Economy

Fracking in the UK? Don’t hold your breath.

Lord MacGregor’s silly Telegraph op-ed is little more than a recitation of energy industry talking points.

The worthies over at the House of Lords—some of them, anyway—have issued a report deploring the fact that fracking has made virtually no progress in the UK, and that it should be an “urgent national priority,” noting that exploratory drilling hasn’t even really begun.

This is a report from the House of Lords Economic Affairs Committee—no, I didn’t know they had one either. I’m the first to admit that the House of Lords often provides a useful service—during the Blair era they prevented a whole series of draconian security measures from taking effect, for example, and were highly dubious about the Iraq misadventure. But in this case, I’m afraid they’re not quite on top of developments. Greenpeace had the predictable, and in this case completely appropriate, response—what the UK really needs to do is ignore the pipe dream of unlimited natural gas, and concentrate on more renewables.

Greenpeace has also accused the committee of cherry-picking the data that they’re relying on for their enthusiastic conclusion. I don’t know whether this is true or not—I haven’t gone through the report in enough detail, although I do notice some omissions. But John MacGregor (Lord Macgregor of Pulham, more appropriately for our purposes), who heads up the committee, helpfully pens a piece in the Telegraph today in which he calls for urgent action, and gives us the usual blather:

The shale revolution in the US has already transformed America’s energy mix, cut energy prices, reduced coal use, paved the way for the US to become a major exporter of liquefied natural gas and strengthened energy security. The full effects on world energy markets are still to be felt, but will be multiplied as countries with large shale deposits develop their own resources.

We are convinced that development of the UK’s potentially substantial shale resources should now be an urgent national priority. We fully support the Government’s decision to “go all out for shale”, but we are greatly concerned that here in the UK we’ve not yet left the starting gate. We are persuaded by the weight of scientific evidence that, with proper regulation, including the improvements we advocate, exploration and production of shale gas would be at low risk to the environment and public health. Our own shale gas would also strengthen the UK’s energy security and be a bridge fuel towards a low-carbon future. It is now vital to get on with the necessary exploration and appraisal to assess the UK’s reserves.

The objection to renewables that MacGregor gets to eventually is the usual one, by the way—they’re too expensive, and it would take so long, and, look, we may have all this gas.

So just why do people believe that fracking is a potential solution to a range of energy problems? The current government, led by David Cameron, is on record as enthusiastically supporting fracking, and it is indeed plausible that the UK is sitting on potentially substantial shale gas resources. Still, there are a whole lot of assumptions here that really don’t stand up to scrutiny, or represent a triumph of hope over experience. And it also suggests that many of the people pushing fracking, however well intentioned (as many of them indeed are), really don’t understand what’s going on, either in the US, or elsewhere in the world where developments have been undertaken. Let’s consider just two that are assumptions that are clearly embedded MacDonald’s puff piece, and presumably the report as well.

The first is right there in the MacGregor piece: “with proper regulation, including the improvements we advocate, exploration and production of shale gas would be at low risk to the environment and public health.” So what sort of regulation is “proper?” In fact, in the only country in the world where fracking is widespread, the US, regulation could hardly be said to be “proper.” Fracking is specifically exempted from all federal clean water laws, as per an act of Congress under George Bush in 2005. The patchwork of state and county regulations governing fracking is wildly arbitrary, and some states clearly do a better job than others, but there are still widespread environmental and health issues, many of which seem to be turning into outright problems, surrounding fracking.

More to the point, the various bits of data that keep coming out about the health effects of living near fracking sites should provide some caution. Which raises the question—do we even know what “proper” regulation of fracking should look like? It’s certainly not clear that one would want to rely on the US as a model of regulatory caution. And in fact, the report itself doesn’t, although it does appear to be a bit too credulous on the methane contamination issue, and on Public Health issues—but these will get aired over time, hopefully. Fortunately, wastewater disposal by deep-well injection doesn’t appear likely here, which is a good thing. As is the clear expectation that chemicals used in fracking be both (a) identified and (b) non-hazardous.

So Lord MacGregor may be right—many, indeed most, of the risks associated with fracking seen in the US may be controllable by “proper” regulation. But that assumes we know what needs to be regulated in the first place. The evidence does seem to keep accumulating that there are some clear risks here, and it doesn’t appear to me that these are fully addressed in the report. And then there’s this—what happens if stuff like this starts turning into class action suits, as often happens in the US? I think it’s still early days. But that doesn’t mean that there can’t be appropriate regulation—we just need to have a better idea of what it is we’re actually regulating.

