House of Commons - Shale Gas - Energy and Climate Change Committee

Shale Gas - Energy and Climate Change Committee Contents

3 Prospects for Shale Gas

UK Shale Gas Estimates

18. There have been estimates that the UK could be producing 10% of its current gas needs from shale gas if it could be extracted at a commercial rate, but the British Geological Survey (BGS) noted that this figure was based on figures from the US a year ago, when "shale gas contributed about 10% of their needs", which in 10 years' time would be "30% or more".[36] They estimated that—by analogy with similar producing shales in the US—the UK's shale gas reserve potential could be as large as 150 bcm (billion cubic metres).This is equivalent to approximately 1.5 years of the UK's current gas consumption, or 15 years of the UK's current LNG (liquefied natural gas) imports.[37] However, the Barnett Shale in the US—which was used as an analogy for UK shale potential in the BGS's calculation—is described by the Tyndall Centre as "an above-average producer due to its low clay content [which allow fractures to form more easily]". The Minister told us that DECC's "initial feeling is that there will be reserves [in the UK] but it will not be on the scale of Poland or the United States and it will be more complicated to extract here than it will be in other countries".[38]

19. In April 2011 the US Department of Energy's independent statistical and analytical agency, the Energy Information Administration (EIA) published their report World Shale Gas Resources: An Initial Assessment of 14 Regions around the United States.[39] This report estimated that the UK had 20 trillion cubic feet of technically recoverable shale gas resources, or 560 bcm. This is equivalent to 5.6 years' of the UK's current gas consumption, or 56 years' worth of LNG imports.[40] The EIA estimated that in Europe, the two most promising countries were Poland (3,740 bcm) and France (3,600 bcm), while globally the US (17,240 bcm) and China (25,500 bcm) have the largest estimated technically recoverable shale gas resources. The report estimate that shale gas could increase world technically recoverable gas resources by 40% to approximately 452,000 bcm.

20. However, the Geological Society of London admitted that "there is currently no clear consensus within the Earth Science community regarding the quantity of these [unconventional] resources" either in the UK or Europe.[41] Professor Selley of Imperial College London told us that one of the problems with a lot of non-conventional petroleum—oil and gas—is it is very hard to work out the reserves. The Geological Society believed that further research will improve understanding, "for example, by helping identify 'sweet spots' in gas plays"[42].

Box 1—Units and Equivalents
The BGS estimateD that—by analogy with similar producing shales in the US—the UK's shale gas reserve potential could be as large as 150 bcm [billion cubic metres]. This is very large compared with the 2-6 bcm estimate of undiscovered onshore conventional petroleum.
In 2009 the UK total demand for natural gas was approximately 1,000,000 GWh [giga/billion Watt-hours] of energy. This was equivalent to approximately 100 bcm. So the UK shale gas reserve potential was equivalent to approximately 1.5 years of the UK's current gas consumption.
DECC statistics stated that in 2009 the UK imported 110,579 GWh of liquefied natural gas [LNG]. This was equivalent to approximately 10 bcm. So the UK shale gas reserve potential could replace LNG imports for approximately 15 years.
Current wholesale gas prices are approximately 53p/therm.^, This would mean that 150 bcm of gas was worth approximately £28 billion. If the Government takes approximately one third of this in tax, the UK gets about £9 billion.

1 tcm = 1 trillion cubic metres = 1000 bcm 1tcf = 1 trillion cubic feet = 28 bcm

21. The British Geological Survey (BGS) believed that the lowest shale gas exploration risk lies where "source rocks have accompanying conventional hydrocarbon [oil and gas] fields". Figure 1 shows UK shale gas prospects including the Upper Bowland Shale[43] (the source rock for the Irish Sea conventional fields, and where Cuadrilla are exploring), and both the Kimmerage Clay and Lias[44] of the Weald Basin (source rocks for the North Sea and English Channel fields).[45]Cuadrilla pointed out that "these same shales are the source of hydrocarbons found in most of the UK's conventional oil and gas".[46] With regard to this, the BGS noted that as conventional and unconventional sources of oil and gas both derive from the same source rocks, there will be some relationship between their productions.[47]

