The Economic Impact on UK Energy Policy of Shale Gas and Oil – House Of Lords Report

  • Date: 08/05/14
  • Economic Affairs Committee, House of Lords

The UK’s opportunity

The shale gas revolution in the United States has illustrated the economic opportunity offered to the United Kingdom by its own shale gas resources—if they can be developed successfully. We strongly support the Government in their objective to exploit these resources but believe they need to do much more to encourage exploration and get development moving.

The US experience

In the US, new production techniques using horizontal drilling and hydraulic fracturing (fracking) to release gas from shale rocks have brought abundant and growing new supplies of gas to market in a short time. Shale oil production is also growing rapidly. The US energy mix has changed fast.

The impact of shale gas on the US economy is already dramatic. Gas prices have fallen to about one-third of the UK price level. Cheap gas has displaced coal from electricity generation. Plans for new nuclear generating capacity in the US are on hold. Investment is rising fast in energy intensive industries and petrochemicals, since cheap shale gas makes “reshoring” of overseas plants economic.

The global implications

The effects of the US revolution are already being felt globally. The UK and Germany, for instance, are generating more electricity from US coal displaced by shale gas. North America is expected soon to become self-sufficient in energy and a large exporter of shale gas in the form of liquefied natural gas (LNG). Many other countries have also been alerted to the economic potential of their own shale resources and expect to develop them.

Patterns of global trade in energy seem likely to change, reducing dependence on the Middle East and Russia and promoting energy security through greater diversity of supply. The impact on prices is harder to predict. Gas prices, unlike oil prices, are regional rather than global. World price cuts on the US scale are unlikely. But abundant new shale gas supplies are bound to have a restraining effect on prices.

Economic impact of the UK’s shale gas

Exploration and appraisal are urgently needed to establish the economic potential of the UK’s shale gas and oil resource. Shale gas is not the answer to all the energy policy challenges facing the UK. Substantial economic benefits would however flow from successful development. It would reduce imports and help maintain security of supply. This would be especially valuable given the continuing fall in output from the North Sea and Europe’s reliance on Russia, its biggest gas supplier, highlighted by the crisis in Ukraine.

Development of shale gas and oil in the UK would also generate direct employment, particularly in the North of England and be a significant benefit to the balance of payments and the Exchequer. UK produced shale gas is also likely to be cheaper than imported gas from the Middle East or elsewhere which carries the extra costs of transport and processing. If the UK does not develop its shale resources in a timely fashion, it runs a serious risk of losing the energy intensive and petrochemical industries which depend on competitively-priced energy and raw materials and which employ around 250,000 people.

The UK hesitates

The UK will certainly feel the impact of the shale gas revolution. It has its own shale gas resource. The question is whether the UK is to be a producer or simply an importer. The Government are committed to development of British shale. The Prime Minister and Chancellor of the Exchequer have announced measures to encourage it. Public concern about possible environmental and health risks, most of it unfounded, together with regulatory uncertainty, have so far delayed the exploration and appraisal needed to assess the UK’s economically recoverable onshore shale gas reserves.

Public concerns in the UK

Development of shale gas in the UK cannot go ahead without public acceptance. Public concerns must be taken seriously and every possible effort made to reduce or eliminate risk and provide reassurance. We consider that the risks to human health and the environment are low if shale development is properly regulated, with the improvements we recommend. We welcome the community benefit schemes announced by the industry which, if well-targeted, could play a role in winning public acceptance. We also recommend that the industry improves its presentation and communication skills and puts across more convincingly the economic and employment gains shale development can bring to areas like Lancashire.

Regulation in the UK

The UK’s regulatory framework for oil and gas exploration and production is highly regarded internationally. It is also dauntingly complex and untested by large-scale onshore development of shale. Ministers and regulators have taken measures to adapt the system. But many complexities remain, with responsibilities divided between different agencies. Industry is uncertain how the rules would apply in practice. Since the lifting in 2012 of a moratorium on hydraulic fracturing, we understand (May 2014) that the Environment Agency has not received or approved any applications for the necessary permits. There is no reason why effective regulation should not be transparent and speedy as well as rigorous. Delay is not only costly and wasteful, it can also drive investors elsewhere.

The Government need to give a stronger lead

We strongly believe that the UK should seize the opportunity offered by its shale gas resource. It could bring regional economic growth and employment, reduce dependence on imports and improve security of supply, help guard against energy shortage in future and perhaps cut prices. We are concerned that regulatory uncertainty is blocking development. The Government should make a sustained and concerted effort to get shale development moving within a robust and responsive regulatory framework. This effort needs to be directed from the top.

We recommend that:

·  the Prime Minister should establish a new Committee or Sub-Committee of the Cabinet, chaired by the Chancellor, dedicated to ensuring that his commitment to “go all out for shale” is matched by action;

·  the Government should streamline and improve the unwieldy regulatory structure to make it effective as well as rigorous;

·  the Government should take the lead in setting out the economic benefits of shale and in reassuring the public that with proper regulation environmental and health risks of developing it are low;

·  the industry should engage better with local communities, building on its community benefit schemes, ensuring that its plans are clear and well-explained, meticulously observing regulations and planning conditions and generally being a good neighbour;

·  exploration, appraisal and then development of the United Kingdom’s substantial shale gas and oil resources should be recognised as an urgent national priority.

Full report