CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 785-ii

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

The Impact of Shale Gas on Energy Markets

Tuesday 11 December 2012

CORIN TAYLOR, FRANCIS EGAN and GRAHAM TILEY

PROFESSOR KEVIN ANDERSON, JENNY BANKS and TONY BOSWORTH

Evidence heard in Public Questions 93 - 218

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 11 December 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Ian Lavery

Dr Phillip Lee

Mr Peter Lilley

Albert Owen

Christopher Pincher

John Robertson

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Francis Egan, Chief Executive Officer, Cuadrilla Resources Ltd, Corin Taylor, Senior Economic Advisor, Institute of Directors, and Graham Tiley, General Manager (Ukraine), Shell International Ltd, gave evidence.

Q93 Chair: Good morning and welcome to the Committee. Thank you for coming in. As the session is being broadcast live, can I ask you very briefly just to introduce yourselves for the benefit of people who are picking this up on a feed rather than present in the room?

Graham Tiley: Yes, my name is Graham Tiley. I work for Royal Dutch Shell. I have a PhD in Geological Sciences. I have spent 25 years working for Shell in the exploration business in Africa, Europe and the Middle East. I am currently Shell’s general manager for our Ukraine venture, which is an unconventional gas project, and I am the country chairman in Ukraine.

Francis Egan: Good morning. I am Francis Egan. I am the CEO of Cuadrilla Resources. We are the company exploring for shale gas in Lancashire, amongst other places.

Corin Taylor: Thank you very much for inviting me. I am Corin Taylor. I am a Senior Economic Advisor at the Institute of Directors and we recently wrote a report on the prospects for shale gas in the UK

Q94 Chair: We are concerned to get our terminology accurate and correct here and obviously draw the distinction between resources and reserves. Why is it that shale gas companies tend to talk in terms of resources and not reserves?

Francis Egan: Well, if I can speak for the example in the UK, at the moment everything is a resource because nothing has been produced. As we begin to produce them, of course, they get translated into reserves. The stage that we are at is an early stage in the exploration process and we have determined that there is of the order of 200 trillion cubic feet of resources-gas in place. In order to translate that into reserves, we will need some further data, principally some flow rates while testing. It is possible to draw analogues with similar plays in the United States but to get definitive information you need more data and that is what we hope to do as part of the ongoing exploration programme.

Q95 Chair: But you said that in your licence alone, you could supply a quarter of the UK’s gas demand.

Francis Egan: I think we said we had the potential to supply up to a quarter, yes. If you take 200 trillion cubic feet, or possibly higher than that, the annual UK gas demand is 3, so a quarter of that is less than 1. So you do not need a very high recovery rate from 200 trillion cubic feet to get to that.

Q96 Chair: You do not think that claim was premature in any way?

Francis Egan: I think we said we had the potential to do that and I believe we do have the potential to do that.

Q97 Chair: Though you said in your first answer that you could not be sure what the reserves were.

Francis Egan: The reserves in any field, conventional or unconventional, are not defined and locked down in time for ever. Reserves are a function of a number of things. We said this in our report. They are a function of technology. They are a function of what time you actually measure the reserves. Generally what you find in conventional oil and gas, and I am sure shale will be no different, is that, over time, reserve estimates tend to increase as technology improves.

Graham Tiley: If I could maybe add something to this, it is important to realise that reserves tends to be quite a formalistic definition. It is important then also to talk about what definition of reserves you are using. Previous witnesses have talked about the SEC reserves. That, of course is one particular definition of a reserve and companies have to follow quite strict rules when defining what can be counted as reserves. That is often a function of price. It is a function of whether or not you have a credible development plan for those volumes. The definition of reserves changes from place to place. Somewhere like Russia or Ukraine have their own reserve definition criteria.

Resources is a more loose term and, as Francis said, in the industry we often talk about in-place resources as being, perhaps, the loosest definition of the possible gas that is in the ground because then that takes you away from commercial technology or other constraints that then have to be applied before you can translate resources into reserves.

Q98 Chair: The British Geological Survey would like to have access to Cuadrilla’s data. Is that something you would be willing to publish?

Francis Egan: I think we have already provided our data to the British Geological Survey. We certainly have provided it to the Department of Energy and Climate Change and I believe that they are working with the BGS on updating estimates for UK resources.

Q99 Chair: When they gave evidence to us two weeks ago, I quote directly, he said, "I would like to see the gas content figures published and I would like to see the actual production figures published as well for many of the wells that they’ve drilled".

Francis Egan: Well, we would like to see some production figures published too but unfortunately we are not able to produce them at the moment.

Q100 Chair: The gas content figures published?

Francis Egan: If they are looking for data from us, we do not have a problem providing them with data. Some of the data is commercially confidential, so as long as that can be protected, that is fine.

Q101 Chair: So that is a step forward in that case. Do you think the Government’s Gas Generation Strategy, which was unveiled last week, is going to be helpful?

Francis Egan: I guess the gas generation strategy envisages a role for gas, clearly. At Cuadrilla we believe that there will be a role for gas in the UK not just in generation but in domestic and industrial sectors and you will be aware, if you look at the gas demand in the UK, generation accounts for only about a third of gas demand in the UK. So, virtually every home in the country, probably everybody in the room here is using gas either for heating or cooking or both. So the fact is that gas will be needed in the UK and it will be needed for decades. Even if we could generate all our electricity without gas, which we cannot, we would still need gas.

Q102 Chair: I do not think that is in doubt. I was asking whether you thought that the gas strategy was going to be helpful or not.

Francis Egan: I think in that it acknowledges that gas will have a role it is helpful.

Q103 Chair: We hardly needed a new strategy to acknowledge that, did we? I do not think anyone was disputing the fact that gas had a role.

Francis Egan: Cuadrilla is not in the business of working out the energy strategy for the country. We are here saying that we have found gas. We believe it can be developed safely and sensibly. If the country thinks there is a market for gas, then we will be able to provide it.

Q104 Chair: So, Cuadrilla really did not care whether there was a gas generation strategy or not?

Francis Egan: I am not saying we do not care whether there is a gas generation strategy. I am saying our role is, and we have a licence from the Government, to look for gas and if we are given a licence to develop the gas, then we will do that in accordance with the Government’s wishes.

Q105 Sir Robert Smith: Yes, I had better remind the Committee of my entries in the Register of Members’ Interests to do with the oil and gas industry and in particular a shareholding in Shell. Just on the wider debate about shale gas, there is talk of benefits for the UK. What sort of benefits do you see coming forward from shale gas?

Francis Egan: Well, you will be aware that the UK is importing most of its gas and in 10, 20, 30 years’ time it will be importing all of its gas or virtually all of its gas. So there are benefits in security of supply. There are benefits in balance of payments. Instead of spending billions importing gas, we will be able to generate at least some of that in the UK. I am not sure we will be able to, and probably will not be able to, completely negate the needs for imports but at least some of them; and of course, if it is successfully developed, generate significant tax revenues and employment.

Corin Taylor: Just to add to that, if you look at the OBR’s long-term fiscal projections that they put out with the autumn statement, the North Sea tax revenue is projected to fall from just over £11 billion last year to just under £5 billion in 2015. That is obviously a massive gap. A developing shale gas industry can help to fill at least some of that gap as it can with jobs in the North Sea too.

Q106 Sir Robert Smith: What is the jobs potential of shale gas? Obviously my constituency is just outside Aberdeen, so we have seen a huge jobs potential over the life of the North Sea and there is still a long tail but it is past its peak. Onshore is obviously less intensive. What kind of job impact would a reasonable take-off of shale gas have?

Francis Egan: There are varying estimates and I am sure you will have seen them from the Regeneris study that was done for Cuadrilla to the IoD estimates and they vary from thousands to tens of thousands of jobs. I think for any industry, at this stage, it is difficult, if not impossible, to be definitive about how many jobs. Will it be 4,000 or 5,057? But we talked earlier about the potential for the resource and the potential to supply up to 25%-20% to 25%-of the UK’s gas demand. You cannot do that without creating thousands of jobs. The oil and gas industry, and you will be aware of this from Aberdeen, creates jobs across the full range of disciplines: engineering jobs, accounting jobs, technician jobs, security guard jobs and out from that into the supply business. Equally, if the UK is the first to do shale gas in a proper regulated manner in Europe, it has the opportunity to create service centres for other European-and there have already been companies approaching Cuadrilla and Lancashire County Council discussing the possibility about setting up service industries based out of Lancashire for shale.

Graham Tiley: I think maybe it is also useful to look at the experience in North America where, as you know, Shell has a number of projects and there have been quite a few studies done in states like Pennsylvania that look at the economic benefit and, indeed, the jobs tend to be measured in the tens of thousands. It is quite labour intensive. I am not sure whether it is less or more than the offshore. It is certainly a little bit different. I think, as Francis said, the supply chain is a key area. It is not opening just the jobs involved within the company, like Shell, but it is all of the service industry that is required to support it, the tens, or perhaps hundreds, of rigs, ultimately required to do the drilling. Then in the United States, of course, what they are also seeing is this resurgence in the industry that is then benefiting from the cheap gas prices, the petrochemical industry and other energy-intensive industries. So there is a further knock-on effect on GDP and jobs simply from having a lower-cost supply of energy.

