If you’ve been following the news recently you’ll have picked up some starkly conflicting views about the potential for shale gas to transform the UK energy market.
Fierce debate has been sparked by the shale gas ‘boom’ currently being enjoyed in the US, where shale gas has been extracted in such abundance that it produced a glut, bringing down gas prices in the US.
US shale gas had a welcome side-effect on US carbon emissions too as cheaper gas has displaced coal-fired electricity generation, lowering the carbon intensity of the US power sector. However, this also caused emissions to rise elsewhere as other countries, including the UK, took advantage of the cheap coal that would have otherwise been used in the US.
The shale gas revolution in the US has been a ‘game-changer’ and the question on everyone’s lips is: can it be replicated here in the UK?
Many commentators have argued that it can. But the debate around shale gas here has been clouded by the hyperbole that surrounds it. In my view, it is very unlikely, if not impossible, for shale gas to have the same impact on prices in the UK as it has in the US. Here are four reasons why:
1) The US gas market is ‘islanded’
Two large oceans stand between the US and other energy markets. This combined with a historical political desire for the US to retain its energy independence, means that the US gas market has effectively been de-linked from other markets or ‘islanded’, with no export route to more expensive Asian and European markets for its domestically produced gas. (This may change in the future, though, as it looks to develop its export facilities to cash in on the high market price in the Asian markets.)
This situation has been great for US gas consumers who have seen prices plummet, but not so for the producers themselves or the US public purse. This would certainly not be the case in the UK, where any gas produced would go to the highest bidder at home or abroad as the UK gas market is heavily linked to European and international gas markets for both imports and exports. It would therefore not create an oversupplied market in the UK as it has in the US.
2) Extraction won’t be easy (or cheap)
I’m no geologist, but it appears that the available reserves in the UK are not as easily accessible as they are in the US. The shale gas extracted in the US is found at shallower depths, making it easier and, importantly, cheaper to extract.
Numerous conflicting studies have been published on the potential for extraction, but, whichever way you look at it, shale gas will not be any cheaper to extract and transport than conventional gas, so it is unlikely to bring down prices.
3) Ownership of mineral rights
In the US, landowners own the mineral rights to their own land (ie the produce from underground belongs to them), which encourages them to cash in with shale operators. This isn’t the case in the UK, where the Crown (whose revenues go to Her Majesty’s Treasury) holds the rights to gas underground.
4) Population density and local opposition
In very simple terms, the UK is more densely populated than the US, meaning there are more people per square mile and therefore far greater likelihood of local opposition to drilling and extraction.
Future role of gas
Whatever your view on shale gas, it’s clear that gas of any origin has an important role to play in the UK energy system for some time to come. In domestic use, gas will continue to be the cheapest form of space and water heating in the coming years, although electrification of heat is making inroads with potential for wider system benefits. For electricity, as more renewables come onto the system, there will be an increasing need for flexible generation to balance their variability and gas can offer that while reducing carbon emissions from coal.
As the UK becomes increasingly exposed to volatile international markets by importing an ever-increasing proportion of its gas, clearly shale gas produced in significant volumes (anywhere in the world) could have an depressionary impact on the UK gas market.
However, in my view, UK shale gas will not be accessible in significant enough volumes to change market dynamics. Indeed, worldwide, shale gas is more likely to delay marginal conventional projects from being developed, rather than replicating the situation in the US.
So is shale a 'game-changer' in the UK market?
The attention UK shale gas has been given in media and political circles is, unfortunately, disproportionate to the likely extent and immediacy of its impact. With Ofgem warning of tightening capacity margins and even blackouts in the next few years, the UK has some shorter-term priorities to deal with first.
The reality is that impacts of shale gas extraction in the UK are extremely unlikely to be of the scale seen in the US, and domestically produced shale gas certainly is not a ‘game-changer’ for the UK – at least not for the foreseeable future or in current market conditions.
My question for policy-makers would be, if shale gas extraction is such an attractive prospect, why does it need a favourable tax regime? The shale gas under our feet isn’t going anywhere, so there isn’t any hurry to try to extract it for use now.