Shale Gas and Oil (EAC Report)
Lord MacGregor of Pulham Market
That this House takes note of the report of the Economic Affairs Committee on The Economic Impact on UK Energy Policy of Shale Gas and Oil (3rd Report, Session 2013–14, HL Paper 172)
Lord MacGregor of Pulham Market (Con)
My Lords, it is a privilege to introduce the report of the Economic Affairs Committee, The Economic Impact on UK Energy Policy of Shale Gas and Oil. I must declare an interest, in that I chair the pension funds of two energy companies.
I have served on this committee for seven years, four as chairman. I have to say that this subject turned out to be not only one of the most fascinating but potentially one of the most influential. At the outset I was uncertain as to whether we would get agreement, given the wide range of interests of the members of the committee as well as the wide-ranging nature of the issues—energy policy, environmental and safety issues and climate change, among many others.
The committee held 20 evidence sessions with a wide range of opinions from political, business and environmental groups. We had 30 witnesses in all covering government departments, academics, energy companies, government agencies, environmental groups, the European Commission and overseas witnesses. In the final outcome, based entirely on the evidence we received, the questions we asked and our own analysis, our report was unanimous.
I thank all our witnesses and give special thanks to our specialist advisr to the enquiry, Professor Nick Butler, visiting professor at King’s College London. His knowledge and analytical and drafting skills were especially valuable to us. I also pay special tribute to our retiring clerk, Bill Sinton, for whom this was the last report on which he served us. His administrative and organisational skills, always quietly and conscientiously undertaken, have been of great benefit to us. Thanks also to Ben McNamee, policy analyst, and Stephanie Johnson, committee assistant, for their unfailing help. I am also grateful to all the members of the committee, whose widespread interests, skills and experience, and great application to the work in hand, made it a joy to be their chairman.
Why did we choose this subject? It started with our fascination for the huge impact of shale gas and oil on the energy situation and the economy generally in the United States in a comparatively short time—the last decade or so. It led us to look at the production prospects in the UK, the potential benefits and the risks of not going ahead. We covered the progress, or lack of it, to date, the climate change effects, the environmental and regulatory concerns and what more needs to be done. I will briefly speak to each in turn.
As our report makes clear, the experience in the United States has been astonishing. I thought I knew a bit about it but the evidence came as a revelation. New production techniques to release gas from shale rock have brought abundant and growing new supplies of gas to market in a short time. Shale oil production is also growing rapidly. This has meant that the US energy mix has changed fast, with dramatic and beneficial effects for the US economy and customers. Gas prices have fallen to about one-third of the UK price level. Despite recent falls in oil prices on the world market, the benefits of shale oil and gas to the US remain substantial and long lasting, whereas world oil prices will continue to be volatile. Cheap gas has displaced coal from electricity generation in the US, with the result of substantial exports of US coal to Germany and, indeed, the UK, with corresponding climate effects.
Most significantly, energy-intensive and petrochemical industries are returning to the United States and building up their investment there rather than elsewhere as a result of the cheap shale gas now available. North America is expected soon to become self-sufficient in energy—and what a boon that is—and a large exporter of shale gas in the form of liquefied natural gas.
As to the UK, we identified substantial benefits if shale gas could be developed on a significant scale—I stress “if”. These include the obvious point about enhancement of energy security through a decreased reliance on imports, which recent developments in Russia and Ukraine have underlined; decommissioning of high-emission coal-fired generating capacity; reducing the risk of gas price increases or even possibly delivering a fall in gas prices; and, as has happened in the United States, the benefits for energy-intensive businesses and the petrochemicals sector, which could not only retain investment here but enhance it. Of course, there are benefits, too, for employment, and infrastructure, and other increased economic and community benefits for areas where shale is likely to be found and which have often suffered from industrial decline. BIS has supported the view in its response to our report that there could be more than 64,000 jobs at peak, with more than 6,000 jobs on shale gas pads, from a successful UK shale industry, and that these would be highly skilled, high-quality jobs, with pay levels higher than the UK average.
Recent geological surveys, particularly that of the British Geological Survey, have shown where the shale gas and oil prospects are likely to be, but the crucial point—and I must stress this—is that we will not know the extent of actual production capacity until the exploratory wells are installed. So far, not a single one has been.
Apart from the obvious geopolitical risks to our energy supplies from Russia and the Middle East, recent events have underlined the risks of, in the jargon, “the lights going out”. The recent closures, at least until the end of the year, of nuclear reactors at Hartlepool and Heysham, which supply 4% of total electricity supply, and the fire at Didcot, bringing the reserve over the winter to only 4%, underline the current precarious nature of our supplies.
Some might ask whether the recent fall in oil prices on world markets negates some of our arguments. On the contrary, the benefits of shale oil and gas to the US remain substantial and long lasting. We here in the UK are nowhere near the production stage, and who can say where our oil prices will be when that begins? So the arguments for swift development of our indigenous supplies remain compelling.
Media coverage of the current debate about shale gas and oil tends to be dominated by environmental and local pressure groups, as we found when our own report was published. Detractors and critics occupy the headlines much more than the proponents. I sometimes wonder what the public reaction would be some years hence if our energy supplies and prices were constantly under pressure and we had missed the opportunity of our own shale gas and oil production. Where would the blame then lie? Therefore, we need to do everything can to ensure, first, that environmental and safety questions are totally addressed and, secondly, that the positive case for exploring and developing our own potential and its importance is fully put over.
We devoted a great deal of our report to the concerns, because it is clear that they need thoroughly to be examined. On climate change, we found persuasive the conclusion that the carbon footprint of shale gas, including fugitive methane emissions, is similar to that of conventional gas production and substantially less than coal. We endorsed the recommendation for a monitoring programme to measure the level of fugitive methane when shale gas extraction begins in the UK. We considered not only that the development of shale gas in the UK is compatible with the UK’s commitments to reduce greenhouse gas emissions, because of the acknowledged role for gas, but that substitution of British shale gas for imported LNG would reduce the carbon footprint.
A large section of our report is concerned with examining the environmental impact of shale gas in the UK, covering ground water contamination, disposal and treatment of flow-back water, the effect on UK water supply, seismic activity and so on.
We also had an impressive amount of evidence about the robustness of the UK regulatory regime in relation to all these matters, and that is crucial. There is an impressive amount of scientific evidence that, with a robust regulatory regime, the risks to the environment and public health are low. We concluded that, with such a regime in place, the environmental risks are small, whereas the benefits, if shale gas development can take place, are substantial.
The one area where environmental concerns are undoubted is the increase in traffic and disruption in places close to the development of shale, especially in the exploratory stage and when the wells are drilled. We acknowledge that, as with any industrial activity of that nature, there would be these problems and they would be significant for that period. This is why an important role for the industry’s community benefit scheme is to compensate the communities and the individuals directly affected. However, once that initial work has been completed, the impact should be low. Who even in Dorset knows where Wytch Farm—the land outlet for one of our major undersea oil wells—actually is?
We heard much evidence that the UK’s regulatory framework is more rigorous than that of the US but, even so, we argued that it was crucial that the Government explicitly continue to address the safety issues. I warmly welcome the Government’s response on this aspect, which points out that the UK has more than 50 years’ experience of regulating the onshore oil and gas industry nationally and has an effective system for addressing safety risks; and stresses that the Government will continue to set this out.
However, while the UK’s regulatory framework for oil and gas exploration and production is highly regarded internationally, it is, as we say in our report, also dauntingly complex in this area and untested by large-scale onshore development of shale. While the Government’s response points out what they are doing on this front, many complexities remain; despite the attempts at co-ordination, many responsibilities are divided between different agencies. Are local authorities sufficiently resourced and geared up with the skills for the necessary technical challenges?
I welcome the Government’s swift response on one question where the UK is at a disadvantage compared with the US—namely underground access—and their proposal in the Infrastructure Bill for companies to be given a right of access below 300 metres, in return for a voluntary payment and notification to the community. However, there continue to be concerns about the costs, complexities and delays involved in the planning process.
I do not have time to go into all the aspects of the streamlining of the planning process that are listed in our report and the Government’s response. However, one of our American witnesses, when asked if he would consider applying for an exploratory well in the UK at present, concluded that it was clear that he would not, and for these reasons. However, the proof of the pudding is in what is happening on the ground, given the urgency of getting material, practical progress. The plain fact is that not even one application for an exploratory well is likely to be granted this year. At best, there might be three or four next year. This is an area which needs continuing urgent action by Ministers. We need to see results; otherwise, developers—which, at this stage, are largely private or comparatively small in terms of the industry as a whole—will be discouraged.
The Government’s response to our report on this area said:
“Development and production will take time. The first successful shale fracking demonstrations in the United States were in the early 1990s, but production at commercial scale did not get under way until the early 2000s”.
I hope that is not the timescale by which the Government intend to judge themselves. We simply cannot wait that long.
Let me be clear: our verdict was not to criticise the general policy of the Government or to oppose their direction. Indeed, we strongly endorse it. We simply feel that, for all the welcome developments in pulling together the planning complexities, in the encouraging fiscal measures that the Chancellor has introduced, and in the Prime Minister’s and the Chancellor’s own speeches earlier this year about,
“going all out for shale”,
not enough is being done.
