Shale Gas

David Mowat Excerpts

Thursday 3rd November 2011 Westminster Hall

[Dr Alan Whitehead (Southampton, Test) (Lab)]

I took part in the Energy and Climate Change Committee inquiry into shale gas, and in the course of that inquiry, I took part in a number of visits, not just to the one site in the UK that is currently being drilled, but to areas where intensive drilling was going on, has been completed, is producing or—in many instances—has been abandoned. What I found particularly useful about those examinations of existing practice was that they not only helped us to consider the overall theoretical picture, but enabled us to see what a shale gas producing economy might look like in the UK, based on what we now know about the in-principle availability of shale gas in the various plays in the UK.

I want to concentrate my remarks on these questions: if we were to proceed with the extraction of a sizeable amount of gas from the reserves that we currently know of, what would be the best, safest and most environmentally prudent way of doing so? If we consider that to be a minimum starting point for extracting shale gas, what will that make the UK’s shale gas market look like? What effect will that have on the overall availability of gas?

Looking at the matter from another end, a number of people have recently made quite wild claims about what the existence of the shale gas reserves means. Some people, in pursuit of particular agendas, have gone so far as to say that all we need to do is extract as much shale gas as possible, run the economy on that gas, and not worry about renewables any more. They say that that would lead to an age of plenty for gas; gas prices would rocket downwards, we would have energy security for the foreseeable future, and we could abandon expensive alternative energy sources forthwith. Some of those statements are partially true; most are not fully true; and some, in my view, are completely off-beam.

On the starting point for shale gas extraction in the UK, the regime under which extraction takes place must be such that the free-for-all drilling taking place in parts of the United States cannot and will not be allowed here. The US’s experience is not comparable, and can never be compared, to what might happen in the UK, for a number of reasons. First, in the areas that the Select Committee looked at, the regulation of mineral rights is entirely separated from the regulation of property rights. One can literally fetch up in a truck outside someone’s front garden and say to them, “I own the mineral rights to the land behind your back garden as far as the eye can see, and I am going to start drilling in your back garden. There is nothing you can do about it. I might give you some money to compensate you, but that will be it.” Consequently, certain plays in the United States, called sweet spots, have gone ahead with intensive drilling. In certain parts of the US, areas literally look like Swiss cheeses, with lots of drilling sites pockmarking the surrounding area. They even extend to urban areas and literally to people’s back gardens.

There is not only intensive drilling, but intensive drilling that goes horizontally out from the pads, which are the size of two football pitches; those are the typical starting points for shale gas drilling. There can perhaps be 16 to 20 wells per pad—intensive drilling indeed. As a result, a large amount of shale gas is produced, but wells continuously deplete, which means that each well is not producing an enormous amount of shale gas. The issue of depletion rates for shale gas wells is addressed in the Select Committee’s report. It is the cumulative effect of a large amount of drilling for multiple wells in particular places that produces the overall volume.

Plays in Texas, Pennsylvania and other parts of the US are infinitely easier—perhaps twice as easy—to extract from than is ever likely to be the case in the UK. We therefore need to treat the reports of overall reserves under the soil in the UK with some caution, because in practice, perhaps not more than 10% to 15% of the gas that is theoretically there will be extractable, even over a long time and with repeated fracking in particular wells.

I completely concur with the caution expressed—caution is the watchword in the Select Committee’s report—regarding the conditions under which drilling may take place. Under a regime with conditions, I think that a substantial amount of shale gas can be extracted over a long time, but probably not a volume that will be the price-reducing game changer that some people talk about. A recent report by Bloomberg looking at, among other things, the likely future effects of shale gas on UK prices suggested that there would not be a significant effect on prices. There may well be a significant effect on energy security; we would replace at least a proportion of the nearly 40% of gas that is imported with gas produced in the UK. That is potentially important, but it seems unlikely to be a price-reducing game changer.

The conditions are important because in the UK it will be necessary to obtain proper licences, maintain the right safety procedures in all wells, and ensure that wells are correctly sheathed, so that there is no danger of the contents of particular geological levels permeating and contaminating other levels. It will also be necessary to be careful about the use, disposal and—I hope—recycling of the large volumes of water that are used in shale gas extraction. That subject is another feature of the Select Committee’s report. There is considerable tension about water in certain parts of the country, so even the use of 1%, 2% or 3% of the water supply could put substantial and increasing pressure on the amount of water available. Keeping a close monitoring eye on the use of water will be important.