Corin Taylor: I very much concur with that and also I think a lot of these jobs would be in parts of the UK that really need them, so it is an important part of helping to rebalance the economy.

Q107 Sir Robert Smith: There is at the moment a skills shortage globally for the oil and gas industry, however, and if you go to Aberdeen there is a desperate desire to recruit people. We have virtually no unemployment locally. There is difficulty getting enough skills into this, projects are being held back almost by it. Do you think the skills base would be able to cope with the take-off of shale gas?

Francis Egan: It needs to be co-ordinated. I think it is a really good point. We are already working with the University of Lancaster about the skills and they will produce a skills study for us within the next two or three months. It will not happen by accident, let me put it that way. It needs to be planned for and people need to be trained. That should be not just the industry but also academia and Government probably also has a role to play in that.

Corin Taylor: We have done this before as well obviously with the North Sea industry in the first place and of course with other industries like the nuclear industry. It is very much something that needs doing but it is something that we can achieve.

Q108 Sir Robert Smith: The North Sea took advantage of the collapse of ship building in its early days and now if you go to an oil and gas exhibition in Aberdeen and you go to a company like Shell’s stand, you find the only people on the stand are the global human resources department looking to poach skills from the UK to other parts of the world.

Graham Tiley: If I can comment from the international perspective, you are absolutely correct. There has been a major demographic crisis in the oil and gas industry, particularly in the developed countries. What we are seeing in Shell, of course, is that we are developing a whole new generation of engineers in the countries where we operate. That is something I am looking at. In the Ukraine context, for example, I am also looking at how I am going to develop the people, the skills that I will need there. In the UK context, I would expect it to be achievable. When I talk to my colleagues from North America, for example, what we find now is we are bringing in a whole new generation. Many of the people working unconventional gas in North America for companies like Shell have only ever worked unconventional gas, so there is a new bulge of workers coming through for whom that is their new core skill.

Francis Egan: It would be a high-class problem if we put it that way; jobs chasing people rather than the other way round.

Q109 Dan Byles: It seems to me that getting the right regulation for unconventional gas on the mainland UK is essential for public safety but also for public acceptance. Do you think that the UK regulatory regime currently strikes the right balance between not being an excessive burden on business but adequately protecting the environment?

Francis Egan: From our experience so far, and I need to stress we are in the exploration phase-we have drilled three wells, currently drilling a fourth and looking to hydraulically fracture and test a couple or three wells-and I have said this before, I think it is effective in that I think everything is covered. The efficiency could be improved in that some things are covered twice, if not three times by different agencies.

Dan Byles: Welcome to government.

Francis Egan: I do think it is effective. The UK also has the advantage of having a very strong regulatory system. I was in Aberdeen in 1988 when Piper Alpha happened. I was working offshore at the time. That, and the Cullen report, was a defining moment in regulation in the UK. Since then, the UK is widely recognised in the oil and gas industry as having the strongest regulatory system. We have the opportunity onshore to build on that foundation in the UK and also on what has been learned from 10 years’ experience in the US. So you will hear a lot about, "This happened in the US, that happened in the US and, ergo, it must happen in the UK". I do not subscribe to that opinion at all.

Corin Taylor: The community concerns around shale gas are probably the No. 1 issue that needs addressing. The regulatory system we have is very good. There is merit in having an Office for Unconventional Gas, which was set out in the gas strategy, bringing it into one place; also providing very much a level playing field and I think helping to reassure communities. One other aspect that would be useful is being able to provide tangible benefits to communities that have shale-gas wells in their neighbourhood, whether that is through lower gas bills or some other mechanism, such as local amenities-some way that communities can get compensated for the disturbance from the development.

Q110 Dan Byles: Do you see an analogy with community benefit for wind farms and the whole discussion going on there?

Corin Taylor: Very much so, yes.

Francis Egan: It is an absolutely key part and there is an analogy.

Q111 Dan Byles: Graham, do you have a view on the current regulatory system? Do you think we can get the balance right?

Graham Tiley: I do not know the UK system. I have not worked in the industry here.

Q112 Dan Byles: Cuadrilla has specifically called for greater co-ordination between the different regulatory bodies. Could you give us an idea of specifically what you would like to see changed in terms of regulation? You have mentioned the possibility that you are already ticking multiple boxes.

Francis Egan: Well, I do not think we are looking for radical change in the regulation. We are in favour of strict regulation for the shale gas industry. We have demonstrated that by our actions. But I will give you an example. At the moment, for the two well tests that we are looking to do, we are doing environmental impact assessments for Lancashire County Council, two of. We will do an environmental risk assessment for DECC, two of. We will do another environmental permitting study with the Environment Agency, two of. There you have six separate environmental studies involving three separate agencies to flow-test two wells for 30 days each. I think it could be improved.

Q113 Dan Byles: Is that the sort of thing that you think perhaps this one-stop Office of Unconventional Gas might be able to help with?

Francis Egan: I think it absolutely can help with that, yes.

Q114 Dan Byles: Do you think there is a danger in having an organisation set up that seems to both regulate the industry but also to promote the industry?

Francis Egan: That is a very good point. It needs to be managed carefully. Promotion and regulation, as you are well aware, are two different things.

Q115 Dan Byles: In terms of reassuring communities, Corin, you made the point that perhaps the biggest public issue around shale is this fear for local communities. Do you see a problem when things like the environmental impact assessments are being conducted by the industry? Do you think that there is a problem that local communities might have a trust issue in terms of who, for example, is conducting these environmental impact studies?

Francis Egan: Sorry for interrupting, but the environmental impact assessments are not conducted by the-we have put them in.

Q116 Dan Byles: You commissioned them?

Francis Egan: The environmental permits of the Environment Agency are subject to public consultation, in fact will be subject to two separate public consultations. The environmental impact assessment is subject to public consultation, two separate public consultations. The environmental risk assessment involves members of the public participating and coming up with a range of risks that they see, associated with this. There is fairly extensive public involvement in this. This is not Cuadrilla writing its own environmental impact assessment and signing it off by any stretch of the imagination.

Q117 Dan Byles: In your experience so far, how much buy-in does the local community take to that? What I am really getting at here is about credibility. Is there something more that can be done to reassure communities that this sort of work is robust and independent?

Francis Egan: I think the transparency is good: the recognition of what the issues are and how they are being addressed. I think the real proof of the pudding will be in actually doing it and demonstrating that it can be done safely.

Q118 Dan Byles: Demonstrating you can be good neighbours basically?

Francis Egan: Yes. That is the case for any industry that is starting up. You have to do it, show that you are doing it properly and then you win trust. We cannot talk the gas out of the ground.

Q119 Dan Byles: If we could, we would not need you. We would be able to do it.

Francis Egan: We would have produced about a quarter of the UK gas supply.

Q120 Dan Byles: One final question: there have been a group of MEPs who have recently called for robust fracking rules, MEPs, I am sure you have seen this. They have stated that, "Environmental protection should be paid for entirely by the industry" in their words. Is that something you have looked at what they mean by that and do you agree with them, that the totality of environmental protection in this should be paid for by the industry?

Francis Egan: Honestly, I have not looked at it. I think that the industry is certainly paying for the environmental assessments. We are paying for the mitigations associated with those environmental assessments. I do not know what else they are expecting the industry to pay for, to be honest, but the industry is paying for that right now.

Q121 Dan Byles: So effectively you are stepping up and paying for all of this?

Francis Egan: We are paying for the assessments. We are paying for anything that needs to be done as a consequence of those assessments and we do not object to that.

Corin Taylor: There have obviously been calls to regulate fracking on a pan-European basis, and I am not sure that is necessary. If you look at the UK’s regime, I think making sure that is strengthened and is suitable for the UK would be the right way to go. If conditions differ in other EU member states, then they should look at their own regulatory regimes.

Graham Tiley: I tend to agree. Shell would very much support strong regulation, and consistent regulation is helpful. It also helps build public confidence, of course, if you do not see too many differences between country A or B but we believe that strong regulation is important and we are very pleased to comply with such regulation.

Q122 Chair: On this point, when we looked at the offshore regulation regime, we concluded that the UK had a robust and probably superior system to quite a lot of others. We were very hostile to the idea that there might be an EU role to try to impose an EU-wide revision. It seems to me it is slightly different in the case of shale. Looking across Europe as a whole, if we think it is desirable to try to facilitate the exploitation of shale gas, is it easier for operating companies if they have a broadly similar regulating regime in different countries or would it not matter if in Poland or France there was a very different approach?

Francis Egan: It is a good question. It depends on the nature of the regulatory regime. When Lord Cullen completed his report into Piper Alpha, one of his key conclusions was that we should have a goal-setting regime; in other words, the regulatory system should not be telling operators how many times to turn a valve and which valve is turned, but it should set goals and then ensure that those goals were enforced. Now, if the regulatory regime is kept to that level, then it is entirely appropriate and easy, in fact, to have a consistent set of standards. If the regulatory regime is attempting to tell you what colour boiler suit you should put on in the morning, that will never work in one country let alone a dozen countries. I think there is a danger that we get into that. The industry and the regulator need to co-operate. The regulator needs to set the rules and strongly enforce those rules and the industry needs to be aware of the rules and comply with them.