We want a more strongly co-ordinated government campaign, and one given higher priority to put over the message constantly repeated and speed up the process. That is why we recommended in our report as one of our conclusions that,
“since several Departments share responsibility for policy on shale gas, the Government should take measures to improve coordination, clarity and speed of policy making and its implementation. We recommend in particular that the Prime Minister should establish a Cabinet Committee or Sub-Committee, chaired by the Chancellor of the Exchequer, to direct and coordinate policy on development of shale gas, with a mandate to promote well regulated exploration and development of the UK’s shale gas resource”.
However it is done, we need to ensure that the important potential benefits are constantly emphasised and the relevant measures urgently pursued. In short, exploration and appraisal of our shale resource has been too slow. Here is a potential economic prize which we should grasp without further delay. We need to get on with it.
Lord Hollick (Lab)
My Lords, I thank the noble Lord, Lord MacGregor, not only for introducing the debate and chairing the committee during the inquiry but for his excellent chairmanship over the past four years. He has managed to keep a group of members, always of strong opinions and often unafraid to express them, in fairly good order. He has done that with quiet authority, charm and good humour. As he mentioned in his introductory remarks, he has kept us focused on the evidence. That has enabled us to reach unanimity on all the reports that he has chaired, which has given those reports a particular authority, helped to shape the debate and, in many cases, led to important change.
A couple of weeks ago, National Grid warned that the tightening balance of generating capacity and demand had forced it to enter into agreement with some customers to allow their supplies to be interrupted to keep the lights on. That extraordinary state of affairs has come to pass courtesy of a shambolic national energy policy and incompetence in Westminster and Whitehall. Although it has been evident for many years that our generating capacity was reaching a crunch point, the Government have failed to devise an attractive environment for encouraging the private sector to invest in new generating capacity to provide consumers with competitively priced energy and reduce emissions.
We are now using the most carbon-intensive fuel—coal—to generate 40% of our electricity. We are investing in very high-cost renewables but because those are intermittent, gas and some coal stations have to be held in reserve at very high cost, to be borne by the taxpayer in the form of capacity payments. As Sam Laidlaw of Centrica pointed out last week, we—that is, the consumer—are paying at the same time to replace coal and to keep coal capacity on standby.
The new nuclear generating capacity at Hinkley Point, built partially to replace our ageing nuclear fleet, comes at a dizzyingly high price. At a time when energy costs generally are falling, the Government have entered an agreement to pay EDF—partially owned by the French Government—twice the current wholesale price for electricity, index-linked for 35 years. The PM’s concern about the £1.7 billion payment to the EU pales into insignificance when compared with the payment to EDF to be borne by every household in the land for each of the next 35 years.
Professor Nick Butler, our excellent specialist adviser, called last week for an independent review of our energy policy before the situation deteriorates further. He is right. Does the Minister agree that such a review is a priority?
How would shale gas improve the energy picture? If shale gas can be developed in the UK it could play a valuable role in our energy mix, to the benefit of consumers and the overall economy. It will help to fill the gap as North Sea gas declines; it will halve emissions by replacing coal; and it will provide a home-produced source of energy which can help us to transition to affordable renewable sources of energy. Yet the search for shale gas in the UK, as the noble Lord, Lord MacGregor, said, has yet to start in any meaningful way. To date, only one well has been fracked—and that was in 2011. As the noble Lord said, the expectation in the industry is that there will be three wells drilled in 2015.
The British Geological Survey has identified sizeable reserves of gas, and in some cases oil, in Lancashire and Yorkshire, southern England and the Midland valley of Scotland. But until test drilling takes place no one knows whether those reserves are sufficient in scale and accessibility to make exploitation economic. The BGS survey suggests that the shale gas deposits identified could supply gas for up to 40 years at the current level of consumption, which means that shale gas could make a significant contribution to the UK’s energy needs. Shale gas would then reduce dependence on imports and provide important security of supply at a time when, as recent events in Ukraine have shown, overreliance on imported fuel carries risks.
While shale is unlikely to have the same downward impact on UK gas prices as it has in the US, because our gas supply is part of a Europe-wide interconnected network, it can moderate price rises. There is also a financial windfall. The public purse will benefit from taxes levied and, importantly, local communities will derive significant benefit from their share of the revenue generated by gas supplied from wells in their localities. Up to a quarter of a million jobs in highly energy-dependent industries will be preserved and an estimated 20,000 to 70,000 jobs will be created by the shale gas industry itself.
Communities where shale drilling is planned to take place have understandably raised concerns about its impact in their local environment, pointing to evidence from the US about groundwater pollution and the use of toxic chemicals. A seismic event in 2011 at Preese Hall, outside Blackpool, further heightened concerns. In 2012, the Royal Society and the Royal Academy of Engineering produced an extensive report into shale gas extraction, which concluded that the risks associated with fracking could all be managed with suitable regulation and care.
We took evidence from a wide range of academics and industry experts from the UK and the USA, and from UK regulatory bodies. Based upon the broad range of evidence we received, there was general agreement that while an industrial process like drilling for shale gas brings with it a level of risk, these risks can be satisfactorily managed by scrupulous adherence to best practice. We can take advantage of some of the significant technological advances in the United States in recent years, which have improved safety, eliminated toxic chemicals and reduced water depletion.
Mining and drilling are not new activities in the UK; we have long experience of managing such activities well. The regulatory regime in the UK is in some ways more rigorous than in the US, and although it remains to be tested in the shale gas industry, its excellent record in regulating offshore and onshore oil exploration gave us confidence that the shale industry can be effectively regulated. Companies with the necessary finance and expertise stand ready to explore shale gas opportunities. At the highest level, the Government have voiced their enthusiasm. The Prime Minister wants to go “all out for shale”, the Chancellor is offering tax incentives and legislation has been introduced to allow companies to drill horizontally under adjacent land.
What, then, stands in the way of rapid development of this promising natural resource? In a word, it is bureaucracy. The regulatory regime is complex, unwieldy and slow with many government agencies sharing responsibility for approving fracking applications. The process is bedevilled by complexity; it lacks transparency, accountability and consistency. Cuadrilla, one of the companies seeking to drill for shale gas, estimated that it could take up to 16 months to navigate the process of obtaining permission to start drilling. We were told that local authorities were not adequately resourced to deal expeditiously with the approval process. Will the Government take steps to ensure that local authorities have the necessary resources?
We recommended that the Government appoint a lead regulator to address these shortcomings. To get an overall grip and provide authoritative leadership of this important opportunity, we also recommended that the Chancellor chairs a sub-committee of the Cabinet to turn the Government’s enthusiasm into action. The Department of Energy and Climate Change’s frankly flaccid, complacent response to our report provides ample evidence of why that leadership is so badly needed.
Lord Shipley (LD)
My Lords, I join in the thanks to the noble Lord, Lord MacGregor of Pulham Market, and pay tribute to his leadership over the several years in which he has chaired us in several complex and important inquiries. This report is one of those and it is a very helpful contribution to the debate on shale oil and gas, which of course is primarily about gas.
As we say, the aim of the report is to focus on the facts. Some have been established, as far as we were able, but many have not because either they are unknown or they need further work. We need to know the extent of shale gas and oil that could be extracted. We need to know where it is, offshore and onshore; we need to understand the commercial viability of extraction, and thus the possible extent of applications for extraction; and we need to understand the negative environmental impact of extraction that might arise, in all its detail. I have much sympathy with residents in areas that could be affected who are asking legitimate questions about the environmental impact. Their concerns need clear answers. I think that this means there is a need for a regulatory regime that is fit for purpose, understandable to the general public, transparent and independent of commercial interests.
These issues all relate primarily to shale extraction policies—but, as we have heard, the role of shale in promoting security of supply remains a major consideration. I believe that we have to reduce energy imports. We have become over-reliant on North Sea output, which is declining, and on imports, which have grown over the past decade. The Department of Energy and Climate Change estimates that we could be importing three-quarters of our gas before 2030. We heard some convincing evidence that home-produced shale gas would displace imported gas rather than displacing renewable energy and would reduce the need for coal to be used more, with all the impacts of that on carbon targets. I want to be clear that I think that we have to maintain investment in renewables because shale gas cannot be the answer to all our energy needs—but shale can give the renewables sector time to grow.
I was impressed when hearing evidence from the British Geological Survey, which was cautious, refusing to jump to immediate conclusions on the capacity for extraction. It said, though, that 40 times the annual UK gas use should be extractable from the Bowland-Hodder area in the north of England. But as we conclude in paragraph 70, there are no well grounded assessments of economically recoverable reserves of shale gas, and we need to know what that potential is.
Mention has been made of the USA, and there are some comparisons that can be made. However, we have to remember that there are large differences between this country and the USA in the scale of the land area; experience and expertise; regulation; and landowner rights. Still, we can learn from the US experience, and I have become increasingly concerned about reports from the USA of a rising tide of opposition to shale extraction. We read recently in the Financial Times of rising public opposition to fracking in Colorado on environmental grounds. There are accusations that shale extraction is industrialising rural landscapes and being committed in city suburbs very close to people’s homes. North Dakota, another state that has substantial shale extraction, and which is perhaps more remote, is clearly facing social pressures, not least the very high cost of housing.