22. Nigel Smith of the BGS told us:

There are probably four good plays that they [industry] could try [...] the Namurian; the second one would be the Weald and the Wessex Basin [...]; the third one is also quite risky, and that is the Cambrian play in central England, going into Wales; and then the fourth one would be looking in the fold belts [where once flat, stacked geological strata have become curved or bent on a regional scale].[48]

Figure 1—Onshore Shale Gas Resources of Great Britain

Source: DECC, The Unconventional Hydrocarbon Resources of Britain's Onshore Basins-Shale Gas, December 2010, Cover

23. Regarding the potential amounts available, Nick Grealy—of gas policy website No Hot Air—told us, "I do not think people really quite understand the amounts of gas that are available […] the United States, from 2007 to 2009, increased their estimates of available resources by 40% over two years […] we may even be looking to an increase on that".[49] The Minister told us that, "In terms of the global impact of shale […] it is a game changer". However, in terms of the UK's own shale gas deposits, he said "it is too early to know at the moment".[50]

24. We conclude that shale gas resources in the UK could be considerable. However, while they could be sufficient to help the UK increase its security of supply, it is unlikely shale gas will be a "game changer" in the UK to the same extent as it has been in the US. It is more likely that in countries such as Poland—with a larger reliance on gas imports and greater potential shale gas resources—the impacts of shale gas production will be significant.

UK Exploration and Production

25. Cuadrilla Resources Holdings Limited ("Cuadrilla") describe themselves as an "English independent oil and gas company based in Lichfield, Staffordshire, pursuing an unconventional hydrocarbon [oil and gas] exploration programme".[51] Cuadrilla has drilled two wells so far; the first at Preese Hall-1, the second at Grange Hill-1. Cuadrilla began drilling for shale gas at Preese Hall-1—located approximately five miles east of Blackpool—in August 2010.

26. Cuadrilla completed Phase 1 of the exploration at Preese Hall-1 in December 2010, during which they found indications of natural gas.[52] Phase 2 of the exploration commenced in 2011 and is expected to last three to six months. CEO of Cuadrilla Resources, Mark Miller, told us, "Once we have completed the wells in the exploration phase we will try to test those wells, see how commercial they are […] so we can make a commercial decision whether we want to drill additional wells".[53] Mr Miller explained to us that exploration data is "kept confidential in the early stages".[54]

27. IGas Energy (IGas, or Island Gas) was set up in 2003 to "produce and market domestic [UK] sourced gas from unconventional reservoirs, particularly coal bed methane (CBM)". Coal-bed methane, also known as "coal-seam gas", is natural gas contained in coal-beds and is often extracted using hydraulic fracturing technology. It is normally exploited from virgin coal seams when the coal-bed itself is considered commercially sub-optimal. The CEO of IGas Energy, Andrew Austin, told us that his company has "pilot operations ongoing in coal bed methane [CBM] right now, producing gas from our site at Doe Green in Warrington and generating electricity and selling that".[55]

28. IGas production licences "cover a gross area of approximately 1,756 km² across Cheshire, Yorkshire, Staffordshire and the North Wales coast".[56] Based on "contingent recoverable resource estimates" IGas believe they have "enough gas to supply electricity to over seven per cent of UK households for 15 years".[57]While IGas has focussed on CBM resources, they have identified "a significant potential shale resource within its acreage" which preliminary estimates put at "1.9 trillion cubic feet [53.2 bcm]".[58]

International Prospects and UK-US Comparisons

29. According to the US Energy Information Administration (EIA), during the last decade, US shale gas production has increased fourteen-fold; it now accounts for 22% of gas production and 32% of total remaining recoverable gas resources in the US. By 2030, the EIA projected that shale gas would represent 14% of total global gas supplies.[59] At a recent oil and gas conference in Houston, ExxonMobil's America's Vice President for Natural Gas, Steve Kirchoff, stated his belief that "unconventional sources of natural gas could represent 70% of US gas supplies by 2030".[60]