Q123 Chair: One potential advantage of the UK being ahead of the field is that we might be able to set a regulatory standard that other countries then find it convenient to adopt using the principles you have just mentioned.

Francis Egan: That is absolutely true.

Graham Tiley: I can give you examples of that already; we, through the diplomatic mission in Ukraine, help bring out UK experts to Kiev to introduce to Ukraine Government officials to start that dialogue regulator to regulator. That is something that we think is very, very powerful.

Q124 Sir Robert Smith: In definition terms, how discrete is fracking or unconventional gas from other gas? The integrity of the well bore has to be the same whatever the process. The flaring consents have to be the same whatever the process. It is what is happening underground in terms of management of the well that has a different process. Is it really a discrete thing that needs a body of unconventional gas regulation as opposed to oil and gas regulation?

Graham Tiley: Perhaps I will try to address that one and I would look at two different areas. From a technical point of view, there are not substantial differences between a conventional well and an unconventional well. Certainly drilling and, for example, correct isolation of your drilling from the groundwater, is the same whether you are drilling a conventional oil or gas well, or unconventional. Fracking is also, of course, something that has been used for decades in conventional-type gas. I have been involved in projects myself in North Africa and the Middle East where we have used fracking for so-called conventional- type gas. So that part of the technical side, the engineering side, is not fundamentally different between the two projects.

What is very different though is the economic behaviour. That is where you start to get into the need to look a little at the regulation. The thing about very tight gas wells, unconventional gas wells, is you are producing relatively low volumes of gas per well and low rates over long lifetimes; quite different from the way a conventional oil and gas field behaves. So the regulations and, in particular, the fiscal environment need some adaption to deal with, let us say, the economic realities of the unconventional gas business. But the engineering is by and large stuff we have been doing for decades.

Q125 Christopher Pincher: In terms of public opinion as to how you use the term, "public confidence" do you think that the industry does itself no favours in terms of the terminology that is used, which we have been using in this inquiry this morning? The mysterious term "unconventional gas", and mysterious terms like "fracking", at best confuse people, at worst alienate them. Gas is gas, is it not? So shouldn’t we be saying it is gas like any other gas and that possibly it is home-grown gas, it is British-produced gas, in order to explain it much more simply to people and to win over public opinion?

Graham Tiley: I have to fully agree with you.

Francis Egan: Equally, I could not agree more. The terminology is repeated often outside the industry, so that is just the way it is. The gas is natural gas. There is nothing unconventional about it. It is normal gas the same as produced from the North Sea. The unconventional phrase comes from the fact that the rock it comes from is not what gas has conventionally been produced from.

Graham Tiley: Francis, can I jump in because I am very passionate about this topic? I believe that definitions matter, words matter. I understand the public concern because, indeed, it is a communication issue. The term "unconventional" has a very specific meaning. It means "unconventionally trapped hydrocarbons". That was the usage that was being done in the geo-scientific and oil industry community. So it is effectively the difference between oil and gas that is trapped in fields beneath seals, the normal stuff that we deal with in the North Sea, and unconventionally trapped gas that is in these very tight rocks, the shales or the deep, tight clastic rocks. So it was actually the trapping mechanism that led to the use of the term "unconventional". But of course you are absolutely correct; it is fine between a bunch of geologists to throw these words around but when it comes out into a public sphere it leads to concern and unease.

"Hydraulic fracturing" is a very descriptive and straightforward term. That is exactly what you do. You use water to fracture the rock, hydraulic fracturing. Unfortunately the shorthand version of "fracking" has become, in effect, almost an accepted swear word these days.

So yes, terminology is obviously not something we think about as scientists when we are first putting these things together. What the industry has recognised is that we did do a very poor job of communicating our activities to the public. I have been through this learning myself personally in a number of projects. We have come a long way in the last couple of years. In companies like Shell, we have gone a long way now to reaching out to the public. In Ukraine, I deal regularly with the communities, with NGOs, the media, the Government, academia; having sessions to basically talk everybody through the principles of what we are doing and what our operations are. But yes, it took some negative reactions to, in a way, wake us up to this issue.

Chair: I should also remind Members and others of my interest in the Register of Members’ Interests.

Q126 Mr Lilley: Turning to the tax regime about which the Government tells us it is consulting with the industry at the moment to ensure an appropriate regime, could you give us your thoughts and what you think an appropriate fiscal framework would be for onshore shale gas extraction?

Francis Egan: I think the framework should recognise both the potential of the industry but also the stage that it is at. Effectively, we are at the point of potentially starting a whole new industry in the UK. We have used this phrase internally; if the industry is allowed to grow up into a tax-paying adult, it will pay a lot of tax, but it is in its infancy and there is concern that that infant could be strangled at birth if the tax system is not appropriate to do that. By that I mean the capital costs at the early stage of the industry tend to be high because you are establishing a new industry in a new basin and, over time, those costs will come down.

The consultation that is going on with the Treasury is to set that appropriate balance between making sure that the industry is capable of taking off but not, as I said, potentially killed off at birth.

Q127 Mr Lilley: Why should there be anything special? A lot of businesses have high up-front capital costs. Parts of the oil industry do. You are allowed to write off your exploration costs against profit in the year they are incurred. Why is there any need for a special regime?

Francis Egan: Some of the companies that are operating will not have exploration costs to write off against profit in the UK certainly to start with onshore.

Q128 Mr Lilley: That means exploration costs were lower, not that they were higher.

Francis Egan: We are not asking for a special regime. The Treasury is deciding whether the existing offshore regime should be applied to the onshore and what alterations might be made to recognise the onshore situation.

Q129 Mr Lilley: So would petroleum revenue tax, then, be the default position of the Treasury that PRT applies onshore?

Francis Egan: I do not know what their default position is. That is the consultation process.

Corin Taylor: My understanding is the default position would be the 30% corporation tax, 32% supplementary charge without change and then I suppose two obvious levers you can look at are potentially the level of the supplementary charge and the field allowances, which is obviously a mechanism that is used offshore. Those are two ways in which you can look at it. Industry will still be paying tax but perhaps at a lower rate than some of the mature fields in the North Sea.

Q130 Mr Lilley: Were any special tax breaks provided in the United States and were they significant? Were they a make or break issue as far as the development of the industry was concerned?

Francis Egan: I am not familiar with the United States’ tax regime.

Graham Tiley: I would not claim to be an expert on it. My understanding is that there would not generally-because obviously you have differences from state to state, so it is very hard to give a blanket answer. My understanding is that in general there were not special tax regimes for unconventional gas but the tax regime in the US is generally friendly to the industry and, of course, that is part of what stimulated the early exploration efforts into these plays-that and the high gas price at the time.

I am not going to comment on the UK tax regime as I do not know it. Again, I will come back to one difference. If you look at the economics of an unconventional gas development versus a conventional, the cash flow profile is different. Typically you have a longer period of expenditure followed by a longer period of production. So there are reasons to look at how a particular tax regime impacts a particular project or a particular type of project and you may find that you need to adjust it because, for example, a lot of the production with an unconventional gas well comes over the decades of long-term production. Now, at a certain point it becomes a simple economic question of does that well continue to pay for itself in terms of the revenue you make as a company versus the operating costs every year for that well. Now, if the tax regime is not set correctly, you are not making money and you turn that well off and then you lose that remaining production. So it is worth, let us say, looking at type examples of how these projects behave to see whether the tax regime gives the desired result.

Q131 Mr Lilley: Other than defining the appropriate amortisation period for investment, other industries do not have special regimes. I am puzzled at the thought that there is any need for a special regime for shale gas. If they cannot make profits at double the American price, perhaps you ought to be looking elsewhere.

Sir Robert Smith: But they do pay a much higher tax rate than any other industry.

Mr Lilley: If petroleum revenue tax applies.

Sir Robert Smith: Well no, because corporation tax is higher and the supplemental to the corporation-so it is something like 62%.

Corin Taylor: Even if you completely abolished supplementary charge, you would still be paying a higher tax rate than other industries across the general economy. One point about the US, generally speaking, is they have a pretty competitive tax regime although I do not know the details of how it was set up. The shale industry does create a lot of tax revenues and just looking at a report from IHS Global Insight, which was released recently, in 2010 the industry contributed about $18 billion of tax revenue, about $8 billion of that to the States, $9 billion to the Federal Government. In 2015, that figure is projected to rise to just over $28 billion-a sizeable number. Whatever you get in the early years, I think if the industry does develop, the Treasury would get a lot of tax revenue from it.

Q132 Mr Lilley: One final question, are you at present impeded or does it slow down the rate at which you are exploring the tax regime or, indeed, any other aspects of the regulatory regime? I would very enthusiastically go ahead, so I do not want to tax you too much or regulate you too much and I just want to know how much tax we can squeeze out of you and what the minimum regulation we can impose on you is.

