5 and 2.6 (converted to triion cubic feet) 24

25 Britain s shae gas potentia BP s most recent Energy Outook 2030 report made a simiar set of projections: Natura gas accounts for 31% of goba energy growth between 2010 and 2030, whie renewabes (incuding hydro) and nucear account for 34% of demand growth; Natura gas wi account for 13% of transport energy demand growth over the same period, compared to eectricity accounting for ony 2% of growth; Shae gas and coabed methane wi account for 65% of North American gas production by 2030; Outside of North America, unconventiona gas production is ikey to pay a growing roe, athough major production is unikey to take pace in Europe before The basic story, then, is quite straightforward. There are arge goba reserves of unconventiona natura gas; unconventiona production is ikey to account for an increasing share of goba gas production; and natura gas wi become an increasingy important energy source, as demand for coa and oi starts to fatten out. Gas and renewabes are ikey to be the biggest energy growth stories over the next few decades 25 BP, Energy Outook 2030, January

26 Infrastructure for Business 2012 #3 3. Britain s potentia The UK may not experience a US-stye shae boom, but Britain s shae resources have enormous deveopment potentia. UK shae gas coud hep to support a ceaner, cheaper and more secure energy system. LNG IMPORTS FROM THE US NOT VIABLE Chapter 1 described the immense benefits that shae gas has brought to the US and the future export potentia. Given that UK gas currenty costs around $8-9 per MMBTU, compared to US gas costing $2-3 per MMBTU, it might be tempting to beieve that the UK can import arge quantities of cheap US gas in the years ahead. Unfortunatey, at current production, iquefaction and shipping costs, it doesn t ook ikey. Firsty, Pacific Basin gas prices are far higher than those in the UK, so the most profitabe export route wi aways be to Asia rather than Western Europe. Secondy, and more importanty, more than a few energy anaysts forecast a return from the current $3 Henry Hub gas price to $5 in the near future. With the costs of export currenty around $4 per MMBTU, exporting gas to the UK woud actuay be a oss-making enterprise, uness UK gas prices increased substantiay. TABLE 3.1 Estimated cost of deivered LNG to Europe from Cheniere s Sabine Pass Project ($MMBtu) Henry Hub Gas Fue (15%) Liquefaction Shipping Low High Deivered Cost Source: Citi Goba Perspectives & Soutions, Energy 2020: North America, the New Midde East? March 2012, Figure tv7DEZ5FymVM%3D This view was confirmed in a recent Deutsche Bank report, which forecast that, once transportation costs were taken into account, US LNG woud be no cheaper than the UK s own Nationa Baancing Point (NBP) gas price. The report projected that, starting from 2016, NBP and US LNG export to Europe wi both hover in a narrow price band between $8-10 per MMBTU, meaning that the spread for traders to take the arbitrage woud be reduced to virtuay ni. 26 The UK is therefore unikey to be importing US gas at scae anytime soon Gas to Power Journa, 3 August deutsche-bank

27 Britain s shae gas potentia UK SHALE POTENTIAL So we need to ook to our own resources. How much shae gas does the UK have, and how quicky can we expoit it? Resources In cacuating the size of the shae resource base, Britain starts from a good 20 years behind the US. To date, apart from three deep wes dedicated to shae appraisa dried recenty by Cuadria, ess than a handfu of exporation wes are known to have tested shae pays in the UK. Because this is sti a matter of exporation, the quantity of UK shae gas is very much open to debate, but the prospects ook very promising indeed. In 2010, the British Geoogica Survey (BGS) estimated the UK s onshore shae reserves at 5.3 tcf. The BGS is set to revise its onshore data substantiay upwards ater this year, possiby to as high as 200 tcf. TABLE 3.2 Companies prospecting for UK shae gas Company Cuadria Resources Tamboran Resources Dart Energy I-Gas Eden/UK Methane/Coasta Egdon/eCorp/Greenpark Geoogica Formations Lower and Upper Carboniferous (Bowand Shae) Lower Carboniferous Lower and Upper Carboniferous Lower and Upper Carboniferous (Hoywe and Bowand Shae) Carboniferous Shaes Carboniferous Shaes Locations Lancashire, Kimmeridge Cay, Wead Basin - Engand Lough Aen Basin Ireand Scotand NE Waes/S Lancashire Mendips, S Waes, Kent Gainsborough Trough, East Midands The exporation companies themseves have far higher estimates from their onshore fieds. Cuadria, by itsef, is a showstopper. In September 2011 it announced that it had indentified a resource of 200 tcf just outside Backpoo. Cuadria s estimates, however, ony cover its exporation area in Lancashire. Other companies have aso reported arge resources: Eden Energy reported 12.8 tcf in June 2011; 27 In Apri 2012, IGas doubed its estimate to 10 tcf; 28 In May 2012, Dart Energy Internationa reported a best estimate of shae gas assets of 66 tcf. 29 A of these estimates are ony onshore. Offshore reserves coud be 5-10 times higher, according to the British Geoogica Survey. 30 For now, itte is known about how to extract offshore shae gas but it does suggest that the UK does not need to worry about running out of gas if it were to appy itsef to proven technoogy. An optimistic estimate of UK unconventiona gas reserves, then, woud add up to 300 tcf onshore, and possiby as much as 1,000 tcf offshore. 27 Patts, 2 June The Teegraph, 3 Apri Energy-pedia News, 10 May Nige Smith, Geophysicist, British Geoogica Survey, Ora evidence to the Energy and Cimate Change Seect Committee, 9 February

