Memorandum submitted by the Office of
Gas and Electricity Markets (Ofgem)|
- There is consensus that unconventional gas production
from within Europe is unlikely to make a significant contribution
to gas supply until 2020 at the earliest. Estimates put European
unconventional gas resources at around 35tcm (trillion cubic meters,
annual demand in GB is around 90 billion cubic meters), which
gives an unconventional supply figure of around 1.75tcm based
on an extraction rate of 5% (this is equivalent to 19 years of
current GB annual gas demand).
- Levels of unconventional gas production from
outside Europe (excluding Australia and North America) are also
highly uncertain although significant resources exist in Asia.
Resources in North America and the Asia Pacific area are estimated
at 233tcm and 274tcm respectively.
- Production of shale gas in Europe is likely to
be significantly more challenging than in North America. Key
challenges include planning (including access to land), water
availability, stricter environmental regulations and availability
of support services for drilling operations.
- Large scale unconventional gas production in
the UK could displace some imports whilst large scale foreign
production could free up conventional gas supply for alternative
destinations, potentially improving UK/European security of supply.
Ofgem is the Office of the Gas and Electricity Markets.
Protecting consumers is our first priority. We do this by promoting
competition, wherever appropriate, and regulating the monopoly
companies which run the gas and electricity networks. The interests
of gas and electricity consumers are their interests taken as
a whole, including their interests in the reduction of greenhouse
gas emissions and in the security of the supply of gas and electricity
to them. As part of meeting our duties and functions Ofgem actively
monitors the energy market and this includes looking at range
of issues such as the impact of new energy sources on the market
Ofgem is monitoring closely the development of unconventional
gas due to the impact of production from these sources on global
and UK energy markets. The rapid development of unconventional
gas has already had a profound impact on gas production in the
US. The resulting reduction in demand for both imports of pipeline
gas (from Canada and Mexico) and LNG (liquefied natural gas) has
released incremental LNG supply to other markets and means that
the US is unlikely to present a significant source of additional
demand for LNG in the medium term (although the US still imports
a large volume of LNG - 12bcm in 2010). In our work on
project Discovery (published in October 2009) we assumed a further
expansion of unconventional gas in the US under all but one of
the four scenarios modelled.
In this note we have attempted to provide material
we hope the committee will find useful. The material has largely
been drawn from publically available sources. The note firstly
sets out forecasts for unconventional gas resources and outlines
a range of technical factors relating to the extraction of unconventional
gas. The note also considers the economics of shale gas production,
presents estimates of potential unconventional gas production
in Europe and outlines a number of barriers to large scale production
in Europe/UK. Section 7 responds to specific questions raised
by the committee where these are not addressed in other sections.
In this note we have focused on unconventional gas
more generally. Shale gas is considered to be a type of unconventional
gas which also includes coal bed methane (CBM) and tight gas.
The chart shows that the total volume of global unconventional
gas in the ground is estimated to be around 921tcm. In comparison
conventional resources at the end of 2008 were estimated at 184tcm.
However, the majority of this is difficult to extract. If we
assume that 5% is recoverable (based on US experience), this gives
a supply of around 46tcm compared to total global consumption
of gas in 2009 of 2.9tcm.
It took around 20 years of development to reach current
levels of shale gas production in the US, with production increasing
from 7bcm in 2000 to 87bcm in 2009 (14% of consumption) and is
forecast to rise to 368bcm in 2035 or around 55% of current consumption
(recently the EIA has doubled its forecasts of US shale resources
from 13.6tcm to 23.4tcm). Replicating this level of increase
in other markets is likely to be challenging although, the know-how
and technology developed during this period can be utilised in
other markets. However, other barriers exist in reaching similar
levels of production (see below).
In Western Europe the key areas that are thought
to contain unconventional gas deposits are Poland, Germany, Hungary,
Turkey and parts of the UK. The chart on the next page shows
the most promising areas for shale gas exploration in the UK.
Source: British Geological Survey
This section outlines a range of technological factors
important in producing unconventional gas. Shale gas is extracted
using a process known as hydraulic fracturing or "fracking"
where water/chemicals are injected at high pressure into a well
to fracture rocks to release trapped gas.
