Updated: Ten reasons why UK Shale Gas is not all it is fracked up to be

(Updated version of piece issued on 11 July 2013)

Introduction

On 27 June the Department of Energy and Climate Control (DECC) released a study by the British Geological Survey (BGS) showing that the shale gas resources under a swath of northern England, called Bowland-Hodder, could be enough to fuel the UK for 40 years.

With hopes of emulating the boom experience by the US over the last 30 years, there are many claims that UK shale gas will:

  • bring economic growth
  • give the UK energy independence
  • reduce fuel bills
  • reduce UK CO2 emissions by displacing coal and even petrol / diesel.

Looking deeply into the report and other materials suggests that we may want to hold off celebrating just yet.

The ten reasons below add up to higher extraction costs: in some parts of the UK that will prohibit operations unless the market price for gas rises.

Please find the links to many sources at the end of this piece.
Where is all the gas?

The purple line shows the region studied.  The green and pink areas (called prospectives) are those that are most likely to contain large volumes of shale gas that can be successfully extracted [1]
Andrews, I.J. 2013.  The Carboniferous Bowland Shale gas study: geology and resource estimation.  British Geological Survey for Department of Energy and Climate Change, London, UK

1. A lot more work is required to confirm ‘Economically Recoverable Reserves’

The BGS report only gives the potential amount of gas ‘in place’ – 1329 trillion cubic feet (with a 50% probability).  The numbers announced by commercial organisations, at this date, are also for gas ‘in place’.  The size of Economically Recoverable Reserves (how much we will extract) depends on two factors:

  • a confirmation of the gas in-place using ‘top down’ surveys (eg using exploratory wells) and
  • the market price of gas

Quite often the Economically Recoverable Reserves are significantly less than estimated gas in-place values.  Normally this happens when exploratory wells do not confirm reserves that are profitable (the oil well in Balcombe is a good example of a well that did not hold Economically Recoverable Reserves when first sunk).

Before investing in drilling oil and gas companies in the US measure the financial viability of shale gas resources using thirteen criteria.  The BGS assessed the UK shale against these criteria using many geological studies, however, at times the BGS assumed that the Bowland-Hodder shale has the same characteristics as the Barnett Shale (Dallas Fort Worth area) in the US; this is the nearest analogy for our own geology that has been fracked.

The Bowland-Hodder shale meets five of the financial criteria.  Of the remaining six: two are satisfied using partial data, one fails, and three have no data.  The nature of the UK basins causes the failed criteria.  They are small and have a high number of faults; both issues will make gas extraction less productive.
2. Shale Gas is ‘fracked’ and the UK does not have fracking expertise or equipment

Commercial experience of current fracking techniques [2] date back to 1996 in the US, which also has a mature supply chain for equipment and chemicals.  China’s proficiency at extracting tight gas has grown rapidly; they keep secret the amount of money they have spent to develop their own fracking industry.  The earliest proposed date for commercial gas production from Bowland-Hodder is 2015; this will require techniques specific to our geology and reserves.

There is the possibility of attracting overseas operators to the UK, this will require higher market prices than they can achieve at home, or in other markets.

3. Economic prosperity does not happen automatically

In 1977 the Economist coined the term Dutch Disease or Oil Curse to describe the decline of manufacturing in the Netherlands after Natural Gas was discovered there in 1959.  The full potential of the oil curse has hit Nigeria where the wealth of oil has had no beneficial impact on the economy or the people, and Venezuela where Hugo Chavez used oil wealth for short term boosts to the economy.  Some people feel that UK squandered the wealth from North Sea oil and gas has in a similar way.

Given that fracking expertise and supply chains lie outside the UK, the best jobs are likely to go to foreign contractors and foreign factories will make the equipment and chemicals needed.  While UK government will get income from licences and taxes, local industry will have to adapt very quickly to make the most of the boom.

Production from the Barnett shale started to ramp up in 2000 and is believed to have peaked in 2010.  If the comparison is valid, then UK industry has around 10 years to build up expertise and put it in the field, because demand for equipment and experts will drop off with production.