28 Infrastructure for Business 2012 #3 Possibe recovery rates Recovery rates do vary very much by the ocation and what companies are prepared to say, but according to the Centre for Goba Energy Studies, shae gas recovery rates in the US average 18%. 31 To use the jargon, utimate recovery rates keep increasing as the technoogy advances, so 15 years from now, 30% might be a more ikey recovery rate. It may be that conditions in the UK are more compex than those in the US, however, with severa issues standing out: UK shae gas may or may not be harder to extract, given the different geoogica conditions and greater popuation density; UK panning aws are more stringent; In the UK, unike in the US, minera ownership rights beong to the Crown Estate and not the andowner, meaning that the andowner may have ess incentive to aow shae driing. Whie panning and ownership rights are certainy issues, they are not insurmountabe. Minera rights aso beong to the Crown in Canada, for exampe, but that hasn t prevented arge-scae deveopment. And athough the panning process does take a considerabe amount of time in the UK, there is no reason why sensibe appications shoud be refused. It is too eary to te whether, compared to the US, UK shae gas wi be harder to extract. There are, however, some encouraging signs. What is especiay remarkabe about the Bowand shae that Cuadria pan to expoit is its quaity, as expressed by the average resource per square mie. According to Cuadria, it is actuay greaty superior to eading US gas shae pays because it is more than 10 times thicker. TABLE 3.3 The potentia of Bowand versus US shae gas pays Pay Age Depth feet Net thickness feet Approx average resource biion cu.ft / sq. mie (GIIP) Barnett Mississippi Marceus Mid Devonian Fayettevie Mississippi Haynesvie Upper Jarassic Woodford Mid Devonian Eage Ford E. Cret Bowand (Grange Hi) Carb = 1.4 tcf / sq.m Source: AJ Lucas, AJ Lucas European Shae Assets Update, Presentation to JP Morgan Shae Corporate Access Day, 10 May THE PROBLEMS THAT SHALE COULD HELP SOLVE Deveoping UK shae does not sove a of the foowing energy probems on its own, but it coud make a arge contribution to mitigating their impact, providing a major economic boost Centre for Goba Energy Studies, Juy

29 Britain s shae gas potentia UK gas production decining Gas production from the UK Continenta Shef has decined rapidy over the past decade, and is set to continue to fa: Between 2000 and 2011, gas production fe from 103 to 41 miion tonnes of oi equivaent; By 2030, North Sea gas production is projected to fa to just 18 miion tonnes of oi equivaent. CHART 3.1 Decining UK gas production Miion tonnes of oi equivaent Net UKCS production Projected net UKCS production The UK oi and gas industry provides direct and indirect empoyment for 440,000 peope, incuding 32,000 directy empoyed by oi and gas companies and their major contractors. 32 As production of both gas and oi decines the job count wi aso fa. UK gas import dependency rising Source: Department of Energy and Cimate Change, UK Oi and Net Gas Production and Demand, March Faing production means that gas imports wi have to rise, even though DECC projects that net gas demand wi fa by at east 10% over the next 20 years: In 2000, net gas exports equaed 13% of consumption. In 2011, net imports equaed 49% of consumption. By 2030, imports are projected to make up 74% of the UK s gas needs. If DECC s projections for gas demand are too ow, then imports coud rise to an even higher share than detaied beow. Energy poicies pacing higher costs on UK industry The UK s energy and cimate change poicies, especiay the renewabes programme, are adding more to eectricity prices paid by intensive users than comparabe programmes in competitor countries: In 2011, the UK s energy and cimate poicies added 14 per MWh to industria eectricity prices; 32 Oi and Gas UK 29

30 Infrastructure for Business 2012 #3 CHART 3.2 Gas imports as a percentage of gas demand Miion tonnes of oi equivaent 80% 70% 60% 50% 40% 30% 20% 10% 0-10% -20% Gas import dependency Projected gas import dependency Source: Department of Energy and Cimate Change, UK Oi and Net Gas Production and Demand, March By 2015, the impact of poicies is projected to rise to per MWh, of which 11 wi come from the renewabes programme; By 2020, these figures are projected to increase to 28 and 20, respectivey; By comparison, US poicies are projected to add nothing to industria eectricity prices, Chinese poicies to add 10 per MWh, and German poicies 17 per MWh by In certain countries, such as Germany, this may be because consumers are paying a higher share of the burden. But it puts UK industry at a severe disadvantage. CHART 3.3 Incrementa impacts of energy and cimate change poicies on eectricity price paid by energy intensive industries GHG trading and standards Energy efficiency targets /MWh Renewabe energy feed-in tariffs and incentives Energy taxes 2 0 Other -2 China India Japan Russia Turkey US Denmark France Germany Itay UK 30

31 Britain s shae gas potentia CHART /MWh GHG trading and standards Energy efficiency targets Renewabe energy feed-in tariffs and incentives Energy taxes Other -5 China India Japan Russia Turkey US Denmark France Germany Itay UK CHART /MWh GHG trading and standards Energy efficiency targets Renewabe energy feed-in tariffs and incentives Energy taxes Other -10 China India Japan Russia Turkey US Denmark France Germany Itay UK Source: Department for Business, Innovation and Skis, An internationa comparison of energy and cimate change poicies impacting energy intensive industries in seected countries, 11 Juy Fue poverty rising Fue poverty 33 has risen substantiay over the past decade, athough it remains beow the eves of the mid-1990s. Between 2003 and 2010, the proportion of househods in fue poverty rose from 6% to 16%. So far, most of the rise has been due to the impact of higher gas prices, but the atest DECC projections show that renewabes subsidies and other energy and cimate change poicies are set to add 7% to domestic gas prices and 27% to domestic eectricity prices by Athough improvements to energy efficiency coud reduce the bi impact, fue poverty coud rise sti further NB: A househod is said to be in fue poverty if it needs to spend more than 10% of its income on fue to maintain a satisfactory heating regime (usuay 21 degrees for the main iving area, and 18 degrees for other occupied rooms) Department of Energy and Cimate Change, Estimated impacts of energy and cimate change poicies on energy prices and bis, November 2011, Tabe 2 NB: The impacts on prices from the measures outined in the Draft Energy Bi may be different to those indicated shoud the Bi be enacted. 31