Francis Egan: We would love to be able to pay tax because that would mean we are making profit but right now we cannot even flow-test a well. We are not impeded by the tax regime, we are impeded by the fact that we are awaiting a decision from the Department of Energy and Climate Change.

Q133 Mr Lilley: But you are drilling wells?

Francis Egan: We are allowed to drill but we are not able to fracture and flow test them all. So, we can tell you how much is in the ground but we cannot tell you how much will flow out of the ground.

Q134 Chair: You will be aware that it is almost two years since this Committee recommended that you should be allowed to do those things but that is the pace of decision making, I am afraid.

Just on this point about tax though, I do not think you are suggesting that this industry should be regarded as the same for tax purposes as other industries because you are having access to a natural resource.

Corin Taylor: Indeed. Exactly, yes. Very much so.

Q135 Ian Lavery: Looking at the potential for global gas markets, shale gas is only one part of the wider global gas industry and there is a huge potential for a global gas market. Do you think then that the development of shale gas could lead to the creation of a global gas market?

Francis Egan: That is an interesting question. The development in the UK-the market for the gas will be primarily, but not exclusively, in the UK. Of course, the UK is connected to Europe, as you well know, in gas terms, so the impact for development in other European countries could be to assist in the development of a global gas market. We already have a global gas market to a certain degree. Cargoes of LNG are coming into the UK from the Middle East. We import pipeline gas from Norway. We are connected by pipeline to Russia and gas is flowing from the Middle East to Asia and from Australia to Asia. So that market already exists. The development of UK shale reserves will not have a huge impact on that, I do not think, but will probably have a small, positive impact on it.

Graham Tiley: At the moment, gas markets tend to be regional, although LNG is starting to develop something that looks like a global market. I think less than 10% of gas moves as LNG at the moment. The majority of that is still on some form of longer-term contracts. So, although we have seen a spot market develop-something like 25% of LNG is traded on the spot market-we are quite a long way from a global, single market developing.

Shale gas will have impact in the regions where it becomes developed. We see the most obvious example of that is the US where people have switched their attention from building regasification terminals to thinking about LNG export terminals. We are already seeing cargoes of LNG that might have gone to the US market starting to go to other markets. The shale gas revolution in the US has already changed that market dynamic and makes more LNG available into Asia or Europe. China is also developing fast its own unconventional gas resources, which will have an impact indeed on its own appetite for LNG perhaps or other forms of fuel.

Shell’s position is it will take quite a long time before we would see a truly global gas market but, as I say, in the regional theatres that we have at the moment, shale gas will have an impact if it becomes a substantial part of the supply.

Corin Taylor: A big issue to talk about is price. Obviously we would see the oil market as being a global market and yet there is about a 25% price differential between West Texas Intermediate and Brent Crude. In terms of gas, you have the Asian LNG, which is at the highest level, about $15, Europe and the UK paying $9 or $10 and the US paying about $4 at the moment. We will see a trend over time towards de-linking gas and oil. It has obviously already happened in the US. The Japanese are now starting to negotiate contracts for LNG based on Henry hub, obviously with a premium on that, but based on Henry hub rather than fluctuating oil price. You have seen Putin talk about Russia needing to develop a strategy to deal with shale. You have seen price cuts for some German utilities, some Italian utilities. The price trends are quite positive. Clearly with the cost of liquefying, transporting, regasifying LNG, you are not going to necessarily see US-type prices around the rest of the world but you could see some conversions downwards.

Q136 Ian Lavery: Oil and Gas UK have said, and I will quote exactly what they say, "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". How can the UK ensure that it is best placed to compete for any future LNG?

Francis Egan: The best thing the UK could do is develop its indigenous resources and reduce its reliance on imported LNG. That is the most positive step it could take because if you are a buyer of LNG, then you will need to pay the market price for LNG.

Corin Taylor: The UK imports about half of its gas at the moment and that is projected to go up to about three-quarters over the next 20 years. If we develop shale in the UK, we may be able to keep imports at about the current level. They may go up a bit but they would not go up as far as three-quarters. Making sure we can buy LNG will still be very, very important but what shale can do is improve our energy security.

Q137 Ian Lavery: The reduction in the price in gas in the US, has that had a dramatic impact on the UK gas prices?

Francis Egan: The most dramatic impact it has had is that we are burning more coal in the UK because coal prices have fallen in the US as a consequence, or they cannot sell coal in the US, and they are exporting it to the UK. So, you will hear talk of a dash for gas. What we have is a dash for coal in the UK right now. In terms of gas prices in the UK, not a huge impact, I do not think.

Q138 Ian Lavery: Finally to Mr Taylor, the Institute of Directors said to this Committee that if the UK wants to benefit from the shale gas boom rather than wait for a global market, probably a better way to do it is to increase domestic production. Can you explain that?

Corin Taylor: Yes, I very much agree with that. If you look at the cost of transporting LNG from the Gulf of Mexico to the UK, for example, it could be about $4 to $5. Add on to that Henry hub price of about $4 at the moment and a lot of analysts expect that to go up a little bit, maybe towards about $5, and you are on $8, $9, $10, which is not that far off what we are paying at the moment, so the potential we have for getting a lot of cheap gas from the US is, perhaps, limited in that respect. We can obviously free-ride on shale gas production in other countries to some extent. That would be benign. But I think it is most important we do increase production of our indigenous gas to really maximise the benefits, not just in terms of price, of course, but in terms of things like balance of payments and jobs and so on in the UK as well.

Q139 Dr Whitehead: You mentioned, Mr Egan, the effect of shale gas in the US of transferring coal from elsewhere in the world to the UK. We have also seen a number of life-cycle studies, mainly in the US, on shale gas production relating to emissions that arise from the whole process; for example the fact that there are a large number of wells drilled as opposed to the small number in conventional and the question of transporting that gas and collecting it and the escape points that intervene and, of course, the loss of gas during the drilling and processing for production. Firstly, what measures do you think may take place in the UK, as opposed to the US, to ensure that that sort of escape is minimised and, secondly, what sort of estimate do you make about those overall emissions from the life cycle of shale gas particularly relating to what you are doing?

Francis Egan: I think the studies that you are referring to, and there are many, as you are well aware, generally agree that the largest source of emissions from shale gas and the methane emissions in the US comes from the practice of storing flow-back water, so this is the water that comes back with the gas, in open pits during the initial periods of flow back. The practice has changed certainly in the US of late and it is our practice in the UK that all flow-back water passes through a four-stage separator and that the gas is separated out in the separator and is, during testing at least, sent to the flare system. I think those studies conclude that if you do that, which is not that difficult frankly, you reduce emissions in that phase of the operation by about 90%. That is by far and away the largest source of emissions identified in any of these studies. The studies conclude that with that alone, shale gas production, the emissions are about 10% less than imported LNG and about the same reduction Vs pipeline imports. From an emissions point of view, it makes sense for the UK to produce its own indigenous gas rather than importing gas from Qatar in LNG ships, where it has to be liquified, transported and de-liquified, or in pipelines from Russia.

On your second point, our estimate-and this gets back to the earlier questions on the regulatory regime-the difference, if we exploit our own reserves, is that we will do it in a properly regulated environment that controls how we do it. Apart from the example I just gave you-which could be passed into regulation tomorrow, I do not think that it is in regulation but Cuadrilla follows that practice in the UK-the other sources of emissions are typically compressor stations, which again is just sound engineering in terms of the seals and how you maintain and manage that, and we can do all that in the UK. The point is we are in control of our own emissions or the emissions rather than relying on gasification processes in Doha or compressor stations in Siberia.

Graham Tiley: If I can add, emissions is one of Shell’s onshore operating principles. It is an area where we have a number of stated standards that we adopt globally. We believe the IEA numbers are broadly correct, which say that if you follow good practices, then the overall well-to-wire impact of unconventional gas versus conventional need only be a few per cent. difference and certainly a lot lower than coal, for example. In our view, particularly a switch from coal to gas is probably the most important thing one can do at the moment for reducing overall emissions. Of course that explains why the US has seen the fastest drop in overall emissions in any country in recent years.

Q140 Dr Whitehead: But that is not particularly relevant to the UK, is it, bearing in mind that there are no plans, as far as we know, to build more coal-fired power stations?

Francis Egan: There aren’t but we are burning over 40% of our electricity with coal right now and it is also relevant in that we are importing more and more gas in pipelines and LNG. Producing your own gas, there is probably 10% less emissions.

Q141 Dr Whitehead: Yes; it is an LNG effect. But bearing in mind what we have heard about the displacement of coal around the world from the US and secondly, less certainty for future developments-we do not have a coal regime upcoming-the question of colonising that area with gas does not look like it is going to arise. What do you think the overall effect of a coal displacement looks like in the UK?

Francis Egan: If we displace coal in the UK, that is good for emissions, and how we do that, frankly, does not matter. If you can displace the coal, you will reduce the coal emissions. If you displace it to renewables-and there is a role for gas and renewables, I strongly believe that-no one fuel is either going to supply all the energy of the country or should be allowed to because it is important to have diversity of fuel as well as source.

