2 Background
The US shale gas revolution
4. The United States (US) is one of the few countries
to have developed shale gas at a commercial scale. The impact
shale gas has had on US energy market and its wider economy has
been described in terms of a "revolution" which could
have impacts globally. Mr Yeager, Chief Executive of Petroleum
and Group Executive Officer of BHP Billiton, told us that, "there
is a huge abundance of shale gas and it will have a worldwide
impact."[4] The US
has a specific set of circumstances which allowed the industry
to develop and which, importantly, differ to other countries especially
the UK. Nevertheless, as the only example of a fully functioning
shale gas industry, the US experience serves as a useful comparator
when looking at how a shale gas industry might develop in the
UK.
5. The US shale gas revolution has been roughly
twenty years in the making.[5]
Previously, US production of conventional oil and gas was in decline.[6]
In response, the US Federal Government sponsored research and
development methods to estimate the volume of gas in unconventional
natural gas reservoirs and to improve ways to extract the gas.[7]
An unconventional fuel production credit was introduced that applied
to certain unconventional fuels including, for a time, natural
gas produced from, "... Devonian shale,[8]
coal seams, or a tight formation...".[9]
These measures were designed to incentivise the development of
US unconventional resources, though some witnesses suggested they
did not play any significant part in accelerating shale gas development.
6. Rapid technological progress, supply chain
development, a favourable regulatory regime, low population density,
and mineral rights (which generally confer to the landowner),
allowed the shale gas industry to flourish.[10]
Mr Yeager described how the regulatory regime in the US is stringent
but reasonable and has a "let's get it done" approach.[11]
He also explained that most areas that are being drilled are sparsely
populated and in some places have "more cows than people."[12]
7. The development of shale gas has prompted
a strong resurgence in domestic production and, the US is now
heading towards self-sufficiency.[13]
In fact, the US is now looking at the potential to export its
shale gas as liquefied natural gas (LNG).[14]
The LNG import terminals which were built prior to the shale gas
revolution (in order to compensate for the decline in indigenous
production) are now underused and many are applying to be converted
into export terminals.[15]
The large quantity of shale gas coming onto the US market, combined
with an inability to export the gas has seen the US gas price
reduce from around $12 to $3 per million British thermal units
(Btu) in just a few years.[16]
The US now has the cheapest gas market in the world.[17]
8. Cheap gas prices in the US have had a significant
impact on its economy and according to the Minister, "it
has arguably increased American competitiveness." This includes,
for example, providing feedstocks to the petrochemical industry
which has seen a revival.[18]
A report by IHS Global Insight found that in 2010 the US shale
gas industry had supported 600,000 jobs, contributed $76 billion
to GDP and generated roughly $19 billion in federal, state and
local government tax and federal royalty revenues.[19]
9. Its abundance has seen gas displace coal as
the favoured fossil fuel for electricity generation contributing
to the dramatic reduction in US greenhouse gas emissions.[20]
Mr Yeager pointed out that, "in the US, we have met our Kyoto
targets, despite never signing the agreement; due to coal consumption
being replaced by natural gas."[21]
10. Witnesses told us that some companies are
making a loss because the cost of production is higher than the
market price of gas.[22]
Despite this, production of shale gas in the US has continued
to grow as a result of both improvements in technology and the
co-production of shale oil.[23]
Many places in the US which have shale gas also have shale oil.
It has been suggested that shale oil is now the main target of
US shale gas companies because it currently commands a higher
price than shale gas.[24]
Professor Stevens of Chatham House told us that whether the shale
gas revolution will continue to be economic depends on:
"How much money you can make out of the liquids
that you are producing during the shale gas operations. If the
shale gas is fairly wet then, even though the dry gas you are
selling is not earning you any money, you will earn a lot of money
from producing the liquids and that is the key to the continuation
of the revolution in the US at the moment."[25]
11. According to Mr Parsons of National Grid,
shale gas is, "not necessarily cheap gas" and tends
to cost more than conventional gas to produce.[26]
It may be that the current glut of gas in the US market which
has been caused by shale gas and which has caused prices to fall
as low as they have, is only temporary. Gas prices could, therefore,
rise again in the future. Companies may decide to scale back production
in response to low prices. Gas prices could, therefore, rise again
in the future to a level at which development is economic - though
that is probably well below the world price. Tightening environmental
regulations in relation to shale gas production, depletion of
easier sources of gas and development of US export potential could
also contribute to price rises.[27]
Mr Yeager is confident that shale gas in the US has a long future.