4. What happens when the gas is used up

As early as ten years and certainly in forty years’ time, extraction will have slowed, any economic benefits that have ‘trickled down’ will have dried up.  Gas communities will face the same future as those built with coal and steel.

At the same time countries with larger reserves will be more than willing to sell gas to us…

One answer to point three and four would be the creation of a sovereign wealth fund, this is the approach taken by Norway, which contributes to its fund through tax returns.  Their fund is worth about $740 billion.

5. The oil and gas industry can be poor neighbours

While there are some examples of unobtrusive extraction (see sources for list); the oil and gas companies have spent extra to landscape these sites, protect the local environment and to prevent noise and light pollution.  The extra costs mean these examples are in the minority.

Using the same analogy (Barnett Shale) as the BGS and industry figures it is possible to calculate the number of wells required to extract 10% of the gas in-place in the Bowland-Hodder reserves.  Such a calculation gives a range of figures from 44,300 to 127,492 wells.  All these wells site on concrete well pads.

While the average number of wells per pad in Barnett is 1.5, Cuadrilla claim they can site up to 32 wells on a pad.  If we assume an average of twenty and that each well pad is the same size as in Barnett (about two football pitches), then between 31 km2 and 89 km2 of land will be concreted over during the drilling of wells.  If fracking licences are even-handed with quarrying and open cast mining licences, then operators will have to restore disturbed land when drilling stops and again when production ends.

In case you cannot visualise this amount of land: the Slough and York built up areas are each a touch larger than 31 km2.  Brighton / Hove and Birkenhead built up areas cover around 89 km each.

The transport of heavy equipment requires good road access, though roads rarely remain good.  Road transport may also be required to remove wastewater and gas, unless a pipeline connects the pad or there is local rail transport.

6. Safety and environmental record of the industry

Every oil and gas field, inadvertently, has let their product spill into the local environment; transport such as pipelines leak.  Rail and sea transport are equally prone to escapes.  Methane is not like oil, it is invisible and does not smell; leaks can be hard to find, with devastating consequences.  Leaks of oil and gas plague the industry, as demonstrated by our own experience.

The North Sea oil and gas fields have been active since 1851, next year will be the 50th anniversary of high volume production and during June 2013 there were 55 leaks of oil or gas (reported to the DECC).

This is what the Presidential commission into the Gulf of Mexico disaster stated:

“…the root causes are systemic and, absent significant reform in both industry practices and government policies, might well recur.”

At all US fracking fields (oil and gas) burn gas in situ (called flaring) because it is disruptive, uneconomical to sell or because the infrastructure does not exist to get the gas to market.  US fracking fields can be seen from space and light pollution is one of the factors that the neighbours of fracking sites complain of the most.  Noise and air pollution are also sources of disturbance.

Since the first issue of this piece a peer reviewed paper has shown that the disposal of fracking liquid in Youngstown, Ohio has caused 109 earthquakes in one year.  Before fracking liquid disposal the town had had no earthquakes since records began in 1776.  Ironically the wastewater came from the Marcellus shale, the shale basin that produces the most natural gas in the US and based in Pennsylvania.

7. Water

There are claims about methane from fractured rocks reaching underground water.  No one has substantiated these claims, indeed a recent peer reviewed analysis by research firm Gradient states that

It is not physically plausible for induced fractures to create a hydraulic connection between deep black shale and other tight formations to overlying potable aquifers

At the same time Duke University has shown that methane escaping from poorly sealed wells has contaminated water and that injecting wastewater into poorly sealed wells can result in pollution of waterways.  Neighbours of fracking operations have also complained that holding ponds have leaked fracking fluid (a mix of water and chemicals).

The key here is to avoid the tautology of ‘fracking creates water pollution’ as the fracking probably does not, but the fracking operation can.

Each well requires 20 to 30 million litres of water.  Compared with Barnett shale that means we will use 2 billion litres of water (that’s 0.000003% of the water will use over 40 years).  It does not sound much until you think that this means we will have to dispose of 2 billion litres of fracking fluids, contaminated with various other chemicals.  US operators pump wastewater pump into old wells and wells drilled for disposal.

