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

8  Conclusion

97.   It has been two years since we last reported on shale gas. In the meantime progress has been slow, largely because of the 18 month moratorium on drilling. We do not believe that it was necessary to take so long to establish the safety of fracking. Hundreds of thousands of wells have been drilled in the USA providing an unprecedented test bed for this technology. In that respect it is different from other new technologies like nuclear where there are rarely more than one or two examples of new reactor types in operation. Had there been any serious consequences they would have come to light. The length of the moratorium has conveyed the impression that the case for and against proceeding with shale gas exploration is finely balanced when this is simply not the case. Care is required to ensure that the shale gas industry in the UK develops more quickly in the future while doing everything possible to allay unwarranted concerns of local communities. But the lack of progress over the past two years is disappointing. The Government has signalled that it sees a role for conventional and unconventional gas in the UK's future energy mix, but it has been slow to establish the framework within which the shale gas industry will operate.

98.  Shale gas offers potentially substantial benefits to the UK. Based on the US experience it is likely that development of shale gas in the UK could improve the UK's security of supply, provide employment, create additional revenue for the Exchequer, and support the energy intensive sector. However, the unique set of circumstances which brought about the US shale gas revolution limit the ability to draw comparisons. Given that the US is the only country so far to significantly develop its shale gas resources, we believe that it is still too early to predict the effect of either internationally or domestically produced shale gas on the UK.

99.  Below-ground, despite the very large estimates, there are significant uncertainties around how much shale gas can be technically recovered due to a lack of production experience outside of the US. This situation will improve as exploration continues. The experience of Poland demonstrates how prospects can change for the worse over a short period of time. For this reason we remain very cautious about some of the more optimistic shale gas estimates in the UK. We are keen to see exploration proceed quickly to validate current estimates and establish the true potential of shale gas in the UK. While it is unlikely that the UK's offshore resources will be economically attractive in the short-term, we believe that they may have medium- to long-term potential especially if they prove to be more acceptable to the public than onshore operations.

100.  Above-ground factors add an additional layer of complexity. The UK shale gas industry can only be developed with the support of the public. Communities affected by shale gas developments should receive and share in some of the benefits. The Government must ensure that the public have confidence in the new Office of Unconventional Gas and Oil, demonstrating clearly that any potential conflicts of interest are avoided. We have previously concluded that the current regulatory framework is sufficient to allow exploration to proceed. We emphasise that, as the industry develops, the regulatory framework will have to strike the right balance between the safeguards necessary to ensure effective environmental protection and the risks of placing unnecessary burdens on business. Similarly taxation policy should strike a balance between ensuring appropriate returns for the Exchequer while avoiding "strangling the industry at birth".

101.  It is still too early to conclude what effect shale gas will have on gas prices in the UK. However, due to a combination of factors including geological differences , population density and environmental safeguards, it cannot be assumed the UK will enjoy the low gas prices experienced in the US. For this reason we believe that it would be wrong for the Government to base energy policy decisions on the expectation that shale gas will be sufficient either to bring down prices or generate significant revenues in the future.

102.   Shale gas also presents challenges to the ability of the UK to meet its statutory climate change targets. While the US has seen a significant reduction in greenhouse gas emissions as cheap gas has displaced coal in the electricity sector, in the UK the opposite has occurred: cheap coal from the US has displaced gas. Moreover, debates over the life cycle emissions of shale gas (arising from so called fugitive emissions) combined with concerns that it will stimulate a new 'dash for gas' mean that these risks will have to be carefully managed. We share SSE's frustration at the slow pace of carbon capture and storage (CCS) development. As highlighted by the Prime Minister, developing CCS at commercial scale will be critical in determining what role gas can play in the UK's future energy mix.

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Prepared 26 April 2013