The Impact of Shale Gas on Energy Markets

Written evidence submitted by Oil and Gas UK (ISG 07)

Introduction

This industry has consistently been the largest investor among the UK’s industrial sectors over the past 30-40 years, with some £8.5 billion of capital spent in 2011 and over £11 billion forecast to be spent in 2012. A further £7 billion was spent during 2011 on operations. The industry currently supports about 450,000 jobs across the economy through its activities on the UK’s continental shelf (UKCS) and in the export of oil and gas goods and services to various parts of the world which are estimated to be worth more than £6 billion a year.

Government policy is that the industry should recover as much oil and gas from the UKCS as can be economically achieved. On current projections, we still expect to be producing some oil and gas in 2050, although much less than currently. However, this will require further improvements in the fiscal regime for the UKCS, especially for gas, thereby reducing the need for imports and benefiting the balance of payments. Nonetheless, the industry will continue to help secure the nation’s energy supplies, provide highly skilled, well paid jobs, pay large amounts of Corporation Tax (over £11 billion in tax year 2011-12, more than any other sector), develop new technologies and export oil and gas goods and services.

What are the estimates for the amount of shale gas in place in the UK, Europe and the rest of the world and what proportion is recoverable? Why are the estimates for shale gas so changeable?

It is worth stating at the outset that any new gas (or oil) basin will have wide variations in the forecasts of the resources in place and the amounts which are recoverable. This has been the experience of oil and gas exploration and production around the world. Indeed, on the UK’s continental shelf, early forecasts were that production would probably last until the 1990s and be finished by the turn of the century. The reality has been that production peaked at the turn of the century and it is now forecast that there will be some production well into the 2040s, even to 2050.

It is to be expected, therefore, that estimates of shale gas resources for a given geological basin, country or continent – both in place in the rock, deep underground, and actually recoverable through production – are highly variable in the early stages of exploration and pilot development. Subtle variations in the characteristics of the shale rock that holds the gas, such as mineralogy, organic content and burial history, can have large effects on both the gas in place and the proportion that may be recovered. Data from exploration wells, including production tests, and subsequent pilot developments are required to understand better the potential of any given shale gas reservoir and the size of its resource.

In most of the world, including the UK and Europe, exploration for shale gas is in these early stages and data on shale reservoirs are very limited. Various organisations have attempted to forecast the amount of shale gas present in countries such as the UK, but because of a lack of data, these studies generally try to forecast resource potential by comparing the shale of interest with a better understood shale reservoir – generally from the United States – where shale gas exploration and development are well established in about a dozen different formations, or "plays". Since no two shale formations are exactly the same, and minor variations in properties lead to big differences in resource potential, early forecasts of a new area’s gas in place or recoverable resource based on analogue data may change greatly when actual data from that formation are gathered through drilling and production testing.

In 2010, a British Geological Survey study commissioned by the Department of Energy and Climate Change estimated that recoverable shale gas resource in the UK could total 150 billion cubic metres (5.3 trillion cubic feet). A 2009 study by the US Energy Information Agency forecast that the UK had technically recoverable shale gas resources of 560 billion cubic metres (20 trillion cubic feet), with Europe as a whole having 18 trillion cubic metres, or 640 trillion cubic feet of technically recoverable resources. Such forecasts are based almost entirely on analogue data and are likely to change significantly when actual data are collected.

Nonetheless, even the lowest of these numbers suggests that there is a substantial quantity of shale gas in the UK which could be recoverable – of the order of another large gas field in the southern North Sea where conventional production began in the 1960s. The proportion of the in-place gas that is recoverable from any particular shale formation varies widely for both technical and economic reasons. Data from the United States suggest that approximately 20 to 50 percent of the in-place gas may be recovered.

Unlike oil which is a fungible global commodity, proved gas reserve estimates (as opposed to resource forecasts) are very market price sensitive. If market prices fall below development costs, then proved reserve estimates can also drop (shifting back into a probable or potential resource estimate). Thus from year to year, market conditions may also affect proved reserve estimates for a given basin, market, etc.

What are the prospects for offshore shale gas in the UK Continental Shelf?

Shale gas wells typically produce at lower rates and have smaller recoverable reserves than conventional wells that are present offshore in the UKCS. While prospective shale formations are likely to occur offshore the UK, the high cost of drilling and operating there may make shale gas development uneconomic.

Offshore well costs are typically a factor of 10 higher than comparable costs for an onshore well (deepwater even more expensive than that). Given that costs of unconventional gas wells are higher than for conventional gas anyway, gas prices are not currently high enough to make offshore exploration and development of any potential unconventional gas resources economic. In this context, it should also be noted that the market price for gas from the UKCS, as at the National Balancing Point (NBP), is about half that for Brent oil in energy equivalent terms.

Should the UK consider setting up a wealth fund with the tax revenue from shale gas?

As mentioned above, this industry is already highly taxed, more so than any other sector, with rates varying from 62% to 81%. We would be opposed to any additional taxes on shale gas as unconventional gas suffers from significant cost challenges, as it is, and any additional taxation would only serve as a strong disincentive for exploration and development.

