Despite falling prices the UK shale gas industry has reasons
to be optimistic.
Tony Smith, Commercial Strategy Manager at Peel Gas and Oil,
discusses why and argues that attention should be focused on which shale gas
the UK should consume.
The decline in crude oil prices over the past year or so has
been front page news with crude oil falling from over $100/bbl in 2014 to
around $30/bbl now. The reasons for this are complex but include suggestions of
OPEC maintaining high levels of production to counteract the huge increase in
USA shale oil. At the same time global demand has fallen, driven by reduced
rates of Chinese GDP growth and Iranian and other ‘new’ oil has come to
market. Industry body Oil and Gas UK
recently warned that if the oil price remains at about $30 for the rest of
2016, more than 40% of all UK Continental Shelf (UKCS) oil fields were likely
to be operating at a loss - deterring further exploration and investment.
But what does this mean for natural gas generally and UK
shale gas specifically? Certainly the Government remains clear we need to have
more secure, home-grown energy supplies in our mix. Gas – the cleanest fossil
fuel – still meets a third of our energy demand and we will need it for many years
to come not only for heating and cooking but also for electricity generation
and the petrochemical industry. Whereas
crude oil prices have dropped to around 35% of the October 2014 price, the
decline in UK gas prices has been to just over 50%, a small but significant
difference. A key factor in this
difference is that whereas previously the UK gas process was linked heavily to
oil prices, the emergence of the ‘gas to gas’ traded markets at the National
Balancing Point (NBP) has all but broken this link.
In order to understand the price dynamics of UK gas, and
therefore the investment environment for UK shale gas, we also have to dig a
bit deeper into the overall supply and demand outlook. On the supply side, the
demise of UKCS gas production from supplying all of UK demand in 2005 to
currently supplying around a half is well known. In 2015 UKCS gas production was actually
higher than 2014, but this is probably only a temporary blip in the decline of
UK offshore gas production. The supply gap for gas has been met by Liquefied
Natural Gas (LNG) and by pipeline imports:
LNG terminals located at the Isle of Grain near London and
Milford Haven in Wales receive liquefied gas which has been transported
primarily from Qatar. LNG imports into
the UK are nothing new, in the 1960’s the UK imported LNG from Algeria before
the onset of the North Sea. What is new
is the plethora of - and soon to be operational - LNG Liquefaction terminals
across the World; from Australia to Norway, from Trinidad to Mozambique, from
Russia to the USA, there is now a significant market in LNG flows and trading.
The UK has for many years been connected to Europe by
pipeline for both import and export purposes. Pipelines from Norway, Belgium
and the Netherlands connect the UK market to continental Europe. The advent of
the Nordstream pipeline from Russia to Germany has recently increased UK gas
connectivity for Russian gas via Holland and further expansion is planned.
History shows that geopolitics and economics have a part to
play in energy strategy not least due to the requirement for the UK to have an
acceptable gas supply security position. Shale gas represents an exciting new
potential energy resource for the UK, and could play an important part in
providing that energy security. The 2013 British Geological Survey (BGS)
independent study estimated in northern England alone there is 1,329 trillion
cubic feet (tcf) of shale gas in place. Assuming only 5per cent of this
resource was recoverable that’s still 66 tcf. The UK consumes less than 3 tcf
per annum, so in simple terms that’s 22 years of supply.
As well as supplying the UK with ‘home grown’ gas, the
emerging industry would:
Act as a bridging fuel to a more decarbonised UK
energy supply replacing coal in the short to mid-term and acting as a source of
peak supply during peak demand periods.
Facilitate the development of jobs to support
the emerging industry; economic studies suggest over 60,000 jobs could be
created and the industry could be worth billions to the UK economy.
Replace imported gas at the margin with
significant tax benefits to the UK. The UK Treasury will ultimately derive tax
benefits comprising ring fence corporation tax and supplementary charge neither
of which are derived from imported gas.
Provide local community benefits through
retention of business rates and through schemes for production related payments
to local communities and landowners.
UK shale gas development is in the
exploration stage; to date the UK still has not drilled, fractured and flow
tested a horizontal shale gas well. In the meantime the emergence of USA shale
gas (methane) exports at Cheniere’s Sabine Pass may well see American derived
shale gas being consumed in the UK in 2016. So the question may evolve from
‘should the UK consume shale gas?’ to ‘which shale gas should the UK consume?’
There are lots of reasons to be
optimistic about shale gas, but of course there are significant barriers to
overcome. Not least the Social Licence to Operate, including concerns
over the environmental risks of hydraulic fracturing. These issues must be
managed through adoption of industry best practice, the application of
appropriate regulation, industry transparency and effective communication.
UK gas prices may have declined significantly over the past year or so
but all credible analysis shows gas to be critically important on the road to a
more decarbonised UK energy supply. The next few years will define
whether UK shale gas can stall the progress of imported gas to supply the
nation’s electricity, heating and cooking and petrochemical needs. One thing is
for sure though; there will have to be gas.