Energy and Climate Change CommitteeWritten evidence submitted by the Chemical Industries Association (CIA) (ISG 14)

1. The Chemical Industries Association (CIA) represents a sector at the heart of UK manufacturing, for which a reliable and competitively priced energy supply is essential to a continued presence in the UK. Although some of our members have interests in energy production, CIA’s collective interests are overwhelmingly those of energy consumers. Hydrocarbons are also used widely as feedstocks in chemical processes: products such as fertilisers, plastics, dyestuffs and pharmaceuticals all have their origins here. It is from an energy and feedstock users’ standpoint that CIA offers the following comments, and from this perspective that we conclude the UK should seek without delay to derive maximum advantage from its shale gas—and other “unconventional” gas resources.

2. We have sought to answer as best we can each of the issues highlighted in the Select Committee’s request for contributions to the Inquiry. What we lack in detailed technical knowledge of the exploration and extraction process is balanced, we believe, by our appreciation of the potential impact on users of both energy and feedstocks. Our overall views are set out in a short summary, following which we address each of the Committee’s specific questions

Summary

3. It is not yet clear precisely how much shale gas can be recovered in the UK, or at what cost, but early indications are that it could be significant, and if not quite on the “game changing” scale of the US experience, certainly of comparable magnitude to our “conventional” North Sea gas reserves. We ask government to make clear without delay that shale gas would be seen as a welcome addition to the UK’s energy resources and to encourage the necessary further exploratory drilling, both onshore and offshore as required, to establish the scale of the opportunity. A similar attitude should be taken towards other forms of “unconventional gas”, for example that recoverable from the underground gasification of thin coal seams, of which the UK has many. Assuming early promise is confirmed, we should then move as fast as possible to routine production. Regulatory standards to ensure safe exploitation of shale gas should be urgently reviewed so that they are fit not only for exploratory drilling but also for full scale production.

4. In contrast to the major renewable technologies, we do not believe that government support needs to be of a financial nature, but only in the form of timely granting of exploration and production licences. Extensive experience in the US, as well as closer to home in Germany, has shown that shale gas can be extracted in an environmentally responsible fashion and at low cost. Energy consumers will not be burdened with the costs of subsidies granted to renewables operators, but will benefit from exploitation of a fully competitive indigenous resource. Rather than making UK energy supplies more expensive, shale gas can reduce prices, thus providing economic benefits both through the extraction activity itself as well as helping the wider economy by enhancing energy security and lowering prices. Although an increase in shale gas supply might be balanced by a corresponding reduction of LNG imports into Europe, diluting the direct impact on UK gas prices, the greater security for the UK in having more locally available gas would tend to reduce the forward winter price premium relative to Continental Europe which has for many years been a major competitive disadvantage for UK energy intensive industry.

5. We appreciate that there are concerns in some quarters that the widespread use of shale gas could compromise the UK’s climate policy goals. CIA believes that there are good reasons to look at the situation from the opposite perspective: without gas as a back-up for the presently available unpredictable and unreliable renewables, the UK has no realistic chance—save by closing large swathes of the economy—of coming close to these goals. With much of our coal based generation capacity soon to be retired, and new nuclear plants likely to be delayed, we have urgent need for more gas—just as conventional North Sea supplies continue to dwindle and we become more dependent on imports. Allowing shale gas into the mix will help the phase out of coal, as well as winning time for much needed research into improving the renewable technologies at our disposal. If that research is successful, it should enable a subsequent wider deployment of low or zero carbon technologies, while still maintaining gas as a back-up to maintain the necessary level of reliability in our energy supply. Carbon capture and storage technology, once proven, could also be applied to gas fired power stations.

6. We should also like to underline the dual opportunity presented by shale gas. Not only does it represent a new, indigenous source of competitive energy, displacing imports and lowering price levels, but it could also provide feedstocks for conversion into chemical products. The US shale gas boom is leading to a huge investment programme in ethylene and downstream products based on the ethane component of shale gas. The UK already has gas “crackers” at Grangemouth and Mossmorran in Fife which use equivalent feedstocks from the North Sea. Present exploitable North Sea reserves are however finite and will need replacing if the plants using them are to continue in operation. Fertiliser producers could use the methane component of shale gas: one of the UK’s main nitrogen fertiliser plants is located directly above what is presently regarded as a prime shale gas opportunity.

Commentary on Specific Questions

What are the estimates for the amount of shale gas in place in the UK, Europe, and the rest of the world, and what proportion is recoverable?

7. The most comprehensive listing of international shale gas reserves which CIA has found is that published by the US Energy Information Administration (EIA) in a report entitled “World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States”1. The report was prepared for EIA by Advanced Resources International (ARI) in February 2011. It quotes for each country listed both a “gas in place” figure, as well as a smaller “technically recoverable resource base” which it is judged can be recovered using existing technology. The report authors said that in estimating total gas in place they had considered only higher quality, “prospective areas” of each shale gas basin and formation. Furthermore, the in-place and recoverable resource values for each shale gas basin and formation were assessed to reflect: (1) the probability that the shale gas formation will (or will not) have sufficiently attractive gas flow rates to become developed; and (2) an expectation of how much of the prospective area set forth for each shale gas basin and formation will be developed in the foreseeable future.