He told us that, "our great grandchildren will be drilling
for shale gas.".[28]
12. Concerns were expressed about the environmental
sustainability and social impact of shale gas extraction in the
US.[29] These concerns
include the potential for ground water contamination and seismic
activity.[30] The industry
recognises that its operations have the potential to adversely
affect individuals, communities and the environment but it says
it works hard to mitigate any potential negative impacts.[31]
Mr Yeager told us that:
"The social piece is a huge component and constitutes
a large part of the US onshore shale gas business. The powerful
benefits of the shale gas industry cannot override confidence
and citizen acceptance and we work very hard to make sure that
our operations are safe.".[32]
13. 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.
4 Annex 1: note of informal meeting with BHP Billiton Back
5
Q 78 [Professor Stevens] Back
6
Ev 81; Annex 1: note of informal meeting with BHP Billiton Back
7
Q 58 [Professor Stevens]; Qq 91-92; Department of Energy, Shale
Gas: Applying Technology to Solve America's Energy Challenges,
March 2011, www.netl.doe.gov Back
8
Devonian refers to rocks formed during the Devonian period of
geologic time (approximately 350 million years ago). Back
9
Q 70; Ev w20; Congressional Research Service, Energy Tax Policy:
Historical Perspectives on and Current Status of Energy Tax Expenditures,
7 May 2010, www.crs.gov Back
10
Q 63 [Professor Stevens]; Q 108 [Mr Tiley]; Q 307 [Chris Barton];
Annex 1: note of informal meeting with BHP Billiton Back
11
Annex 1: note of informal meeting with BHP Billiton Back
12
Annex 1: note of informal meeting with BHP Billiton Back
13
Ev w20; Annex 1: note of informal meeting with BHP Billiton Back
14
Ev 81 Back
15
Q 59; Q 72; Q136 [Mr Tiley]; Ev 81 Back
16
Q 231 [Mr Parsons; Mr Pibworth]; Q 293 Back
17
Q 61 [Dr Bros] Back
18
A feedstock is a basic material from which a product is manufactured.
This material is usually in an unprocessed or minimally processed
state. In the case of the petrochemical industry a feedstock could
include ethane, propane or butane obtained primarily from natural
gas processing plants. Back
19
Q 61 [Professor Bradshaw]; Q 62 [Professor Stevens]; Q 293; Annex
1: note of informal meeting with BHP Billiton;
Ev w20 Back
20
Q 61 [Mr Moore]; Q 63 [Dr Bros]; Q 73 [Dr Bros]; Ev w20 Back
21
Annex 1: note of informal meeting with BHP Billiton Back
22
Q 6 [Mr Smith]; Q 23 [Professor Davies]; Q 61 [Dr Bros]; Q 160
[Professor Anderson]; Ev 136 Back
23
Q 30; Q 61 [Dr Bros] Back
24
Q 6 [Mr Smith]; Q 23 [Professor Davies]; Q 30; Q 61 [Professor
Bradshaw]; Q 252 [Mr Parsons] Back
25
Q 63 [Professor Stevens] Back
26
Q 231 [Mr Parsons] Back
27
Q 63 [Professor Bradshaw]; Q 232 [Mr Spence] Back
28
Annex 1: note of informal meeting with BHP Billiton Back
29
Ev w20; Annex 1: note of informal meeting with BHP Billiton Back
30
Annex 1: note of informal meeting with BHP Billiton Back
31
Q 140 [Mr Tiley]; Ev w20; Annex 1: note of informal meeting with
BHP Billiton Back
32
Annex 1: note of informal meeting with BHP Billiton Back
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