32 Infrastructure for Business 2012 #3 CHART 3.4 Proportion of househods in fue poverty Percentage of househods in fue poverty Source: Department of Energy and Cimate Change, Fue poverty statistics Decining capacity of coa and nucear Over the next decade, the UK wi experience a rapid decine in the generation capacity of two key sources of baseoad power coa and nucear. This decine is expected to exceed 20GW, representing more than a fifth of tota generation capacity. Athough rapid renewabes depoyment coud theoreticay repace this ost capacity, it woud need to be compemented by reiabe back-up generation, underining the growing importance of gas. A new nucear programme is aso vitay important, but it is unikey to reach scae quicky enough. CHART 3.5 The decining capacity of coa and nucear Percentage of househods in fue poverty Unabated coa Nucear Source: Department of Energy and Cimate Change, Updated Energy & Emissions Projections, October 2011, Annex J tota capacity (centra scenario) 32

33 Britain s shae gas potentia The potentia contribution of UK shae Shae gas deveopment can reverse some of these trends and provide a big economic boost: As detaied earier in this report, in ony a decade in the US, shae gas production increased from virtuay zero to sufficient to meet over a fifth (22%) of US natura gas consumption. In the US, shae gas recovery rates average 18%. If, over the next 10 years, the UK is roughy haf as successfu on both measures as the US has been over the ast 10 years, it woud mean that shae gas coud account for around 10% of 2011 UK gas consumption, and that around 10% of the UK s onshore shae reserves prove to be economic to extract. If, in this way, the UK is haf as successfu at deveoping shae gas as the US, the benefits coud be enormous. Note that the foowing are very indicative cacuations, designed to provide an appreciation of the big picture surrounding UK shae: In 2011, the UK consumed 2.9 tcf of gas % of 2011 UK gas demand is therefore 0.29 tcf. If 10% of the 300 tcf of onshore reserves estimated by the exporation companies were economic to extract, then 30 tcf woud be sufficient to meet 10% of current UK gas demand for 103 years. 10% of 2011 UK gas demand is equa to 8 miion tonnes of oi equivaent, 8% of tota UK oi and gas production in The UK oi and gas industry provides direct and indirect empoyment for 440,000 peope. 37 Assuming that jobs are directy proportiona to production, then an extra 8% of 2011 production woud generate 35,000 extra jobs, heping to offset job osses from a decine in conventiona oi and gas production in the UK. Many of these posts woud be in some of the most economicay depressed regions of the country. Recenty, Lord Browne, former Chief Executive of BP, tod the Independent that UK shae coud create 50,000 direct jobs. 38 Between 2011 and 2022, conventiona UK gas production is forecast to decine by 13 miion tonnes of oi equivaent. 39 If shae production rose to 8 miion tonnes of oi equivaent, it woud offset 60% of the projected fa in conventiona production. 8 miion tonnes of oi equivaent aso represents 20% of projected UK gas imports in This woud be sufficient to keep gas imports at the 2011 eve of 49% of demand, rather than imports rising to a projected 59% of demand. 40 Shae gas deveopment coud aso have other benefits: The US experience shows that shae gas does not have to dispace competey other conventiona natura gas resources to bring the price down substantiay. The current proportion of a fifth of tota consumption ceary does the job, as pricing can be decisive at the margins. If shae gas heps to reduce gas prices, it woud provide a big boost to industry, potentiay creating thousands of jobs in addition to those in the oi and gas industry, and reduce the number of househods in fue poverty. UK shae gas, together with renewabes and new nucear, can offset the panned cosure of around 20GW of coa and nucear stations, heping to ensure that the ights stay on. 35 Department of Energy and Cimate Change, DUKES Tabe 4.2 (converted to triion cubic feet) 36 Department of Energy and Cimate Change, UK Oi and Net Gas Production and Demand, March Oi and Gas UK 38 The Independent, 26 March Department of Energy and Cimate Change, UK Oi and Net Gas Production and Demand, March Department of Energy and Cimate Change, UK Oi and Net Gas Production and Demand, March

34 Infrastructure for Business 2012 #3 THE VIEWS OF IOD MEMBERS In Apri 2012, the IoD poed 1,095 IoD members for their views on the potentia of UK shae gas. Whie there were some mixed views, and a degree of uncertainty, members were positive overa: 58% said that extensive deveopment of the UK s shae gas resources woud have a positive or very positive impact on British businesses. By contrast, just 7% thought it woud have a negative or very negative impact on business, whie 22% said it woud be neither positive nor negative. CHART 3.6 What is your view on the potentia impact on UK businesses of extensive deveopment of the UK s shae gas resources? 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Very positive Positive Neither positive nor negative Negative Very negative Don t know Source: Poicy Voice po of 1,095 IoD members, Apri 2012 Views were mixed on the possibe safety and environmenta risks of hydrauic fracturing (which are covered in Chapter 4). 36% thought that the risks were significant, compared with 17% who thought they were insignificant and 27% who fet they were neither significant nor insignificant. Overa, amost haf (48%) of IoD members agreed that the benefits outweighed the risks, compared to 18% who thought that the risks outweighed the benefits, and 15% who neither agreed nor disagreed with the question. There is, however, some uncertainty amongst IoD members. 13% said they didn t know what the impact of shae gas deveopment on business woud be; 19% said they didn t know what the risks of fracking woud be; and 20% said they didn t know whether the benefits outweighed the risks. Regionay, IoD member views are very simiar. In a regions of the UK: More than 50% of members think that shae gas wi have a positive impact on business; Less than 40% of members think that the risks of fracking are significant; At east 45% of members think that the benefits outweigh the risks. 34