However, this question may be more directed towards how the tax revenues are used, in which case we consider this to be a matter for government and parliament to agree.

What have been the effects of shale gas on the LNG industry? Could shale gas lead to the emergence of a single, global gas market?

The development of unconventional gas in the USA (that includes, but is not limited to shale gas) has almost removed the need for LNG imports, freeing those supplies to serve other gas markets.

The US Department of Energy has received applications for some 170 million tonnes per annum (MTA) of LNG export licences, but so far projects for less than 16 MTA have been approved for development by the Federal Energy Regulatory Commission. However, unconventional gas-to-LNG projects are also under development in Canada and Australia (coal bed methane to LNG)

Every 100 MTA of new LNG available for export into the world’s markets is equivalent to about 140 bcm per annum of pipeline natural gas or about a quarter of European demand today. The chart below taken from BP’s Statistical Review of World Energy 2012 shows the major trade movements during 2011 for both pipeline gas and LNG and indicates the beginnings of a world market, as a result of the international trade in LNG. Even just a few years ago this chart looked very different, with far fewer blue (LNG) lines on it.

Source: BP’s Statistical Review of World Energy 2012

In the EU, DG Energy is intent on developing integrated, liquid and well functioning wholesale markets, to emulate the success of GB’s NBP market across the continent. The ability of GB’s market to attract LNG cargoes remains strong today. It is also worth noting, in this regard, that each LNG vessel of the size built by the Qataris contains the equivalent, when re-gassed, of the contents of some of the UK’s salt cavity storage projects.

Irrespective of the actual pace and contribution that LNG from unconventional sources makes to the global gas market it remains of critical importance that the market structure in the UK allows it to compete for future LNG supplies from these sources

What is the potential impact on climate change objectives of greater use of shale gas? What are the effects on investment in lower-carbon energy technologies?

Natural gas can help to meet the demand for cleaner energy in many sectors, including power generation. The use of natural gas for electricity production has proven to be reliable and cost-competitive. New, efficient gas-fired power plants can be built in three years and the cost of generating electricity from gas is often lower than other power generation options such as coal, wind and nuclear. Natural gas is also much more efficient than traditional fossil fuels; a modern combined cycle gas turbine has an efficiency of approximately 60%, being half as efficient again as a standard thermal power station.

Natural gas is less carbon intensive than other fossil fuels, with 30% less carbon than oil and 60% less carbon than coal. When used for power generation, natural gas emits up to 60% less CO2 than coal, with emissions of other waste products such as mercury, sulphur and nitrogen oxide also significantly reduced. Over time, the potential deployment of new technologies like Carbon Capture and Storage (CCS) could continue to improve the environmental advantages of natural gas.

A study conducted in 2011 at Carnegie Mellon University compared the life-cycle greenhouse gas emissions, including carbon emissions, from shale gas development to coal production and conventional natural gas. The chart (below) illustrates the results. The top bar shows, as a basis of comparison, the amount of CO2 emissions from a typical coal-fired power plant. Newer, more technically advanced coal-fired power plants emit approximately 20 percent fewer CO2 emissions on a life-cycle basis, as shown in the second orange bar below it. By comparison, the Carnegie Mellon researchers used the production characteristics of a typical Marcellus Shale [1] well to estimate overall life-cycle carbon dioxide emissions of 68 grams. That is roughly 3 percent higher than conventional gas production life-cycle emissions – shown in the two red bars at the bottom – but still more than 50 percent lower emissions than a coal-fired power plant on a energy-equivalent basis. Additionally, as another emissions mitigation measure, the US EPA released a regulation in April 2012 that further caps emissions of volatile organic compounds (VOCs) from natural gas operations in the USA which will reduce the emissions of GHGs from natural gas even more.

Other information on the US power generation market, based upon data from the IEA (chart below), shows that, over the period of time since 2005, gas-powered generation and wind and solar generation have collectively increased whilst coal consumption has declined sharply. In fact, far more renewable energy capacity was installed in the USA in the 5 years after 2005 than the 5 year period before. This is highly significant, because shale gas development increased significantly from 2005 onwards. It does not appear, therefore, that increased gas use from shale has had a adverse effect on investment in renewable sources of electricity. Indeed, the rapid rise in gas-fired power generation, fuelled by the growth of shale gas production, has led to US carbon dioxide emissions falling to their lowest for 20 years.

Some Concluding Comments

1. It is normal that, at this early stage of exploration, there is much uncertainty about potential volumes of shale gas in place and those which may be recoverable. It will only be through the drilling of many wells, pilot developments and, assuming some success, production of commercial quantities that enough data will be amassed to build a proper picture of longer term prospects. This will take time, as in any gas or oil basin.

2. In various parts of our response, we have relied on information from experience in the USA, because this is the only place where such experience exists.

3. We naturally remain available to answer any questions arising from our response which the E&CC Committee may have or to provide further information where we can. Please do not hesitate to contact us.

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September 2012