We say in our report that the development of shale gas cannot go ahead without public acceptance. We say that shale development has to be properly regulated and that we must reduce or eliminate risk, and I agree. But I want to express support for the rights of local people in areas that have been or could be subject to licensing applications. Such local concerns are understandable and must be clearly answered because fracking must be safe.
Public concerns relate to issues around ground-water contamination, flow-back water, tremors, noise, traffic, fugitive methane and destruction of the countryside. These all need clear answers. Fugitive methane, as the report indicates, can leap from well-heads during the extraction process or when being transported. As we say in the report, this will need to be monitored, even though levels of fugitive methane emissions are estimated to be similar to conventional gas production.
Concerns that ground-water contamination could arise from chemicals in the fluid used to fracture the rock have also been made. In the USA, leaks from faulty shale gas and oil wells have contaminated water supplies, but fracking itself is not to blame. Well integrity is essential. The Royal Society, as I think we have heard, and the Royal Academy of Engineering have told us that none of the claims of contaminated water shows evidence of chemicals found in hydraulic fluids. Cuadrilla said in its evidence that 99.95% of its fracking fluid is water and sand. The other 0.05% is polyacrylamide, as used in cosmetics. The regulators would need to confirm that this continues to be accurate to allay any public concerns. Concerns about flow-back water, traffic noise and impact on the natural environment are very understandable—which is why effective regulation is so important.
Some have given the public the impression—not in your Lordships’ House—that this report is calling for relaxation of fracking regulations. It most certainly is not. The trouble is that the regulatory system is so confusing even though we have a tighter regulatory regime than the USA—and I think it is pretty clear from all the evidence we have received that we do. That regulatory regime has to be applied and it has to be seen to be applied. The operators say it is a complex system, but it is complex for the general public, too. I support streamlining the system to make it more robust.
There are three different UK bodies responsible for licensing and regulating above and beyond the planning system. The Department of Energy and Climate Change issues exploratory licences, requires environmental risk assessment, approves hydraulic fracturing plans and grants final consent to drill to mitigate the risk of induced tremors. The Environment Agency grants environmental permits, jointly inspects well sites with the Health and Safety Executive and is responsible for mitigating risks to public health. The Health and Safety Executive approves well design and jointly inspects well sites with the Environment Agency to prevent ground-water contamination.
I find the relationship somewhat confusing and wonder how it can work in practice, which is why the report’s recommendations to identify a lead regulator to oversee all stages of licensing is important and why we should consolidate all regulatory provisions relating to onshore oil and gas development into one clearly titled set of regulations. My last point is that there should be an explicit recognition in the regulations that well examiners must be independent of the well operator—not appointed by the operator. This would create a more robust and more transparent regulatory system, because nothing less will build public confidence.
In conclusion, we have heard about the potential benefits; the difficulty is that we do not know how great those are. We think that energy-intensive industries might grow. We think that there will be benefits to the balance of payments and to tax revenues, but the truth is the benefits will be unknown until exploratory drilling takes place. We need that evidence but we also need strict environmental protection in place in the areas affected.
Lord Lawson of Blaby (Con)
My Lords, I shall follow the noble Lord, Lord Hollick, our new chairman—who I welcome most warmly to a job that he has been carrying out with aplomb and finesse—and my noble friend Lord Shipley in paying tribute to my old and noble friend Lord MacGregor. He knows what a high regard I have for him. From the bottom of my heart, I thank him for his brilliant service as chairman of the Economic Affairs Committee. The report that we are debating was the last report produced under his chairmanship. It is an excellent report and he deserves more credit than anybody else for it, and for the other reports that we have done.
It is well over 30 years since I was Energy Secretary, and since then I have followed the energy scene quite closely. In all that time, I have never known as big a game-changer as the technological revolution which has made it possible to extract economically the vast amount of shale gas and shale oil distributed over the world. Geologists—and all of us, I think—have long known that this existed, but there was not a means of extracting it commercially and economically. Such means now exists and it is a huge game-changer. As has been pointed out, there has been a game-change in the American economy and it has dramatically changed the strength of the American economy. Indeed, the main reason why the American economy has recovered considerably better from the banking meltdown of 2008 than the European economy has, despite the subprime crisis and all the banking difficulties, is the development of shale gas and shale oil in the United States.
It is not just a game-changer for the American economy; it has been a game-changer for the world energy scene. I have never been a believer in the peak oil thesis. When I was appointed Energy Secretary in 1981, one of the first things I did was to ask the chairmen of the two British-based oil majors—Shell and BP—to come and see me. They came to see me and I said, “Tell me what I need to know”. They said, “The first thing you need to know, Secretary of State, is that there are only 30 years of commercially exploitable oil left in the world”. That was in 1981, 33 years ago, but it has always been like that. They never need to look beyond 30 years in their plans, so why should they be interested in beyond 30 years?
It is true that, through a thoroughly incompetent energy policy—I shall not go into it now as I am sure there will be another occasion to do so—we have managed to get very close to peak electricity in this country. However, that is a different matter altogether. Oil and gas have never been in greater abundance in the world. We see that in the declining prices of oil and gas, which are highly beneficial to all those who use energy—not that it ever happens in this country. Unlike other countries, prices have not fallen in this country. Again, that is because of the energy policy that I alluded to earlier. However, shale has completely changed the global energy scene.
The question now—and this is what our report addresses—is whether shale could be just as big a game-changer for the United Kingdom. The answer is that we do not know. The British Geological Survey has shown that the actual mineral resources of shale gas and shale oil in the United Kingdom, particularly the Bowland shale, in the north-west and particularly in Lancashire, are absolutely massive. The Bowland seam is a particularly thick one, which is good.
The potential for something possibly on the scale of North Sea oil and gas—which is now in decline—is before us. On the other hand, some people say that it might be very much less. Nobody knows because nothing has happened. Until the exploratory drilling takes place it is impossible to know whether we have the biggest bonanza since North Sea oil and gas or something rather small. We need to find out. It is all very well for the Prime Minister and the Chancellor of the Exchequer to wax enthusiastic about UK oil and shale but we need action, not words. So far it has been all talk and no action.
The problem lies partly in the lack of real interest or enthusiasm but more particularly because of the nature of our regulatory system. I disagree with my noble friend Lord Shipley on only one point—when he referred to the regulatory system in the United States. There is no regulatory system in the United States. The United States has decided that this should be at the discretion of the individual states, so each individual state has its own policy towards shale and its own regulatory system. That is why, in some states, they have developed shale tremendously; in others they have not developed it at all. The regulatory systems vary considerably in efficacy from state to state. It is pretty good on the whole, but not in all of them.
A proper regulatory system is needed here, as it is in many other areas, such as—to confine myself to energy—for nuclear power. We have a good, strong and rigorous regulatory system for nuclear power. We need a similar system here but we do not need anything as cumbersome, as inefficient or as time-consuming in this case because it creates an almost impossible barrier.
The biggest company seeking to operate in this country is Cuadrilla, in which Centrica has about a 30% stake. After almost interminable talks and discussions, five months ago, Cuadrilla put in a complex, detailed planning application for two wells in Lancashire to Lancashire County Council. It has now been told that it has to wait for another three months. After that, there will probably be a further delay. That is just Lancashire County Council. The Environment Agency is equally slow moving. There is enthusiasm in words but not in deeds from DECC. So nothing happens at all.
We took evidence on the environmental issues, as my noble friend Lord MacGregor said. Under pressure, it became quite clear that the nature of the objectors’ objection was to fossil fuels in principle, despite the fact that gas has only half the carbon emissions of coal. The environmental objections are all completely spurious. I will mention three. First, there are the so-called earthquakes. These are minor tremors which happen from time to time. They are considerably less than the tremors that regularly occur both in coal mining and in nature. They are about on the scale of a heavy lorry passing along the road—that sort of thing. Then there is the contamination of groundwater. That would be very difficult to achieve, even if you wanted to, considering that fracking happens at least a mile if not more below the surface, while the groundwater is, as its name implies, near the ground. The risk of contamination from one to the other is negligible—it is nonsense; in fact, it is zero. As for the chemicals, as my noble friend Lord Shipley says, dangerous chemicals are not used in the mixture that Cuadrilla proposes and which will be used elsewhere. It is 99.95% water and sand and 0.05% polyacrylamide, which is widely used in the manufacture of cosmetics. No dangerous chemicals are involved in the slightest.
We have got to get to grips with this problem—which is impeding this development, this possible huge game-changer for the British economy—of the regulatory system. Again, shale is a game-changer in a particular way. Some points have already been mentioned but I will mention just one other which has not. North Sea gas is running down and we are going to be reliant on imported gas. I am not concerned about the so-called security problem of imported gas. However, the only way that you can import gas is first to have it liquefied into liquid natural gas, which is a very expensive process; and then when it comes to the country of destination—to this country—it has to be gasified again, which is also very expensive. Therefore the overall transport cost of gas is far higher than the transport cost of anything else because of the process that it has to go through. The Government have to get their act together.
As my noble friend Lord MacGregor said, we proposed that a government committee or Cabinet sub-committee should put everybody together in order to knock heads together, but that was rejected by DECC. There is an extraordinary number of Cabinet sub-committees dealing with totally trivial matters but there is no Cabinet committee or sub-committee dealing with something as important as shale. That is despite the fact that a large number of different departments—this is why onshore is different from offshore, which involved just the energy department—have a locus and their own point of view, and a number of government agencies also have a locus. If anything needs co-ordination, this does. People used to talk about joined-up Government. How about joining up the governance of shale? Nothing could be less joined up than it is at present. People have decided that it is not worth investing in UK shale if you cannot even get to the exploration stage. Other countries, such as China and Argentina, are going ahead with it—America is by no means the only one although it was first in the field—and we are left languishing behind.