35 Britain s shae gas potentia CHART 3.7 What is your view on the safety and environmenta risks of hydrauic fracturing ( fracking ), the technique used to extract shae gas? 35% 30% 25% 20% 15% 10% 5% 0% Very significant Significant Neither significant nor significant Insignificant Very insignificant Don t know Source: Poicy Voice po of 1,095 IoD members, Apri 2012 CHART 3.8 To what extent woud you agree or disagree with the foowing statement: the potentia benefits of shae gas deveopment outweigh the potentia risks of hydrauic fracturing ( fracking )? 40% 35% 30% 25% 20% 15% 10% 5% 0% Strongy agree Agree Neither agree nor disagree Disagree Strongy disagree Don t know Source: Poicy Voice po of 1,095 IoD members, Apri

36 Infrastructure for Business 2012 #3 4. The environment It is impossibe to tak about shae gas without discussing the environmenta concerns. Using gas in pace of coa for eectricity and in pace of petro and diese for road transport woud ead to big improvements in air quaity and a reduction in CO2 emissions. The process of extracting shae gas, however, has been heaviy criticised on environmenta grounds. But if carried out carefuy and under thorough reguation, hydrauic fracturing ( fracking ) is no more dangerous than conventiona hydrocarbon extraction. AIR QUALITY AND CARBON EMISSIONS In 2011, the UK used 42 miion tonnes of coa in eectricity generation, 41 emitting around 90 miion tonnes of CO2. 42 Were this to be entirey repaced with gas, which emits around haf as much CO2 as coa, 43 the UK woud quicky and cheapy save around 45 miion tonnes of CO2, around 8% of the 2011 tota. Athough UK shae is unikey to be sufficient to repace a coa-fired generation, it coud make a major contribution to decarbonisation in its own right, as we as supporting the further deveopment of renewabes. According to DECC s projections, around 25GW of renewabe generation wi be added to the grid by 2020, 44 much of which wi be in the form of intermittent sources such as wind and soar. UK shae gas can support this deveopment, ensuring that the ights stay on when the wind isn t bowing and the sun isn t shining. Repacing coa with gas woud aso hep to improve Britain s poor air quaity, which is responsibe for 29,000 deaths annuay, 45 as gas emits far fewer particuates and other harmfu poutants than coa. Shoud shae gas in the UK prove to be as disruptive to pricing as in the US, then we coud aso quicky move to buy off the shef buses that run on natura gas rather than diese. These woud start to cean up city air with much ower particuate and other emissions, compementing eectric cars. The switch woud pay for itsef in heping to reduce the 5,000 annua premature deaths from road poution aone. 46 According to a recent Deutsche Bank report, natura gas vehices have good prospects of growing their market share in the years ahead Department of Energy and Cimate Change, DUKES Tabe Department of Energy and Cimate Change, 2011 UK Greenhouse Gas Emissions, Provisiona Figures, March 2012, Figure For a comparison of ifecyce emissions of coa and natura gas, see, for exampe: Wordwatch Institute, Comparing Life-Cyce Greenhouse Gas Emissions from Natura Gas and Coa, August 2011, Figure ES-2 This report uses the 2011 methodoogy empoyed by the US Environmenta Protection Agency, and finds that ifecyce emissions of natura gas equa 582kg of CO2 per MWh of eectricity, 47% ess than coa s figure of 1,103kg of CO2 per MWh. 44 Department of Energy and Cimate Change, Updated Energy & Emissions Projections, October 2011, Annex J tota capacity (centra scenario) 45 Simon Moore and Guy Newey, The forgotten crisis of Britain s poor air quaity, Poicy Exchange, Juy BBC News, 17 Apri Deutsche Bank, Natura gas as a fue for road vehices: The underrated aternative, 13 Apri

37 Britain s shae gas potentia HYDRAULIC FRACTURING BOX 4.1 What is fracking? In the eary 1980s, George Phydias Mitche, a Texan born to Greek parents, came up with the radica idea of driing much deeper into the gas-bearing shae rock to extract natura gas. After neary 20 years of experimentation, his company finay found the right formua for the economic expoitation of tight shae gas. Hydrauic fracturing, or fracking, iteray breaks open the rock aong fractures and reeases the trapped gas. This is done by firing a cheap combination of high pressure water, sand as a propping agent to open up the fractures and some chemicas. These foow after the vertica we has been dried, which is encased with stee and concrete to prevent the we s coapse and the escape of gas or fracking fuid. A more recent innovation has been to dri horizontay outwards from the vertica we as far as 5,000 feet. Hydrauic fracturing horizontay requires much more water but it aso means that one dri pad can cover a much arger area and extract much more gas. The fracking itsef ony asts a few weeks but the we wi keep producing gas for years as it woud typicay be connected to the gas network. The process in more detai A good description of the fracking process can be found in a recent report from the insurance brokerage Wiis: 48 The technique of hydrauic fracturing is used to increase the rate at which natura gas can be produced from subterranean natura reservoirs. Hydrauic fracturing enabes the production of natura gas and oi from rock formations deep beow the earth s surface. At such depth, there may not be sufficient porosity, permeabiity or reservoir pressure to aow natura gas and oi to fow from the rock into the webore at economic rates. Fractures provide a conductive path connecting a arger area of the reservoir to the we, thereby increasing the area from which natura gas can be recovered from the targeted formation. The process can be summarised as foows: After the we is dried and casing is fitted, stee pipes are inserted and cemented into pace. Additiona stee casing is fitted beow the water eve unike oca private and municipa water wes; A perforating gun is owered into the we; Controed eectric charges pierce the pipe and cement, basting into the shae where the gas is trapped; The treating fuid (mainy geed water) which is injected into the we at high pressure creates and widens the shae fractures, then these created fractures are hed open by proppant (usuay in the form of sand) which is bended with the treating fuid and introduced to the fractures that are created during the fracturing process; Natura pressures then force the iquids back through the pipe to the surface; As the fuid recedes, the sand grains hod open the fractures and natura gas fows up the we. There are severa environmenta issues associated with hydrauic fracturing, detaied in Tabe 4.1. They are not to be taken ighty, but at the same time must be put into perspective. 48 Wiis, A Fracked Up? Just how concerned shoud energy insurers be about hydrauic fracturing? Energy Market Review, Apri 2012, p