[David Mowat (Warrington South) (Con)]

I am listening carefully to the thrust of the hon. Gentleman’s remarks. I think he will concede that there has been a significant price differential in the US on the Henry hub, for whatever reason. Gas prices have fallen by about 50%, and that has been attributed to shale. I have listened to the logic of his remarks, but I have not heard the specific reason why he does not think that that will happen, not in the UK—the UK is not where the issue is—but in Europe; that is where the issue is.

[Dr Whitehead]

I think that the reason why that will probably not happen is that the US, as recently as five or six years ago, was in the process of building substantial quantities of liquefied natural gas delivery depots, which were anticipated to take up a substantial shortfall in gas in the US; that shortfall was even greater in the US than in the UK. The US economy was therefore in a position where, as a result of the anticipated introduction of that large amount of LNG, prices reflected the situation regarding indigenous gas in the US, imported gas, investment prospects, and the likely prospect of a need to procure further large amounts of LNG for the US, at a time when there was increased worldwide demand for LNG in various other economies.

Since five or six years ago, that particular metric has been entirely flipped over. The United States is now exporting, rather than importing, LNG. That has had a substantial flip-over effect on prices in the USA. I am not an expert in these matters, but that is my understanding of the situation. The position is not comparable with that in Europe or the United Kingdom. As I say, the production of shale gas will perhaps have some effect on the stabilisation of prices over a period of time, and some effect on the requirement for a secure gas supply within the UK, rather than us importing it through interconnectors or through LNG. We have, of course, fairly efficient gas interconnectors between the UK and the rest of Europe, although whether gas flows down them is another matter. However, the two propositions are entirely different in their likely effect on prices.

The two propositions are similar, however, to the extent that there will be a significant effect on what one might term the energy security front—on what would otherwise be the question of where the UK will source its gas supplies from in future—although the UK interconnectors are pretty secure; they mainly go to Norway and other European destinations. Sourcing that gas from within Europe arguably brings us close to the energy security that we would have if we had an entirely indigenous supply. That is my take on why the price effect will not take off in the way that some people think it will.

I want to emphasise and underline that point, as the Committee’s conclusion is that there is not a case for banning or stopping the exploitation of that shale gas resource through drilling, but that there is a case for ensuring that there are careful, secure environmental guidelines to ensure that it is done in the best way for the protection of the environment. There is also a case for ensuring that, unlike the USA, we have careful continued regulation of not only the drilling but the capture of the gas, and regulation covering the fate of wells as they deplete and go out of commission.

The point about multiple wells is that they do not have long productive lives compared with more conventional forms of drilling. One of the issues in the United States has been that in a number of areas, because wells have often been drilled in a speculative and unorganised way, there are large numbers of abandoned wells scattered across the landscape, some of them well capped, some not capped and some not very well capped. Indeed, the magnificently named Texas Railroad Commission, which regulates the whole business in Texas, is in the process of finding where those abandoned wells are and putting in place a programme for capping them. That is a regime that we cannot afford to have in the UK, because of the implications of gas leakage and the danger of those uncapped and untreated wells from an environmental point of view.

The overall picture is that, with careful regulation, a reasonable contribution can be made to UK energy supplies from shale gas over the next period. We should not, however, run away with the idea that it will solve everything or that it should not be properly and fully environmentally regulated, to ensure that some of the things that we have heard about elsewhere in the world do not, by accident or by negligence, take place in a UK energy environment. I believe that that is a balanced view, and that the Committee has taken a balanced view on the future of shale gas. It is important for future debates on the energy economy that we keep that balanced view of what various elements of the UK energy mix can contribute to the overall welfare of our future energy supplies.

--- Later in debate ---

[David Mowat (Warrington South) (Con)]

Thank you, Mr Gale, for calling me to speak.

In several contributions, the term “balanced” has been used, both about the Select Committee’s report and the tone of the speeches. My remarks might be a little less balanced, because I think that shale gas production is a very positive development and that we could be on the verge of something significant.

I apologise in advance for using the term “shale gas” interchangeably with “unconventional gas”. The report does that and several Members have also done it in their contributions. In my constituency, we have a fair bit of coal gas. IGas has found coal gas in Warrington.

I will not talk further about the environmental issues around shale gas production; they are genuine and they need to be sorted out. A number of Members have already spoken well about them. I will just say that there is no form of energy—and no choice that we have for sorting out energy—that does not have some kind of environmental issue. We have to make choices.