Q142 Dr Whitehead: Do you, or any of the panel, go along at all with the suggestion that investment in unconventional gas is likely to be opposed to investment in renewables or do you think they are compatible with each other?

Corin Taylor: I think they are complementary. If you look at the US, they have had quite large development of renewables over exactly the same time period as they have developed shale gas. That is obviously going to be the case in the UK. The biggest driver of renewables investment is policy and that is also true in the US. If you keep the policy incentives for renewables, then you will see renewable deployment.

Francis Egan: I can speak from our example. One of our largest investors is Riverstone who are also probably the largest investor in renewables in private equity. It is entirely, in their minds, logical to invest in both.

Graham Tiley: I cannot give a UK-specific answer but globally, of course, what we are seeing is renewables are about 13% of the energy mix today. In Shell, we think it could rise to between 20% and 30% by 2050. But even to do that on a global scale will require huge investment both in the technology as well as the development of the renewable sector. So, in our view, the two are going to go together for a long time.

There are also very specific advantages. We know that gas, as a power-generating source, is easy basically to turn on and off. With intermittent wind or solar, gas is a perfect complement to those renewable sources. Gas plants are relatively cheap and easy to build, so they are a good way to keep your balance in your overall supply of power generation.

Corin Taylor: If you look at the International Energy Agency projections and their Golden Rules for a Golden Age of Gas report, under the scenario in which you get a lot of shale gas development outside of the US, they see gas meeting 31% of global primary energy demand growth by 2035 and renewables, including hydro and biomass, accounting for 34%. Gas and renewables are the two big global growth stories over the next 25 years.

Q143 Dr Whitehead: What is the profile for Shell in terms of investment in shale and unconventional, and renewables?

Graham Tiley: I am afraid I do not have figures in terms of overall investments. I know we are investing-I think we have invested just over $2 billion in the technologies, various technologies like CCS as well as renewable energy in the last four or five years-but I do not have an investment number for you, sorry.

Q144 Sir Robert Smith: Some of our earlier witnesses highlighted how the US Government has led a lot of the basic research into conventional gas processes. They are also suggesting that there is some talk that the lessons learned in the US do not necessarily read across to European production and that we are going to need different processes for making sure we can get the gas out in the EU. Is that something you would agree with?

Graham Tiley: I think there will be differences. I would highlight two factors: first, their licensing regime, which is quite unique, with all the small licences, which drives a very fast pace of drilling and a big focus on drilling. Secondly, the availability of an existing contractor industry with many rigs, frack units available, has driven a certain approach in the US. As we go into Europe, we will have to be more technologically minded. It is a little bit like the difference between a US muscle car and a European sports car. What we will find in Europe is we throw less horse power at the problem and have to be a little bit more sophisticated in the engineering because costs will be higher, so we have to be a little bit smarter in the way we do it. I agree that there will be differences as we transfer from the US to the global shale gas possibilities, yes.

Francis Egan: If we look at Lancashire, the geology in Lancashire is somewhat unique. I read in one of the articles over the weekend that shale gas will be difficult in the UK because it is too thin. The shale formation in Lancashire is over a mile thick. It is probably unique in shale. There is nothing in the US that can compare with it. Typically, shales in the US are a couple of hundred feet thick. So there is an opportunity in Lancashire, in particular, to do things differently. The two technologies that have driven the shale industry in the US are horizontal drilling and hydraulic fracturing and the ability to improve on both. Certainly the horizontal drilling in Lancashire, because the shale is so thick, opens up the opportunities of drilling not just at one horizontal level but at many horizontal levels within the same shale. What that means is you have a much lower surface footprint. For one vertical well at the surface, it is like the arms of an octopus, you have many laterals. To visualise it, these laterals are eight inches in diameter. This is not mining; this is equivalent to keyhole surgery. This is small holes carefully placed. They can exist at multiple levels because of the thickness of the shale. So we have a unique opportunity in the UK and in Lancashire in particular, because of the geology. It is different. It is better.

Q145 Sir Robert Smith: Do we need government research or is the industry going to be able to meet the challenge?

Francis Egan: I would perhaps characterise the UK as a fast second-mover. We can take what we have from the US. We can customise it and we can improve on it as needed.

Corin Taylor: I do not have anything much to add. There was a report by the Breakthrough Institute in California that made the argument that at key stages there had been public money that was put at the problem of hydraulic fracturing and horizontal drilling in the 1970s and 1980s and that helped pave the way for George Mitchell to pioneer the process economically. I am sure there was government involvement at that stage. For the UK, it is a bit like the internet, which was invented in the US and we obviously benefit from that. There is some read across from that in this context as well.

Q146 Sir Robert Smith: Finally, the British Geological Survey were saying that Cuadrilla had had problems at Anna’s Road with a well? Is that problem to do with the unconventional side of it?

Francis Egan: No, it is nothing to do with the unconventional side of it. We drilled down to about 2,000 feet. We needed to run a pressure test to prove that the cement bond was good. We proved it was good but unfortunately the packer, a piece of kit that was run into the hole, got stuck and we were unable to retrieve it. So we needed to start again. It is not commonplace but it happens in drilling. It is nothing to do with fracturing, nothing to do with shale. We were nowhere near the shale.

Q147 Chair: You sounded a bit frustrated earlier on about the fact that you cannot yet start doing flow tests. Once you are, assuming you get the go-ahead to do that, will that rapidly improve the information you have and the judgments you can make about the actual recoverable reserves?

Francis Egan: Once-I say once, I should say if-the Government approves the go-ahead, we need to go through a planning process with Lancashire County Council, so that is going to take several months to work through and there will be, as I mentioned earlier, various environmental impact assessments and public consultations as part of that. We plan to fracture and flow-test most likely two wells. That is not going to be the end of the story. There will be some initial data that we would hope to have by the middle of next year. That is not going to be the definitive answer. As I said, reserves are not a fixed number. They evolve over time but certainly it will give some good opening data, UK data.

Q148 Chair: Given the potential importance of this, obviously there are a wide variety of guesses about what it might be, one of the concerns of this Committee is that the UK needs to invest quite a lot in new-generation capacity quite quickly now. It would clearly be helpful to have reasonably accurate data about this as a background in which to make those decisions about future investment.

Francis Egan: Yes. Well, we will give you the data as soon as you let us start.

Q149 Chair: Are you concerned about what has happened in Poland? I am told Exxon were very disappointed with the results in Poland.

Francis Egan: We have licences in Poland and we are at a fairly early stage. I cannot speak for Exxon’s experience in Poland.

Graham Tiley: There will be disappointments. That is why it is called exploration. We drilled three shale-gas wells in southern Sweden and did not find the gas content in the shale and exited that project. Not every shale is going to work and this indeed is one of the reasons it is quite a difficult subject for us all because these resource estimates are sometimes enormous but indeed until we get to frack and test these reservoirs, and not just in one well but a number of wells, it is often talked about as being a bit of a statistical game. At the end of the day, if you have drilled your 1,000 wells, the question is does the average recovery per well exceed your economic threshold. That is the test you need to apply to see whether you have a viable project. Some wells will come in lower. A few wells will hopefully come in much higher. But the absolute critical factor is your average recovery per well. Even after one well, you have an average of one that is not statistically a very stable sample. Ideally, over time, you build up a number of wells upon which to base your predictions.

Francis Egan: So far we have drilled three wells. We have the data from two offset wells. We have taken 1,200 feet of core. We have logged all the three wells. We have completed a 3D seismic survey over 100 square kilometres. So we know the geology is good and we know it is gas bearing and we know it is a mile thick and we know it is gas bearing throughout. In fact, we have not even reached the bottom of it. We have not been able to drill to the bottom of the shale formation because we have not gone that deep yet. So the geology is good. We need to establish flow rates. Some wells will be better than other wells, over time. That is undoubtedly the case. But the geology and the gas exist across the licence area.

Q150 Dr Whitehead: When you first drilled your wells-this question is directed to Mr Egan-you very early on produced some estimates about the total amounts of shale gas for the UK. I assume that was a resource estimate rather than-

Francis Egan: For the UK?

Dr Whitehead: For the UK. You publicly said 200-

Francis Egan: We have never produced an estimate for the UK. We have given an estimate for our licence area in Lancashire alone.

Q151 Dr Whitehead: Right. So, those reports were newspaper embellishments?

Francis Egan: I am not even aware of newspaper reports quoting us as giving a UK estimate. We have certainly given an estimate of 200. That is just for our licence area in Lancashire alone.

Q152 Dr Whitehead: But certainly the impression I am getting, from what we are hearing this morning, although we may have some thoughts about resource in terms of reserves, bearing in mind what we have heard about the uneven nature of production in various places offset against the known reserve that you have identified in Lancashire, is that this is still a pretty inexact process as far as saying anything about recoverable reserves, say from the UK, are concerned?

Francis Egan: I have not done a good job in explaining myself. We have not published any reserves number for Lancashire. We produced a number of 200 trillion cubic feet resource. We did not produce that quite quickly. We had drilled wells and taken 1,200 feet of core and had logged all the wells. We were somewhat ridiculed at the time and people said, I think, it will be three or four. I will be surprised if BGS does not come up with a number that is at least our number. What we are saying today is we are doing exactly the same thing. I could sit here and guestimate reserves all day long. You need to get some data and that is what we are asking for approval to do. If the country does not want the data, tell us.