Then there’s the more general assumption that the US experience can be replicated elsewhere. For a number of reasons, this is very unlikely. First, while it’s only vaguely clear that the UK might have a lot of shale gas resources, we know for a fact that the US does. It’ a big country, and has shale gas all over the place—consider the map below, courtesy of the US Department of Energy’s Energy Information Administration. This is a pretty accurate map of the shale gas areas in the US, and you can also more or less see where they extend into Mexico and Canada:

Now, China, Argentina and Algeria actually have more potential resources than the US, but there are problems there—fracking involves very large quantities of water, and much of the shale gas in China, for example, is in areas where water is scarce—and China already has huge water management and competition issues. And test drilling has been disappointing in China—there are no economically productive wells yet, apparently, although about 100 test wells have been drilled. In some areas, there’s too much clay, and this (literally) gums things up. Poland has had a similar experience—after some great enthusiasm several years ago, most US and Canadian drilling companies have pulled out, and only about 50 test wells have been drilled—and only one is economically viable at present. This doesn’t mean that these resources won’t be developed, but it does mean that it won’t be quick, or inexpensive. And these are the two countries with the most ambitious development programs—they’re actually farther along than anyone else.

The US, on the other hand, has many decades of experience with shale gas, nearly ten years of fracking experience, and over 40,000 actively producing gas wells. Not to mention about 80% of the global infrastructure for hydraulic fracturing (with much of the rest in Canada). And you know what else? It’s being used—it’s not like there’s a lot of extra equipment to go around. And the US also has significant infrastructure in the rest of the energy complex for natural gas—it has lots of pipelines, for example. It has lots of everything, in fact.

The other thing worth noting about the map are the areas outlined with a solid red line. These are relatively shallow areas of shale. It’s not fair, I’m sure, but the US seems blessed with the resources here—few countries have as much shale gas, and nowhere has shale gas that’s as easy to get out of the ground as the US. Naturally, this has affected the cost of the process, and contributed to what has been called the “overabundance of natural gas” that the US allegedly is set to experience for decades, if various prognosticators are to be believed.

So on this basis alone there’s reason to be dubious about the rapid or inexpensive development of shale gas resources in the UK. Then consider the first paragraph from MacGregor that we have cited. Let’s take these bits in order.

– “transformed America’s energy mix”—True enough. There’s a lot more cheap gas, so there has been a shift towards greater gas use. Whether or not this transformation is permanent remains to be seen; it relies on certain assumptions that may not be sustainable, the principal one being that natural gas will remain cheap as a result of hydraulic fracturing. For reasons to be discussed below, this may not be the case.

– “cut energy prices”—Well, yes. There was so much over-drilling of natural gas that gas prices actually went below $2 for a while there. Of course, drillers don’t actually make any money when gas is that cheap, so that’s not a sustainable situation either. A number of drilling companies have gone bankrupt in the past several years, in fact. Several of the larger ones—Chesapeake Energy comes perhaps a bit too easily to mind—were almost calamitous disasters, and will certainly end up as Harvard Business School case studies eventually. Gas prices have more than doubled since then, although it remains cheap relative to levels of say a decade ago.

Energy prices remaining low, as we’ve indicated, rely on several assumptions. One is that the economics of fracking are understood. This may or may not be true. On the one hand, the technology is improving—remember that fracking as it’s currently understood (hydraulic fracturing plus horizontal drilling) is a technology that’s actually been in widespread use for less than a decade. There’s always a learning curve for this sort of thing.

For example, it’s been known for decades that the decline rates of shale gas wells are much more rapid than conventional wells—the industry plans for this, sensibly. Still, it’s probably not the case that the decline rates seen in some shale fields recently was expected, because they are significant. I’ve actually seen little discussion of this point among industry analysts, but at some point it will need to be addressed. Specifically, several of the major shale gas producing areas are in outright decline—Haynesville, Barnett, and Fayetteville in particular. Well, this in and of itself wouldn’t be unexpected, although in the case of Haynesville, the decline has been extraordinarily rapid from its peak in November 2011, when it was the single largest producer of natural gas in the US. Since then production has declined about 45% in Louisiana, and about 20% in Texas (the areas straddles both states).

But the problem is that the number of producing wells actually has increased at Haynesville, both in the Texas and the Louisiana portion. So we have a situation at Haynesville where the number of producing wells is increasing while outright gas production is declining. In the case of Haynesville, the decline is dramatic. At Barnett and Fayetteville, the declines are less robust, but they are real, and in both cases also in spite of an increase in the number of producing wells. Now, these declines have been masked by the robust growth of overall shale gas production elsewhere in the US, particularly in the Marcellus Shale, and to a lesser extent at Eagle Ford. But this all suggests that the economics of this aren’t completely understood yet. The assumption that shale gas production in the US will remain relatively inexpensive for a long period is, frankly, a bit uncertain. Couple this with the LNG situation (discussed below) and you’ve got a headache.

