Viscount Ridley
Main Page: Viscount Ridley (Conservative - Excepted Hereditary)Shale Gas and Oil (EAC Report)
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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.
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.