Q153 Dan Byles: Is there a time limit beyond which if the Government continued to delay, you are going to pack your bags and go away?

Francis Egan: I was asked and, again, quoted as saying we would walk away. The question I was asked was if the Government said no, what will we do and I said we would have no choice but to walk away. We hope the Government will make a decision soon.

Chair: That has been very instructive for us. Thank you very much for coming in and I am sure we shall stay in close contact with you all.

Examination of Witnesses

Witnesses: Professor Kevin Anderson, Deputy Director, UK Tyndall Centre, University of Manchester, Jenny Banks, Energy and Climate Change Policy Officer, WWF UK, and Tony Bosworth, Climate and Energy Campaigner, Friends of the Earth, gave evidence.

Q154 Chair: Good morning. Thank you for coming in. As with the previous group, could you just very briefly, for the benefit of the broadcasters, introduce yourselves?

Tony Bosworth: Good morning. I am Tony Bosworth. I am a climate and energy campaigner at Friends of the Earth.

Professor Kevin Anderson: Kevin Anderson. I am Professor of Energy and Climate Change, University of Manchester and Deputy Director of the Tyndall Centre and I should also express that I used to work offshore with Francis on the same oil platform in the 1980s.

Jenny Banks: Jenny Banks from WWF. I work on energy policy.

Q155 Chair: You have heard and read, of course, of the claims that have been made about the scale of the contribution that shale and, particularly the discoveries in Lancashire, could make to total UK gas demand. WWF have, I think, referred to this speculation as hype. Is that correct? Why do you think it is hype?

Jenny Banks: I am not necessarily calling Cuadrilla’s estimates hype. I think what we were referring to as hype was more the general expectation around shale and some of the rather optimistic reports that have been written about what we might get out of the ground. At the moment we have been looking at the BGS estimates as the only ones that are produced by a scientific organisation. All of the other estimates have been produced by companies and clearly there is a lot of uncertainty around what is going to be produced. Francis himself earlier acknowledged that there is a lot of uncertainty even for them about what they will get out of the ground.

Q156 Chair: But the BGS told us two weeks ago, and I quote, referring to Cuadrilla’s figures, "Their figure, in my opinion, is more reliable than mine".

Jenny Banks: I was very interested to watch that.

Chair: Pardon?

Jenny Banks: I was very interested to watch that session but obviously we had not heard that from them at that point.

Chair: We have heard it now.

Jenny Banks: Yes.

Q157 Chair: So are you still casting doubt on Cuadrilla?

Jenny Banks: Well, Cuadrilla have drilled two wells, now three possibly, and they themselves are the first to acknowledge there is a lot of uncertainty about what will eventually be got out of the ground or the total gas in place.

Tony Bosworth: The other point we could make on this is that the numbers are notoriously volatile numbers for shale gas reserves and it has been pointed out already that the estimates of gas in Poland have been cut significantly earlier this year by 85%. But even in the more mature fields such as the Marcellus Shale, they are having significant cuts in their estimates. So, the numbers are notoriously volatile. What is a reserve figure today or a recoverable resource figure today might not be the same in a few years’ time given improved data.

Professor Kevin Anderson: It is also my own experience from talking to a lot of academic geologists, quite a few who have been involved with BGS would suggest that you have a number of levels of uncertainties. In fact, we were talking in the House about this last week with Professor Taylor, one of my colleagues in Manchester who is a geologist, saying, if you think about it, you have big uncertainties on the resources. You also have big uncertainties on the reserves and what part of that you can mobilise. I think natural gas is about 30% recovery rate. I gather the US is giving about 6% recovery rate at the moment. So what you think is actually down there, we can get about 6% out. Now you can refracture and you might be able to get those numbers up. They will not be up towards 30%. The problem there now, as was pointed out before, is that the shale is heterogeneous. Some of it is quite ductile. If it is fissile shale, you will not get the gas out. It has to be quite brittle shale. You then have a lot of population in the UK, so the analogy to the US is very different. So at every level what you see are considerable uncertainties.

Now that does not mean to say that of course the estimates could not turn out be correct. They may or may not be. They could be higher, they could be lower. What that does mean is that we are very uncertain and we will remain with a high degree of uncertainty because it is not natural. It is natural gas in terms of what comes out, it is the same material, but the place that it is held is unconventional as was pointed out before and, therefore, we do not have a lot of experience with that and it will remain heterogeneous. We will learn by examples and lessons.

Q158 Chair: When we talk about recovery and reserves, is that figure affected by the price?

Professor Kevin Anderson: As is always the case with the hydrocarbon industry, you can do a lot more. If you want to get more out of it, you can spend more money trying to get it out of the ground. Yes, the price does impact what is available.

Q159 Chair: So, have the recent cuts about reserves that you referred to in America been the result of the fact that the price has collapsed?

Tony Bosworth: As I understand it, the recent cuts are down to improved data on drilling and production. It is information from the US Energy Department citing improved data on drilling and production and that has led to the changes in the estimates.

Professor Kevin Anderson: But my colleague last week was pointing out that it makes a loss now in the States. The shale gas production is a loss. One of the reasons they are doing it is effectively because of the tight oil is also in the reservoirs. So they are producing at about $2 to $3 per million BTUs at the moment and it needs to get up towards $6 to make it break even. So I think in the US at the moment there are lots of uncertainties as to why it is the price has dropped to that level. It is certainly unsustainable in the long term economically.

Q160 Chair: Since we need more data to establish exactly what the reserves in the UK are likely to be, isn’t that a very powerful reason for giving the companies permission to get on with their work?

Professor Kevin Anderson: It depends on your other sets of concerns around it. From a climate change perspective, I would say no, not at all. If you are interested in energy security, you might argue there is some legitimacy to their case.

Q161 Chair: Even from a climate point of view though, if we did have significant domestic gas reserves that might help to lower prices relative to what they otherwise might be, if we were relying very heavily on imports, given that that reduces energy bills, doesn’t that actually make it easier for us to support a renewable energy industry alongside it if overall costs are lower rather than higher?

Jenny Banks: If you look at the International Energy Agency, for example, they produced a report earlier this year called the Golden Rules for the Golden Age of Gas, which looked at two scenarios: in one there is a global dash for gas; in the other there is not; both came up with climate change being around 3.5 degrees. One of the interesting things about that report was that in the dash for gas scenario, gas prices were lower and the reason that the carbon saving was not greater and, therefore, that climate change was still likely to be around 3.5 degrees was that it undermined investment in low-carbon generation because the gas price was lower. So, I would say the IEA are suggesting exactly the opposite to that.

Q162 Chair: It depends on the policy, of course, does it not, that is pursued?

Jenny Banks: Yes, absolutely.

Q163 Chair: If you simply bank the gain from lower gas prices it does not help, but if you say that has restrained the rise in household bills or industry costs, you can then afford the support for other forms of low carbon energy.

Professor Kevin Anderson: You would first have to assume that shale gas was cheaper than other forms of generation. We would argue that if you take the full capital costs into account, even ignoring the operating costs, that that is not the case for shale gas and that is using Cuadrilla’s own data on the costs for their pads and combine that with Bickerstaff’s estimates that certainly DECC have been using for cost of CCGTs with and without CCS. So I think that is not the case necessarily with shale gas.

The other concern, of course, is do you necessarily want the prices to be lower? We just take these things as a given but we are sat in this modern room with the blinds closed and the lights on, so clearly energy prices are not particularly significant here. There are too many people in the 20% of housing in the UK that are in fuel poverty. To them energy prices are very significant and if, of course, prices go down we end up consuming more so, again, it depends on what your questions are. If your question is about climate change, consumption of energy is a major issue so you may not necessarily want the prices to go down for everyone. Clearly here you might make an argument there are things we could do to respond to the price signal today.

Tony Bosworth: I think it is also worth pointing out that it is at least unclear whether shale gas is going to be cheaper than other forms of gas or not. I think the general consensus of view is that the costs are going to be a lot higher in the UK than they are in the US due to things like labour costs, the lack of a well-developed drilling sector; issues like that. Some analysts have said that they cannot see shale gas coming on to the market at much less than the current wholesale cost of gas. So is shale going to lead to lower prices? I think that might be one of the areas where there has been a certain amount of hype.

Q164 Dan Byles: If all domestic UK shale gas production does is offset imports of gas, do you think that effectively would mean it is a neutral change as far as emissions and climate change, if it basically means we do not necessarily burn more gas but we burn our own rather than Qatari gas?

Professor Anderson: It depends how much credence you give to basic economics because if it is a supply and demand issue you simply say if we are not consuming the gas, we are in the world market, and that means there is more gas out there in the world market and someone else will burn it. The lights go out around the world at the moment because a lot of people around the world do not have enough energy. In a world that is energy hungry with rapidly growing economies it seems-I am not suggesting you are saying this-incredibly naive to assume that any fossil fuel we get out of the ground will not be burnt. I think it is naive to say that any fossil fuel we are aware we can get from the ground will not be burnt, in the absence of some of the criteria around that. If we don’t run the gas here it will be burnt elsewhere, so there is no reduction in emissions. In fact I would suggest it is an increase in global emissions as a result.