30. Dr Ken Morgan, Professor of Geology and Director of Texas Christian University's Energy Institute, has discussed the opportunities for shale gas as a fuel in the transport sector. An increase in the number of vehicles capable of using natural gas fuel would allow the US to use shale gas production to displace some of its oil imports. Of the 16-17 million barrels of oil the US imports per day, he told us that 10 million barrels is imported, and 70% of that is used for transport.[61] Dr Morgan noted that there are less than 150,000 natural gas vehicles (NGVs) in the US at the moment, but he believes that the US could be on the verge of entering the "Golden Age of Natural Gas".61

31. Schlumberger describes itself as "the leading oilfield services provider".[62] Schlumberger's Chief Operating Officer of Oil Services—Paal Kibsgaard—has said that "We are convinced that the brute force approach [in other words, drilling many individual wells until a viable "play" of gas was found] established in North America will not be practical overseas, either from a financial or an operational standpoint",[63] adding that "We need to establish a workflow and corresponding technology offering built around a better evaluation of shale gas reservoirs […] the goal will be to only drill the best wells, and only stimulate the best intervals, while we continue to look for [fracturing] solutions that further minimize the usage of both water and proppant [sand]".63 Andrew Gould—Schlumberger's Chief Executive of Oil and Gas Services—has said that the "drilling and producing of shale gas in Central Europe will be very different from doing so in the southern United States for financial and logistical, social and regulatory reasons".[64]

32. Cuadrilla's Executive Director Dennis Carlton told us that the current UK regulatory regime "is a better system than [in] North America in that […] every well has its own drilling plan".[65] The Minister also claimed that the UK has a "much more cohesive system of regulation […] that applies across the whole of the country.[66] DECC described UK regulation as "well-designed with clear lines of responsibility among several different bodies including DECC, the HSE, the respective Environment Agency, and Local Planning Authority".[67]

33. Shell drew our attention to existing shale gas exploration in Sweden, Germany, Ukraine, South Africa and China as well as coal-bed methane assets in Eastern Australia and China.[68] Table 1 on page 17 sets out the estimated global unconventional natural gas resources in place. Professor Stevens of Chatham House noted that a National Petroleum Council Report in 2007 estimated global unconventional gas resources at five times conventional gas reserves,[69] whilst Shell quoted an International Energy Agency estimate that unconventional gas resources were equivalent to 123 years of current global production.[70] However, whilst the figures seem exciting, Jonathan Craig of the Geological Society told us that the "real issue is how much of that gas is producible technically and commercially […] there are resources […] a significant portion—maybe 20% to 30%—of those are technically producible. You then have an economic overlay [to consider] on top".[71]

34. ExxonMobil Exploration and Production Poland (EMEPP), based in Poland, told us that they were awaiting analysis of drilling results from two wells (as of April 2011) to see whether there further operations, including hydraulic fracturing, will take place at these sites.[72] They have also undertaken surveys in three other areas, and have commenced them in a fourth. ExxonMobil told us that they believed, "unconventional resources will increasingly contribute to European supply" and that they expected it to contribute "about 10% of total supply by 2030".[73]

Table 1—Global Unconventional Natural Gas Resources in Place (trillion cubic metres)

Tight Coal-bed Shale Total

Middle East and North Africa 23 0 72 85

Sub-Sahara Africa 22 1 8 31

Former Soviet Union 25 112 18 155

Asia-Pacific 51 49 174 274

North America 35 85 109 233

Latin 37 1 60 98

Europe 12 8 16 35

-Central and Eastern 2 3 1 7

-Western 10 4 14 29

World 210 256 456 921

Source: memorandum from DECC (Ev 57)

35. The Oxford Institute of Energy Studies (OIES) identified a number of barriers to unconventional gas exploration in Europe. It believed that to take advantage of such resources there were five requirements for European governments:

a much more R&D-based and "sweet-spot" focused approach to drilling (identifying areas of high productivity);
new technology developments that reduced the number of wells needed, allowed for the reduction and recycling of water volumes used in fracing operations, and gave the ability to drill longer laterals;
government incentives and regulatory reform,
the expansion of a home-grown trained service workforce; and
financial compensation to local communities.[74]