Typically around 15-16 wells have to be drilled before
finding the "sweet spot" (an area within a shale gas
region that contains a high concentration of gas). Average extractions
rates are between 4-6% as shale gas is not evenly distributed
across a given area (based on US experience). This means that
a greater number of wells are required compared to conventional
Extraction rates and cost of production depend on
a range of factors such as the quality of the play (an area containing
shale gas resource), the technology employed and the quality of
the well operator. For instance:
- Production is significantly higher in dry gas
areas than oil/wet gas areas (wet gas contains some liquids such
- Production is higher where horizontal drilling
extends further out.
- Operator performance varies significantly, with
the best operators producing significantly more than less efficient
operators holding all other relevant factors constant.
- Deeper shale gas is harder to access but provides
better flow rates due to higher pressure.
It is possible to apply horizontal drilling techniques
used in unconventional gas extraction in improving flow rates
from poorly performing conventional gas wells. For example, using
this technology in Saudi Arabia has increased volumes from a conventional
gas well from 0.5mcf/d to 30mcf/d. This could improve the economics
of existing conventional gas wells that are either currently uneconomic
and/or are coming to the end of their useful lives. It is also
possible to improve/maintain extraction rates from existing unconventional
gas production wells by further re-fracturing wells.
Global gas prices play an important role in determining
the economics and hence overall levels of unconventional gas production.
The chart below shows estimated costs of European shale gas production
versus other new sources of supply in 2020.
Source: Oxford Institute for Energy Studies.
The current $/£ exchange rate is 1.55 and the cf to cm conversion
factor is 0.028. This gives a p/therm for Poland Shale (base case)
The chart shows that European shale gas is likely
to have a higher cost of production compared to other gas supply
sources. The long run cost for current shale gas projects in
the US have been estimated to range from 12.5p/therm to 40p/therm.
Current Henry Hub (a pricing point for gas trading in the US
based in Louisiana) prices are around 25p/therm whilst GB prices
are around 65p/therm.
In North America, government has provided assistance
to unconventional producers. This has included tax breaks (eg
the crude oil windfall profit tax act) and R&D support. The
US is also offering to help other countries realise their unconventional
gas resources through their Global Shale Gas Initiative launched
in April 2010.
AND UK UNCONVENTIONAL
The charts on the next page show that European gas
demand is unlikely to recover to 2008 levels until 2013. The
second chart shows that unconventional gas is unlikely to make
a significant contribution in meeting gas demand in UK by 2020
(in both base and high case scenarios) although other European
countries have the potential to produce around 5-10bcm by 2020
(in the high case scenario).
Cuadrilla Resources, the first company to drill for
shale gas in the UK, have recently obtained promising results
from the UK's first shale gas well in Lancashire. Based on this
data they estimate that shale gas could ultimately meet 5-10%
of UK gas demand although they do not give a time frame for this
view. They are hoping to start the extraction process in early
In terms of coal bed methane, according to Reach
CSG, the UK has potentially large deposits that could be exploited.
They estimate that CBM has the potential to provide up to 20%
of UK gas production in 2020.
6. FACTORS THAT
A number of factors may restrict the extent to which
unconventional gas resources can be exploited in UK/Europe compared
to volumes observed in North America. These include:
- Availability of sites.
Some sites containing potential unconventional resource are protected
by national or European law.
- Geology of sites. Many
European sites are smaller, with shale gas deposits deeper and
further away from each other.
- Service sector. A
lack of a flexible, readily available service sector in Europe
to support unconventional gas operators. However, current operators
in North America are commercial firms and as such are likely to
offer their services in other markets where demand exists.
- Local opposition.
Concerns about the impact of drilling on the local community,
in particular concerns over drinking water contamination.
- Water utilisation/scarcity.
Concern whether there is adequate infrastructure to transport
water to the drilling sites, disposing of waste water and competition
with other uses, eg drinking. Some positive developments in this
area including using saline water for fracking (rather than drinking
water) and recycling a high proportion of the water used.
- Environmental restrictions. These
are often more stringent in Europe than in the US (particularly
when compared to the large shale gas producing states).
- Less uninhabited/available land.
Population density in Europe is 100 to 200hab/km2 compared to
just 30hab/km2 in the US. The US model of "factory drilling",
where hundreds of wells are drilled across a specific play to
indentify a "sweet spot", is therefore unlikely to be
appropriate for most European markets. Instead a target approach
is more suitable, where detailed R&D takes places to identify
sweet spots more accurately. This method is consistent with the
traditional exploration and production method that the large European
energy firms are familiar with. In the US drilling is often in
sparsely populated areas but even where it is in more heavily
populated areas, the public is accustom to drilling activity due
to a history of onshore oil drilling.
