The Impact of Shale Gas on Energy Markets - Energy and Climate Change Contents

Conclusions and Recommendations

The US shale gas revolution

1.  We conclude that because the US is the only country to have developed a shale gas industry, it can serve as a useful case study when considering how a shale gas industry might develop in the UK. Some of the factors which facilitated the US revolution, however, do not apply to the UK and so development of the UK's shale gas industry is likely to be different to the experience of the US. The UK should learn the lessons of the US experience, including creating a favourable climate for companies to operate in, while ensuring environmental damage is avoided. (Paragraph 13)

Defining shale gas estimates

2.  We conclude that it is right for the Government to exercise caution over shale gas estimates given the uncertainty and confusion over definitions. If and when the Government does decide to issue estimates of UK shale gas resources it should set a good example and ensure that it is explicit about which definition it is using. We recommend that it should use the definition which is most relevant to the general public, which in our opinion is recoverable resources. The Government should also clearly communicate the uncertainty inherent in some of these figures by emphasising the difficulty of producing an accurate estimate of shale gas.
(Paragraph 16)

Calculating shale gas estimates

3.  We conclude that it is impossible to determine reliable estimates of shale gas in the UK unless and until we have practical production experience. Therefore, if companies can demonstrate that they can meet the required standards the Government should encourage exploratory shale gas operations to proceed in order to improve current estimates, providing that public concern over environmental impacts is recognised and taken into account. It should require shale gas companies to share their gas content and production figures with relevant research bodies (subject to commercial confidentiality). (Paragraph 21)

Latest shale gas estimates

4.  While it is unlikely that offshore shale gas will be pursued in the near future, strategically, it may have the most potential for the UK in the medium- to long-term, especially if it avoids public opposition associated with onshore operations. We repeat the recommendation made in our previous report that DECC encourage the development of the offshore shale gas industry in the UK, working with the Treasury to explore the impacts of tax breaks to the sector. This must be done before the UK's North Sea oil and gas platforms are decommissioned, otherwise the opportunity to utilise the UK's offshore oil and gas assets may pass. (Paragraph 29)

Public perception

5.  One key to community acceptance will be a robust factual response by government to scare stories. The other key to ensuring public acceptance of the shale gas industry is community engagement. Engagement should be early and businesses need to be able to demonstrate that they are both listening and responding to community concerns. The Government should consider whether it would be appropriate for the new Office of Unconventional Gas and Oil to provide advice and support to local communities living near potential shale gas developments, taking into account the need to address perceptions that the Office may be too closely linked to industry.
(Paragraph 34)

6.  Communities who are affected by shale gas development should expect to receive, and share in, some of the benefits of the development. We support the Government's intention to ensure that local communities will benefit from shale gas projects in their area. We recommend that the Government explores ways of sharing substantial material benefits with local communities. In the same vein as the recommendation in our Building New Nuclear report, one option the Government could consider is extending the scope of its proposal to allow local authorities hosting renewable energy projects to retain business rates to include shale gas developments. A mechanism for sharing substantial material benefits with local communities should be ready to be offered to communities in time to encourage them to take a positive view of the prospect of commercial shale gas operations beginning in their locality. (Paragraph 37)


7.  We welcome the Government's attempts to minimise the regulatory burden on companies by streamlining processes and avoiding duplication where possible. However, robust regulation of the sector in order to protect the environment and ensure the health and safety of workers is absolutely essential in itself as well as to ensure that the shale gas industry is to be accepted by the general public. We recommend that the Government maintains the highest standards of protection in environment and health and safety procedures. When the Government provides detail of the objectives, remit and responsibilities of the Office of Unconventional Gas and Oil should include clear lines of accountability to a single Minister responsible for the Office. The Government must also demonstrate how it intends to avoid any potential conflict of interest arising from the different roles of the Office. (Paragraph 43)


8.  The Government should make an assessment of whether these tax breaks will continue to be required during commercialisation. (Paragraph 47)

Impact of foreign shale gas on UK gas prices

9.  We conclude the shale gas revolution in the US has the potential to influence the nature of gas markets around the world. In particular, it could stimulate greater use of gas-to-gas competition in spot markets to determine gas prices rather than oil-indexation. However, this would not necessarily guarantee that the price of gas will fall. (Paragraph 52)

10.  We conclude that if the US were to begin exporting its shale gas as LNG, the UK might find it economically attractive to import some of this gas. However, the significant transportation costs associated with shipping LNG, combined with expected demand for LNG from Asia, means that the price for this gas in the UK is likely to be significantly higher than that experienced in the US. (Paragraph 56)

