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Chatham House: Waiting for the shale gas revolution could be bad for energy prices and emissions

  • 15 Aug 2012, 16:00
  • Robin Webster

The thinktank Chatham House has released a new briefing on future prospects for shale gas in the UK and elsewhere. Updating a report it released in September 2010, the paper concludes that many of the uncertainties surrounding the industry have been reinforced over the last two years  - with unpredictable impacts on shale gas investment and development in Western Europe.  Impacts on climate change remain equally uncertain.

Since the 2010 report was published, author Professor Paul Stevens argues, "an extremely sharp division has developed between the proponents and opponents of shale gas".  Stevens says he and other analysts are left

"...in no-man's land between the warring parties, simply uncertain as to the realistic prospects for shale gas"

Can the UK emulate the US shale gas revolution?

The background to all this is the much-touted US " shale gas revolution". Between 2000 and 2010, shale gas rose from less than 1% of North American domestic gas production to 20%. Could the same thing happen over here?

Well, maybe. But in Western Europe, the same circumstances do not necessarily apply. First, initial estimates of technically recoverable resources are increasingly being doubted. In March 2012 for example, Poland reduced its initial bullish estimate for the amount of shale it could extract by a factor of ten.

How this will apply to the UK remains uncertain. Rumours indicate that a much-awaited estimate by the British Geological Survey of the shale gas resource available is going to be large - but that doesn't provide any indication of how much of it will be economically viable to extract.

The Chatham House briefing outlines a series of twelve different barriers that could inhibit replication of the US shale gas scenario in Europe - including stricter environmental regulations, a different approach to property rights, an industry dominated by large players rather than "smaller, entrepreneurial companies" and a different geology where shale has a higher clay content, making extraction more difficult (see p.9 of the report for a full list).

Uncertain investors and the price of gas

In the UK, a significant amount of media coverage has focused on the potential for indigenous production of shale gas to bring down consumer energy bills.

The US shale gas glut has pushed prices down. According to the Chatham House report figures from the US Energy Information Administration show:

"In 2011….the average wellhead price was $3.95 per thousand cubic feet and in February 2012 it was $2.46.5 …"

But the vagaries of investor uncertainty make it less likely that this effect could be replicated in Europe, Stevens says:

"How far technically recoverable resources of shale gas will translate into actual production continues to create serious investor uncertainty. If the hype turns into reality, then world energy markets can look forward to floating on clouds of cheap gas, certainly up to 2030, if not beyond. However, if the hype remains hype then current investor uncertainty will limit future gas supplies. Assuming gas demand continues to increase, the effect in the next five to ten years would be much higher gas prices."

In other words, shale could drive down gas prices around the world. But if investors hold out for shale, that could also inhibit investment in conventional gas supplies. And if the shale gas miracle doesn't materialise, that could drive gas prices up.

Climate change

If shale gas does get going in the UK and elsewhere in Europe, what effect will it have on carbon emissions? Stevens discusses current uncertainties around so-called fugitive emissions of greenhouse gas methane during the drilling process.

But drilling companies can combat fugitive emissions through better practices. There is another, potentially more important question - what will shale gas replace? In the United States, shale gas has driven emissions down by displacing more polluting coal power. The UK is already heavily dependent on gas - so the promise of an indigenous shale gas industry and lower gas prices might instead inhibit investment in renewables, Stevens says.

Some cheerleaders for shale gas have already welcomed this possibility. Other advocates for shale see it as a potential bridging fuel to a low carbon power sector. But, again, the uncertainty surrounding shale gas and the impact on investors is important. The Chatham House briefing argues:

"….the anticipation of cheap natural gas could inhibit investment in renewables. But again, if the revolution fails to deliver a lot of cheap gas, by the time this is realized it could well be too late to revert to a solution to climate change based upon renewables."

Climate change and an uncertain future

Stevens' conclusion lays out the possible impact on greenhouse gas emissions if shale gas inhibits investment in a low-carbon economy pretty starkly - "In terms of climate change concerns, this is seriously bad news".

But it is noticeable that the briefing does not deal with the potential conflict with renewables in any great detail, perhaps reflecting a dearth of wider research and discussion in this area. As the media and political rows over shale gas continue - with associated impacts on investment patterns - it's an issue that probably merits further attention.

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