Shale Gas - Energy and Climate Change Contents

Memorandum submitted by Scottish & Southern Energy

SSE would like to thank the Energy and Climate Change Committee for this opportunity to respond to their inquiry into shale gas. Although SSE, formerly Scottish & Southern Energy, does not have any immediate shale gas prospects, it has been examining its potential development in the UK after the significant role it has played in the US. SSE has seen how shale gas developments have reduced the US's potential dependence on LNG imports, a situation of relevance to the UK given its growing dependence on importing LNG and concerns about security of supply.

1.  What are the prospects for shale gas in the UK, and what are the risks of rapid depletion of shale gas resources?

1.1. There are certain factors which were pivotal to the increased production of shale gas in the US, which may not be applicable in the UK. Firstly, the geology of the UK in regard to shale gas resources is not as favourable as it is for the US, but the available resource is still potentially significant. Due to higher production costs, the economically viable prospects in the UK will be a fraction of the potential resource as most will not be economic to exploit in the current market with current technology. If the wholesale price of gas were to rise in the future, the relatively high production cost of shale gas would become more acceptable to developers.

1.2. A second factor for the rapid development of shale gas in the US was easy and low-cost access to the gas transport network, and this could prove to be an advantage in the development of shale gas in the UK with our existing gas distribution network, which is one of the most developed in the world. This could partially offset the higher production cost, as exploiting domestic sources of shale gas would lead to an inevitable reduction in transit costs, which are particularly high for energy intensive LNG imports.

1.3. Another major barrier to shale gas development in the UK would be land access. In the US there was an opportunity for rapid leasing of large areas of land for development at a low cost. This is unlikely to be replicated in densely populated regions of the UK where initial resources are located. This issue can be highlighted in the relative population densities, which in England has 383 people per km2, as opposed to the US, which has 27 people per km2.[5] This is particularly relevant when compared with conventional gas reserves, as shale gas resources are spread more thinly over much wider areas.1.4. As for the risks of rapid depletion of resources, it is unlikely that the depletion rates of shale gas wells would be a problem. Whilst it has been noted that shale gas wells deplete rapidly compared to conventional wells, individual shale gas wells can maintain a level of production, albeit at a lower level than at first production, for a significant period of time. This should not discourage initial projects, as long as this depletion rate is factored into the economic rationale behind the investment.

2.  What are the implications of large discoveries of shale gas around the world for UK energy and climate change policy?

2.1. The implications of large discoveries of shale gas for US energy policy have been significant, as it has greatly reduced its potential dependence on LNG imports. The recent increase in US production of shale gas has also benefited the UK by freeing up LNG supply in the Atlantic basin, and thus reducing the price of uncontracted LNG supplies for the UK's spot market. The initial implications of large discoveries in other regions around the world could benefit the UK in a similar fashion by further reducing wholesale prices by widening the gap between supply and demand, improving security of supply.

2.2. For the UK's energy and climate policy, shale gas discoveries could be positive. For the electricity sector, lower costs would likely increase coal to gas switching in the short term, meaning gas-fired electricity would be able to displace coal in the electricity market, with a consequent reduction in the CO2 intensity of the electricity sector. There would also be a medium term benefit as there will be a need for continued significant amount of gas-fired generation capacity to balance issues of intermittency associated with increased renewable deployment.

2.3. In the domestic sector, which comprises a third of the UK's gas demand,[6] any significant discoveries of shale gas could reduce the costs for consumers reliant on gas who may be unable to switch to alternative sources of energy, for heating and cooking. This would have positive short and medium term implications for the Government's fuel poverty objectives.

2.4. However, it should be noted that a low wholesale gas price caused by potential shale gas discoveries would encourage significant investment in gas infrastructure, which would lock carbon into the UK's energy system. Furthermore, if the UK is consuming shale gas directly or imported conventional gas displaced by shale gas consumed elsewhere in the world, then there are negative implications for additionality of CO2 emissions globally.

3.  What are the risks and hazards associated with drilling for shale gas?

3.1. The risks and hazards are connected with water consumption for hydraulic fracturing and/or methane leakage. The technique of hydraulic fracturing requires large amounts of water, with estimates of 4-5 million gallons needed to fracture one well[7]. This waste water has to be carefully managed and there have been concerns that chemicals used in the fracturing process can contaminate local water supplies. To mitigate these risks, closed loop water systems are being developed by industry to reduce water requirements. There is currently work being undertaken by the Environmental Protection Agency in the US, which is looking into the process of hydraulic fracturing and its potential adverse effects on water quality and public health, which should bring greater clarity on the risk and hazards associated with the process of hydraulic fracturing.

4.  How does the carbon footprint of shale gas compare to other fossil fuels?

4.1. Currently there is not a definitive answer. The carbon footprint of shale gas extraction is uncertain but it is provisionally seen as slightly above onshore conventional gas drilling, but it must be noted there are reports suggesting that its lifecycle carbon emissions are significantly higher. More detailed analysis will be required for greater understanding the carbon lifecycle of shale gas production, as even with development of CCS for gas-fired generation it will not be able to capture the carbon emitted during the production of shale gas. Even so, domestically produced shale gas would have the benefit of not needing to be processed and transported vast distances, as is the case for imports from LNG and pipeline supplies, partially offsetting any potential additional carbon emissions from production.


5.1. Increased shale gas production in the UK and worldwide is likely to result in a market of excess supply and subsequently low prices in the short and medium term. Combined with the relatively attractive low carbon emissions of natural gas and the low cost and speed of construction of gas-fired generation plant, this is likely to increase gas demand in the electricity sector. The increased electrification of heat and transport will exacerbate this trend.

5.2. However, natural gas remains a finite resource, regardless of source, and UK supplies of shale gas cannot totally replace reliance on importing supply. There is a concern that with limited capital for investment in the energy industry, significant development of policy incentives to encourage development of shale gas resources in the UK, alongside uncontrolled growth in gas-fired generation could decrease investor certainty on UK policy direction towards renewables, CCS and/ or nuclear. Although this would lead to a short term gain in carbon emission reductions, it would be to the detriment of the long term decarbonisation of the UK power sector.

5.3. SSE believes that shale gas could prove to be a viable and attractive resource for the UK to exploit in the future. This would however, be at a significantly reduced scale compared to that of the US, due to a number of factors, most notably potential issues with land access and secondly the issues over the necessary water use, which Government will need to consider.

January 2011

5   Stevens, P (2010) The "Shale Gas Revolution": Hype and reality, Chatham House, London Back

6   DECC (2010) Digest of UK Energy Statistics, London Back

7   IEA (2009) World Energy Outlook, Paris Back

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Prepared 23 May 2011