Will fracking really produce cheaper Energy?
In August 2013, Prime Minister David Cameron wrote, “Fracking has real potential to drive energy bills down. Just look at the United States: they’ve got more than 10,000 fracking wells opening up each year and their gas prices are three-and-a-half times lower than here.” [1]
This was surprising because only a few days earlier Richard Sarsfield-Hall, Senior Principal of Pöyry Management Consulting, commenting on a report they made for their client Cuadrilla, said, “Shale gas development in the UK won’t lead to a collapse in gas prices.” [2] Presumably Mr Cameron missed that.
And many months earlier, in February 2013, leading energy analysts Bloomberg New Energy Finance, said, “Exploitation of the UK’s significant shale gas resources is unlikely to result in low natural gas prices. Market prices will continue to be set by imported gas.” Bloomberg concluded that hopes of shale gas bringing in a new dawn of low energy prices in the UK were ‘wishful thinking” [3] Perhaps Mr Cameron missed that as well.
But way, way back in December 2012 The Daily Telegraph reported that Conservative MP Charles Hendry, who had served as an energy minister until the September reshuffle, had told The Telegraph that shale gas extraction was “unlikely” to bring down energy costs significantly. [4] Did Mr Cameron miss his own ex-Energy Minister’s comments as well? Perhaps.
Since Mr Cameron’s article was published, has anyone rallied to Mr Cameron’s defence?
Well, no. The day after the article was published, Cuadrilla Resources spokesperson, Mark Linder, publicly stated that the company’s analysis of the potential for reducing gas prices is “very small…at the most it’s a very small percentage…basically insignificant.” [5]
Three weeks later, Lord Stern, author of the hugely influential Stern review on the financial implications of climate change, stated in an interview in The Independent, that he was puzzled by the prime minister’s claim that fracking has real potential to drive energy bills down. “I do think it’s a bit odd to say you know that it will bring the price of gas down. That doesn’t look like sound economics to me. It’s baseless economics,” said Lord Stern, chair of the Grantham Research Institute on Climate Change at the London School of Economics. [6]
And then one month after Mr Cameron’s article, Ed Davey, Secretary of State for Energy and Climate Change, said, “North Sea gas didn’t significantly move UK prices – so we can’t expect UK shale production alone to have any effect.” [7]
So that’s that then. Shale Gas will not bring down UK prices.
Mr Cameron was wrong. Now the pricing claim has been dropped altogether.
So how come USA enjoys low gas prices, but UK will not? Quite simply the UK situation has very different dynamics to the USA.
First of all, costs of extraction. The International Energy Agency says, “Operating costs in Europe will be up to 50% higher than in the US because of factors including less promising geology and higher population density.” [8]
Secondly, gas is hard to export, you can either pipe it or freeze it and put it under high pressure into a specially designed tanker - Liquefied Natural Gas (LNG). When the shale gas started flowing in the US they had very little export infrastructure. All the gas that flowed went into the domestic market. Supply exceeded demand. Hence depressed prices.
The UK, however, thanks to its North Sea infrastructure, is already a 'gas hub' with two European interconnector pipelines and large LNG infrastructure. What’s more, the UK is a state member of the European Union - a free market, which means UK gas will be sold to highest bidder. Consequently the price in the UK will depend on the regional and global price of gas - just as it does now - no matter how much we produce.
The International Energy Agency estimated that prices in Europe will remain around 40% above their 2010 levels (a little above current levels) in a scenario in which most of the world's best shale reserves are used. [9]
But hang on, surely when America starts exporting gas, then our gas prices will come down? Unfortunately no. Peter Voser, retiring CEO of Royal Dutch Shell, was quoted in the Daily Telegraph saying, “the idea of cheap US gas going into the rest of the world and therefore changing the pricing structures across the world” was a “myth”. The price impact of US exports would be “not that significant” because the additional costs of liquefying, transporting and then re-gasifying the gas would mean its eventual cost was comparable to existing market prices.” [10]
Perhaps we should leave the final comment to the chairman of fracking company Cuadrilla Resources, non executive director of UK government, and ex-boss of BP, Lord Browne. He said, “We are part of a well-connected European gas market and, unless it is a gigantic amount of gas, it is not going to have material impact on price." [11]
In conclusion
Unconventional gas will not bring our gas prices down.
References
[1] The Daily Telegraph, 11 August 2013
[2] Proactiveinvestors united kingdom, 6 August 2013, at: http://www.proactiveinvestors.co.uk/companies/stocktube/2133/shale-gas-wont-lead-to-a-collapse-in-uk-gas-prices-says-pyry--2133.html.
[3] Bloomberg New Energy Finance, 21 February 2013, at: http://about.bnef.com/press-releases/uk-shale-gas-no-get-out-of-jail-free-card/].
[4] The Daily Telegraph, 23 December 2013.
[5] Source: Greenpeace 12 August 2013, at http://www.greenpeace.org.uk/newsdesk/energy/fact-check/will-fracking-lower-bills
[6] The Independent, 3 September 2013.
[7] The Daily Telegraph, 10th September 2013.
[8] International Energy Agency, November 2012.
[9] International Energy Agency: ‘World Energy Outlook’, November 2012.
