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Shale Shocked: UK Energy Sector Set For Shakeup

The energy sector in the U.K. could be set for a major shakeup if the first significant shale gas discovery in the north of England is the start of bigger things to come.

A boom in shale gas production has already confounded energy markets in the U.S., turning a country that was once doomed to growing import dependence into a potential exporter.

“If results like Cuadrilla’s keep coming in, shale gas could well prove to be the energy game-changer in Europe that it has been in the U.S.,” said Jonathan Robinson, energy consultant at Frost and Sullivan. “This would have far reaching implications.”

Drilling company Cuadrilla estimates shale rocks under Lancashire in the North of England contain 200 trillion cubic feet of gas. Only 10-20% of this is typically recoverable, but even that would be a considerable volume. The U.K. consumes around 3.3 trillion cubic feet of natural gas a year and its proven reserve base is just 9 trillion cubic feet, according to BP data.

This is only a fraction of the 84 trillion cubic feet of recoverable reserves contained in just one of the shale basins in the U.S.—the Marcellus. So the U.K. is a long way behind, but it’s worth considering how a shale gas revolution might change the country’s energy landscape.

A sudden shift in import dependence is the most likely outcome.

“The U.K.’s gas reserves have been declining for some years now and the country is becoming increasing dependent on imports,” said Robinson. “This find means that U.K. reserves have technically now increased by 400%.”

In 2010, the U.K. was Europe’s second largest importer of liquefied natural gas from distant locations like West Africa and the Middle East. It also imports natural gas by pipeline from Europe, paying high prices which are indexed to the cost of oil. The prices of both these import energy sources are forecast to remain high, meaning shale gas could potentially offer a lower cost alternative.

If shale gas were to displace more expensive imports, the price of electricity in the U.K. could also fall. This could have a significant impact on the two main planks of the country’s plan to decarbonize its electricity–nuclear and renewables.

The U.K. has ambitious plans to cuts its carbon emissions by 80% by 2050. This requires many new wind farms, wave power stations and nuclear reactors to be built.

Onshore wind power is already well established in the country, but hitting emissions targets requires major expansion of offshore wind, wave and tidal power, all of which have struggled to compete on cost with electricity generated from fossil fuels, despite subsidies.

German utility RWE withdrew funding from the world’s largest planned wave power project in Scotland earlier this year. The U.K.’s largest offshore wind project, the London Array, has taken several years to get off the drawing board.

The hoped-for renaissance in nuclear power, with all its risks and high up front costs, has also struggled to get going. Scottish and Southern Energy just became the latest in a string of utilities to contemplate abandoning plans to build new nuclear power stations in the U.K.

This has forced the U.K. government to promise a subsidy in the form of a guaranteed minimum price for electricity from new reactors.

A shale gas revolution could undermine both these plans. If natural gas were to be cheaper and more abundant than expected in the next couple of decades, the relative cost to consumers of subsidizing nuclear and renewable electricity would soar. Not something the public would accept easily as the years of austerity grind on.

No wonder some environmental groups were reported to be “dismayed” by Cuadrilla’s discovery.

Of course, none of this is certain. Cuadrilla’s discovery could prove to be a one off. Environmental fears could turn the British public against shale gas, as it has in some parts of the U.S. But established assumptions about Britain’s energy future are looking a lot shakier than they did yesterday.

The Wall Street Journal, 22 September 2011