8. For the UK the report estimates gas in place at 97 trillion cubic feet (tcf), or 2700 billion cubic metres (bcm), and technically recoverable resources at 20 tcf, or roughly 550 bcm. For comparison, the UK’s gas consumption in 2011 was around 93 bcm. Cuadrilla, the most prominent company presently undertaking exploration in the UK, later announced in September 2011 that it had located 200 tcf gas in place in the Bowland shale.

9. For Europe as a whole (including eastern Europe, but excluding Russia) the IEA/ARI report estimates gas in place at 72,000 bcm and technically recoverable resource at 17,500 bcm. The bulk of European reserves are believed to lie in Poland and France; recoverable resource in each of these countries is put at around 5,000 bcm.

10. For the world as a whole, but excluding the US itself, as well as regions such as the Middle East and Russia which have large reserves of conventional natural gas and where shale gas is therefore unlikely to be exploited in the near term, shale gas in place was put at over 600,000 bcm and recoverable resource at 160,000 bcm. US recoverable resource is separately quoted by EIA at about 24,000 bcm.

Why are the estimates for shale gas so changeable?

11. Estimating reserves of any mineral deposit, whether oil, gas in various forms, or metal ores is inherently uncertain because it depends on sample drilling and extrapolation to larger areas and depths. Further judgment is then required to assess the likely recoverable percentage. This depends in the case of shale gas both on the nature of the deposit (basin) as well as the current and possible future capabilities of drilling technology. Prices of alternative resources, as well as taxes and levies applied, also influence which reserves will be worth exploiting. Drilling technology associated with shale gas exploitation has seen very rapid advances and this clearly influences estimates of recoverable reserves. Environmental issues and government attitudes to licensing and taxation can likewise influence the viability of reserves. Estimates of recoverable reserves of “conventional” hydrocarbons have generally risen with time as exploration and extraction techniques have been improved—CIA expects this will be the case with shale gas.

What are the prospects for offshore shale gas in the UK Continental Shelf?

12. We have no technical information, but it is likely that the shale gas formations will extend offshore. The UK has considerable expertise in drilling for “conventional” offshore oil and gas, and we should therefore be able to access equivalent shale reserves. We are also aware that the UK has considerable reserves of thin seam underground coal which extend under the North Sea and possibly elsewhere round the UK’s shores, and that these could lend themselves to exploitation using coal gasification techniques.

Should the UK consider setting up a wealth fund with the tax revenue from shale gas?

13. If this question is being asked, it implies that there must be a reasonable chance that UK shale gas could be exploited in significant quantity. Perhaps it should have been put several decades ago before the North Sea conventional oil and gas began to flow. However, the UK is far from being in the same position as, say, Norway or the Gulf states in terms of revenues per inhabitant. Given the dire state of the UK’s public finances, we would suggest that revenues from shale gas exploitation might be better applied to reducing the public debt rather than establishing a separate fund. Alternatively, a proportion of the revenues might be ring-fenced to support research into more dependable renewables/low carbon technologies.

What have been the effects of shale gas on the LNG industry?

14. Shale gas is an alternative to “conventional” gas, whether from a local source or internationally mobile LNG. Its ability to affect market prices, certainly on a regional basis, has been seen very dramatically in the US. Prior to the discovery and production of shale gas in quantity in the US, it had been assumed that the US would become an importer of conventional LNG. Because shale gas production has expanded so rapidly, this has not been the case, and the US could instead become a significant exporter. US demand for globally transportable LNG has therefore not materialised, although the market impact has been offset by the consequences of the Fukushima disaster, as subsequent closure of Japan’s nuclear generating capacity has led to higher Japanese gas imports. Most observers consider the UK has been an indirect beneficiary of US shale gas, in that LNG has been more freely available than otherwise might have been the case, and it has been easier to attract supplies of LNG to UK import facilities at Milford Haven and Isle of Grain.

15. The large scale availability of shale gas is also affecting investment decisions related to other reserves. As a Guardian headline announced on 29 August, “Plug pulled on Russia’s flagship Shtokman energy project ... Soaring costs, falling European demand and cheap shale gas in America see Gazprom’s ambitious Arctic scheme shelved”. Russian sources have since hurried to say that the Shtokman project in the Barents Sea is merely postponed: as the on line Moscow Times reported on 2 September, “French oil company Total said it and partners in a project to develop the Shtokman gas field in the Barents Sea were studying ways to make it economically viable after financing costs became too high. Total, Gazprom and Norwegian company Statoil have not decided to postpone the project indefinitely, Total said Friday. ‘The partners have come to the conclusion that the cost of the project with its current definition is too high,’ the company said. ‘Consequently, the partners’ teams are pursuing technical studies to achieve an economically viable project.’” The reason for the project’s reassessment is one of cost in a market where prospects of increased future supply from shale gas have pushed down price expectations.

Could shale gas lead to the emergence of a single, global gas market?

