Shale Gas

Debate between Charles Hendry and Dai Havard

Thursday 3rd November 2011 Westminster Hall

[Charles Hendry]

The hon. Gentleman raises an important point. One thing that struck both the Select Committee and me when we visited Cuadrilla’s site in Lancashire was the immense separation distance—it is thousands of feet—between the water table and the area where the shale gas was being sought. The company drills below the level of the water table, and then encases it in concrete. Only then, when it has been sealed, do they drill further down to where the shale gas is. The point has been made clearly that, as long as the well retains its integrity, it is very difficult to see how there can be any contamination of the water supplies. The way in which the operation will be carried out and the standards that will be used will be an absolutely integral part of deciding whether a licence should be issued. We do not just look at the application in itself; the company must have the technical and economic expertise to carry out the work to the required standards. There is no question of cutting corners. We are adamant that the highest environmental standards must be applied as the technology progresses.

These are early days for shale gas in the United Kingdom. The pattern of development in a new basin in the US has shown that there are roughly three phases. The first is the initial discovery and the appraisal wells to prove the presence of the gas and the size of the resource. The second is an experimental phase, in which explorers work out the best techniques for obtaining production from the particular shale, which may take some time. The third is the production phase, in which an efficient pattern of production wells can be drilled to extract the gas on a commercial basis. Clearly, we in the United Kingdom are right at the beginning of the process. Only a handful of wells have been drilled, and their production potential has yet to be quantified.

Although it is encouraging that Cuadrilla believes that it has good quantities of shale gas in the rocks underlying its licence area in Lancashire, it is, as I have said, still very early days for shale gas in the UK, and I think that it is too early to know how significant shale gas may prove to be as a contributor to future UK energy supplies.

When he opened the debate, my hon. Friend the Member for South Suffolk talked about the reserves in place. At this stage, we should recognise that these are not reserves but gas in place. The recoverable amount is a small proportion—often about 10%—of the total reserves. Nevertheless, even with a large estimate of gas in place, the reserves could still be significant.

Comparisons have been made with the United States. It is right to recognise that there are significant differences in the United Kingdom that will determine the pace at which things progress here. As the hon. Member for Southampton, Test, has said, there are differences in the ownership of mineral rights, which is a critical issue for development. There are some 30,000 operational shale gas wells in the United States, so the scale is of an entirely different magnitude from anything that we can foresee happening in the United Kingdom.

That leads us to the issue of price separation, to which my hon. Friend the Member for Warrington South (David Mowat) referred. We have seen the separation of gas and oil prices in the United States. My assessment is that that will happen gradually over time in Europe, probably in the middle of this decade. Shale gas in the UK will not be a driver of that. We will look at developments with great interest, but at the moment we should be cautious. We are in no doubt that gas and shale gas can be part of the mix as we progress.

We are aware of reports from the United States of issues linked to some shale gas projects. There have been reports of contamination of water supplies with either methane or fracking fluids, and of explosions, and there is dramatic footage of householders setting light to their kitchen taps, as has been mentioned. I had not heard about the blackbirds tumbling from the sky, but we will, of course, set up a taskforce immediately to assess whether that needs further consideration—actually, we will not. If there is clear evidence that that is a problem—

[Mr Dai Havard (in the Chair)]

Joy and disappointment for the Royal Society for the Protection of Birds, all in one sentence.

[Charles Hendry]

All in one sentence. There is certainly joy for the Treasury at the end of that sentence, when I did not commit to setting up a massive taskforce to investigate something that is as yet unproven.

Where those reports have been investigated by the relevant US regulators, the evidence so far is that no incident of water contamination by methane has been attributed to fracking operations, and that the few incidents of contamination of water resources with fracking fluids were caused by accidents on the surface, rather than underground leaks of any kind. Also, some incidents of methane contamination of water were not attributable to oil or gas operations at all; they were caused by methane of recent biological origin.