36. DECC identified the following factors when comparing the US situation to that in UK, Europe and the rest of the world:

a lack of production experience outside of the US leads to uncertainties about the extent to which other resources can be exploited;
the price required to incentivise investment will depend on the productivity and cost of the well;
Europe has a well developed regulatory framework;
Europe has a high population density compared to the US;
US law grants landowners rights over hydrocarbon resources rather than conferring ownership on the state;
poor gas infrastructure in developing economies; and
unconventional exploration technology and expertise is generally confined to the US.[75]

37. We conclude that it is important for the UK to monitor the development of shale gas in Poland—the "barometer of Europe" on this issue—both in terms of exploration and regulation. We are concerned that there could be adverse competitive consequences for the UK if Poland unilaterally develops its shale gas resources within the EU, particularly if their energy policy is driven by energy security—in spite of the environmental concerns associated with hydraulic fracturing—owing to their reliance on imported gas.

The Risks of Rapid Depletion of Shale Gas

38. "Decline rates" describe the rate at which the production of gas or oil wells decline over time. For illustrative purposes, the two extremes of the decline curve are shown in
Figure 2. Using arbitrary data, this figure demonstrates the two characteristic ways that gas reserves can decrease with time—the pessimistic decline rate sees the reserve deplete rapidly to zero, while the optimistic decline rate sees a more gradual decrease in the reserve followed by a long period of production at a low level. The commonly held view is that the decline curve of shale gas wells flattens out over time, but maintains a low level of production for a significant period—this is the optimistic ("hyperbolic") view.[76] A smaller group of commentators believe that production will fall to very small levels relatively quickly—this is the pessimistic ("exponential") view. Professor Paul Stevens of Chatham House observed "although unconventional gas resources were estimated to be five times those of conventional gas, there was concern that [due to the nature of unconventional reservoirs] their depletion rates are much faster".[77]

39. Cuadrilla (who take the hyperbolic view) told us that the only "scientific method currently available to estimate these [depletion rate] factors for UK shale formations is by analogy to commercial North American shale plays", adding that "long-term shale gas production decline rates remain projections rather than based on scientific facts".[78] They explained that "in common with other unconventional gas wells, [a typical shale gas well] will witness steep early production decline rates—typically of around 30% to 40% for one to two years—followed by up to 50 years of commercial life at low decline rates, typically 5% to 7%". OFGEM told us that "experience from the US indicates that although unconventional gas wells deplete faster than conventional wells production levels can be improved by re-fracturing of wells".[79]

40. The pessimistic view of depletion rates raises the spectre of abandoned well heads scattered over the landscape. Over the past decade shale gas exploration and production has moved from rural to urban areas in Texas. One of the issues encountered has been abandoned wells—with production levels too low to be economic—that can then not be built upon. The Texas Railroad Commission, the State's oil and gas regulator, now requires operators to hold bonds with the authorities (proportional to the number of wells they are working on) in order to discourage abandonment of well ownership. This goes to fund an "orphaned wells" plugging programme, which is a cleanup programme set up to deal with Texas' legacy of old abandoned wells.
Figure 2—Optimistic and Pessimistic Shale Gas Depletion Rates

41. In the crowded UK we cannot afford to risk the creation of contaminated and abandoned sites where shale gas production has stopped. The prospect of such a risk must be carefully considered when licences and other permissions are granted. We recommend that DECC should require that a fund be established to ensure that if wells are abandoned they can be "plugged". Such a fund could be established through a levy on shale gas well drilling or an upfront bond. Arbitrary

