New York Times: Why Shale Gas Won’t Conquer Britain

LONDON — With the announcement in December of its decision to award new shale drilling licenses in 2014, the British government has made plain its enthusiasm for shale gas. This zeal stems from the belief that an increased domestic gas supply will drive down national prices, at once enhancing export competitiveness while addressing growing public concern over rising domestic energy bills. But this strategy is misguided: Unlike in the United States, a shale gas revolution will not bring down prices in Britain.

In Britain, proponents of increased drilling, including Prime Minister David Cameron, like to point to the success of expanded shale gas production in America. There, the ability to tap into vast resources of shale gas, thanks to developments in a technology called hydraulic fracturing, or fracking, has led to a significant drop in domestic gas prices, created tens of thousands of jobs and helped to move the United States away from dependence on gas imports. But America’s shale gas revolution, which was over 25 years in the making, occurred in a context that would be very difficult to replicate in today’s Britain.

A number of specific conditions helped to drive the American shale gas revolution, not least favorable geology. Much of America’s shale yields high levels of very valuable liquids, like crude oil, as well as gas. The ability to extract these liquids, produced as a byproduct of shale gas operations, has tended to make the economics of American shale operations favorable despite low domestic gas prices.

The geological know-how underpinning the success of drilling in the United States was the product of government-funded research dating as far back as the 1980s, the results of which were widely disseminated to private industry. (This sort of research would not — and should not — be funded by private companies, as fundamental science cannot be patented.) Extensive tax breaks for shale operations were allotted early on in the game, and environmental regulations were relatively weak. Capital markets were willing to provide risk finance for oil and gas operations, and the industry was dominated by a network of small, entrepreneurial companies, supported by a dynamic and highly competitive service sector. Finally, property rights in the United States make any extracted shale gas the property of the landowner, incentivizing private owners to tolerate the disruptions caused by shale operations.

Virtually none of these characteristics are present in Britain. The British government is ideologically reluctant to fund basic scientific research. Environmental regulations are extremely strict, and public opposition to fracking is vehement. Capital markets are not accustomed to funding high-risk petroleum exploration activities, and the onshore service industry is woefully undeveloped compared with its American counterparts. The vesting of British oil and gas rights in the state, instead of with the private landowner, discourages individuals from supporting new drilling operations.

Moreover, without major government intervention in the domestic gas market, greater shale gas production will simply enable the big British companies to send more gas through the interconnector pipeline to Belgium, taking advantage of higher prices on the Continent. They would not leave money on the table for British consumers. Although Britain does appear to have significant technically recoverable resources of shale gas, a revolution along American lines is therefore unlikely.

Greater emphasis on shale may still generate revenue and make Britain more energy-secure, but only if the British government implements strategic policy measures. Tax breaks could be offered to communities that host shale gas wells (indeed, breaks along these lines have recently been proposed, with payouts of 100,000 pounds, or about $162,000, for each hydrofractured well, plus one percent of the revenues from each well — but the specifics remain unclear). Incentives could also be implemented to spur the development of a service industry that could eventually become a major earner, exporting its services to a Europe hungry for shale gas operations.

Most crucially, in a country where communities are being mobilized to actively resist the presence of shale gas operations, the British government must make a concerted effort to address public concerns. Among these is the fact that current shale gas activities are subject to a plethora of regulations, and monitored by multiple, often obscure, authorities. The establishment of a designated administrative body for shale gas operations, armed with a single set of production guidelines, might go some way to assuaging community fears.

There are legitimate environmental concerns, and these will have to be weighed against any benefits of increased shale gas production. Many fear that a greater emphasis on shale will lead to an increase in greenhouse gas emissions, a byproduct of methane emissions and burning larger volumes of natural gas. Groundwater pollution and waste are real risks. Also significant is the argument that a ramping up of shale gas operations would come at the expense of needed investments in renewable energies like wind and solar.

To the extent that it may reduce Britain’s dependence on gas imports, shale gas has the potential to make the country more energy secure. And it may also generate some much-welcomed revenue. But even if the public relations campaign can be won, the British government is ultimately likely to be disappointed because a shift to shale will not bring down domestic gas prices.

Paul Stevens is a distinguished fellow at the Energy, Environment and Resources Department at Chatham House in London.

Posted on: January 15, 2014