Many people recognise that there is a malaise in this country. It might not exist exclusively in this country but it is certainly here. There is a great gulf between the people and the elites. Elites are needed, but they are needed to provide leadership in the interest of the people, and the people do not feel that they are acting in their interest at present. We could make a start in changing that by making the development of UK shale “an urgent national priority”, to quote the concluding words of our report—and we did not say that lightly. Action, not words, is needed, and not just for the economy. It might restore a sense of optimism in place of the debilitating pessimism that is so prevalent in our country at present.
Baroness Blackstone (Lab)
My Lords, I will speak briefly to support the noble Lord, Lord MacGregor, who so ably chaired the Economic Affairs Committee during its consideration of the report.
The evidence we heard convinced us that the Government should create opportunities for shale development and persuade the public of its desirability. We were convinced for five main reasons. A thriving shale gas industry will contribute to our commitment to reduce our carbon imprint and to mitigating the effects of climate change. The environmental impact of fracking will not be damaging in the way it has sometimes been portrayed—most of my speech will be on that. Moving towards greater self-sufficiency and less dependence on importing our energy supply will have advantages for energy security, and for our balance of payments and tax revenues. New jobs will be created, a substantial proportion of them outside London and the south-east. The longer-term benefits of developing and retaining energy-intensive industries was also something that we thought important.
I will expand on the first of those reasons, the impact on climate change. I endorse what was said by my noble friend Lord Hollick. While the case for renewables is strong, they are expensive and they are a long-term solution. However, the exploration and exploitation of the extensive reserves of shale gas in the UK should be seen not as an alternative to renewables but as an additional source of energy that is much superior to burning coal. The carbon footprint of shale gas extraction is about half that of coal. That is a huge benefit that it would be irresponsible to ignore.
I will now focus on the environment, mainly because that is the issue about which there has been some public disquiet, as well as quite a lot of misinformation. As the noble Lord, Lord Shipley, said, in considering the issues we can learn from the experience of the US, although it is important to recognise that there are differences, not least in the location of US shale in the wide-open spaces of relatively remote rural areas.
The committee took this issue very seriously and received extensive scientific evidence from a variety of government and independent sources, as has been said. We were convinced that the potential long-term benefits of shale gas outweigh any potential environmental damage in a well regulated system. It was therefore somewhat disappointing to read the strident reaction to the report from a couple of the green environmental groups, which seem unwilling to adapt their views in the light of the evidence.
On the claim that ground-water will be polluted by the chemicals used in fracking fluid by operators, we were convinced that there is no reason why that should happen in the UK. The regulators here do not allow the use of hazardous chemicals. The companies concerned have clearly set out their intentions to avoid their use. As long as the regulators insist on enforcing the prohibition, there is no risk to ground-water from fracking fluid.
On the escape of methane into ground-water, leading to flames coming out of taps when they are turned on, we accepted evidence from the Royal Society and the Royal Academy of Engineering. The risk of methane migrating up natural faults in aquifers is hard to imagine. However, it is important that wells are properly constructed and well sealed. The Environment Agency is well aware of the need to ensure this. Nor did the committee accept the claims of the Frack Free Balcombe Residents Association that wastewater treatment from fracking would not be safe. We were convinced that the low percentage of wastewater from fracking—estimated to be about 3%—could be handled by the tough regulatory system already in place for mining.
The claim that water shortages would arise as a result of shale gas development has also been greatly exaggerated. The demand for water from the operators will be similar to that from other industrial users. Moreover, technological advances will allow the use of saline water and recycling of flow-back water, reducing the need for fresh water. It is inconceivable that the regulators would allow levels of water consumption that would threaten supply to households.
Perhaps the most serious misinformation is about the threat of earthquakes from fracking. The scientific evidence is clear that the likelihood of tremors from fracking is negligible and that their magnitude is likely to be so small as to be—I repeat the quotation cited by the noble Lord, Lord Lawson—
“no worse than a heavy lorry driving past the house”,
in the words of one of the scientists who gave evidence to the committee.
It is, however, important that any risk of seismic activity should be mitigated by strong regulatory controls. All the evidence that we heard about the stringent measures that are in place was compelling. We took evidence from the Health and Safety Executive and others about air pollution, which might have an effect on public health. Again, the conclusion of a review by Public Health England of all the evidence on the risk to public health of both air emissions and radon levels in people’s homes was convincing. Once again, with proper regulation the effects would be very small.
This brings me to the last of the possible environmental effects: traffic and noise pollution. Here, the committee accepted that there would be some disruption to local communities from increased traffic, as with any industrial activity. Two things follow from this. First, the planning procedures in local authorities and the environmental permit provided by the environmental regulators must mitigate these effects through requirements on noise levels. Secondly, the operators must work with local communities to provide compensation for the disruption through the industry’s community benefit scheme, to which they are already committed and to which they must be held.
I have argued that the environmental disadvantages of fracking have been exaggerated, leading to unnecessary public disquiet. It is important that the Government tackle these unwarranted fears, and they need to do so along with the regulators and the industry.
I conclude by saying that it is vital that we have a strong regulatory system in place. Everything that I have said about the environment requires this. This may mean that in a few areas the existing environmental regulations and voluntary measures from industry need some strengthening, if only to reassure the public. The Environment Agency will in any case have to take on additional work to regulate the industry. Will the Minister reassure us that it will have adequate resources to do so, and will the principle of full cost recovery from the industry be applied?
As other speakers have said, we also need an efficient and well run system, as well as one which is rigorous and thorough. As the noble Lord, Lord MacGregor, said at the beginning, we were not convinced that the current system is sufficiently clear. There is a lack of transparency and it is overcomplex. I am sure that the Minister will want to respond to these concerns when she replies.
Lord Tugendhat (Con)
My Lords, I, too, begin by congratulating the committee on this excellent report. As has already been pointed out, it is the last in a long line of distinguished reports produced under the chairmanship of my noble friend Lord MacGregor. I am honoured to have been a member of the committee for part of the time that he was chairman, so I can, with great sincerity, pay my tribute to the skills that he deployed in that role, to which others have referred.
My noble friend Lord Lawson referred to his background in the energy industry. I have a background which goes back further even than his, although it is of a less distinguished nature. Back in the 1960s, I was energy editor of the Financial Times. In that capacity, I covered the discovery and development of North Sea oil—and how very exciting that was for a young journalist. It was exciting for me but it was also very exciting for the country. I remember clearly how something which at first seemed like a dream came true, and how what seemed as though it might be a peripheral contribution to the national economy turned into a major contribution. I remember how first the Wilson Government and then the Heath Government did everything possible to encourage the development of this great new resource. When I was energy editor of the FT, which was before my noble friend was Secretary of State, world oil reserves were reckoned to last for 20 years, not even 30 years. That gives some idea of the importance that the North Sea assumed in the national imagination.
As has been pointed out, we do not know whether shale gas or even shale oil reserves will have anything like the impact on the British and wider European economy that the North Sea has had. The one point that I really want to make in this short speech is that it is of major importance that we determine whether we have a real bonanza lying under our island or something less important. If it is something very important we cannot let the opportunity slip: it would not only be of great significance to the British and the wider European economy but would also contribute, as the discoveries in the United States have done, to depressing the oil price and reducing the dependence of this country and the economies in the rest of the EU—which play such an important role in our prosperity or otherwise—on those suppliers. To the extent that it would help other countries it would help us. To the extent that developments in this country could encourage developments in other countries, the benefit of shale gas would be increased.
As my noble friend Lord Shipley and others have pointed out, the environment must be effectively safeguarded and a stringent safety regime put in place. That applied in the North Sea. There were many people then who argued that it would be impossible. The predecessors of some of the organisations that gave evidence of a rather doleful and pessimistic nature to the Select Committee were saying exactly the same things back in the 1960s, but an effective safety regime was put in place. The North Sea environment has also been sufficiently safeguarded.
Due account must also be taken of the economic interests and the quality of life of those who live in the areas where production takes place. It has, however, been pointed out several times that we are not talking about the sort of massive disruption that coal mines constituted in the 19th century or the early 20th century; we are talking about inconvenience of a much more modest nature.
Lord Lawson of Blaby
My noble friend referred to the effects on the areas where this is taking place. I am sure that he will agree that in the United States some of the most impoverished parts there have, as a result of the development of shale gas, been enormously enriched. In the case of England it is fortunate that the big deposits of gas are in the north, and everyone agrees that it would be great if we could strengthen the economy there. There is a huge plus for areas where this takes place, which is very important.
Lord Tugendhat
I certainly agree with my noble friend. I was going to touch on a related point, which I will now make. One of the most disagreeable things about many of the protests against the development of shale gas is that they come from prosperous people in prosperous areas, and these people may very well prejudice the development of a resource that would help less prosperous people in less prosperous areas. I agree that the regime must safeguard as far as possible the quality of life of the people in the areas concerned, but it would be quite intolerable if a small minority of people in the most well-to-do parts of the country was allowed to prevent the development of a resource which could have such a very great and beneficial impact on the country as a whole—and, as my noble friend said, in particular on that part of the country which has benefited least from the great development of the British economy over the last 20 to 30 years.