38 Infrastructure for Business 2012 #3 TABLE 4.1 Environmenta risks of hydrauic fracturing Risk Perspective Water Methane migrating to the water tabe as a resut of driing Chemicas used in the fracking fuid pouting ground and surface water Methane can sometimes migrate naturay, athough any suspicion of migration caused by fracking needs to be taken seriousy. The chemicas used in fracking fuid are generay ess than 0.5% of the tota, and are used in a waks of ife. For exampe, Sodium Choride is sat, Poyacryamide is used for water treatment and in cosmetics, Borate sats are found in aundry detergent, Citric Acid is used in food additives and Sodium/Potassium Carbonate is found in ordinary detergents. Disposing of chemicas safey is not a unique probem for shae gas driing. Large quantities of water Large quantities of water are, of course, used in many industria and eisure activities, not east gof courses in areas of desert. Earthquakes Earthquakes caused by the fracking process Fugitive emissions Leaks from the shae wes of methane or other poutants In 2011, two earthquakes were caused by the activities of Cuadria, one measuring magnitude 1.5 and the other measuring magnitude 2.3. For comparison, the British Geoogica Survey pubishes a record of earthquakes around the British Ises in the ast 50 days. Based on a search conducted on 15 August 2012, in the previous 50 days there were five earthquakes measuring more than 1.5, of which two measured 2.3 and one Coa mining has aso caused earthquakes of a simiar magnitude for a ong time. It shoud aso be noted that earthquake magnitudes are exponentia, not inear. According to the British Geoogica Survey, an earthquake beow 3.0 is generay not even fet, et aone the cause of damage. Not a probem uniquey confined to shae gas wes, but to coa mining and andfi sites as we. In the case of shae gas, fugitive methane emissions shoud ony exist sporadicay during the first few weeks of initia operations, not during the three or four decades of the we s ife. These issues can be deat with in practice. Tabe 4.2 gives severa exampes. 49 British Geoogica Survey, Earthquakes around the British Ises in the ast 50 days, Last updated: 13.40, Wednesday August 15,

39 Britain s shae gas potentia TABLE 4.2 Practica steps to dea with the risks of shae gas exporation Risk Contamination of drinking water suppy Gradua contamination of the soi from fracking fuid pumped down a disposa we or from seepage or spiage of driing fuid at the driing site Action Industry best practice is for wes to have a surface casing and an intermediate casing that extends far beow the depth of the aquifer as far as the regiona sea (the ayer of impermeabe rock beneath which ie the vast majority of the gas deposits). The gap between the production casing and the intermediate casing is then cemented a the way to the surface. Any faiure of the production casing above the regiona sea is covered by the intermediate casing. Standard oi and gas driing practices and egisation appy. Industry best practice is to underay the grave or soi at the top of the we site with a very thick impermeabe ayer of pastic, which sopes into drainage ditches. Any spi from the we, a fue tanker or the storage tanks on site wi be covered. The pastic sheet is not removed when fracking operations are competed, but remains for the duration of the ife of the we. Secondy, rather than using a disposa we, best practice is to use stee tanks for the used fracking fuid. These tanks are emptied reguary and the contents taken to andfi or waste treatment sites. Testing is carried out to ensure that the fuid is compiant with what is permitted at the disposa site. Earthquakes Driers can minimise earthquake risks. For exampe, rea-time seismic monitoring in each individua we aows driers to determine every seismic occurrence we in time to ensure that the fracking activity is shut down we before any tremor is caused. Source: Wiis, A Fracked Up? Just how concerned shoud energy insurers be about hydrauic fracturing? Energy Market Review, Apri The UK Despite having a mere three (and currenty suspended) exporation wes in pace across the whoe country, thanks perhaps to its pervasive heath and safety cuture, Britain aready has a mutitude of reports into shae gas safety. Reativey onerous reguations are aready in pace for fracking in the UK, incuding an obigatory fu discosure of the fracking fuid composition. The reguatory bodies incude: Department of Energy and Cimate Change; Environment Agency (Engand and Waes); Scottish Environmenta Protection Agency; Heath and Safety Executive; Loca authorities. 39

