UK may crack its energy dilemma

Demonstrators call for a ban on exploration and development of shale gas and coal bed methane after fracking won UK government backing. John Stillwell / AP Photo

Britain could be on the cusp of a new boom along the lines of the North Sea oil bonanza of the past few decades. But fears over extracting the country's potentially huge reserves of shale gas threaten development.

Britain could be on the verge of a second energy boom - another North Sea oil-style bonanza - but the country is strangely reluctant to take the plunge.

The Institute of Directors (IoD) organisation in the United Kingdom released a report last month - Getting shale gas working - which said the UK's shale gas reserves could be "a new North Sea" boom for Britain "creating tens of thousands of jobs" in exploring and recovering the unconventional fuel.

The exponents of shale gas say the UK faces three long-term energy problems shale gas could help to resolve: an energy security problem; a tax problem; and a jobs problem.

The IoD claims a new shale gas industry could create 74,000 jobs and provide, ultimately, a third of the UK's energy needs, drastically reducing the country's growing dependency on gas imports.

Significantly, the exploitation of shale gas could create jobs in parts of the country that need them most - especially the north east, where unemployment is as high as 15 per cent compared with 9 per cent in the south east. And it could eventually generate a significant tax revenue, just as income from North Sea oil and gas - which averages £6.7 billion (Dh37.39bn) a year declines.

The hopes for shale gas come as concerns in the City of London over the direction of energy policy are accelerating. One respected energy analyst, Peter Atherton, at Liberum Capital, recently warned that "moving from a largely fossil-fuel-based power system to one dominated by renewables and nuclear in just a decade and a half, whilst keeping the lights on and consumer bills affordable, may simply be impossible".

He fears investors may refuse to fund Britain's £430bn programme of decarbonisation and, in a worst-case scenario, that the government may be forced to re-nationalise companies in the energy sector.

Against this backdrop, the IoD report, sponsored by Cuadrilla, the biggest company in the UK fracking sector, says British shale production could peak at 1,121 billion cubic feet per year, based on exploration companies' estimates of the size of recoverable resources.

With UK gas demand predicted to remain more or less flat for the next two decades - it was 3,055bn cu ft in 2011 - shale could potentially meet about one-third of annual demand.

At that level of production it could help reduce import dependency from 76 to 37 per cent by 2030. The cost of net gas imports in 2030 could fall from £15.6bn to £7.5bn (at last year's prices), the report says.

At the same time, shale gas could generate significant tax revenues and make up for a decline in receipts from North Sea production.

The UK wants to follow the example of the US, where shale gas discoveries have led to gas prices falling by 75 per cent - to about a third of Europe's - and created tens of thousands of jobs in little more than six years. The shale gas boom there has been credited with kick-starting the US's economy and it is said the country could now be self-sufficient in energy by 2030.

Experts believe Britain may well have comparable shale resources to the United States. However, Frank Chapman, the former chief executive of BG Group, a major oil and gas producer, says the UK is about 10 years behind the US in exploring for and exploiting shale gas potential.

"Whether it's economic, whether it changes the cost of gas to consumers, that's difficult to say."

One of the problems is the UK is quite a different market to the US. America has considerable gas infrastructure already in place and a high demand for gas from consuming industries situated close to the resource bases.

That means sites originally built to import liquefied natural gas (LNG) can be easily converted to handle shale gas. These factors do not apply in Britain, where the industry is still in its infancy.

UK policymakers warned last month that the government should not bet on a replay of the US shale gas revolution in Britain.

The energy and climate change select committee says it is "by no means certain" exploiting UK shale reserves would lower energy prices.

Its report on shale gas says it would be wrong for the government to base policy decisions at this stage on the assumption gas prices will fall - adding that in fact gas prices could rise in the future.

The report recommends the government "should now encourage companies to get on and drill" so Britain can work out how much shale gas the country has and whether it can be extracted.

Meanwhile, the UK prime minister David Cameron recently told a US business audience that Britain looked to the US with some envy.

"Frankly, I am pretty jealous of your fracking success here in the US," he told them.

At a European Union energy summit last month, Mr Cameron said Europe could not afford to be left behind, as the US gained the advantage.

George Osborne, the chancellor of the exchequer, or finance minister, is expected to announce new tax breaks for shale gas in a few weeks time. At the same time, the British Geological Survey, which was commissioned to estimate UK gas reserves, is set to publish a new, higher estimate.

Yet there remains reluctance on the part of the government to push forward this potential energy game-changer. It has not accelerated plans to drill for gas, the only realistic way to find out what is available, and in 2011 the government imposed an 18-month moratorium on fracking - the process whereby water, sand and chemicals are pumped underground at high pressure to crack rock and release the shale gas trapped inside - which it lifted in December.

Since that ended, Cuadrilla - the only company that has drilled in the UK - has suffered further delays due to environmental obstacles and the department of energy and climate change that has consistently talked down the industry's prospects.

And the Confederation of British Industry (CBI), which represents Britain's biggest companies, also seems wary of banking on a shale gas bonanza.

"Shale gas should be part of a balanced mix of energy policy -but volumes mean it won't be a game-changer as in the US," John Cridland, the CBI director general, recently tweeted.

One of the reasons the government is reluctant to push forward is that opposition from environmental campaigners in the UK, and from local residents, is strong.

Also, many of the areas where shale gas has been discovered are rural constituencies, with sitting Conservative members of parliament - people whom the ruling coalition cannot afford to alienate. While England's largest known shale reserve is at Bowland in Lancashire, there is also the shale-rich Weald Basin that stretches across the south-east.

Many people are concerned about the dangers of fracking. The shale gas lobby has argued forcefully the process is safe if wells are constructed properly and has denied fracking can contaminate groundwater.

Opponents of shale gas also argue the country should be developing genuinely renewable energy, rather than merely hunting for alternative fossil fuels.

Another reason a shale gas revolution would be difficult in the UK is that all mineral rights in Britain belong to the Crown rather than private or corporate owners as in the US.

Whereas US landowners can demand royalties when companies drill on their land, in Britain all the benefits accrue to companies and the government.

Consequently, firms are likely to have to offer greater compensation to local residents for their operations, making it more costly to explore.

Shale gasfields may yet prove to be the new North Sea for the UK but there is a long way to go before the gas starts flowing.

The doubters are out there in force but the very really threat that the lights may go out might yet prove to be the most convincing argument for the exploration of this fuel's potential.