The Bowland-Hodder shale is in areas rich in cave systems and underground waterways, most of which are unmapped.  More study will be required to confirm that disposing of wastewater by drilling through these systems will be safe.

8. Local government will have to give planning permission

Outside of energy, one of the biggest issues facing the UK is a lack of housing, yet many people oppose government proposals to relax planning constraints for housing.  Wind turbine projects do not leave the drawing board because of local opposition.  It is likely that planning permission will be equally hard to get.

The demonstrators in Balcombe have shown how local people and activists can halt operations (in this case the reuse of an exploratory oil well).  More people are likely to turn to the planning system to prevent exploration and extraction, or to put constraints on activities (eg restoration of land, no night time operations, and the relocation of rare animal and plant species).

9. Access to land

In the US getting land to drill through is relatively easy – land prices are lower than in the UK – and in the US landowners have mineral rights, so those in fracking areas have incentives to allow fracking on their land.  The government owns all mineral rights in the UK, with one exception: the Duke of Devonshire who owns the oil rights for his lands in Derbyshire and Nottinghamshire.

As you can see from the map, the Bowland-Hodder region covers several urban areas; outside these areas the country is rural and includes the North Yorkshire Moors.  Who is going to sell land or lease the land required for well pads, roads and pipelines?
10. The price of gas might even go up

In December 2012 The Independent reported the release of a study by Wood Mackenzie “Wood Mackenzie estimates that in order to develop UK shale reserves, potential operators would need a gas price of $9.68 per million British thermal units (mbtu) for the project to make economic sense.  This is considerably more than this year’s average UK spot price of $8.69 per mbtu and the $8 per mbtu that Bloomberg forecasts it will hover around between 2015 and 2020.”

Many of the people who commented on the first issue of this piece pointed to a report by Navigant.  Navigant provided three estimates about the price of gas in the UK if reserves of unconventional gas are exploited worldwide (these reserves include Coal Bed Methane and Tight Gas, which is found in sandstone).  Before we come to that is it worth noting their conclusion about the prospects for shale gas extraction in the UK and the rest of continental Europe.

The UK faces similar issues to the rest of continental Europe.  [social issues surrounding extraction of unconventional gas in densely populated areas, with considerable
public antipathy to the industry, makes the barriers much higher.  In addition, the supply chain to drill and stimulate the huge number of wells required to produce meaningful quantities of gas does not exist at present.]  There are certainly at least two promising
shale plays and plenty of CBM opportunities. However public concern is substantial and the commercial
case for gas production is marginal at current costs and gas prices. The general consensus is that
exploration will continue, but major development will either need a belief that the unit cost can be
brought down quickly, as in the US, or the promise of natural gas liquids to increase returns.

In the best case example, over 20 years, UK gas prices (commercial not retail) will drop by 30%, reaching 125% of US prices.  In the worst case they increase by 15% and the middle road would keep them pretty much static.  The DECC sponsored this report and it is on their website (link provided in the sources).

Much is made of a huge price decrease in the US.  The Energy information Agency’s data on prices does not show much evidence of such a reduction.  Here is that data in graphical form:

Not much sign of a reduction in price since fracking started in large volumes in the late 1990s.
All data from the Energy Information Agency (US Department of Energy).

Indeed in the ten years from January 2002 to December 2012, the price increased.  It increased at the wellhead and at hubs; it also increased for every customer type – by up to 29%.  I only found five instances where a previous price was more than 3 times larger than the price in December 2012, four improved Well Head and Hub prices and one gave Commercial users a bonus (though it was ten years earlier so they could be forgiven for not noticing).

The 29% increase came in the price of natural gas sold to electricity markets – the much-heralded displacement of coal.  As you would expect electricity generators passed this increase on to all their customers.

From April 2003 to April 2013 US electricity prices rose by around one third.
Data from the US Energy Information Agency (Department of Energy).