Q165 Dan Byles: Is the counter-argument that if we do not produce more gas there are going to be shortages?

Professor Anderson: If we don’t produce more gas?

Dan Byles: If we do not produce more gas globally, there is going to be energy shortages, you just said so.

Professor Anderson: Unless we invest in other forms of-generation of course is only part of the energy system that we use. There are energy shortages today. People go hungry, people have the lights out. There are other things we can do. Of course those people have also suffered the impacts of climate change so you have to relate these things and see it from a system perspective but at the moment it is fairly clear that if we burn more indigenous gas here, that other gas will be burnt elsewhere and the carbon dioxide emissions will just go up.

Q166 Dan Byles: I want to explore with you some of the similar issues I explored with the first panel about the regulatory regime. I am quite keen to know your view. The view we heard from the first panel was that the regulatory regime is pretty robust; that there were some frustrations around it but that on the whole the previous panel were pretty united in saying, "We have a gold standard, pretty tough regulatory regime here in the UK". I am curious to know whether you agree.

Jenny Banks: The Environment Agency has been very proactive engaging with environmental NGOs and other groups. If you look at the stage they are at now, they are currently pulling together their guidance for all of the different bits of regulation and how it will apply to shale gas just for exploratory drilling. So two years ago when the Committee first met, the Environment Agency were at a relatively early stage; they had very little dedicated resource. The reason for that-and I am not blaming them at all-was because we did not have a history of shale gas in the UK and it has taken them some time to catch up and to work this through. They are even now currently considering questions of, for example, will flow-back fluids be allowed to be stored in open pits. When I spoke to them they were not totally clear on what the regulation on that meant. So I think for us it is difficult to draw a conclusion as yet, particularly because there is still uncertainty in the US. For example, the US EPA is still yet to publish the findings of its review, even the preliminary findings of its review, on the environmental impacts of shale. I think for us it is an early stage still. The Environment Agency are trying their best but we have not yet seen even their preliminary guidance for exploration.

Tony Bosworth: I think that point applies equally to the Health and Safety Executive, again they are still developing their guidance through the UK Onshore Operators Group. They are developing their guidance on shale gas activities. That is something which we have not seen yet, it is still too early to say whether or not that regulation is going to be up to it; how they are going to respond to the recommendations of the Royal Society and people like that. It is too early to say whether the regulation is up to it. The Government is saying it wants to have a regulatory regime that is simplified and streamlined but we must ensure that does not mean that it is not robust.

Professor Anderson: I would suggest that again going back to Francis’ comments earlier, we don’t know a lot about what the production of shale gas would look like in the UK so the regulatory process will have to be one that very slowly learns from how we proceed, if we decide to proceed and go ahead with it.

The other thing I would suggest to be aware of, and this is my understanding anyway, is that the monitoring of the levels of methane, particularly the fugitive emissions, around sites is done for health and safety reasons, obviously for the operators and for the local community, and that is in order of magnitude higher than the level you would want to monitor for environmental emissions. So if you are wanting to include in your regulations the environmental concerns then you would have to have a much, much more stringent monitoring regime for the levels of fugitive emissions than I understand is currently in place. There is a lot more that needs to be done yet and it will be a learning by doing approach to ensure the regulation is appropriate.

Tony Bosworth: If I could just make one final comment. Early regulation has a role in making fracking safer but I am not sure whether it can make it safe and that is something that the United Nations environment programme has recently said. When they said, and I am quoting, "Hydrological fracking may result in unavoidable environmental impacts if extracted properly and more so if done inadequately". Even if risk can be reduced theoretically many accidents will occur from leaky or malfunctioning equipment or from bad practice. So we can make it safer but not necessarily safe.

Q167 Dan Byles: Would you say that is more so for shale gas than for conventional oil and gas production, or is that something that could be said for the whole of the oil and gas industry?

Professor Anderson: I would have to say I think it could be said for the whole of the oil and gas industry. If I was put on the spot I would say that if the choice was a straightforward one between Putin’s gas regulated in Russia or gas from the UK produced by shale, I would say from a regulatory point of view my preference would be to go for domestic production, from a purely regulatory point of view.

Q168 Dan Byles: Because we can control it, we can be robust and-

Professor Anderson: We can indeed, yes.

Dan Byles: -we would probably do so better than Putin’s Government?

Professor Anderson: Yes, indeed. Of course we would have to renege on any regulations on climate change because it would not fit with those but if we did that, then fine, yes.

Q169 Dan Byles: Do you take the point made by industry, because I have had it made to me a number of times outside Committee, that they are very keen for very robust regulation because what they do not want is a cowboy operator coming in, publicly doing something wrong and shutting down the industry for everybody because there would inevitably be a public backlash? Do you think there is going to be a degree of self-regulation imposed simply because if the companies want to carry on fracking they need to be seen to be doing so safely?

Professor Anderson: You would like to think self-regulation works well but we are awash with instances from the hydrocarbon industry to the press to many other organisations who will remain nameless, who are not particularly good at self-regulating. I think by and large we are poor as organisations in self-regulation and I think it is not the way we should go.

Q170 Dan Byles: A similar question as put to the first panel about the recent report by a group of MEPs about where the cost should lie in terms of environment protection. I can guess what your answer is going to be, but where do you believe the responsibility for environmental protection should lie in terms of who pays for it?

Jenny Banks: It is not an issue I have particularly thought about or looked into but it would seem reasonable for the industry to shoulder the costs.

Q171 Dan Byles: Even if Government is going to be reaping a tidy tax sum from the industry? Do you not think perhaps Government should say, "Well, perhaps some of those taxes could be recycled into paying some of the costs of environmental protection"?

Jenny Banks: I am not really an expert in this area.

Tony Bosworth: Nothing to add.

Professor Anderson: There is a complete mismatch in these things because sometimes we cover environmental costs and sometimes they are covered by the public purse and others by the private purse, and this is another one of those where it would be a complete hotch-potch as is always the case and it is very difficult to get some set rules on it. But I doubt, for instance, that they will paying for the climate change impacts, if that is what you are thinking about. I doubt they will be paying for coastal defences in Bangladesh, which would of course fit with the recent discussions in Doha. I think we have to be quite careful where we think about these sorts of things and see it right across the industry. Who pays for decommissioning costs for nuclear power? Who pays for the climate change impact of other sorts of power generation that we are using? Indeed, who pays for the impacts of some of the renewables? It is not a straightforward, easy answer to give.

Q172 Dan Byles: Briefly on the issue of public acceptability, community views, that sort of thing, the stronger and more robust the environmental regulations are seen to be, the greater confidence one would hope that might give to local communities. What do you think the current state of play is? There is obviously a lot of fear. There are a lot of competing claims about what fracking does and does not mean to local communities. Where would you say the current state of play is? What do you think that the industry and Government could do to perhaps better reassure communities that if fracking does go ahead, it is being done safely?

Jenny Banks: There was quite an interesting poll by ICM, which came out quite recently.

Q173 Dan Byles: That is the one, "I would rather live by a wind farm than a fracking pad". Is it that one?

Jenny Banks: Yes, the very same.

Dan Byles: I do wonder how many people who answered it either live next to a wind farm or a fracking pad and therefore what they were basing their answers on.

Jenny Banks: I think it provides a snapshot of what public opinion is at the moment and people’s views. For anyone who didn’t see it, it was basically that 11% of people would rather live near shale gas and 67% said they would rather live near a wind turbine. Now, I can’t comment on it apart from the fact that you would assume a poll would be representative of public opinion.

Tony Bosworth: Those figures are also echoed more broadly if you are looking at what people’s views are about the broader direction of energy policy, that people want to see much more of their power coming from renewables. There is a much greater percentage of people wanting to see more power coming from renewables than want to see that additional power coming from gas. If you are looking more broadly at the opinion of shale gas, I think the overwhelming conclusion is that there is a lot of uncertainty. People do not know what shale gas is; they don’t know what potential risks and benefits there are and they don’t know whether they think it should go ahead. There are a huge amount of unknowns or people who don’t know in these surveys.

Q174 Dan Byles: Who do you think should be responsible for improving public awareness? If we say to industry, "You need to educate and improve" are people going to simply not believe what they say because they are going to say, "Well, that’s the industry". Should it be people like the University of Manchester perhaps, coming forward producing independent research and independent papers on it?

Professor Anderson: Yes, I and colleagues do engage in such events. I have not done one on shale gas particularly but I know other colleagues that have. I think the most important thing is you have to be absolutely candid and direct. We should never try and hoodwink the public. We all think this publicly and then privately we say something different and do something different. But I think that is real mistake. We never learn by that.

Q175 Dan Byles: Do you think there is a role for industry in public education here or do you think people simply will not accept if the oil and gas industry come forward and say, "This is what shale gas really is, this is what fracking really is"?