16. The necessary condition for the establishment of a single global gas market is the existence of a global gas transportation network—whether by pipeline or specialised terminals and ships—with sufficiently high capacity and moderate costs relative to the inherent value of the commodity. Regions with gas surpluses must be able to supply those with deficits. This is clearly the case for oil: huge tankers move vast quantities at costs which are only a small fraction of the market value. A counter example, however, is the current differential in price between, say, North Sea Brent crude oil and the West Texas Intermediate benchmark. Increased inland oil production in the US is being delivered by existing pipelines to Cushing, Oklahoma, from where there is insufficient outward transport capacity to allow significant quantities to flow into world markets and close the price difference.

17. Gas is a more difficult commodity to transport over long distances than oil (or coal): the necessary export terminals with liquefaction facilities, specialised shipping with pressurised, cooled containment and import terminals with re-gasification and storage capacity are all expensive investments, as are long distance high capacity pipelines. However, the UK is already importing LNG from as far away as North Africa and the Gulf, so that a world market is moving closer. If shale gas developments result in greater regional surpluses of cheap gas it will become more attractive to invest in yet more export facilities in order to access higher price markets.

18. Fundamental supply and demand balances determine prices in regions with comprehensive pipeline networks (which, once built, are a much cheaper form of transport than shipping.) Northern Europe already approximates to this position, although local price differentials can still occur as a result of varying storage capacities, contractual obligations and pipeline constraints. Arbitrage between regions will occur when the price differential exceeds the logistical costs of transportation. It is immaterial whether the gas is “conventional” indigenous gas, internationally shipped LNG or from shale deposits: price and availability are the key factors.

What are the effects on investment in lower-carbon energy technologies?

19. Essential attributes of any power supply system are the ability to supply power reliably when and where required. Of the present low carbon technologies so far deployed at scale only nuclear can be regarded as a dependable provider of baseload power. Wind is fine for powering batch processes where time is not critical and intermediate stocks can be built up, but without back-up is far too capricious to meet the demands of baseload electricity consumers. The aggregated grid-connected supply from wind can often fall to 5% or less of nominal capacity, sometimes for extended periods. At other times output fluctuates with large amplitude over short periods. This will still be the case even as total installed capacity increases. Solar is somewhat more predictable, but still fails to provide power when demand is likely to be highest, for example on cold winter evenings. “Smart grids”, even those envisaged with a capability of automatically switching off domestic appliances, can do little more than time shift a proportion of demand for a few hours in the interests of “peak shaving”. They could not cope with the magnitude of random variation in output over extended periods from a significant wind capacity. Without the benefit of hydro or pumped or other storage of comparable capacity, the only feasible balancing method for wind in the UK will be gas, incidentally operated much less efficiently than when used for continuous generation. CIA does not see lower-carbon energy technologies as alternatives to gas, but rather as dependent on gas availability. We would also mention at this point that the chemical industry uses a lot of heat. Renewable sources of heat for large scale industrial use are still not commercially viable in the UK and (like electricity generation) will still require some form of backup fuel (likely to be gas) to meet reliability requirements.

20. Since present policy is to support the building of more wind power, we see an increasing demand for gas as a back-up fuel. Furthermore, because the nuclear new build programme appears to be falling further and further behind schedule, it is clear that an alternative source of reliable baseload power will be required as old coal and nuclear plant is retired. “Clean coal” with carbon capture remains a possibility but the schedule for its deployment on a commercial scale has also appeared to recede, and it has the further disadvantage of impairing the energy efficiency of generation, quite apart from cost. Marine technologies such as wave and tidal power may yet offer more certain yields, but these remain distant prospects. To fill the gap in reliable baseload generation we have little alternative but to turn to gas.

21. Increasing our dependency on gas in this way has obvious dangers. CIA would prefer an energy supply with more varied composition, and we are acutely conscious of the lack of gas storage capacity in the UK. Shale gas, as a domestic resource, would help to reduce our dependence on imports, improve our energy security and potentially reduce the price of both gas and electricity in the UK. We see exploitation of shale gas as helping to allow the further deployment of the less reliable low carbon technologies currently available, and acting as a medium term alternative while more reliable, fit for purpose low carbon technologies are researched and developed.

What is the potential impact on climate change objectives of greater use of shale gas?

22. With the technologies currently at our disposal, we do not believe the UK can come close to its climate change objectives, and maintain a functioning competitive economy, without a major role for gas. If, as seems very likely, shale gas can be won in the UK while adhering to strict environmental standards and at a commercially attractive cost, it could either displace imported LNG or—the Committee’s implied concern—displace or delay deployment of other lower carbon energy technologies. However, CIA does not believe that these other technologies are yet able, on their own, to provide the reliability demanded by a modern economy—whether running an electrified train service, a hospital operating theatre, a computing centre or a steel or glass works. They still need back-up, using some form of hydrocarbons, either gas for substitute centralised power generation, or widely dispersed local emergency generators, to maintain essential power. Gas is also needed to ensure reliable industrial process heat input. We believe shale gas should therefore be seen as a positive option supplying enhanced energy security, reducing carbon emissions compared to those from coal fired power generation (disregarding here the possibility of carbon capture and storage in either case) and affording a much needed breathing space to undertake some essential development of more reliable low carbon technologies.

October 2012