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FT Warning: Green Energy Mess Threatens UK Shale Bonanza

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Nick Butler, Financial Times

UK shale gas, even if it is much cheaper than green energy, could go unproduced while consumers pay prices which make the UK an uncompetitive location for industries for which energy costs matter.

When it comes to energy, the UK is a fortunate country. First coal, then oil and gas in the North Sea, and now shale gas. It is still too early to say whether shale gas represents anything close to the wealth creation opportunity which came from the North Sea. But it is becoming clearer that the resources base is huge. The report published this week covered just part of the North and Midlands and came up with a central estimate of 1,300 trillion cubic feet. We have to wait, for reasons which are not completely clear, to see the estimates for the rest of the UK.

What is very reminiscent of the story of North Sea oil and gas development is the mood of disbelief and denial stoked up by those who have something to lose from change. Older readers will remember town gas and the gasometers which were to be found in every major town. For years after the first gas field was found forty miles off Grimsby in September in 1965 there was opposition to development. The waters of the North Sea were too deep, the rigs would sink. The weather conditions were too harsh. Britain didn’t have offshore skills, there would be untold pollution, and the gas would be too volatile to be supplied through a grid.

Even in those golden days before the lobbying industry was created the negative voices were very loud. And very wrong. North Sea turned out to be cheaper, cleaner and more efficient as a source of power than town gas produced from coal with all its nasty by-products including carbon monoxide. Supplies also turned out to be much more plentiful than originally predicted. The North Sea gas and oil industry continues to thrive even though production has peaked and one recent forecast suggest that it could live on for another nine decades.

I hope that Professor Alex Kemp will produce a popular version of his magisterial official history of North Sea oil and gas. The story is powerful and instructive even if the book at £ 100 is bizarrely priced beyond the reach of ordinary readers.

The problem for the Government is not the noisy opposition to shale gas but the fact that development on any serious scale will undermine the logic, if that is the right word, of the jumbled mess which currently passes for an energy policy. At one and the same time we have the real risk of a short term shortage – with Ofgem warning last week that some form of rationing may be necessary because of Government indecision over the terms for new suppliers – and simultaneously an emerging longer term problem of being locked into expensive supply sources just as shale gas becomes available.

As the Director of the British Geological Survey rightly said last week we don’t know how much of the resource base can be developed. That will require drilling and appraisal work which has hardly begun. But with the technology of fracking, water management and horizontal drilling all advancing the odds are that shale gas can be developed commercially in the UK. That is Centrica’s judgment in buying a stake in Cuadrilla and I agree with them. But there is a serious risk that shale gas could be left in ground because prior commitments to other sources of power generation could make shale surplus to requirements.

Regardless of the relative prices of production, once the Government has signed contracts which guarantee a return to investors in nuclear and renewables such as offshore wind there will be more than enough capacity to supply projected electricity demand growth. In part this policy is driven by legal commitments on emissions reductions which take no account of the costs involved. So shale gas even if it is materially cheaper could go unproduced while consumers pay prices which make the UK an uncompetitive location for industries for which energy costs matter.

History provides one gleam of optimism. In the 60s and 70s successive Governments ignored the negative voices of those who didn’t want the North Sea developed. Work went on, and accelerated after the 1973 oil crisis. The result has been that for the last three decades the North Sea has produced tens of thousands of jobs and billions of revenue as well as secure and reliable sources of supply. I hope the current Government has the nerve to do the same.

Financial Times, 30 June 2013