The North Sea and Offshore Shale Gas

42. Conventional oil and gas production from the North Sea is in decline, and while there is still the potential for significant new discoveries, they are unlikely to match the billion barrel fields that were found in the 1970s. It is interesting to note that the decline of UK gas production has been much quicker than that of oil. Figure 3 shows that imports of gas grew gradually from 2004 until by 2009 they were equivalent to 32% of consumption. In 2009, 58% of the imports came from Norway, 16% came from the Netherlands, 2% came via the Belgian interconnector, and 25% were LNG imports.[80]

43. When pipeline transportation of natural gas is not possible, the gas can be cooled to minus 162°C at which point the methane condenses into a liquid, known as LNG.[81] This cooling to a liquid reduces the volume of the gas by approximately 600 times. This LNG can then be shipped in an LNG tanker over long distances. Shipping LNG is an expensive process and therefore requires high natural gas prices to make it worthwhile. The most expensive part is building and running the liquefactions plant that cools and condenses the gas into a liquid. Once LNG has reached its destination, it needs to connect to a re-gasification terminal with storage facilities and connections to regional gas pipelines.

Figure 3—Natural gas production, net exports/imports and consumption,

Source: DECC, Digest of UK Energy Statistics 2010, Chart 4.1 p 97

44. The British Geological Survey (BGS) told us that UK "offshore shale gas would have the size to affect the [potential reserve] figures more dramatically [than onshore]", especially as "UK onshore basins are small in comparison with UK offshore and US onshore basins".[82] However, the BGS reports for DECC on unconventional resources did not investigate offshore potential. The Tyndall Centre says "the costs [of offshore shale] […] would make such projects economically unviable at current market prices".[83] The Geological Society believe that if the UK were to look into offshore for unconventional gas, it would require a pioneering approach on the part of the UK as the expertise does not exist anywhere else.[84] But it is also interesting to note that deepwater drilling was once considered "unconventional".

45. Nigel Smith of the BGS told us "I think if we went offshore, we could become [self] sufficient [in gas]",[85] he added that "UK onshore basins are small in comparison with UK offshore basins".[86] Describing the magnitude of difference between offshore and onshore deposits, Mr Smith told us, "say five to ten, something like that. It is massive, the North Sea".[87] In a discussion of the potential benefits of offshore drilling, Professor Selley of Imperial College London told the Committee that "you don't have people for a start".[88] Nigel Smith added that it "is [also] easier to acquire [...] [geological information, and in many cases it] already exists[s] so in a lot of ways the data is better offshore".[89] On offshore shale gas exploration, Cuadrilla's CEO Mark Miller told us "in general the procedures would be the same […] all the issues are identical whether you are onshore or offshore. It is only the type of equipment that you work with [that is different]".[90]

46. The Minister believed that if shale gas development was going to occur offshore "it would be likely that it would be horizontal drilling reached from onshore facilities".[91] DECC's Simon Toole then referred to operations like this at BP's Wytch Farm oil field, "where there is a concentrated set of wells [comparable to multi-well pads] that go out under near the shore".[92] The Minister added that DECC's view at the moment was that "the costs for doing this offshore are so great that it is not going to be viable with the price of gas where it is".[93]

47. There is substantial evidence that UK offshore unconventional gas resources could dwarf the potential onshore supplies. While these might be economically unviable at present, "uneconomic" reserves can become economic quickly as technology and prices shift. We recommend that DECC encourage the development of the offshore shale gas industry in the UK, working with HM Treasury to explore the impacts of tax breaks to the sector.

Gas Pipelines Transmission Networks

48. National Grid Gas (NGG)—owner and operator of the national gas transmission system throughout Great Britain and the Isle of Grain (Kent Coast) LNG import facility—says there are likely to be technical challenges surrounding the transmission of shale gas, "in particular the UK requirements for gas quality and for [network] entry capacity [requirements]".[94] SSE (formerly Scottish and Southern) stated that the UK's "existing gas distribution work, which is one of the most developed in the world" could offset the higher production cost of shale gas.[95] Chatham House's Professor Paul Stevens pointed out that access to the gas grid in the US is based upon "common carriage", which means "any gas supplier can gain access to the grid even if it is already operating at full capacity".[96] Whereas, in Europe, access is based upon "third part[y] access", which means if the system is operating at full capacity "there is no access unless dedicated new pipelines are built".[97]