If we do not get ahead with exploiting this possibility we will be doing a great disservice to the nation. Nobody can foresee the future but we know that the electricity margin of safety is now so tight that supplies might well be interrupted during the winter. We are investing huge sums in renewables and in nuclear power, but when will they make a decisive contribution? As the noble Lord, Lord Hollick, pointed out, the cost in the case of nuclear power will be very considerable indeed.
Can we be sure that we and our European Union partners will never again be blackmailed by Russian or Middle Eastern suppliers, or that we will never suffer interruptions as a result of war or civil disorder? One only has to consider these possibilities to realise the importance not just in terms of our prosperity but in terms of our security of developing a new natural resource. If things go wrong and we are not safeguarding our future, the people who will suffer will be the least prosperous people because it will be impossible to keep our manufacturing industry going at the rate at which it could have been kept going if power supplies act as a brake instead of an accelerator on national economic development.
Looking back to the 1960s when development of the North Sea began we have a great deal to learn from the foresight, enthusiasm and political courage of those who made sure that we had a regulatory regime that enabled companies to go forward and develop those resources. All of us have benefited from that and I hope that in 50 years’ time, those who are sitting here will be able to say the same for the present.
Lord Smith of Clifton (LD)
My Lords, I am not sure whether anyone will be sitting here in 50 years’ time.
I, too, should like to thank the noble Lord, Lord MacGregor of Pulham Market, for introducing this debate and join all my colleagues in thanking him for his excellent chairing of the Economic Affairs Select Committee over the past four years. I also want to thank our clerk, Mr Bill Sinton, and wish him well in his retirement, and Professor Nick Butler, our very knowledgeable specialist adviser. As has been said, the noble Lord, Lord MacGregor, successfully contrived to get the committee members to produce unanimous reports during his term. That is a commendable record given the contentiousness of the subjects investigated by the committee. That, of course, includes the question of shale gas and oil, which is the topic of today’s debate.
In the wider context of the UK’s energy supplies, it must be recognised that successive Governments over many years have abysmally failed to produce effective and coherent energy policies. The cumulative result, as my noble friend Lord Shipley said, is that our energy supplies are now at their lowest level in the living memory of most people. Recently, it has been reported that the margin is down to a mere 4%. Long may the recent mild weather continue, to avoid another catastrophic supply failure if a severe cold snap occurs. Some of us recall what happened in 1947, and more will recall the shivering conditions at the turn of the year in 1962-63.
The very feeble response from the Government to our report revealed a lack of urgency bordering on irresponsibility by Ministers that is frankly unacceptable. As the noble Lord, Lord Lawson, pointed out, “energy requires energy”, to coin a phrase. If successive Governments have found it impossible to produce a coherent, credible and robust energy strategy that would endure in the medium term, perhaps the obvious approach is to spread the risks by fostering a diversity of energy resources that would embrace nuclear, solar, wind and tidal power and, now, shale. As has been remarked, all sources have their advantages and drawbacks and all, of course, are subject to the vagaries of both climate change and prices in the international markets. The recent developments that have enabled the exploitation of shale deposits as a source of oil and gas, most noticeably in the USA, have added to the range of supplies of which we should seek to take advantage.
The case for shale, as the committee points out, is not without its problems. The fracking methods involved contain potential environmental dangers, but it is said that fracking may also lead to an excessive demand for water and the possibility of its pollution. Disturbances caused by greater use of lorry traffic and the fumes and noise emitted, together with toxic gas escapes, are all risks that need to be assessed, properly regulated and kept under continuous review by both the industry and government. That is only common sense. However, as many noble Lords have remarked, the risks have to be placed alongside the advantages that are likely to accrue from shale exploitation. Very important among these would be lessening the UK’s dependence on foreign supplies, particularly prudent in the increasingly turbulent times we are currently witnessing. There would be increases in employment and great benefits for our energy-intensive and petrochemical industries. This would help to promote the UK’s manufacturing capacity, which is much needed if we are to reduce our economic reliance on the financial services sector of the economy.
There is now an urgent need to commence shale extraction, not least to ascertain more accurately the extent of our potential reserves. Time is of the essence. The vast majority of people will want to secure our energy supplies overall, including shale exploitation. However, there is likely to be a strong element of nimbyism among the public, which will be played upon by pressure groups who—in principle and never mind the evidence—are totally opposed to shale exploitation whatever the safeguards imposed. The Government and their successors should offer the necessary guarantees to rebut nimbyism and encourage the creation of a fracking industry to exploit the use of shale as a new source of energy.
Lord Borwick (Con)
My Lords, the report of the Economic Affairs Committee is extremely sensible. It quite rightly stresses the urgency with which the Government must act to start the shale revolution. We have seen what economic benefits gas extraction can bring. North Dakota’s economy grew by 13.4% in 2012, according to a report by the US Bureau of Economic Analysis. That was nearly three times the next fastest state, Texas, and dwarfed the national average of 2.5%. I would love to see that kind of growth in the north-west and other regions of the UK. However, the community benefit schemes seem to be a tax pretending to be something else. Are local councils the winners here, rather than local people?
By giving these taxes a nice name, we seem to be just trying to make them more acceptable, although one up side is that this shows that tax has become a dirty word. However, it just goes to show that Governments devising new taxes would rather not call them what they are. Most key services are funded through a central government grant anyway, so it would be a tragedy if new revenues were used badly, or squandered on pet projects. Therefore, these community benefit schemes may mean that the central grant is reduced, leading to a further reliance on hidden revenue streams such as this. Of course, those living in an area that sees a boom from gas extraction should benefit, and they will. Shale extraction will bring new industry, more jobs, more skills and knock-on growth for the whole local economy. It just seems to me that the local authority need not be the conduit for those benefits, as I am not convinced that the proposed methods will actually benefit people as much as they should.
We should also consider the environmental benefits of shale extraction as an economic opportunity. It has been estimated, most notably by Peter Atherton of Liberum Capital, that the cost of renewing our energy infrastructure and implementing both the EU carbon reduction strategy and our own renewables strategy will run into the hundreds of billions of pounds. In short, meeting renewables targets and pursuing them with inefficient methods of energy production will be very expensive.
The environmental benefits of fracking should not be forgotten. As an excellent paper by Professor Richard Muller for the Centre for Policy Studies found, shale gas extraction can reduce not only greenhouse gas emissions but a deadly air pollution known as PM2.5. It is currently killing more than 3 million people each year worldwide, primarily in the developing world, where traditional fossil fuels are still burnt in larger proportions than in the western world.
Of course, the IPCC announced just last week that the use of fossil fuels should be phased out entirely by the end of the century. But even if the IPCC’s target was feasible—or desirable—surely the switch from coal to natural gas must be encouraged as soon as possible. Perhaps we can then rethink our energy mix—and relieve taxpayers and bill payers of the burden of massive subsidies for inefficient methods of energy production.
We should not forget that climate change is a global issue. The volume of CO2 produced worldwide is the problem, not just the amount produced in the UK. The task is huge. What we do here is of course important, but a year’s worth of reducing our CO2 emissions would be wiped out in a matter of days by China’s energy growth. That is why time is of the essence with regard to shale extraction, and we should be sharing the technology across the globe.
Perhaps the most important benefit of getting on with shale extraction will come from increased energy security. At the moment Europe imports about 30% of its natural gas from Russia—and the Russians certainly want it to stay that way. At a global economic conference last year, Putin said fracking means that, “black stuff comes out of the tap”. He has also previously said that shale extraction would directly reduce Europe’s competitiveness, as it would be “more expensive” than Russian gas and oil. That indicates he is worried about Europe breaking free of dependence on Russian resources. Again, we can look elsewhere to see how crucial it is to break that dependence.
On current projections, America will be energy self-sufficient by 2035, with some predicting it might come even sooner. The pattern is the same elsewhere. Estonia is the world’s first country to meet all its power needs from shale gas. It even has enough left over for fuel exports for the shipping industry. We should be doing all we can to emulate that here.
The Economic Affairs Committee made a very sensible suggestion; namely, its recommendation that a Cabinet committee should be established to ensure that the Prime Minister’s commitment to shale gas extraction is matched with action. But the Government’s weak response is easily mistaken for that of a Civil Service that does not understand the importance of action. Will my noble friend the Minister assure me that that is not the case?
Lord Giddens (Lab)
My Lords, I congratulate the noble Lord, Lord MacGregor, and members of the committee on their report, and on using the term “fracking” only once in it, thereby skirting some of the corny humour that could otherwise ensue. Other noble Lords have not been quite so parsimonious in this respect.
We live in a world of huge risks, most of which we have created for ourselves. Irrevocable climate change is one of them. Yet at the same time this is a period of massive technological innovation, much of it positive and most of it global in implication. The shale gas revolution—and I would not hesitate to call it that—is a very interesting and consequential example. Its roots stretch back some 60 years. The Breakthrough Institute in the United States has demonstrated that it would not have come about without a history of federal intervention and support, just as in the case of the internet. George Mitchell’s extraordinary accomplishments would not have been possible without that.