[10] The Daily Telegraph, 16 October 2012.
[11] Speech given to London School of Economics 27 November 2013.
This was surprising because only a few days earlier Richard Sarsfield-Hall, Senior Principal of Pöyry Management Consulting, commenting on a report they made for their client Cuadrilla, said, “Shale gas development in the UK won’t lead to a collapse in gas prices.” [2] Presumably Mr Cameron missed that.
And many months earlier, in February 2013, leading energy analysts Bloomberg New Energy Finance, said, “Exploitation of the UK’s significant shale gas resources is unlikely to result in low natural gas prices. Market prices will continue to be set by imported gas.” Bloomberg concluded that hopes of shale gas bringing in a new dawn of low energy prices in the UK were ‘wishful thinking” [3] Perhaps Mr Cameron missed that as well.
But way, way back in December 2012 The Daily Telegraph reported that Conservative MP Charles Hendry, who had served as an energy minister until the September reshuffle, had told The Telegraph that shale gas extraction was “unlikely” to bring down energy costs significantly. [4] Did Mr Cameron miss his own ex-Energy Minister’s comments as well? Perhaps.
Since Mr Cameron’s article was published, has anyone rallied to Mr Cameron’s defence?
Well, no. The day after the article was published, Cuadrilla Resources spokesperson, Mark Linder, publicly stated that the company’s analysis of the potential for reducing gas prices is “very small…at the most it’s a very small percentage…basically insignificant.” [5]
Three weeks later, Lord Stern, author of the hugely influential Stern review on the financial implications of climate change, stated in an interview in The Independent, that he was puzzled by the prime minister’s claim that fracking has real potential to drive energy bills down. “I do think it’s a bit odd to say you know that it will bring the price of gas down. That doesn’t look like sound economics to me. It’s baseless economics,” said Lord Stern, chair of the Grantham Research Institute on Climate Change at the London School of Economics. [6]
And then one month after Mr Cameron’s article, Ed Davey, Secretary of State for Energy and Climate Change, said, “North Sea gas didn’t significantly move UK prices – so we can’t expect UK shale production alone to have any effect.” [7]
So that’s that then. Shale Gas will not bring down UK prices.
Mr Cameron was wrong. Now the pricing claim has been dropped altogether.
So how come USA enjoys low gas prices, but UK will not? Quite simply the UK situation has very different dynamics to the USA.
First of all, costs of extraction. The International Energy Agency says, “Operating costs in Europe will be up to 50% higher than in the US because of factors including less promising geology and higher population density.” [8]
Secondly, gas is hard to export, you can either pipe it or freeze it and put it under high pressure into a specially designed tanker - Liquefied Natural Gas (LNG). When the shale gas started flowing in the US they had very little export infrastructure. All the gas that flowed went into the domestic market. Supply exceeded demand. Hence depressed prices.
The UK, however, thanks to its North Sea infrastructure, is already a 'gas hub' with two European interconnector pipelines and large LNG infrastructure. What’s more, the UK is a state member of the European Union - a free market, which means UK gas will be sold to highest bidder. Consequently the price in the UK will depend on the regional and global price of gas - just as it does now - no matter how much we produce.
The International Energy Agency estimated that prices in Europe will remain around 40% above their 2010 levels (a little above current levels) in a scenario in which most of the world's best shale reserves are used. [9]
But hang on, surely when America starts exporting gas, then our gas prices will come down? Unfortunately no. Peter Voser, retiring CEO of Royal Dutch Shell, was quoted in the Daily Telegraph saying, “the idea of cheap US gas going into the rest of the world and therefore changing the pricing structures across the world” was a “myth”. The price impact of US exports would be “not that significant” because the additional costs of liquefying, transporting and then re-gasifying the gas would mean its eventual cost was comparable to existing market prices.” [10]
Perhaps we should leave the final comment to the chairman of fracking company Cuadrilla Resources, non executive director of UK government, and ex-boss of BP, Lord Browne. He said, “We are part of a well-connected European gas market and, unless it is a gigantic amount of gas, it is not going to have material impact on price." [11]
In conclusion
Unconventional gas will not bring our gas prices down.
References
[1] The Daily Telegraph, 11 August 2013
[2] Proactiveinvestors united kingdom, 6 August 2013, at: http://www.proactiveinvestors.co.uk/companies/stocktube/2133/shale-gas-wont-lead-to-a-collapse-in-uk-gas-prices-says-pyry--2133.html.
[3] Bloomberg New Energy Finance, 21 February 2013, at: http://about.bnef.com/press-releases/uk-shale-gas-no-get-out-of-jail-free-card/].
[4] The Daily Telegraph, 23 December 2013.
[5] Source: Greenpeace 12 August 2013, at http://www.greenpeace.org.uk/newsdesk/energy/fact-check/will-fracking-lower-bills
[6] The Independent, 3 September 2013.
[7] The Daily Telegraph, 10th September 2013.
[8] International Energy Agency, November 2012.
[9] International Energy Agency: ‘World Energy Outlook’, November 2012.
[10] The Daily Telegraph, 16 October 2012.
[11] Speech given to London School of Economics 27 November 2013.