49. Scotia Gas Networks (SGN) is the UK's second largest gas distribution company, with 5.7 million customers and 74,000 km of gas mains.[98] It believed that as shale gas wells will be distributed over a wide area across the UK, they were "likely to need large numbers of smaller scale connections to gas distribution networks than typical gas wells".[99] However, SGN also noted that "the [already] large scale and wide coverage of the gas distribution network could […] increase the speed at which shale wells can connect to the system".[100]According to Shell, shale gas was likely to meet regional and national market demands in the first instance, as rapid growth in unconventional gas production was "likely to require new investment in European gas transport infrastructure" to facilitate pan-European sales.[101]

50. However, it is interesting to note the potential option to generate electricity on site at the shale well. An example of this is Cuadrilla's Elswick site, located near Blackpool, which we visited in March. The Elswick site was commissioned in July 1996, and is a natural gas to electric generation power plant, which means the power plant sits on top of the gas formation, negating the need for gas transmission (sometimes referred to as "gas-to-wire").[102] It has been producing natural gas and generating electricity since 1998, and originally produced 1MW of power.102

51. The Minister told us he thought it was more likely that shale gas would be extracted and used for generating electricity on site than transported through pipelines: "I think Cuadrilla's interest has been their closeness to the electricity grid rather than their closeness to the gas grid".[103] As well as being input directly into the grid, the Minister suggested to us that electricity generated from shale gas could "be linked into a renewable resource [such as wind generated electricity] and, therefore you have the gas that is available to generate the electricity when the renewable resource is not there".[104]

52. During our recent visit to the US, we met with the Mayor of Fort Worth in Texas. There, the shale gas industry began by exploring in rural areas, but then encroached upon the city itself as it had identified "sweet spots" where the gas could be more easily extracted. "Sweet spots" were described by Nigel Smith of the BGS as "places where you get higher productivity".[105] The Mayor told us that that pipelines—which transport the extracted shale to compressor stations before it is injected into the gas mains—had become a major issue, and one they wished they had dealt with at the outset. Each operator could have their own set of pipelines, leading to multiple sets across the city. They acknowledged that a lot of unnecessary duplication could have been avoided if companies had been made to work together and share pipelines.

53. There is a suite of environmental legislation, including Environmental Impact Assessment (EIA) that is applicable to pipelines for the onshore oil and gas industry in England, Scotland and Wales. The aim of EIAs is to determine the likely effects of new developments on the environment, and ensure these effects are taken into account before the development is allowed to go ahead. The Town and County Planning (Environmental Impact Assessment) (England and Wales) Regulations 1999 and the Environmental Impact Assessment (Scotland) Regulations 1999 require an EIA to be undertaken for "pipelines for the transport of gas […] and a length of more than 40 kilometres". For smaller gas pipeline projects, an EIA is only required "if the development is likely to have a significant effect on the environment" as determined by the local authority.[106]

54. Planning for any new gas transport infrastructure required to exploit shale gas should take into account the opportunity to minimise disruption and costs by sharing pipelines between different companies operating near to each other. We recommend that the Government consider amending the Town and County Planning (Environmental Impact Assessment) (England and Wales) Regulations 1999 to require Environmental Impact Assessments for smaller gas pipeline projects, with the aim of avoiding unnecessary duplication of infrastructure.

36 Ev 71 (BGS) Back

37 See Box 1, p 13 Back

38 Q 324 Back

39 US EIA, World Shale Gas Resources: An Initial Assessment of 14 Regions outside the US, April 2011 Back

40 See Box 1 p 13 Back

41 Ev 92 (GSoL) Back

42 Q 3 Back

43 Namurian Stage rock containing organic matter from 313-326 million years ago. Back

44 Jurassic Stage rock containing organic matter from 145-199 million years ago. Back

45 Ev 71 (BGS) Back

46 Ev 78 (Cuadrilla) Back

47 Ev 71 (BGS) Back