Impact of domestic shale gas on UK gas prices

11.  We conclude that it is too early to say whether domestic production of shale gas could result in cheaper gas prices in the UK. It is unlikely that the US experience will be directly replicated in the UK because of differences in geology, public attitudes, regulations and technological uncertainties. Shale oil is likely to be present in the UK but it remains uncertain whether industry will consider shale oil economically worthwhile to explore. (Paragraph 61)

Impact of foreign and domestic shale gas on UK gas markets

12.  We conclude that there remains substantial uncertainty about the impact shale gas will have on gas prices, both internationally and domestically, and it is by no means certain that prices will fall a result of foreign or domestic shale gas development It would be wrong for the Government to base policy decisions at this stage on the assumption that gas prices will fall (it is possible that they will rise) in the future. However, if large quantities are found they will either bring down prices in the UK, or generate substantial tax revenues, or both - and will certainly reduce imports with benefits to our balance of payments and energy security. For all these reasons the Government should encourage exploration to establish whether significant recoverable reserves exist. (Paragraph 64)

Global emissions

13.  We conclude that although development of shale gas in the US has reduced America's greenhouse emissions this may have been offset by increased use of the coal in Europe. This highlights the importance of improving the EU ETS to ensure it is able to deter the consumption of unabated coal for electricity generation. (Paragraph 68)

UK emissions

14.  We recommend that the Government should complete its research into the impact which shale gas extraction could have on greenhouse gas emissions as quickly as possible so that the data can be used when considering applications for licenses for commercial scale extraction. Policies on flaring and venting of methane should be reviewed in light of the study in order to ensure that fugitive emissions from fracking are kept as close to zero as possible. DECC should also monitor the methane emissions of those companies that are currently exploring for shale gas. It should be possible, by way of regulation, to ensure that fugitive emissions are prevented by outlawing venting. (Paragraph 73)

15.  We conclude that the Government needs to recognise that the unchecked development of gas-fired generation, which the development of shale gas may facilitate, might be incompatible with meeting the UK's climate change obligations. As we have recommended before the Government should implement an emissions performance standard (EPS) that gets tighter over time so as to include unabated gas-fired plant and avoid excessive gas "lock-in". However we do recognise there will be a role for unabated gas as peaking plant and to balance intermittent renewable sources. If shale gas does prove to be plentiful and either cheap or yielding substantial tax revenues it would be sensible to put far more emphasis on developing CCS.
(Paragraph 77)

16.  We share SSE's frustration at how long it is taking to develop CCS especially as it is clear that the Prime Minister sees it as critical to meeting our future climate change targets. The speed of commercial development of CCS will affect whether it can play a meaningful role in the UK's energy mix and how much gas we can rely on without conflicting with the UK's climate change targets. While we are pleased to hear in the Budget that the Government will take two CCS projects to the next stage of the CCS commercialisation competition, we recommend the Government needs to conclude its CCS competition as soon as possible and bring forward CCS demonstration projects to allow it to be deployed in time to contribute towards meeting our carbon budgets. Unless progress towards economically viable CCS accelerates rapidly in the next three years, it will become impossible to base UK energy policy on the assumption that it will be available in time to help meet the decarbonisation recommendations of the Committee on Climate Change. We intend to keep a close eye on DECC's progress in this area. (Paragraph 81)

17.  We recommend the Government push through its reforms to the electricity market, as set out in the Energy Bill, without delay. This will discourage the unchecked development of unabated gas-fired generation and create a favourable investment climate for low carbon technologies which could help to avoid gas "lock-in". (Paragraph 86)

Security of supply

18.  We recommend that Government should not rely on shale gas contributing to the UK's energy system when making strategic plans for energy security. We welcome the commitment made by the Minister that the new Office for Unconventional Oil and Gas will assess the effects of shale gas development on the UK's security of supply - providing we can be reassured that that the Office does not have a conflict of interest. (Paragraph 90)

Economic benefits

19.  We recommend that Government encourage partnerships such as the one between Cuadrilla and the University of Central Lancashire to ensure the skills required to develop the shale gas industry are available. Government should make an assessment of the need for skills development and should work with industry and the relevant sector skills council to develop a skills action plan for shale gas similar to the Nuclear Supply Chain Action Plan which the Government has recently published.
(Paragraph 93)

20.  If shale gas development produces cheaper gas prices in the UK, as a result of the export of shale gas from the US and the development of shale gas in the UK, the energy intensive industries could benefit from lower electricity and chemicals prices. (Paragraph 96)

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Prepared 26 April 2013