I want to talk for a minute or so about gas in general, before I get into shale gas in particular. I want to put into context where we are in our decarbonisation targets. In 2010, 2.5% of the UK’s energy came from renewables and 90% came from fossil fuels. Of that 90%, the majority is still coming from what we would call the “dirty” fossil fuels, which are coal and oil. We have a long way to go. There was a debate on this subject recently and it was pointed out that the UK is 25th out of 27 countries in the EU in uptake of renewables. It is my judgment that gas has a role to play in decarbonising the economy. We may debate the matter later, but I believe that we have wrongly placed some efforts by confusing “decarbonisation” with “renewables”. Decarbonisation is necessary and it is a legal requirement. Some of the renewables targets might not always lead to us making the right decisions about how we decarbonise, and at what rate.

Right now, 50% of the UK’s energy still comes from oil and coal, and although it would not be easy to replace them with gas because that would mean transport being sorted out, if we did so we would have a carbon reduction of 30% or 40%, depending on the precise ratio used.

I have mentioned the decarbonisation of transport, and there is a lot of emphasis on electrification and the need for electric cars. That market is moving ahead in a way that this country might not have noticed, with well in excess of 10 million gas-powered cars in the world. Interestingly, the leading countries are some of the developing ones, such as Pakistan, which is making a big effort to decarbonise.

Probably the single most important observation about shale gas—unconventional gas—is that we do not have much of it in the UK compared with other types of energy. I heard the remarks of my hon. Friend the Member for South Suffolk (Mr Yeo), and I agree that it is a fluid thing. I have here a report by the United States Energy Information Administration, which states that the UK has something like one tenth of 1% of the total technically recoverable reserves of unconventional gas. Although the UK might have a lot—the numbers are significant—it is the impact on the gas market in the world around us that will affect us.

We have talked a little about the US experience. The hon. Member for Southampton, Test (Dr Whitehead) said that five or 10 years ago the US was building liquefied natural gas terminals to import the gas, and it is now talking about applying for licences to change them into export terminals. That is because of shale gas; we have already mentioned that unconventional gas prices in the US are now 50% of gas prices in Europe. There is a great phrase in the Select Committee report: “The tyranny of distance”. Gas prices are regionally based, and what happens in the US does not have to happen in Europe or Asia.

It is worth my giving my perspective on what really drives gas prices. I worked in the industry for a large part of my life and I never wholly understood how gas got priced. Gas used to just come off when the oil came off and was then burnt and sold. The truth is that gas has historically been priced under long-term contracts as a percentage of oil price, which is why the gas and the oil prices are linked in the various regions. Oil has gone up and therefore gas has gone up with it. That relationship needs to be decoupled and, notwithstanding the comments that we heard earlier, I postulate that shale gas provides the opportunity for that to occur, whether or not we exploit the gas in the UK. If such decoupling does occur, there will be a set of impacts. We are at the end of the Russian gas pipeline. Poland and France are the big places for shale gas in Europe, apparently with many times the reserves that we have.

[Dr Whitehead]

Does the hon. Gentleman accept that notwithstanding what he properly identifies as the relationship between gas and oil prices, and the possibility of decoupling, shale gas—unconventional gas—is a relatively expensive part of the gas extraction spectrum, and will remain so regardless of what its plentifulness suggests? Therefore, if gas prices decouple and go below a certain point, the gas becomes uneconomical to extract and regulates itself to some extent on the basis of its unconventionality.

[David Mowat]

I certainly accept that the market will determine gas prices and that if the price drops to a point at which it is not viable to take the gas out, it cannot be done. It appears possible, however, for the US to exploit and develop shale gas for $4 per million cubic feet, compared with $10 here. That is the market price, because people are obviously making a profit at that level. I can see absolutely no reason why that would not happen in France and Poland, and indeed in Russia. The report interestingly misses out South Africa—it might just be that things are moving very quickly. The Department of Energy and Climate Change figures for worldwide unconventional gas show that South Africa has one of the larger residues.

The thrust of what I am saying is that we have to be careful with all these environmental issues, and we must, of course, bring people with us. The market will happen anyway, and it could be a significant game changer and a big assistance to the decarbonisation effort that we must make in the shorter—and potentially the longer—term. One reason why unconventional gas has perhaps had a slightly weaker profile than it might otherwise have done is that it has a lot of natural enemies. The green lobby does not like it because it is a fossil fuel, and it is worried that it will take our attention away from renewables, and big oil does not like it because it is not at the forefront of this as it has been west of Shetland, for example. I used to work in the industry, but had not heard of Cuadrilla until a couple of years ago—Cuadrilla and IGas are new companies.

Shale gas is not a panacea—nothing is. But it could make a bigger contribution than is perhaps implied by the tone of the Select Committee report and the remarks that we have heard today. I was taken by a line in paragraph 76 of the report, which sums things up rather well:

“we can’t make the perfect the enemy of the good”.