– “reduced coal use”—Reduced coal use in the US at least, as some utilities have shifted to natural gas. But this shift was going to happen anyway under the new EPA requirements that are coming along governing coal use by utilities. And, more to the point, the coal that isn’t being used in the US is being exported, and exports of coal, particularly to Europe, have actually increased in recent years. So the net carbon benefit of lower coal use in the US is offset by using it elsewhere—and the additional cost of the energy used to get it there. It would be one thing if the coal not used by US utilities was to stay in the ground—but that’s not the case, sadly. (In fact, to be fair, the report itself seems to recognize this. Why MacGregor doesn’t follow his own report here is unclear.)

– “paved the way for the US to become a major exporter of liquefied natural gas”—Well, this is years away, and may or may not really happen at all. Yes, there’s certainly been lots of talk about this, especially with the Ukraine situation (has there ever been a geopolitical crisis so favorable to the US energy industry?). But there’s only one LNG liquefaction plant under construction at present, and it’s not coming on line until next year. Other permits have been granted, but there’s nothing there in any mass for years. The US isn’t exporting LNG in quantity for at least a decade. These facilities are not straightforward, either—they cost billions to put up, and it takes years. So you don’t just say, hey, let’s export some LNG, and then start exporting. There’s billions of dollars to spend and many years of development before we can even start that conversation.

There’s another issue as well, which relates to the political dimensions of this within the US. A large increase in US LNG export capacity would be a mixed blessing. There a number of studies that tout the positive economic impact of such exports. But a number of significant domestic consumers of natural gas—the chemical industry in particular, but also steel manufacturers and, in fact, any energy-intensive manufacturing firm—have expressed opposition to materially increasing US natural gas exports over concerns that such exports would increase the price of US natural gas. This has led to competing pieces of proposed legislation in the US Congress, with some legislation currently being proposed that would limit, if not block, natural gas exports, while other proposed legislation would do the reverse—it would allow a significant increase in LNG exports to a wide range of countries, including countries that do not have Free Trade Agreements with the US (including Japan, currently the largest importer of LNG, mostly from the Middle East).

This issue of the potential impact of LNG exports on natural gas prices is actually of critical interest for the US chemical industry, for example. While the potential impact of a substantial increase in LNG exports would not be a near-term one, even the long term impacts on natural gas pricing would probably be of interest to an industry set on investing at least $100 billion to upgrade plant over the next 10-15 years. Chemical producers, who are clearly aware of, and highly sensitive to, the impact of fluctuating natural gas prices on their own feedstock costs, have apparently viewed some of these proposals with concern—so much so that Dow Chemical resigned its membership in the National Association of Manufacturers in 2012 in reaction to the latter’s support of increased LNG exports. You can go on the Federal Energy Regulatory Commission (FERC) Web site and look at all the applications for LNG export facilities, which need to be approved by FERC. If all pending requests for LNG exports were approved and currently operational, this would represent about 45% of total 2013 US natural gas production. Do gas prices stay cheap in that scenario? Highly unlikely.

– “strengthened energy security”—I’m not sure what this means. If it means that the US may reach a point where it no longer needs to import oil and gas, this is unlikely. The US is unlikely to stop importing oil unless it builds a whole new set of refineries. It may be producing excess oil soon, though—but this is not the oil it’s importing, which is heavier. It’s possible that the US could become self-sufficient in natural gas—but this isn’t something that’s imported in any real quantity except from Canada, and these imports aren’t likely to disappear. Again, this is a talking point that sounds good until you try to figure out what it means.

MacGregor himself? I’m sure he’s a nice man. And he has a long life of public service, including being a life peer since 2001. He’s no slouch, either—he’s been Secretary of State for a number of ministries, was almost John Major’s Chancellor, and clearly knows his way around Whitehall. He’s exactly the kind of friend David Cameron and George Osborne want in the fracking debate—he sounds as if he knows what he’s talking about, and he’s got street cred as a former minister. Prior to entering politics in 1974 he worked at a merchant bank. So, like many of us, he seems largely self-taught in the energy area-his university degrees are in history and economics.

So it’s pretty clear why he thinks fracking is a swell idea—look what’s happened in the US, he practically shouts. And he may be correct that the permitting process for this sort of thing in the UK is complicated, perhaps unnecessarily so, although not everyone would agree with that, I imagine—there is probably an equally good case to be made for proceeding slowly on this. But when he closes his Telegraph piece with a line like “Other countries have shale resources, too, so investors could easily look elsewhere.” Really? Where? And with what equipment? And under what time frame? This suggests to me that MacGregor actually knows considerably less about this whole area than he thinks he does, sadly. All of which make me think that Cameron and Osborn as well know considerably less than they need to if they really think they’re making informed decisions on Britain’s energy future.

Unfortunately, Lord MacGregor has written a very silly piece that will not clarify much of anything, but certainly does a good job of passing on energy industry talking points.

Leave us a reply. All replies are moderated according to our Comment Policy (see "About S&R")

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s