The Breakthrough Institute pioneered the thinking that became the basis of President Obama’s climate change policy. It is one based more on technology than on any legal framework. Essentially, it is progressive replacement of coal as a source of energy by gas, with shale gas to the fore, and by renewables. The US, as the report notes, as a consequence has reduced its greenhouse gas emissions substantially in recent years.
I would dissent from very few of the points and recommendations made in this admirable and thorough report. I note the Government’s positive response to it. I would like, however, to add to it by mentioning further lessons to be taken from the American experience. These, I feel, are not stressed enough in the report, and I draw attention to three here.
First—this echoes partly what the noble Lord, Lord Shipley, said—the successful cultivation of shale gas need not and must not distract from investment in renewable energy. Here I disagree a bit with what the noble Lord, Lord Borwick, said. In the United States it has certainly not done so. Wind and solar have seen dramatic advances. More than 50% of the new US energy sources installed in the first half of 2014 consisted of renewables, including hydro. The cost of wind power has dropped, on average, by 40% in the United States over the past four years. Advances are being made in reducing the impact of intermittency. Texas is a pioneer in shale gas, but it is also a national leader in wind power—and why not?
Secondly, contrary to what many people here seem to think, “Not in my backyard” has been a major problem with shale gas in the United States, and we should reflect on that very carefully. Shale gas production has been implemented mainly in regions in the US where drilling for oil and gas or open-cast mining were already very familiar. Those are the regions in which it has been readily accepted. In other parts of the country, such as New York State, Michigan or California, and not only in prosperous areas, it has met with fierce resistance. I think the same or worse could happen here. After all, this is a small country, about the same size as California, which is only one state among 50 in the US. If we are not very careful, “Not in my backyard” could sink the whole show. The American experience on this, not just on a macro level but on a micro level, therefore, should be studied in detail and with great care.
Thirdly, the American experience shows that “Not in my backyard” so far as shale gas is concerned does not derive only from prejudice and misinformation, although there is a lot of that around. If successful, the American evidence shows, shale gas production changes the nature of local communities more than renewable energy. It can also expose them to a cycle of boom and bust. Providing economic incentives for local communities to accept shale gas exploration and production is therefore not enough. I do not think government policy in this area is sufficient. More rounded forms of community involvement and planning are needed. I strongly advise the Government to enrich their community policy on the basis of research available from the United States, which has to look in comparable areas to those which we have in this country. I would be pleased if the noble Baroness would respond to those three points.
Viscount Ridley (Con)
My Lords, I, too, congratulate the noble Lord, Lord MacGregor, and his committee on their powerful and evidence-based report. I declare my interests in the energy sector as listed in the register, but I do not think that they include shale gas.
The title of the report is The Economic Impact on UK Energy Policy of Shale Gas and Oil. There has already been a significant impact on UK energy policy even without pumping a teaspoon of shale oil or a cubic metre of gas in this country.
As my noble friend Lord MacGregor said, America’s shale revolution has driven down the price of fossil-fuel energy. It has pushed Qatari and Algerian oil out of the US market, and has done the same for coal and oil, which benefits the UK by lowering energy prices generally. The US has doubled its oil output in six years as a result of the shale revolution. It has overtaken Saudi Arabia as an oil producer. A McKinsey report last year said that the effect of shale gas and oil on the US economy will be such that, by 2020, the economy will be $500 billion to the better, representing 3% of GDP, and it will have 1.7 million extra jobs. These are enormous impacts. And, of course, the oil price is down: from $115 per barrel to about $85 now, and falling further. That is largely because of the shale revolution.
World gas prices have come down despite the fact that the Fukushima accident and Middle East turmoil in recent years would normally have been things that pushed them up, as would the economic recovery. UK wholesale gas prices are down to levels last seen about four years ago. That is largely because of the US shale revolution. As my noble friend Lord Lawson said, shale is definitely a game-changer.
So, yes, we have already felt some benefits from shale, but not nearly as much as we could have felt. That is for several reasons. The first is that we have backed the wrong horse in the decarbonisation race. As my noble friend Lord Borwick and the noble Lord, Lord Giddens, said, the US has cut its carbon dioxide emissions, using gas to replace coal, by three times more than Europe has cut its carbon emissions using solar and wind. Whereas decarbonisation has cost Europe hundreds of billions of dollars, US decarbonisation with shale gas has benefited that economy to the tune of $200 billion. In 2010, the Department of Energy and Climate Change forecast that there would be a doubling of gas prices by 2020. They are now falling, and every fall puts up the subsidy cost of renewable energy and therefore, in effect, insulates us against falling world energy prices.
The second reason for our not having been able to benefit as much as we could from the shale gas revolution is that gas costs a lot to transport by sea, as my noble friend Lord Lawson said. Therefore, even if US gas prices fall, we will not see the full benefit over here—it is not like oil; it is not a fungible commodity with one world price. So we have to produce domestic gas to get the full benefit of lower gas prices. But we have twiddled our thumbs and listened to every discredited theory about environmental harm from shale, including fugitive emissions, flaming taps, aquifer pollution, damaging earthquakes, radioactivity and heavy water use. As the noble Baroness, Lady Blackstone, said, these have been greatly exaggerated.
I hear it said that there has been exaggeration at both ends of the spectrum: that people have exaggerated the potential benefits of this technology as well as its potential environmental drawbacks. I do not think that this is true. Shale’s boosters have, if anything, been found to underplay its impact; they have been too cautious—and I know because I was one of them. Back in early 2011, I went to Pennsylvania, found out what was going on, wrote a report for the Global Warming Policy Foundation of my noble friend Lord Lawson, and worried when it came out that I was overhyping this revolution. But, in fact, if you go and look at what I wrote, you will see that I was far too cautious about what was going to happen. Had we pushed ahead then with shale gas in this country we could have been roaring now.
The third reason why we have not fully benefited from falling world energy prices in this country—and I hate to bring an element of partisan disagreement to this thoroughly bipartisan debate so far—is the impact of last year’s announcement by the leader of the Opposition, Ed Miliband, of an energy price freeze. I would be very interested to hear the response of the noble Baroness, Lady Worthington, to this point. It had the effect of telling energy companies that it would not be a good idea to drop their prices now lest Labour win the election next year. Paul Massara, the head of npower, said in August:
“Then we are acutely aware that if the Labour Party were to implement their proposed price freeze, we will be living with the consequences of our standard rate tariff price for a very long time and beyond the level of risk that we could manage in the wholesale market”.
The effect of our policies has been that we have, to some extent, insulated ourselves in this country against the benefit of falling oil and gas prices. As a result, we face a real economic threat from the shale gas revolution: the threat that the reshoring of energy-intensive jobs to the United States will leave us without so many opportunities in those industries. As the noble Lord, Lord Hollick, said, technology in this industry is getting better all the time. There is no sign of diminishing returns in the improvement of shale; the drilling time per well is down by two-thirds, compared with six years ago in the Fayetteville shale. Gas production per day is eight times as high today in the Marcellus shale as it was in the beginning. Oil production is five times as high in the Bakken as it was a few years ago. The break-even price at which shale is profitable is coming down all the time and is somewhere around $60 a barrel for oil now. It is nonsense to say that this revolution could not happen quickly in this country and could not have a big impact over a relatively short number of years.
What about shale in this country? We thought that there was not very much to start with, but we now know, as the noble Lord, Lord Shipley, said, that we possibly have enough to last us for 40 years if it is economically recoverable. We have one of the biggest, thickest and highest quality shales in the world. As my noble friend Lord Tugendhat said, it exists in an area with high unemployment. In parts of North Dakota where shale oil is being exploited, the unemployment rate is 0.8%.
I will make a few suggestions for the Minister to consider. First, as has already been said, we need to address the streamlining of permitting. We have to be able to drill many wells, because we will not get the recipe right the first time—or at least the industry will not. It was clearly mentioned in the report that you cannot be required to file a separate application every time you drill a well: you have to be able to drill several.
Secondly, there is no incentive at the moment for local government application- handling to be quick. There is nothing to prevent it delaying applications—as we heard in the case of Cuadrilla in Lancashire—several times. Thirdly, we need to keep an incentive in this country to burn gas as electricity. At the moment, we have brand new gas stations that are being mothballed to make way for renewables—indeed, sometimes to make way for coal, which surely is madness. It is important that the Government encourage the use of gas as a heating fuel. That is something that we obviously use a lot of at the moment, but there has been a lot of talk about displacing gas with electric heating in the future. I do not think that is an efficient way to do it, either economically or environmentally. A statement saying that there is a great future for gas in this country would help the industry.
In conclusion, shale gas has already had a big impact, but not as big as it could have had. Letting others do it and not doing it ourselves is a threat to us as well as an opportunity. We must get an energy policy that does not insulate us from falling energy prices.
Lord Griffiths of Fforestfach (Con)
My Lords, before we hear the winding-up speeches, and although my name is not on the list of speakers, I would like to make a few brief remarks. Before I do so, like others, I would like to pay tribute to the outstanding chairmanship of my noble friend Lord MacGregor. He was very fair and even-handed—and he was determined, when there was an issue that we were not sure about, to really get to the bottom of it. He was frankly a huge pleasure to work with.