- Getting gas to market.
Grid density varies considerably, with a gas grid (km)/area (1000km2)
of 62 and 45 in the US and UK respectively but only one in Sweden.
One solution could be to convert extracted unconventional gas
into electricity and transmit the power where electricity transmission
is more readily available than gas.
- Compensation to land owners.
In the US legislation provides owners of above ground land rights
over underground resources. In almost all European countries
underground resources is owned by the state. However, European
drilling companies have said that they have not found it difficult
to obtain access by negotiating directly with land owners. However,
this may change as the level of drilling increases.
- Lower prices in 2009/10,
due in part to high levels of production of unconventional gas
in the US, reducing the NPV of European projects, although gas
prices are currently rising in Europe.
Whilst European players are less experienced than
their North American counterparts there is a greater preference
for partnerships and joint ventures in Europe, with energy majors
with unconventional gas extraction experience partnering up with
smaller outfits. This is due in part to higher costs of developing
European plays (~£200 million from development to production).
What are the prospects for shale gas in the UK,
and what are the risks of rapid depletion of shale gas resources?
As the analysis above shows, there is considerable
uncertainty over the likely levels of unconventional gas production
(including shale gas) in the UK and across Europe more generally.
There are a number of barriers that need to be overcome before
significant production levels can be achieved. Based on current
forecasts, significant volumes of UK unconventional gas production
are unlikely before 2020.
The level of recoverable gas from an unconventional
gas play sets the overall production limit. As noted above various
factors including geological and technical determine the level
of recoverable gas. In terms of the rate of depletion of shale
gas wells, 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.
What are the implications of large discoveries
of shale gas around the world for UK energy and climate change
Large scale discoveries of shale gas resources do
not necessarily mean large scale production will follow due to
technical and economic factors, particularly in Europe. However,
if we assume large scale production occurs this will increase
overall gas supply, which is equivalent to large discoveries of
conventional gas. Thus, an increase in shale gas production is
likely to have the same impact on energy policy as an increase
in gas production from conventional sources.
Large scale unconventional gas production in the
US has already had a significant impact on global, European and
UK energy prices. The significant rise in US indigenous production
has reduced its LNG import requirement freeing up cargoes for
alternative destinations. It is difficult to isolate the impact
of increasing shale production on global gas prices from other
factors such as demand reduction due to the recession and the
increase in LNG liquefaction capacity. However, it is likely
to have played a role in reducing gas prices.
Large unconventional gas production (as with any
increase in gas supply) is likely to have an impact on the UK
energy policy. For instance, everything else equal, it is likely
to improve the security of supply outlook, both if large scale
UK indigenous unconventional production is realised which then
displaces imported gas or if large scale unconventional gas production
in other countries occurs freeing up gas for international markets.
Our view is that impact on security of supply for the UK is likely
to be neutral to positive. However, a number of factors complicate
the picture, for instance how quickly global demand will recover,
in particular the speed of energy demand growth in China and India.
Finally, it may be new regulations, particularly
environmental, may be need to manage the environmental impact
of unconventional gas drilling, in particularly relating to usage
and disposal of water.
How does the carbon footprint of shale gas compare
to other fossil fuels?
Work on understanding the environmental impact of
unconventional gas production is still at an early stage. However,
environmental impacts are likely to include impact on water resources,
concerns on contamination of the water table and the possible
leakage of methane.
The Environmental Protection Agency in the US has
launched a study into the impact of hydraulic fracturing, used
in shale gas production, on the environment including drinking
water. The study will publish its results in 2012 (please see
the following link
A paper published by Robert Howarth at the University
of Cornell calculated that if methane leakages from hydraulic
fracturing are including, along with emissions from forest clearing
and water transport the carbon footprint of shale gas is slightly
worse than coal. However, the paper notes that the assessment
is highly uncertain and the numbers should be treated with caution
I hope that you consider this information useful.
11 Unconventional gas is largely made up of methane,
i.e. the same as conventional gas. However, it is harder and/or
less economic to extract than conventional gas. Gas that is currently
considered unconventional could become conventional as technology
develops and costs fall. CBM is found in coal seams and is methane
gas that has either been absorbed onto the coal or is dispersed
into pore spaces around the coal seam. Tight gas is gas trapped
in usually impermeable and non-porous rock. Back