However, there were cases in which gas leaks had occurred. That was attributed to unsatisfactory well construction or cementing. That confirms, if any confirmation were needed, that drilling for shale gas—like drilling for any other kind of oil or gas—is a hazardous operation that requires careful and consistent regulation. However, that also supports the Committee’s conclusions that there is no evidence that the fracking process itself poses a direct risk to underground water resources, and that the risks are related to the integrity of the well and are not different from those encountered in conventional oil and gas extraction.

The Government and their regulatory agencies will continue to study the experience already gained in north America and its relevance to shale gas activities in the UK. It is, of course, necessary to make the point that UK conditions, including its geology and its regulatory framework, are different, and there will not necessarily be any straightforward read-across. However, it is clearly important that we learn from the US experience, as the Committee recommended.

The UK has a long history of onshore gas exploration, and the range of techniques employed in shale gas drilling and testing operations are broadly similar to those used for orthodox gas production. We have a strong regulatory safety and environmental regime in place, administered by the HSE, the relevant environmental agencies and my Department, to ensure that potential risks to safety or the environment are properly managed. There is scrutiny by the regulators, and that is why we believe that shale operations, as permitted in the UK, are safe, and that there is currently no justification for a moratorium. Again, we welcome the support of the Committee on that point.

I can confirm that, as the Committee recommended, current shale gas operations in the UK are being carefully monitored by the HSE, the Environment Agency and my Department. The three regulators are regularly in touch to exchange information and to ensure effective co-ordination. According to present information, the Environment Agency does not consider that current operations pose a risk to the environment, including water resources. Of course, that has been an important theme of the debate. Some 99.7% of the fluid used in fracking operations is water. If anyone wished to use additives in that process, they would need to be absolutely clear about what those additives were. They would also have to satisfy us on how those water resources will be handled when they are brought back up to the surface. Stringent measures are in place to ensure that they cannot be disposed of without being taken through a proper process. If there is any spillage, a plastic membrane is on the ground to ensure that the fluid cannot leak back into the ground.

The debate has also focused on the seismic tremors experienced near Blackpool in April and May. Following those tremors, DECC had discussions with Cuadrilla and agreed that a pause in hydraulic fracture operations would be appropriate, so that a better understanding can be gained of the cause of the seismic events.

The hon. Member for Wansbeck (Ian Lavery) is an absolute expert when it comes to understanding the nature of the issues. He has spent his entire career in an industry that is involved in underground development. There is much expertise that we can transfer from the coal industry in order to understand the impact of different underground activities. However, I assure the hon. Gentleman that there is often a strong connection between coal mining and seismic activity—much greater than there is in relation to fracking. Of course, those processes take place at different levels. Shale gas development normally takes place thousands of feet further below the surface than coal mining, so there are additional reasons for believing that such operations can be done in a safe and proper way.

A geo-mechanical study undertaken by the company was delivered to my Department yesterday. The implications of that report will be reviewed very carefully in consultation with the British Geological Survey, independent experts and the other key regulators before any decision on the resumption of hydraulic fracture operations is made. I reassure the Committee and others that the highest environmental standards and measures, which we believe will carry public support, will be part of that process. I pay tribute to my Parliamentary Private Secretary, my hon. Friend the Member for Fylde (Mark Menzies), who has been assiduous in understanding the issues. The approach that he has called for—the close monitoring of operations and a gradual progression of shale development—is the right way forward.

In conclusion, this has been a very useful discussion of the issues raised by the Committee’s report. I stress that we have a robust system in place in the United Kingdom to ensure that shale gas activities—and other oil and gas activities—are conducted safely and with proper protection of the environment. When significant new issues such as seismic tremors arise, we must ensure that we have the capacity to deal with them effectively. I assure hon. Members that we will continue to maintain that rigorous approach.

[Mr Dai Havard (in the Chair)]

Before I call Mr Yeo, I should explain that Mr Gale and I have taken an innovative approach today. The reports under consideration come from the same Select Committee, and there is clearly an interrelationship between them, so Mr Yeo will now be asked to do a very interesting thing: make his summary remarks on the last debate and coincidentally introduce the next subject. I call Mr Yeo.

