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Why fracking for shale gas won’t bring Britons cheap energy bills

Debate over the development of shale gas in the UK and its potential benefits has intensified in recent weeks as the prime minister visited a fracking site in Lincolnshire to make announcements over how…

Burning issue. ClawzCTR

Debate over the development of shale gas in the UK and its potential benefits has intensified in recent weeks as the prime minister visited a fracking site in Lincolnshire to make announcements over how more money from any gas produced should go back to local communities.

Media reports regularly claim that shale gas will lower domestic energy bills, linking shale gas to another political hot potato – energy’s role in what the Labour party has called the “biggest cost-of-living crisis in a generation”. Those who say bills will fall in the UK look to the US, where shale gas production has lowered gas prices and supported an economic recovery through cheap energy. We can have that here too, goes the argument.

Well, the British experience is unlikely to follow a similar path to that in the US but it’s still attractive for the economy to develop shale gas if it can be done commercially and with the right environmental and social safeguards. These are challenging hurdles to overcome, however.

The US shale gas “revolution” has been impressive in many ways. Back in June 2008, US gas prices peaked at more than US$13/Mbtu (natural gas is priced in millions of “British thermal units”, abbreviated as Mbtu). The discussion at the time was of the US needing to import liquefied natural gas (LNG) and billions of dollars were invested in constructing import terminals.

But rising prices had encouraged small, entrepreneurial drilling companies to develop cost effective ways to produce gas from shale rock. Domestic US shale gas production started to rise. But echoing the original development of oil in north-eastern US a century or so ago, a boom in gas supply within the US plus the financial crisis led to a bust in prices which fell as low as $2/Mbtu in April 2012.

In January 2014, the US price is back to more than $4/Mbtu. But prices in Europe and Asia are several times that level, and governments around the world are looking with envy at the benefits received by US consumers, politicians and energy intensive industries.

But North America is an island as far as gas is concerned – albeit a pretty large one. While the US had been preparing to import gas before the shale revolution, it does not have the network of international pipelines or export facilities that exist in Europe or other parts of the world.

You’ll still need to watch the meter. Leo Reynolds

International critics of the US argue that the lack of progress in approving gas export facilities or lifting the ban on exporting US-produced crude oil are deliberate tactics to keep energy prices low and maintain the economic advantage they have fostered. Canada meanwhile faces the dilemma of declining oil & gas exports to the US, and is considering its own investment in pipelines and export terminals to serve Asian countries.

As North Sea oil and gas developed, a series of sub-sea pipelines were built between the UK, Norway and the rest of Europe to enable the UK to sell gas internationally and enjoy the economic boom it provided.

This network served the UK well and, since 2004, the same pipelines have supplied gas into the UK as it has become a net importer. Regulators point out that the UK’s gas market is “the least concentrated and most liquid amongst the larger countries of the European Union”.

If the UK can develop shale gas commercially and sustainably on a significant scale, it will take a highly controversial change in policy for that gas not to become part of the wider European market, where prices are currently around $12/Mbtu.

This is recognised by UK politicians with a detailed understanding of the situation. Energy Secretary Ed Davey has been clear that lower prices are unlikely. The benefits of a sizable shale gas industry will be in terms of energy security, jobs in the UK and the economic contribution of producing gas here in the UK rather than importing it.

So the UK energy market after a shale gas boom would mirror the development of North Sea oil and gas. When North Sea energy came online, prices in the UK still reflected world markets but the country gained significant economic wealth from having a thriving oil and gas industry.

The government takes more than half the value of North Sea energy in taxes. How much it will take from shale is still being debated, but the chancellor can certainly look forward to significant tax revenues, even allowing for some to be passed back to local communities. But the consumer won’t find their bills are suddenly much cheaper.

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4 Comments sorted by

  1. Steven Crook

    Programmer and software designer at Currently resting

    I think the article misses an important point.

    If UK shale ensures that gas prices only rise at or below RPI for the next 20 years it will be enough to completely invalidate the calculations that current and prior governments have made on the economic viability of some forms of renewable energy.

    Shale is relatively new and exploration outside the US is in its early stages. While its possible that the US is unique on the planet in having large scale exploitable shale, it seems likely that it…

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  2. Scott Montgomery

    Lecturer on Global Energy and Geopolitics of Language at University of Washington

    An informed and timely article. A few points might be added. The U.S. situation will likely change in terms of LNG exports, as the fear of a major rise in prices is likely unfounded and industry players are pushing hard for such exports. It is an interesting situation, since at current prices it doesn't pay very well to drill for gas, and most companies are moving rapidly towards liquids-rich targets, either in the same shale formations or in other basins. Prices have risen recently because of…

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  3. Firozali A Mulla

    logged in via LinkedIn

    ! fracking is very expensive USA would have done this long time back 2Inequality is emerging as a central issue for the post-2015 development agenda and the establishment of the sustainable development goals. Inequalities in income and wealth cause economic instability, a range of health and social problems, and create a roadblock to the adoption of pro-environment strategies and behaviour. Social and economic inequalities tear the social fabric, undermine social cohesion and prevent nations, communities and individuals from flourishing.

    The Impact of Inequality

    Social and economic inequality increases the power and importance of social hierarchy, status and class.1 As a result, a long list of problems more common further down the social ladder – in poorer neighbourhoods for instance – are much more common in societies with larger income differences between rich and poor

  4. Perry Kitsell

    logged in via Facebook

    The owners of North Sea gas always sell for the highest price possible, which is why it doesn't come here. Just as Centrica/BG buy gas on contract from Qatar and often hold it in their tankers for weeks waiting for the most profitable sale. It rarely comes here.
    Last year electricity consumption fell by 1.5%, over the last eight years it has fallen by 11.5%, the power suppliers merely increased their prices to maintain rising profitability.
    We can anticipate that as sales go down, prices will go up. No hope there then.