40 Infrastructure for Business 2012 #3 There are aso numerous reguations that dea with specific risks, as detaied in Tabe 4.3. TABLE 4.3 Environmenta contros in Engand and Waes Risk Groundwater poution Surface spis Disposa of used fracking fuid Over abstraction of water Fugitive methane emissions Contros Water Framework Directive and Groundwater Daughter Directive through the Water Resources Act and Environmenta Permitting Reguations (EPR). These reguate discharges to groundwater and require discosure of chemicas. Panning regime for site construction standards. The EPR reguates discharges to surface water and groundwater. Mining Waste Directive through the EPR. A waste management pan must be approved by the Environment Agency. Euratom Treaty appies if there are naturay occurring radioactive materias, via the EPR. Abstraction icensing under the Water Resources Act. Borehoe reguations (Heath and Safety Executive) to protect human heath. Conditions under Petroeum Licences (DECC) for faring and venting. Mining Waste Directive may appy. Source: Tony Graying, Head of Cimate Change and Communities, Environment Agency, Managing the environmenta risks of shae gas extraction, Presentation to the UKERC Annua Assemby, University of Warwick, 20 June The UK-based safety reports come to simiar concusions. Their findings incude: Carried out propery and under strict reguation, hydrauic fracturing is safe; Probems are generay due to poor standards, rather than the hydrauic fracturing process itsef; Environmenta issues are generay itte different from those of conventiona hydrocarbon extraction; Earthquakes caused by hydrauic fracturing are no arger than those that have been caused by coa mining for years. 1. Energy and Cimate Change Committee, May The Seect Committee aunched its investigation in November It took 24 submissions as evidence to consider the prospects for shae gas in the UK, the risks and hazards associated with shae gas, and the potentia carbon footprint of arge-scae shae gas extraction. The report, pubished in May 2011, concuded: There is no evidence that the hydrauic fracturing process poses any risk to underground water aquifers provided that the we-casing is intact before the process commences. Rather, the risks of water contamination are due to issues of we integrity, and are no different to concerns encountered during the extraction of oi and gas from conventiona reservoirs. However, the arge voumes of water required for shae gas coud chaenge resources in regions aready experiencing water stress. 50 House of Commons Energy and Cimate Change Committee, Shae Gas: Fifth Report of Session , May

41 Britain s shae gas potentia 2. Government response to Energy and Cimate Change Committee, Juy The Government pubished a joint response to the Seect Committee s report in Juy 2011, which incuded contributions from DECC, the Treasury, the Department for Environment, Food and Rura Affairs (DEFRA), the Heath & Safety Executive (HSE), the Environment Agency (EA), and the Scottish Environmenta Protection Agency (SEPA). Unsurprisingy, the report recommended an increased roe and funding for the Environment Agency to monitor for contamination and poution and that the HSE test the integrity of the wes before aowing driing activity to commence. Once again, however, the report was anything but a red ight to UK shae gas exporation. It concuded: Hydrauic fracturing itsef does not pose a direct risk to water aquifers, provided that the we-casing is intact before this commences. Rather, any risks that do arise are reated to the integrity of the we, and are no different to issues encountered when exporing for hydrocarbons in conventiona geoogica formations. 3. Report commissioned by DECC on the Cuadria earthquakes, Apri The big events that piqued a ot of interest were the earthquakes that occurred in the Backpoo area during Cuadria s exporatory operations. Two minor earthquakes of magnitude 2.3 and magnitude 1.5 were recorded and Cuadria vounteered to suspend driing unti an investigation yieded the cause. The report, which was pubished in Apri 2012, recommended that Cuadria be aowed to resume driing, concuding: Based on the induced seismicity anaysis done by Cuadria and ourseves, together with the agreement to use more sensitive fracture monitoring equipment and a DECC agreed induced seismic protoco for future operations, the authors of this report see no reason why Cuadria Resources Ltd. shoud not be aowed to proceed with their shae gas exporation activities and recommend cautious continuation of hydrauic fracture operations at the Preese Ha site. In respect of future shae gas operations esewhere in the UK, we recommend that seismic hazards shoud be assessed prior to proceeding with these operations. This shoud incude: 1. Appropriate baseine seismic monitoring to estabish background seismicity in the area of interest. 2. Characterisation of any possibe active fauts in the region using a avaiabe geoogica and geophysica data. 3. Appication of suitabe ground motion prediction modes to assess the potentia impact of any induced earthquakes. 4. Roya Society and Roya Academy of Engineering, June In June 2012, a joint report from the Roya Society and the Roya Academy of Engineering was pubished. The report was by far the most prescriptive and endorsed much heavier reguation and oversight. It caed for mandatory through-ife Environmenta Risk Assessments and monitoring before, during and after operations. It argued that reguatory capacity may need to be increased. The report did not focus on whether fracking shoud go ahead or not, but rather ooked at what the process invoved. What was particuary interesting was the assessment of the negigibe risk of earthquakes compared with usua earthquake activity or seismicity in Britain: Natura seismicity in the UK is ow by word standards. On average, the UK experiences seismicity of magnitude 5 ML (fet by everyone nearby) every twenty years, and of magnitude 4 ML (fet by many peope) every three to four years. The UK has ived with seismicity 51 House of Commons Energy and Cimate Change Committee, Shae Gas: Government Response to the Committee's Fifth Report of Session , Juy Dr Christopher Green, Professor Peter Styes and Dr Brian Baptie, Preese Ha Shae Gas Fracturing: Review and Recommendations for Induced Seismic Mitigation, Apri The Roya Society and the Roya Academy of Engineering, Shae gas extraction in the UK: A review of hydrauic fracturing, June

