Forget the Energy Bill; the announcement that exploration for shale gas can now resume is the big energy story of 2012. In Lancashire alone, there is enough shale gas in the ground to meet Britain’s needs for decades. But the big question is what proportion can be developed at a reasonable cost. Yesterday’s decision means that we can now find out.
Even on pretty cautious assumptions, the benefits of a new source of domestic gas could be immense. There are three principal dividends.
Firstly, economic. We estimate that developing a shale gas industry could provide 35,000 jobs, many of them highly-skilled and in parts of the country that need them most. Shale gas will also generate tax revenue and improve the UK’s balance of payments. According to the Office for Budget Responsibility, North Sea oil and gas revenue will fall from over £11bn last year to less than £5bn in 2015. A growing shale sector could help to fill that hole. And a recent report from the Pöyry energy consultancy found that the UK’s trade balance could improve by over £3bn a year through lower gas imports.
Secondly, environmental. Gas is the ideal fuel to provide back-up electricity to intermittent renewables like wind and solar. The development of cheap UK gas will help to accelerate the move away from coal, reducing carbon emissions and improving air quality. Using natural gas in road transport is another major opportunity, and could complement electric and hybrid cars in cutting the thousands of deaths each year from polluted streets.
Thirdly, security. Britain currently imports around half of its gas, and falling North Sea production means that imports are projected to reach three quarters of usage by 2030. UK shale gas can halt this rise. Shale developments around the world are also likely to lead to the link between oil and gas prices breaking down, as has happened in the US. But transporting natural gas by sea or long-distance pipeline can be expensive. Indigenous production will remain important.
The official reports have concluded that the hydraulic fracturing process is safe if conducted properly. But strong regulation is important to ensure that no corners are cut. As energy secretary Ed Davey pointed out yesterday, the seismic controls placed on shale gas fracking are more stringent than those for geothermal energy, construction and quarrying projects. And with the Lancashire shale many times thicker than the leading plays in the US, considerably more gas can be extracted from each well. In Britain, thousands of wells dotting the landscape are therefore unlikely to be needed.
As in so many cases, the shale revolution began in the US. From a standing start, shale now accounts for around a quarter of US natural gas production. Natural gas prices have tumbled to around a third of those in Britain, leading to a manufacturing renaissance as industry returns from the Far East and relocates from Europe. Cheap gas is increasingly displacing coal in electricity generation, meaning that carbon emissions have fallen more quickly than in any other country over the last few years. And with an accompanying boom in shale oil production, North America is on a rapid path towards energy independence.
Other countries, particularly the major coal users, are racing to catch up. China has set out ambitious plans to produce up to 100bn cubic metres of shale gas annually by 2020 – about as much as the UK’s entire consumption. South Africa removed a ban on hydraulic fracturing in September. Poland will have 34 exploration wells completed by the end of this year. And India will unveil a shale gas exploration regime over the next few weeks.
Globally, the International Energy Agency believes that extensive shale developments outside the US will lead to natural gas and renewables going hand-in-hand as the major energy growth stories of the next 25 years, with each energy source accounting for around a third of global energy demand growth through 2035.
Less than 40 per cent of UK gas demand is for electricity, and so however successful we are at decarbonising the power sector, gas will still be needed in large quantities for heating, industry and potentially road transport for several decades to come. So Britain faces a choice between ever-rising imports and developing a great source that is under our feet. Fortunately, it looks like we’ve made the right one.
Corin Taylor is a senior economic adviser at the Institute of Directors (www.iod.com).