Energy and Climate Change CommitteeWritten evidence submitted by Scotia Gas Networks (ISG 20)

SGN would like to thank the Energy and Climate Change Committee for the opportunity to respond to the inquiry on the impact of shale gas on energy markets. Scotia Gas Networks is the UK’s second largest gas distribution company providing a safe and secure supply of natural gas to 5.8 million customers. SGN own and operate two gas distribution networks, one covers the whole of Scotland whilst the other network covers the South East stretching from Milton Keynes to Dover in the east and Lyme Regis in the west, including London Boroughs south of the River Thames.

As the UK’s second largest gas distribution company, SGN is extremely interested in the prospects for future gas reserves in the UK. As a distributed source of gas, shale wells are likely to need large numbers of smaller scale connections to gas distribution networks than typical conventional gas wells which require larger connections to the national gas transmission system; in our licensed area, it is likely that SGN will be the provider of many of these connections and all of these connections will need to join our network.

Various pieces of research including that commissioned by the Energy Networks Association such as the Redpoint Scenarios Work have shown that in 2050, gas could still be supplying a significant proportion of the UK’s total energy demand through both heating and electricity generation whilst ensuring that carbon targets are met. Further still, this work showed that by utilising the existing asset base, ie the gas networks, the costs of meeting carbon targets and supplying clean energy were significantly reduced. If gas used in the UK’s energy mix is sourced domestically and is not imported, this also has clear benefits for energy security and the UK economy along with the carbon benefits associated with the reduced greenhouse gas emissions from reduced use of Liquefied Natural Gas (LNG).

Q1. 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?

It is widely remarked that the UK shale plays could provide significant volumes of gas into the UK market. However the resource is not as easily accessible as it is in the US and the population density of the UK and Western Europe would make it more difficult to mitigate the impacts of drilling on local communities.

The volumes of shale gas recoverable will depend on the gas price. At current market prices, shale gas extraction in the UK is unlikely to be economically viable due to higher production costs in the UK than the US. Higher gas prices in the future could allow for the extraction of higher cost unconventional shale gas, although large volumes of cheap shale gas extraction as seen in the US looks unlikely.

Q2. Why are the estimates for shale gas so changeable?

Estimating potential resources and recovery rates is not an exact science and an understanding of recovery rates is only reached after there is has been significant investment in an individual well. Given the absence of production experience outside of the US, resource estimates should be treated with caution.

Q3. What are the prospects for offshore shale gas in the UK Continental Shelf?

The prospects for offshore shale gas exploration appear limited because of the higher costs of offshore operations on top of the higher production costs of extracting unconventional gas. As with onshore shale gas, while offshore resources may be uneconomic at present, they could become economically viable if gas prices rise into the future.

Q4. What have been the effects of shale gas on the LNG industry?

The success of shale gas in the US has led to a reduction in demand for LNG in the Atlantic Basin. This has put a downward pressure on the UK market, but it is unlikely that shale gas volumes seen in the US will be replicated in Europe or elsewhere. This effect on the LNG market would be the same if any volume of natural gas were to be extracted and is not limited to shale gas.

Q5. Could shale gas lead to the emergence of a single, global gas market?

Large discoveries of natural gas of any source have the potential to moderate the global trade of natural gas, particularly the inter-regional flows of LNG, but there is no evidence to suggest that it could lead to the emergence of a single global gas market. The large transport costs associated with gas would be the most obvious barrier to a single global gas market.

Q6. Should the UK consider setting up a wealth fund with the tax revenue from shale gas?

It would appear unlikely that shale gas extraction would be a sufficiently lucrative activity to make it worthwhile to consider setting up a wealth fund. It is unclear why setting up a national wealth fund would be considered for shale gas, and not conventional oil and gas.

Q7. What are the effects on investment in lower-carbon energy technologies?

The UK government must ensure that the most cost-effective path for low-carbon transition is chosen in order to protect the most vulnerable in our society. Much of the vision surrounding low-carbon transition focuses on an increasingly electrified future with significant volumes of both personal transport and heat powered by electricity. Although an entirely electric future is one route to meet carbon targets, it has serious implications from a consumer and cost point of view.

Any increase in the use of shale gas in the UK and also across the world is likely to increase the availability of natural gas both reducing the costs of gas (relative to if there was no shale gas) and increasing supply margins. However, as we understand, the use of shale gas will not lead to a reduction in the price of gas, it is only likely to lead to a slower increase in gas prices.

Research commissioned by the Energy Networks Association and carried out by Redpoint Consulting has shown that the 2050 carbon targets can be met with gas supplying a significant proportion of the UK’s total energy demand through both heating and electricity generation.1 The work also shows that a future energy mix that included gas resulted in lower system costs than scenarios in which more heat was provided by electric heating systems, as the UK already has one of the most developed gas infrastructure networks in the world.

With whatever future energy system we have, gas is likely to continue to provide a significant proportion of the UK’s heat and electricity well into the future. If that gas can be sourced more cheaply and from within the UK, which shale gas potentially can, that is definitely a good thing.

Q8. What is the potential impact on climate change objectives of greater use of shale gas?

Gas is going to be required in the UK in whatever energy pathway we travel down. For electricity generation it is the only technology which can ramp up and down quickly enough to balance intermittent renewables.

For heat, gas provides the majority of the UK’s requirements with over 80% of homes with a gas connection and people generally happy with the service it provides. Gas heating currently also provides the cheapest levelised cost of heat for the majority of situations. As such it is difficult to see why any UK households would switch away from gas heating to other sources of energy. Independent research commissioned by ourselves and carried out by the University of Exeter has agreed with this view suggesting that without significant intervention, consumers will stick with gas.2

As we explained in the answer to our previous question, as gas is going to be required for the foreseeable future as both a transition and destination fuel, and shale gas can reduce the price of gas and reduce the UK’s reliance on imports, shale gas should be supported by the Government.

October 2012