Electricity Market Reform

Debate between Charles Hendry and Dai Havard

Thursday 3rd November 2011 Westminster Hall

[The Minister of State, Department of Energy and Climate Change (Charles Hendry)]

We have had an interesting debate. This is one of the rare occasions where one can say that we should have had more time to have a debate on energy; we would happily fill a much longer time scale. That says a great deal about the complexity of the issues, the knowledge of many Members on both sides of the House and our joint determination to try to reach the right conclusions.

[Mr Dai Havard (in the Chair)]

At one point, Minister, I seemed to have managed to stop time, but I cannot stretch time. Carry on.

[Charles Hendry]

I know that you, Mr Havard, are capable of so many miracles and magical things that we thought that nothing was beyond your capabilities.

The hon. Member for Brent North (Barry Gardiner) made an interesting comparison to a Rubik’s cube, but I think of the issue as more of a complicated jigsaw. With a Rubik’s cube one makes a move and moves everything else out of place, whereas with a jigsaw, one gradually puts in place the elements that build up the whole picture. One has to do that in a structured and sensible way, because some parts are more complicated than others. Nevertheless, we are keen to take forward the challenge.

What we are about here is securing £110 billion of investment over this decade. The £200 billion includes investment in gas infrastructure, the wires and the pipes, but it is still an enormous investment. It is twice the rate of investment every year of this decade than has happened in the past decade. We need to recognise that the old market structure did not bring forward the necessary investment—it sweated assets to try to keep costs down—and could not price in the cost of carbon, which is one of the big issues that we have had to address. Therefore, I do not see market reform as being about subsidising nuclear, but about how we make all forms of low carbon feasible, affordable and economically attractive.

The Chair of the Select Committee on Energy and Climate Change, my hon. Friend the Member for South Suffolk (Mr Yeo), asked a number of questions when introducing the debate—it was like a bullet train going through the energy terrain. A comprehensive range of issues and questions were raised. He asked how much investment we have seen in the past year. Just in the renewables sector, in six weeks between 1 September and early October, we saw £800 million of new investment, offering nearly 2,000 new jobs, and we expect that to pick up. However, he has had to accept that much of the investment is lumpy—a nuclear power station needs £5 billion or £6 billion of investment, and an offshore wind farm needs billions of pounds of investment. Therefore, there will not be a straightforward progression to 2020, but we will have big steps up over time. We are quite clear that without the measures we are putting in place, it will not be achievable.

My hon. Friend also asked why we had not gone for a target such as 50 grams per kilowatt-hour for the electricity sector by 2030. We will set out our formal response to the Energy and Climate Change Committee later in the year. We recognise, through the work that we have done, that there are a number of ways to reach our 2050 requirement, which is that we need to have reduced our carbon emissions by 80%. There is not just one way to do that, and we need to look at what is the best way. At the end of the day, we need to do it in a way that is cheapest for consumers. A common theme in this brief debate has been to ask how we deliver that in a way that will protect consumers, both industrial consumers and people in their own homes.

We have covered a number of measures regarding market reform, and I want to address each of them briefly. We have adopted a system of feed-in tariffs with contracts for difference, because we believe that that is the best way of getting the best deal for consumers and giving the greatest certainty to investors. By clawing back when the wholesale price is high and paying more when it is low, the system is more predictable, and it is easier to bring in investors from outside.

One of the things that Mr Atherton from Citi, who has been referred to, has not fully taken account of is that we are trying to take the system closer to a regulated rate of return. Many institutional investors, such as sovereign wealth funds around the world, are now looking at the opportunities to invest in the UK energy sector precisely because of the structure that is being put in place and the fact that we think that the CFD mechanism delivers the policy more securely than any other mechanism.