42 Infrastructure for Business 2012 #3 induced by coa mining activities or the settement of abandoned mines for a ong time. British Geoogica Survey records indicate that coa mining-reated seismicity is generay of smaer magnitude than natura seismicity and no arger than 4 ML. Seismicity induced by hydrauic fracturing is ikey to be of even smaer magnitude. There is an emerging consensus that the magnitude of seismicity induced by hydrauic fracturing woud be no greater than 3 ML (fet by few peope and resuting in negigibe, if any, surface impacts. Recent seismicity induced by hydrauic fracturing in the UK was of magnitude 2.3 ML and 1.5 ML (unikey to be fet by anyone). The US and gobay Across the US, over 20,000 shae wes have been dried. At state eve, there have been a number of reports and penty of pubicity. Athough there have been probems at a sma number of wes, these are generay due to poor practice, rather than the nature of the fracking process itsef. The UK, of course, has the opportunity to earn from mistakes made in the US. A study by the Massachusetts Institute of Technoogy concuded: With over 20,000 shae wes dried in the ast 10 years, the environmenta record of shae gas deveopment is for the most part a good one one must recognize the inherent risks and the damage that can be caused by just one poor operation. 54 The reay big report the biggest and most comprehensive ever is being prepared the US Environmenta Protection Agency (EPA). The EPA s study of hydrauic fracturing and its potentia impact on drinking water resources started in Apri 2012 with a preiminary report due ater this year and a fina report in Meanwhie, a goba reguatory picture is emerging, with encouragement from the Internationa Energy Agency (IEA). The IEA s report, Goden Rues for a Goden Age of Gas, pubished earier this year, set out a range of measures to address the environmenta and socia impacts of shae gas. 56 The report found that the technoogies and know-how exist for unconventiona gas to be produced in a way that satisfactoriy meets these chaenges and summarised these goden rues as underining that: fu transparency, measuring and monitoring of environmenta impacts and engagement with oca communities are critica to addressing pubic concerns. Carefu choice of driing sites can reduce the above-ground impacts and most effectivey target the productive areas, whie minimising any risk of earthquakes or of fuids passing between geoogica strata. Leaks from wes into aquifers can be prevented by high standards of we design, construction and integrity testing. Rigorous assessment and monitoring of water requirements (for shae and tight gas), of the quaity of produced water (for coabed methane) and of waste water for a types of unconventiona gas can ensure informed and stringent decisions about water handing and disposa. Production-reated emissions of oca poutants and greenhouse-gas emissions can be reduced by investments to eiminate venting and faring during the wecompetion phase. The report estimated that appying the goden rues woud increase the cost of a typica shae-gas we by 7% and perhaps more for operations with mutipe wes. But it concuded that appying the goden rues woud aow for a continued goba expansion of gas suppy from unconventiona resources, with far-reaching consequences for goba energy markets. If, on the other hand, unconventiona gas is not deveoped at scae outside of the US, the report projected that energy-reated CO2 emissions woud actuay be sighty higher. 54 Massachusetts Institute of Technoogy, The Future of Natura Gas, US Environmenta Protection Agency, EPA s Study of Hydrauic Fracturing and Its Potentia Impact on Drinking Water Resources 56 Internationa Energy Agency, Goden Rues for a Goden Age of Gas,

43 Britain s shae gas potentia BOX 4.2 Usefu questions to consider when deaing with shae gas The Wiis report set out a ist of questions to consider when deaing with shae gas. 57 Generay speaking, the more of these questions with a yes answer, the safer the operation wi be: Webore integrity How far beow groundwater (aquifer) is the surface casing set, what is the shoe (rock ithoogy), has cement been circuated to surface and has the webore been pressured tested (FIT or Formation Integrity Test) before driing out? Based on the pressure gradient, ithoogy and driing conditions is there the need to set intermediate casing before penetrating the target/pay zone? Has a Cement Bond Log been run (with and without pressure) prior to driing out? Production Casing once at tota depth and production casing set, has cement been tied back (or circuated to surface) to the intermediate (or surface casing) and a Cement Bond Log been run (with and without pressure), and has a FIT been conducted? Pre-dri we data Has the webore design taken into consideration pre-existing driing data to estabish a pressure gradient (under-, norma or over-pressured), natura artesian water zones/fows, caving intervas, etc? Has the webore design been approved by an independent examiner? Have surface waters surrounding the we pad been tested for chemicas and methane gas pre-spud to estabish a natura baseine? Pre-hydrauic fracture simuation data Is there adequate subsurface/geophysica data to determine the eve of structura deformation to minimize the risk of triggering a seismic event on a pre-existing criticay stressed faut/faut-zone? Has a (traffic ight) system been put in pace to detect minimay -1.0 to 0 magnitude seismic events? Wi a microseismic mapping system be utiized to determine hydrauic fracture height growth; i.e., propagation of the fracture to intersect (contaminate) ground water? Driing Does the driing contractor have a genera and site-specific HSE pans/manua in pace? Does the driing contractor have a schedued Bowout Preventer testing schedue and is it adhered to? Do the cement surries meet or exceed recommended surry design standards for thickening time, setting time, compressive strength, free water, and fuid oss? Is there an active gas monitoring system with aarm/communication to the dri foor? Is the disposa of driing fuids and cuttings transported to a EA approved/certified tipping site? Is post-frac fow back water tested as it comes to surface (both by the Environment Agency and the operator)? Is the dri site underain by an impermeabe membrane and is there a spi response pan? Is there 24/365 site security? Post-frac fow back Wi fow back fuids be contained in exposion proof tankage? Wi gas fows be vented or fared using a fare stack at safe distances from the webore? 57 Wiis, A Fracked Up? Just how concerned shoud energy insurers be about hydrauic fracturing? Energy Market Review, Apri 2012, p

