The future of unconventional gas in the UK and Ireland

Paul Stevens, of international affairs think tank Chatham House, looks at the shale gas revolution in the US and discusses if it is possible in the UK and Ireland.

The shale gas revolution in the US has been “a triumph of technology” developed through learning by doing, says Chatham House’s Paul Stevens. But it was not the overnight success that many think of it as being and relied on a number of key factors.

Less than 10 per cent of US domestic gas production came from shale in 2008. The most recent statistics released, for the year 2013, set the rate at 40 per cent. Stevens admits that people tend to look at the figures and say: “Wow, look at that. That really is a revolution!” But, he says that the joke in the US is that shale gas is “an overnight sensation that has been 30 years in the making.”

“In other words, there’s a long history that goes behind that sudden dramatic increase in the production of gas.”

The US story so far

Horizontal drilling was invented in the 1930s, with the first well fracked in 1947. Stevens says that in the US, in the early 1980s, the projections for domestic gas production were examined and it was decided that if nothing was done, the country would end up being major importers of gas.

The US government poured millions of dollars into the research and development of fundamental scientific research into low permeability basins and then, made the results available to the industry.

He explains: “This is the sort of research funding that private sector companies won’t do.”

The more that is done, the better these things are understood and a declining cost curve begins to develop, Stevens continues.

“To do that, you need to drill an awful lot of wells and to frack an awful lot of wells. We’re talking in terms of thousands and thousands. Again, this in a European context is something that is not understood.

“People think that if we drill a few wells and frack a few wells, this gives us the information.”

Factors and consequences

The problem, highlights Stevens, is that one of the main characteristics of shale operations is that they are highly differentiated so plays are very different and wells on the same play are very different. “You need a lot of information and you need that information to be shared.”

Stevens gives the example of the Marcellus Shale Coalition, established in 2008, which works with exploration and production, midstream and supply chain partners in the United States. The coalition shares in-depth information to policymakers, regulators, media, and other public stakeholders.

“A very important consequence of the shale gas revolution has been what it has done to domestic gas prices in the United States and the reason, of course, is you are producing a lot of gas and there isn’t anywhere for it to go.

“So inevitably if you increase supply, price comes down. In October 2008, the price was $11/MMBtu. In April 2012, it went below $2/MMBtu,” he continues. “Incidentally, it was that slide that the British government seized on when it decided that ‘we’ wanted a shale gas revolution and the argument put forward was ‘If we have a shale gas revolution, it will bring down domestic gas prices in the UK.’

“Unfortunately, that illustrated a degree of economic illiteracy which was breathtaking on the part of the British government because obviously if you have an interconnector into mainland Europe, if the prices in mainland Europe are higher than the UK, increased gas is not going to stay in the UK. It is going to flow into mainland Europe,” Stevens opines.

Necessary conditions

In order to test if unconventional gas has a future in the UK and Ireland, Stevens created what he describes as a “very simple” methodology. He explains: “It basically says: Let’s find out why the United States had a shale gas revolution? What were the conditions in the US that came together and allowed the production of shale gas to rise from less than 10 per cent in 2008 to over 40 per cent in 2013?

“He devised 17 characteristics which the US had in order for the revolution to take place. Referring to them as “necessary conditions”, the picture is not so clear for the UK and Ireland with question marks hanging over some of the characteristics while others receive a negative response. The only yes being for easy access to water.

Stevens highlights what he sees as “the big problem” for the UK and Ireland – the necessary condition of ‘people familiar with and accepting of oil and gas operations’.

“In the UK, the green NGOs have done a brilliant job – a bad job if you believe in science – but a brilliant job of convincing everybody that if a well is fracked within 50 miles of them it is the end of life as they know it.”

Public opposition “however you define it, however you consider it, is probably going to be the major barrier” to seeing the development of shale gas in the UK and Ireland, the academic says. Whereas an important part of the American story, Stevens says, is that there was fairly weak environmental regulation. “In 2005, the Energy Act explicitly excluded hydraulic fracturing from the Environmental Protection Agency’s clean water act.

“The implication of this was that an awful lot of the shale operations in the United States had virtually no environmental impact assessment done on them. Also, as well, the green NGOs were very slow in the United States in getting their act together so there was very little opposition from the green movements, from the environment concerns, as the shale operations began to develop.”

In conclusion, he notes that the United States had a shale gas revolution, over 30 years in the making, in situations with incredibly favourable circumstances.

“If you are talking about unconventional gas in the UK or Ireland all I would say to you is don’t hold your breath because you are certainly looking at a period of five to ten years because anything of any significance is going to happen.”

Necessary conditions

Paul Stevens’ 17 characteristics needed for a shale gas revolution are as follows:

• favourable geology;

• lots of drill core data to help identify ‘sweet spots’;

• weak environmental regulation for fracking;

• tax credits and intangible drilling cost expensing;

• property rights to the landowner;

• pipeline access easy – large network and common carriage;

• selling gas into a ‘commodity supply’ market very easily;

• driven by small entrepreneurial companies;

• dynamic and competitive service industry;

• people familiar with and accepting of oil and gas operations;

• licensing large areas with vague work programmes;

• significant government investment in basic research and development;

• high liquids content in the gas;

• began with rising gas prices;

• access to risk capital on a large scale;

• easy access to water; and

• easy access to future markets to hedge prices.