Shale gas – the Queen will probably not be amused.

I was a little light on posts the week before last because I spent most of it in the United States, looking at what they are doing about Shale Gas production and development. I know, I should get a blackberry and learn how to tweet, or whatever. Shale gas, or its potential, is really quite relevant to the UK, because it so happens that under our feet lies a swathe of rocks running south west to North East across the centre of the country,  and in ‘plays’ in the north West that contain substantial strata of gas-bearing shale – hitherto regarded as non-productive. New methods of extraction that involve drilling into the shale, fracturing (or ‘fracking’) the rocks in the seams accessed and collecting the resultant gas make the recovery of perhaps 25% of the trapped gas very possible at an economically feasible cost. Indeed, there is already one such well being drilled near Blackpool to test the potential in the UK.

So will shale gas be the ‘game changer’ that some such as Prof. Dieter Helm think it will be? He told the DECC select committee last month that Shale gas developments mean ‘It is probably best to assume that it is an infinite supply…a transformational event in energy markets’. It certainly has been already in the US, where within a very few years, Shale Gas has leapt from contributing 2% of US gas supplies to over 20% today, with predictions that by 2030 it will contribute up to 50% . This has turned the US projections on gas availability and future supply sources upside down; and the huge investment in Liquid Natural Gas receiving terminals predicated on tight future supply and high gas prices is now mostly standing idle, to the distress of numbers of relatively recent investors.

But, as became plain to me in looking at US installations and policies, this has come about on the basis of assumptions that may have difficulty in implanting themselves in the UK. Most of the initial boom has concentrated on Texas, where to say the least, approaches to regulation and drilling are very different, not to say relaxed.

Some of this intensive drilling is of course, in areas of virtually zero population (i.e. much of Texas) but some occurs right in the heart of Texas cities, such as Fort Worth, and is facilitated by the primacy that is accorded to mineral rights in the state. You can own mineral rights without having to possess the surface land under which the minerals lie – but Texas law allows you – literally- to fetch up in someone’s front garden and commence drilling. All you need to do is provide adequate compensation.

The process of ‘fracking’ also uses huge amounts of water per well – millions of gallons plus chemicals – and this presents a potentially serious and largely unregulated strain on supplies, not to mention the issue of disposing or recycling this (by now chemically-laced) water, together with the saline, mineral rich water that comes up with the gas, once tapped. This is assuming the well is properly drilled and protected to prevent seepage of gas into near surface aquifers- also the subject of rather cursory regulation. Texas disposes of water in super-deep aquifer beds, well below the drilling and sub-surface layers, but no such luxury is afforded to other fields in the US such as Pennsylvania, where the geology prevents such methods being employed.

In a country with ten times the population per square mile of Texas, the likelihood of the intensity of drilling evident in Texas being achieved is low – and that intensity is necessary to the success of a technique with low initial production per well and a rapid rate of depletion. Now I didn’t think I’d be saying this, but a small cheer must go up to the Queen, who has seen to it that she owns most mineral rights in the UK, and who, will almost certainly be more mindful of the side effects of extraction than seems to be the case in the US.

I’m not sure the ‘game’ is about to change in the UK in the way it has in the US: but what might change in the short to medium term is the offset consequence of the change in US gas profile. Where will all that LNG that was to enter the fuel-hungry US go, and at what price?

In the shortish term I imagine it will mean lower gas prices in general, particularly if the US turns LNG exporter rather than importer. But I doubt that this alone will be a game changer, – and I see that LNG prices have just tightened on the anticipation that Japan will suck much of it in to make up for other lost energy supplies.

Prices will stay high, over the longer term in the UK, unless we drill like it is going out of fashion; and that is unlikely. Poland, with vast and easily accessible shale deposits, might be tempted to do so as a hedge against Russian gas and its unsustainable coal and lignite power dependency: but the EU may have something to say about environmental standards in any case.

So a game modifier perhaps – like bringing on a moderately talented sub ten minutes from the end. But an Alex Oxlade-Chamberlain, Southampton’s wunderkind winger – I don’t think so. (He is reputed to be off to Manchester United in the summer for £10 million – about the cost of drilling a shale well since you ask).


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