44 Infrastructure for Business 2012 #3 Insurers Looking at the views of insurers is crucia to understanding the environmenta risks of hydrauic fracturing, as their concusions wi affect their own profits. A recent report from the major insurance brokerage Wiis found that, if best practice is foowed, there is no reason for insurers to deny cover. The report concuded: Much that is written about the shae gas industry shoud be taken, in the time honoured od Engish phrase, with a pinch of sat. Whie hydrauic fracking operations wi continue to pose a measure of poution and contamination risk just ike the upstream oi and gas industry or any other industria process in genera the extent of the probem has, in some quarters of the media at east, perhaps been bown somewhat out of proportion. There can be no doubt that reguators in the US, Europe and other domicies wi have their work cut out to keep abreast of deveopments in best practice in this rapidy expanding industry. The debate over whether further reguation of the shae gas industry wi be a good or a bad thing is perhaps best eft to the poiticians; perhaps the broking community shoud instead turn its attention to paying our part in ensuring that our cients risks are presented to the insurance market in the best possibe ight. Our study has shown that cover is much more ikey to be provided to those buyers who can demonstrate that they have competey bought into the highest standards of the industry. Indeed, the contrast between contractors who do indeed adhere to these standards and those who do not is aready very pronounced. 58 Deveopments Hydrauic fracturing is not standing sti. As an extraction technique, it is constanty improving. For exampe, Chimera Energy Corporation of Houston, Texas, is the atest company to announce that it is icensing a new method for extracting oi and gas from shae fieds that doesn t use water. 59 Wateress fracking soves the issue of water suppies, and reduces the risk of ground water contamination. The technoogy has great potentia. CONCLUSIONS The extraction, transportation and combustion of hydrocarbons are not without risk. The oi tanker spi at Miford Haven in 1996 and the huge BP Guf of Mexico spi in 2010 are good exampes of major disasters from which the environment sowy recovers. Hydrauic fracturing, as this chapter has shown, is aso not without risk. But as the expert reports have made cear, the risks can be managed. The risks of hydrauic fracturing shoud be paced aongside those of conventiona hydrocarbon extraction, not in a cass of their own. The foowing extracts from an ora evidence session at the Energy and Cimate Change Seect Committee sum up the issue we: 60 Professor Richard Seey: Chairman, can I put this into perspective? There is a ine of oi and gas fieds around the Wead paraeing the North Down to the South Downs. There are fieds there that have been producing oi and gas for 100 years. Not many peope know that. Q27 Dr Lee: What from shae gas? Professor Richard Seey: No, this is conventiona petroeum Wiis, A Fracked Up? Just how concerned shoud energy insurers be about hydrauic fracturing? Energy Market Review, Apri 2012, p Gizmag, 31 Juy Professor Richard Seey, Petroeum Geoogist, Imperia Coege London and Nige Smith, Geophysicist, British Geoogica Survey, Ora evidence to the Energy and Cimate Change Seect Committee, 9 February

45 Britain s shae gas potentia Nige Smith: Aso it is true in the East Midands as we. I mean, that heped in the Second Word War effort. Does anybody know there was an oi fied at Formby? These things were deveoped. BP have done a briiant job at Wytch Farm driing out ateray, even offshore, yet, quite a few peope in the genera pubic do not even know it is going on. Q28 Dr Lee: In terms of water contamination, how many tests have been done in those areas since? Nige Smith: I do not know of any water contamination in any of these onshore fieds. Q29 Dr Lee: If you are not ooking, forgive me, you are not going to find it, are you? Nige Smith: No, but it woud be reported. You cannot keep anything quiet these days, I woud say. The oca authority woud find out. Q59 Dan Byes:...Overa, is it a fair summary of your view that there is currenty no rea evidence that shae gas is any more dangerous than any other sort of hydrocarbon or exporation. It is another source of energy to be tapped for the UK when the economics say that it is right to do so, based on price and cost? Is that a fair assessment? Nige Smith: Yes, I agree. If hydrauic fracturing is no more risky than conventiona hydrocarbon extraction, then there can be net benefits to the environment from using unconventiona gas in pace of coa in eectricity generation and oi in road transport. 45

46 Infrastructure for Business 2012 #3 Concusions Shae gas deveopment does not magicay sove a the UK s energy issues. North Sea production wi sti fa, the renewabes programme wi sti increase energy prices for industry, and coa and nucear wi sti decine in capacity. But what shae gas deveopment can do is mitigate the impact of these trends. Shae gas deveopment can counter faing North Sea production, hating the increase in gas imports; UK shae gas can offer a cheap and reiabe energy source for industry, potentiay reducing the number of job osses; It can aso hep to reduce price rises for consumers, reducing the number of peope in fue poverty; Expanding renewabes creates jobs directy, and so can deveoping shae gas, especiay in ess affuent parts of the country; With coa and nucear set to decine in importance, at east before new nucear power stations come on stream, new gas pants powered by UK shae can hep to fi this eectricity generation gap, as we as acting as a vita back-up to wind and other renewabes. A mix of power sources is vita, and domestic shae gas is unikey to account for a majority of the UK s eectricity generation, or even of its gas usage. But it coud and shoud pay an important roe. In the US, shae gas accounts for around a fifth of overa gas demand, and yet that has been sufficient to revoutionise the gas market, cutting costs for industry and repacing coa in eectricity generation. The same economic and environmenta benefits coud be reaised in the UK, if we aow shae deveopment to happen. 46

47 Britain s shae gas potentia About the Infrastructure for Business series The UK s infrastructure was once the best in the word. Great innovators ike Brune and Stephenson were pioneers of the raiway, which revoutionised the way peope and goods moved around the country. Faster, better and cheaper infrastructure heped fue the rapid growth of the industria revoution, giving businesses the patform they needed to thrive at home and export to the word. In the ast century, Britain continued to deveop new forms of trave, eading the way in aviation and buiding an extensive motorway system. The UK sti benefits from its infrastructure inheritance, and parts of our network function reativey we. But we have ost our ead, as we try to squeeze too many onto too itte. Our roads are congested, many of our trains are standing room ony, and panes are forced to circe in stacks before getting a anding sot at our main airport. High taxes on driving and fying, and big rai fare increases, have made getting around more expensive. And there are risks to the security of our energy suppy, as repacements for our ageing coa and nucear power stations are not buit quicky enough and environmenta reguations and taxes, which shoud be better focused on reducing emissions in the cheapest way, push up the cost of powering the country. Infrastructure for Business is a new series of papers ooking at the key energy, transport and technoogy infrastructure deveopments that woud hep the UK regain competitiveness and encourage a thriving private sector. We need to put Britain back in the ead again to hep our firms compete in the word. For more information, pease emai corin.tayor@iod.com 47