I will make three points. First, I emphasise once again the huge benefits that there potentially are—and not just the benefits of oil and gas coming out of the ground, but the secondary benefits because of falling energy prices. One of the most remarkable things we found in producing the report was the impact on the petrochemical industry in America. There had been no new investment in petrochemicals for 25 years in the US; now, 11 major facilities are under construction and seven are in the planning phase. The reason for this is that production of oil and gas has gone along with the production of products such as ethane, propane, butane and the higher alkalines. In fact, it has been so successful that European producers are reported to be moving their operations to the US.
Secondly, I have found the arguments of those who oppose fracking unconvincing. The reason is that I never felt that they were based on evidence: they were based on opinion. They raise important issues. Fracking involves legitimate concerns, which all of us should be interested in and respect. Fracking involves risks, which we have to manage, and we should not brush them under the carpet. They have been mentioned this evening.
The committee examined each one of them in detail, and our conclusion, which, by and large, is very supportive of fracking, was backed by the best available research from technical experts in the field. We discovered that some of the concerns were not really an issue. On those that were, we discovered that, in the UK, we have a strong, detailed and rigorous regulatory framework through which we can manage those risks.
Thirdly, I have a personal view that does not come out in the report. I have found a great contrast between those giving evidence from the US—from US citizens—and those giving evidence from the countries which make up the United Kingdom. For the US people, the cup was always half full; for too many of our fellow citizens, the cup was half empty. The US people involved in the industry showed an enthusiasm, urgency and intensity which, I have to say, was lacking in colleagues from this country.
The result is that we have a section in the report that refers, in my noble friend Lord Lawson’s phrase, to moving at a snail’s pace. That sums up the problem. The Government have made very clear that they support fracking. However, their intention has become mired in a cautious bureaucracy. There is a great prize to be won, as so many people have said. I think that now, as a matter of urgency, the process of exploration and development must be made quicker, simpler and easier.
Baroness Worthington (Lab)
My Lords, I add my congratulations to the noble Lord, Lord MacGregor, on the production of his last report for the committee and thank all noble Lords for their contribution to the debate this evening.
I want to inject a note of optimism. I do not often find myself agreeing with the noble Lord, Lord Lawson, but in this case I agree that we need to have less pessimism. We are moving along quite rapidly towards a new energy system. I may support the Minister when I say that this is not a simple problem. Moving away from the fossil-based economy that we are used to, where the externalities of the use of those fuels is largely borne by society, to a cleaner, more sustainable future is not simple. There is no silver bullet and no one technology that will deliver the answers—and we do not have a crystal ball, so we have to try to move forward in a diverse way that respects our need to keep costs low and to keep the security of supply strong. That is challenging, but we are making progress.
On shale gas, we have the vocal support of the two most senior politicians in the Government. They have made it very clear that they want to pursue it to find out exactly what resource we may be sitting on. Several noble Lords have rightly pointed out that there is great potential but we do not have very much information at the moment about the total recoverable resource and what it will cost.
Either it might be that the two most powerful men in politics just are not very good at their job—we could debate that—or it must be true that this is a complex issue. Not only energy in general but shale is complex. The noble Lord, Lord Tugendhat, pointed out that we have had gas revolutions in the past. We were fortunate enough to discover North Sea gas. In comparison to shale gas it was quite a simple process: not simple in engineering terms but simple politically, because it took place a large distance from the crowded island that we all share, and it was simply a case of drilling and then the gas was relatively easy to extract. I do not want to trivialise the effort, but in engineering terms it was doable, and in political terms very easy.
Shale is not quite that simple. We do see advances, and it is true that in the US they are learning by doing, and getting better at it. But the very nature of shale is that it is largely onshore, more visible, and it has some environmental implications. A number of noble Lords have pointed out that these have, perhaps, been overemphasised. Nevertheless there is often a grain of truth in many of the concerns, and it is true that the UK has a rich heritage of regulatory standards and a regulatory framework that we should be very proud of.
We will probably not be able to do what they have done in the US: we do not have the same geographic conditions of large open spaces with very few people in them; we do not have the same land ownership rules; and we have a world-class environmental regulatory system. That is not to say that fracking and shale gas cannot be developed in that context, but it is going to be different, and it is going to mean that we will be a bit slower to start, but when we do start, hopefully it will be more sustainable.
I do not want to pick up on all the comments that have been made about the various environmental impacts. Noble Lords will know that in the course of debating the Infrastructure Bill, our party has tabled amendments to encourage the Government to look again at whether we have covered all the bases in our environmental regulations. We will probably return to that issue on Report. The key thing for me is that we are relying on a fairly old regulatory framework. Old is perhaps a relative term but regulations were passed in 1996 that cover “Offshore Installations and Wells”. The title slightly gives it away; they were focused on the offshore industry. It might have been sensible for the Government to look again at those regulations and consider whether, in moving forward on fracking, we did not need a comprehensive review of the regulatory framework and to have had government time given to bringing in those regulations.
We have obviously seen some movement on the trespass issue—again, we will discuss that—but we have not seen enough consideration of some of the unique elements of fracking and shale gas. Those will require changes to the way that our regulatory system is currently conducted, not just to try to harmonise it and make it more efficient but to ensure that we have the absolute integrity of the environmental protection completely encapsulated.
One of the issues that we need to think about is fugitive emissions. A number of noble Lords have mentioned this. This is not to say that it will necessarily be a huge issue but, as we move from a fairly centralised system of extraction of energy resources to one which is quite distributed, we will need to have a careful and well resourced environmental regulatory framework to ensure that fugitive emissions are being properly monitored. One of the key recommendations from the report was that we put that monitoring in place. I think it was Professor MacKay who gave that evidence. The report recommended that it was taken on board that we should have a proper monitoring regime for emissions. It would be a shame if the detractors of shale gas were continually able to say, “Oh but it’s going to be worse than coal”, purely because we do not have the information. It would seem sensible to ensure that that monitoring is there, and that it is well resourced and developed in an independent manner.
I support a lot of what the noble Lord, Lord Shipley, said about the need for independence to build the public’s confidence that this is being done fairly, not in a way that compromises integrity because of a lack of independence. Again, that was a clear recommendation from the report. I would be very interested to see the Minister’s response to the recommendation that those inspecting the integrity of wells should be independent of the company that benefits from them.
This has been a fascinating debate. As I say, we can be reasonably optimistic. We in Europe have moved from a system of energy policy that was very focused on renewables and energy efficiency and, in the time that we have been focusing on those two areas, we have seen quite a lot of development. As much as we might want to cast our eyes westwards to America and see the great impact of shale gas over there, we also ought sometimes to look eastwards at some of the things that are happening on the European continent. There we have seen similarly game-changing technologies coming to market. Indeed, we are part of that with our offshore wind industry and other developments in the renewables sector. These show that we have not reached peak electricity—far from it, actually; we have an abundance of mechanisms for generating electrons now. That is a good thing and that diversity will be a huge strength for Europe.
There is no one-size-fits-all solution to the energy trilemma. We need to keep our options open. We were right to press Europe to allow us the flexibility to pursue different technologies; if Germany tries to do it one way and we try another, we will benefit from that diversity. As I say, while we do not have a crystal ball, the last couple of decades have seen big advances in people’s understanding of the different ways in which we can improve our security of supply and reduce carbon at the same time. We must always of course focus on keeping costs manageable and reducing them. This is the energy trilemma and that is what we are undertaking.
I feel amazingly privileged to be involved in this debate, which has been a very rich one. I look forward to hearing the Minister but the debate today is symptomatic of other debates that we need. We need to have a sensible, grown-up discussion that is evidence-based rather than getting too dogmatic about particular technologies.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)
My Lords, I want to put on record our appreciation of the work of the Economic Affairs Committee for this report. I thank in particular my noble friend Lord MacGregor and all noble Lords who have contributed to the debate today, as well as to the report, for the opportunity to discuss this really important issue.
We welcome the committee’s conclusion that realising our shale potential in a safe and sustainable way could enhance energy security and provide jobs and opportunities for economic growth. The Government have not been, and are not, complacent about responding quickly and being able to ensure that realising the potential for shale oil and gas is not hindered by unnecessary regulations. I hope that during the passage of my contribution, noble Lords will feel reassured that the Government are taking active steps to ensure that the environment in which this is happening is streamlined as quickly as possible. We are working very closely with other departments.
Home-grown gas, just like home-grown renewables and new nuclear, will of course assist our energy security, be compatible with our climate goals and provide jobs and tax revenue for our society. The Institute of Directors estimated that UK investment in shale gas could, at peak, reach £3.7 billion a year and, as my noble friend Lord MacGregor rightly points out, support 74,000 or 75,000 jobs in the oil, gas, construction, engineering and chemicals sectors, mostly highly skilled and highly paid. The Royal Society, the Royal Academy of Engineering and Public Health England have concluded that the risks in shale development are manageable if industry follows best practice, enforced by regulation.
I hope that my comments will illustrate to noble Lords, as my noble friend Lord Ridley pointed out, that we are supporting every opportunity and taking every action to ensure that opportunities to explore shale gas and oil are there for companies to take advantage of. The Government are putting legislation through this House to ensure that drilling for shale oil and gas can go ahead without undue delay or cost and with the right environmental protections in place. The right to underground access, which is part of the Infrastructure Bill, will simplify the procedure for onshore gas and oil and deep geothermal developers to get underground drilling access. These new rules will help us unlock exploration for shale gas and deep geothermal, as we move towards a low-carbon economy.