My hon. Friend the Member for South Suffolk asked us not to tinker with the policy as it progresses. The history of previous Energy Ministers suggests that I will most certainly be long gone by the time anyone gets a chance to tinker, but if I am still in the position at the time, I guarantee to him that the whole system is designed to stop tinkering. It is not just an agreement or Government policy, but a long-term contract that tells investors over 20, 30 and more years how much they will be paid for each unit of electricity generated by a certain technology. That means that we need to build a system that is as close to automatic as possible in order to recognise how the costs are coming down, so that new entrants coming in beyond a certain point understand how they will be remunerated in the process. The policy will also deliver investment, particularly in renewable energy, at a cost lower than that of the existing renewable obligation. As the policy supports all low-carbon technologies, it will make a greater contribution to our decarbonisation targets than is otherwise possible.

The discussions, particularly my hon. Friend’s remarks, also focused on the emissions performance standard. My intention with such a standard will be to give a long-term signal for what we believe is acceptable and to start to set out how that degression might take place when it is considered. Above all, it has to be a driver for investment. It is easy to set it in place in a way that kills off investment decisions. How we have done it, which is to say that it will not be reconsidered before 2015 and that investments happening before that will have perhaps 20 years of assured production on a certain emissions level, will strike the right balance.

I was intrigued by the comments my hon. Friend the Member for South Suffolk made in the earlier part of the debate. He sees the role for shale gas as having been underestimated. He said that we should be having much more shale gas and gas in general in the mix, with perhaps less energy from renewables, offset by the structure that he was calling for in the second part of the debate, which would be subject to an emissions performance standard. We will not get the investment that he wants to see in new gas generation if there is a much tighter emissions performance standard biting at an earlier stage on gas generation.

We have also said that the capacity mechanism should be part of this process, because we recognise that we need to know exactly how we will keep the lights on at all times of the year, as well as ensuring that there is back-up capacity and, critically, building in that demand-side response, to see whether we can find cleverer ways of dealing with this than building new power stations that will only be used for a small part of the year. If we can find ways of taking demand out of the system during times of particular demand, it will be a big gain for the consumer and save £1 billion on new plant. Clearly, whether that is a new plant or an old plant going for a few hours a day will depend on how that capacity mechanism is structured. We are determined, however, that that demand-side response element should be part of the structure as well.

The final element of the package is the carbon floor price. The carbon floor price is important for giving investors confidence. Currently, if one looks at the history of the European emissions trading scheme, it has been impossible to guess where it will be in a few months’ time, let alone in nine years’ time. The people who are making investment decisions that will not come to fruition until the end of the decade need greater clarity. Putting in place a carbon floor price is all part of that process.

The trajectory that we have taken is to show them that we are serious. If we had said, “Yes, there will be a carbon floor price, and it will be introduced by the next Government after the next election, at a level to be established,” nobody would have taken that seriously. The way in which that has been done shows a much greater commitment to giving the industry the clarity that is necessary. A measure of success in this will be whether we can bring new entrants into the market. Improved liquidity will be one of the benchmarks by which we can test whether market reform is working. Undoubtedly, we want to see more liquidity and more players. That is primarily the responsibility of Ofgem, and we know that Ofgem will look at this further if that proves to be necessary. The Government have said that they will act, if necessary, to address those structural barriers.

My final point is on fuel poverty and feed-in tariffs. One cannot, on the one hand, talk about concern for those suffering from higher fuel bills and, on the other, baulk at every measure that is designed to take pressure off their bills. The cost of solar technology has come down by around half since 2008. Degression was always built into it, from the very first brochure, signed off by the right hon. Member for Doncaster North (Edward Miliband), who is now the leader of the Labour party. He said that degression should be part of that process. As the prices have gone down much faster than anyone anticipated, it was right to do that. We know that a domestic installation can be done in a few weeks and had we not acted quickly—if it had been announced that it will come into place in the spring—there would have been a complete explosion in demand and installations, which would have completely destroyed the budget that has been set for this and led to the complete collapse of the industry, because anything after that would have been much more draconian.