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Which shale gas should the UK consume?

14 March 2016

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.

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