This does not take away from our strong regulatory system, which provides a comprehensive and fit-for-purpose regime for exploratory activities. As has already been said, the UK has more than 50 years’ experience of regulating the onshore oil and gas industry to draw on. This is supported by an authoritative review of the scientific and engineering evidence on shale gas extraction conducted by the Royal Academy of Engineering and the Royal Society in 2012. This concluded:
“The health, safety and environmental risks associated with hydraulic fracturing … as a means to extract shale gas can be managed effectively in the UK as long as operational best practices are implemented and enforced through regulation”.
My department’s Office of Unconventional Gas and Oil will work closely with regulators, such as the Environment Agency and the Health and Safety Executive, and industry to ensure that regulation is robust enough to safeguard public safety and protect the environment, imposes no unnecessary burdens on operators and is as simple and easy to understand as possible. On the point made by the noble Baroness, Lady Worthington, about the resourcing of the Environment Agency and the Health and Safety Executive, they have both said that they have at this time enough resources to meet current demands. Of course, if the demand gets bigger, we will review the situation.
We have already put in place appropriate measures to address seismic issues. As rightly pointed out by my noble friend Lord Lawson, seismic risks measured previously have been very small. I want to assure all noble Lords that it is very much the will of this Government to ensure that we have a regulatory road map so that operators and citizens can see the overall process and how it applies to the different nations in the UK. It confirms the roles and responsibilities of all the different regulators. We have also looked for opportunities to simplify regulations and speed up processes, while continuing to maintain a robust system. For example, we are reducing permitting times for low-risk activity from 13 weeks to around four weeks. Already, all onshore oil and gas projects, including shale gas, are subject to scrutiny through the planning system, which addresses impacts on local residents such as traffic movements, noise, working hours and so on.
Planning guidance has been produced by the Department for Communities and Local Government, making clear the planning and appeals processes for operators. It also encourages the planning authorities to engage with the regulator at an earlier stage, identify any issues and ensure that they are all involved at that earlier stage, rather than later, as has been the case in the past. The guidance also makes clear that operators can make all relevant required permit and planning applications in parallel.
In November 2012, the Health and Safety Executive and the Environment Agency published a “working together” agreement for shale gas sites, which specifies when and at what stages they will conduct joint inspections. It confirms that they together must be satisfied that wells are designed, constructed and operated to standards that protect safety and the environment. The Health and Safety Executive is also committed to visiting jointly with the Environment Agency all shale gas sites during the current exploratory phase of shale gas development.
The Office of Unconventional Gas and Oil based in my department co-ordinates across Whitehall. We have a very close working relationship with all departments to ensure that the policy is well informed, coherent across government, alert to the risks and challenges and delivered in the right order at the right time. That is why we have not sought to set up a sub-Cabinet committee on this. It is being led at the front by the Prime Minister and the Chancellor. They are fully supportive of it. We think that the work we are doing across government satisfies all the concerns and issues raised as we are making progress.
Planning permission underscores the need to engage the public. Noble Lords have rightly pointed out that by properly engaging we will gain support and take communities with us. That is why the Government believe that a social licence is key to operate, so we are ensuring that there is access to evidence-based information that can address any questions the public may have. We have a range of materials on the gov.uk website which help to explain the processes involved in shale gas operations to the public. We agree with my noble friend Lord Shipley that proper public engagement is crucial.
All noble Lords have identified that the benefits that can be brought to communities are potentially huge. The communities that would benefit most are those where this potential has already been identified. We want to work actively with local communities. At their request, staff from my department regularly take part in events held by local councils and residents. We engage, address concerns that are raised and explain policy and regulation, and we bring along regulators and expert scientists so that we have proper public engagement. Events range from national events to local authority exhibitions and parish level. We engage at that level as well because we want to work with local communities and local authorities to ensure that concerns raised by some groups are addressed and the public are well informed about what will happen in their localities if exploration takes place there.
Viscount Ridley
I came across an important point. We often say that we have to win public trust before we can do this, but the best way of winning public trust turns out to be to drill a well. I was told this about Poland. People’s reaction is: is that all there is? Is that little box of tricks behind that hedge all that is needed?
Baroness Verma
I accept my noble friend’s comment but evidence has also shown that real engagement, right from the start of the process, explaining what will happen within those communities, how it will impact on those communities and the benefits that come with the exploration ensures that you have public opinion on side before anything has to take place. That evidence is perhaps slightly more informed than the example my noble friend gave.
We are working with the industry, and the industry has committed that it will include at exploration stages £100,000 in community benefits per well where fracturing takes place, and 1% of revenues from wells that go on to production will be paid to communities. That could be worth between £2.5 million and £10 million for a typically producing well. These are key benefits to local communities. Each operator will have to publish evidence of how it has met these commitments.
The industry is looking to present positively the case for shale gas developments. It has recently launched a campaign called Let’s Talk About Shale” which has been providing answers to public concerns on shale. Both the Government and the industry continue to work with the public to present the positive case for shale development. We cannot do enough. It has huge potential, but there are questions to be answered, so it is right that we engage thoroughly.
At this stage, I shall quickly touch on some points that were raised by noble Lords before I finish with my concluding remarks. The noble Baroness, Lady Worthington, asked about the independence of well examiners. They will be separate from and in addition to the Health and Safety Executive well inspectors. The well examiners will be employed by the company but, under health and safety legislation, the company will be responsible for the safety of its operations. The HSE has also undertaken that well inspectors will visit and inspect all shale sites during the exploratory phase.
I refute the opening remarks by the noble Lord, Lord Hollick, who asserted that this Government have done nothing to respond to the massive underinvestment that the energy sector faces. I remind him that this underinvestment went on for many years while his party was in government. It knew that 20% of our energy supply would be coming offline by 2020. As the noble Baroness pointed out, we need to have a sensible debate about investment in the infrastructure to ensure that we do not face the massive underinvestment that we are seeing today. That inevitably puts costs on to consumer bills because we are having to catch up now; whereas we should have spent many years looking at how the ageing infrastructure needed to be upgraded as it was coming offline. Since we came into government, we have seen more than £40 billion-worth of infrastructure investment as well as the biggest reform of the electricity market through the Energy Act, which came into force in 2013.
The noble Lord asked if there would be an expert group set up to look at shale gas. A task force has been set up which will be independent of government. It will be chaired by the noble Lord, Lord Smith, the former chair of the Environment Agency, and it will provide impartial opinions on the impact that the exploitation of shale gas will have on the UK. The Government look forward to reading its report.
My noble friend Lord Shipley referred to the Bowland basin. The probable amount of gas in there is estimated at around 1,300 trillion cubic feet, so there is huge potential. We are at the exploratory stages. Noble Lords asked when we would see first drilling. We hope to see something happening in the new year. Other noble Lords asked about water contamination. My noble friend Lord Lawson and the noble Baroness, Lady Blackstone, referred to the fact that drilling is so deep down—over 1,000 metres below groundwater—that the layers of rock in between stop gas and fracking fluids from escaping into the water. Any wastewater will be stored in closed metal tanks before being treated, in accordance with strict environmental regulations. This is common practice, as with other industrial processes, so we are sure that water contamination will not take place.
A lot of work has been done in preparation for this new industry. There is still much to be done. We look forward to further debates as to how we can take this huge potential forward. There are challenges ahead but we need to ensure that the public are informed with a proper, evidence-based debate. I hope this will be the start of it.
Lord MacGregor of Pulham Market
My Lords, I thank all my colleagues for the very kind remarks they made about my chairmanship. I will say only that I found this a most rewarding experience. Both chairing that committee, and this debate tonight, demonstrate one of the great benefits and values of the House of Lords. We have come together from different backgrounds, had different experiences, have different areas of knowledge and come from different parties, but I suspect that those looking down on our debate and listening to it would not know which party we belonged to if they could not see where we sit. That is a reflection of the very real benefit that the House of Lords can give, as well as the very valuable experience we had from outside our committee. I thank in particular my noble friend Lord Ridley for a very knowledgeable and splendid contribution to our debate. That is my first point: this shows the House of Lords at its best and has real value.
Secondly, I have to say to the Minister that when we got the response from the Government I felt that it was somewhat complacent. To a certain extent it argued, “We understand all these things; we are doing all that, and don’t worry”. The noble Lord, Lord Smith, described it as feeble. Whether it is complacent or feeble, that is still the impression that has been given to the House, and the impression out in the country. I absolutely accept everything the Minister has said about what the department is doing, but this needs real promotion. Of course the industry must do that, but the Government must do it in a much more forceful way, by getting across the benefits that shale gas could potentially give us. I suspect that that is not happening strongly enough at the moment, which is why we made the recommendation for a Cabinet sub-committee. I do not mind how it is done, but it has to be done much more forcefully across the board. If you go out and ask the general public what the contribution of shale gas to the UK could be, I am sure that they would not have a clue. However, they are aware of the problems in local communities. Therefore, there is a big job to do to put the case over, as well as all the policies to be made by government. That was one of the messages that came out of the debate tonight.
In conclusion, this has been a very useful debate. It is extremely important to keep pressing the case for shale so that the general public understand it. With those few remarks, I beg to move.