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

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, 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,  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 

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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© Parliamentary copyright 2013
Prepared 26 April 2013