Previous ‘energy’ booms have brought prosperity because they enabled trade, commerce and consumerism.  Coal allowed mass production and fuelled the railways.  Oil brought cheaper energy, mass and personal transportation, and incredible materials.  So far, the Shale gas boom has increased the profits of oil and gas companies.

In conclusion

Claim Conclusion
Lower gas prices Each of the ten points indicate the cost base for UK shale gas extraction will be high – prices are unlikely to fall significantly
Economic growth The industry jobs are likely to go to countries with expertise and, with no wealth fund, economic benefits will dry up with the gas
Energy independence If our gas is expensive then the biggest users of gas (electricity companies) will continue to look overseas
Reduced GHG emissions Flaring and methane leaks will contribute to GHG emissions.  Any displacement of coal or vehicle fuels will at the expense of price.

You might think I am anti shale gas – but you would be wrong.  I am against blindly putting all our energy eggs in one basket.  Some shale gas extraction – done to our standards of safety and environmental care – is necessary and could be profitable / beneficial.  Shale gas is not an energy silver bullet, it is an opportunity to power investment into renewable sources of energy and, if that is how we choose to go, nuclear power.  We cannot afford to let political expediency and short-term thinking blind side us into an energy cul-de-sac.

Sources

Introduction

Shell explain shale gas, tight gas – other gas, and fracking

Boris is keen to get fracking

UK Energy Minister spells out his love of shale gas

The BGS website for link to the 2013 report and other good stuff

Useful information about the Barnett Shale

1. Only if you drill…

Firms lose billions in Indonesia

“Hampered by difficult geology, a paltry service sector, a lack of adequate infrastructure, as well as an uncertain regulatory and tax environment, there have been few exploratory wells drilled.” Polish gas industry fails to take off

8 wells and $600 million fail to find oil in Greenland

2. Expertise and equipment

The Chinese are fracking

The Telegraph reports a lack of UK fracking equipment

3. Economic growth

The oil curse in West Africa

Venezuela’s oil legacy

Barnett shale production has peaked

If US gas is cheaper will we import anyway?

4. Long term economic prospects

UK should have created a wealth fund

Norwegian sovereign wealth fund

5. Neighbours

Good neighbours in Nottinghamshire

Good neighbours in Dorset

Good neighbours in Germany

Bad neighbours in Detroit

Bad neighbours in US

Oil and gas boom air pollution in Colarado

Road damage from oil / gas equipment

Earthquakes caused by injecting used fracking fluid into the ground

Industry paper spells out the size, noise and air impacts of a well pad

6. Safety and the environment

6000 oil spills in the US in 2012 – that is 16 a day and up 17% since 2010

Flaring in Bakken seen from space

One field leaked 6 % to 12 % of methane production in one day

Shale gas explosion in West Virginia kills five

Is the industry inherently capable of improving?

7. Water

Physically implausible

Duke study

UK cave system links Lancashire, Cumbria and Yorkshire

10. Prices

The Independent report a study by Wood Mackenzie

Navigant analysis of the potential impact on UK gas prices by global shale gas extraction

In 2013 gas prices rise but not enough to prompt new drilling

Others that share this view

The Huff did manage to get this out before I did

Business Green open letter to the Prime Minister

The presentation may be a bit annoying, but it is informative.  Note they came up with the title at the same time as me

Investors banking on high US gas prices


[1] An earlier report listed three other areas of interest, the Weald and Wessex basins (pretty much the south coast, up to London / Bristol and ending around the Devon / Dorset border) and the Midland Microcraton (a triangle north of the Weald and Wessex basins, excluding East Anglia and taking in parts of western Wales).  The BGS is studying the Weald basin and that is of interest to Boris Johnson as the area includes some parts of London.  Return

[2] Horizontal drilling was introduced in 1991 and ‘slickwater’ or fracking fluid in 1996.  Return

© Michelle Spaul and Leaving the world of work, 2013.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Michelle Spaul and Leaving the world of work with appropriate and specific direction to the original content.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s