Professor Anderson: It is more difficult to accept it from industry. Obviously some people in society are given more trust than others. But I think if we all try and be as honest as possible, warts and all, that is a good thing. I think one of the big problems with shale gas at the moment is literally the uncertainty. It is not necessarily just the initial operations but it is the refracking. So we do not know how often you would have to refrack and that refracking will mean lots more trucks, more water, lots more local disturbances. That is going to be quite a challenge because you don’t know what that is going to look like and Francis and Cuadrilla don’t know either. So we are uncertain about the future if you live near one of these, what that will mean for you locally. We can’t do anything about that at the moment. So I think again we should be honest about that uncertainty. It comes back to Tony’s point. That makes it very challenging for people who live nearby because all we can say is, "Well, we don’t know what your future will be like for the next 10 or 20 years in terms of trucks and other movements around the site". That is true, we do not.

Tony Bosworth: One of the conclusions of the recent Royal Society report was that one of the precursors they said to the decision-making on shale gas, one of the benefits, would be greater knowledge about the public acceptability of the risks, whether that was environmental risks, health and safety risks or climate change risks. I think, as Kevin has said, we need an objective and honest debate about that. I think the industry has a role to play in that but so do we. We should not be relying simply on the industry.

Jenny Banks: I think there are two facets, in a way, of people saying, "We don’t want shale gas drilling near us". People tend to object to a lot of forms of development near them, whether it’s a crematorium or a wind farm or a gas field. People generally don’t like change that involves big things that bring traffic.

Q176 Dan Byles: I am very struck by the people who answer in the abstract that they like the idea of more wind but who often do not necessarily follow through when it is going to be at the bottom of their garden.

Jenny Banks: Yes, sure. So maybe that is more of an indication of whether people in general prefer renewables theoretically to gas. But I think there are two things here, there is the general opposition that people tend to have to anything being built near them, and then there is the people’s fear about the environmental impacts and I think what the industry needs to do is to show, if indeed it can do, that that is not a legitimate concern. We obviously have reservations about whether it is or not but I think time will tell on that one.

We did a few calculations, (we have a high import dependence, as you are all aware now, on gas) looking at how many wells would need to be drilled to keep gas import dependence at current levels out to 2030. There is quite a disparity on how much gas wells will yield. So we looked at, for example, some industry figures, which were 3.5 times higher than what the US geological survey was coming up with in terms of average well years. So if you use the US geological survey figures, it came up with around 7,000 wells, which we assume would be about 700 well pads, whereas the industry figures were about 1,936 new wells. So there is a big disparity and I think that is quite relevant in terms of public opinion and how many wells that means.

Tony Bosworth: That is relevant also to what Cuadrilla are saying about what could happen in Lancashire. Kevin and his colleagues at Tyndall have said that if we wanted to produce 10% of the UK’s current gas demand from shale gas, we could be needing 2,500 to 3,000 wells. That is for 10%. Cuadrilla have said they can produce 25% of the UK’s gas from their area in Lancashire but the maximum number of wells they have talked about is 800. So I think if you are talking about 25%, you could be talking about a lot more than 800, and that is something that the local MP has certainly said would be unacceptable.

Q177 Dan Byles: Does that take into account what Mr Egan said about the thickness of the shale and each pad being able to have multiple levels?

Professor Anderson: Yes, we used their data.

Chair: That is very interesting, thank you.

Q178 Sir Robert Smith: In the previous evidence session, not today but an earlier evidence session, there was a suggestion that you could not necessarily read across the number of wells from the States to here because of their land ownership rules and therefore in the States you had everyone wanting a well because they would get the income from it. With horizontal drilling the number of pads to achieve the same effect in the UK could be a lot less.

Dan Byles: Every half mile.

Professor Anderson: Yes, I think as was said earlier, you cannot simply take what has happened in the US and just superimpose that on the UK. I think everyone would accept that is the case.

Jenny Banks: We had to use something so I had a look at the US figures, I discounted about two-thirds of the lower performing wells just because I thought probably they are not very economic, but, yes, there is a big disparity between different shale plays and we would not know what shale wells in the UK would be yielding until it was done.

Q179 Dr Whitehead: Just before we move on, have you done any work or is there any work that you know of that scopes that sort of ambition to provide a certain percentage of UK’s either domestic or domestic and industrial gas supply with, say, the ambitions that the biogas industry has to supply a similar percentage of gas from anaerobic digesters and produce therefore biogas that is injectable into the gas mains? Are there any figures? You have mentioned, say, 800 wells in Lancashire. Are there any figures that you know of which would say that is equivalent of 400 bio digesters or 200 large AD plants or whatever?

Tony Bosworth: I know that the National Grid produced a report in 2009 saying that the bio renewable gas could meet up to 50% of UK residential gas demand. I don’t know about how many AD plants that would involve.

Jenny Banks: It sounds like analysis we should go away and do.

Q180 Dr Whitehead: We have heard that a gas regime could serve effectively as a transitional instrument to the low carbon economy; that is you introduce gas, it displaces some existing coal, it produces a cheaper option for consumers and therefore you can do lots of things that lead to a transition and at that point you turn the gas off. That is a slight oversimplification, but what is your view on that particular scenario?

Professor Anderson: I am very clear about this. From a UK perspective, it is simply wrong. I think it is probably appropriate in the non-annex 1 countries, China, India, some of the poorer parts of the world. For the annex 1, the wealthy parts of the world, if we are serious about climate change-and of course the whole thing on climate change pivots on what do we mean by it, by this nebulous expression-if we quantify it in relation to say our international commitments then we can be absolutely categorical mathematically that shale gas cannot be a transition fuel to meet our international obligations. There is not enough emission space for it to play any role whatsoever in that. That is not the case for China and other parts of the world where it may well have a role to play because they have a larger emission space because obviously their level of development, their income per capita, their welfare per capita and even their emissions per capita are much lower than in the West. So we can make a very categorical mathematical statement relating to our international commitments. So if we renege on those and say we do want to go to a slightly lower carbon Britain but not very much lower then you might argue it has some role to play. But I think we would have to be absolutely clear as to what our starting position is about what we mean by climate change and by and large the UK has a muddled set of targets. It has different targets internationally to what it has domestically. I think the statute only has the 80% target, and that is not clear either. 80% of what? Does it include aviation and shipping or not? DECC, I think, are looking at that at the moment.

Jenny Banks: It was pointed out earlier that obviously we are not planning to build any new unabated coal fire power stations, so the question in the UK is more to do with to what extent are we burning coal and using more coal as a result of the coal price going down. A simple solution to that is having a higher carbon price, preferably through the EU ETS but we all know what the issues are with that at the moment.

Professor Anderson: I think what you could seriously consider is putting a standard in place. I wish we had done that right from the beginning. I find it slightly odd that a Government that has a rhetoric around free markets then chooses to pick winners as to which energy ideology it prefers. I find that quite a clash of ideologies but I am an engineer so I wouldn’t know. But it would seem wise to me the thing to do would be to set a standard in terms of emissions. If it was for electricity, for instance, it could be grams of carbon per kilowatt hour. Just set that standard and say to the industry, "You can use what you want. You can use nuclear power, you can use gas with carbon capture storage or you can use renewable powers but you will meet 350 grams per kilowatt hour or not sell it from your portfolio next year and the year after that it will be 10% stricter and the year after that it will be 10% stricter". You give a real clear dynamic signal to the industry and let it run. So then you can have your gas if you want but you won’t get your gas down the levels that we need for our international commitments. That is the concern that it is technically impossible to do that.

Q181 Dr Whitehead: Yes, but we do have an EPS coming forward in the Energy Bill, have we not?

Professor Anderson: Not related to our climate change commitments, no. These are just angels on the heads of pins.

Q182 Dr Whitehead: Would you like to expand on that?

Professor Anderson: Yes, internationally we, and of course every other country who signed the Copenhagen accord are committed to a very high probability of not exceeding 2 degrees Centigrade, which if you use the language of the IPCC, to which we are a major contributor, then than is not more than a 10% chance of exceeding 2 degrees Centigrade. We from that can very clearly work out what the carbon budgets are and from those we can attribute those to the UK and then say there is no emission space available for the UK. We knew this. We have been saying the same thing to committees like this for many years and we in the UK and elsewhere have fundamentally failed to control our emissions. They have gone out of control in the UK and globally.

Tony Bosworth: The UK targets, the 80% cut by 2050 target, gives it a 50:50 chance of temperatures rising by more than 2 degrees and we think that is effectively a toss of the coin, which is something that is far too risky for something that this Government has said we must-underlined must-not do.

Professor Anderson: I have to say I would disagree with my colleague there, that in fact the 80% reduction for the UK by 2050 is premised on a very inequitable distribution of global emissions to the UK, which again we would be reneging on our commitments under the Copenhagen Accord, which has very clear statements about the poor parts of the world be given more space to grow their emissions and the wealthy parts of the world having to compensate for that. The UK legislation does not take that into account. It thinks it is appropriate that Ghana and the UK have as similar proportion attributed to it.

Q183 Dr Whitehead: The fact that there is an energy performance standard coming in the Energy Bill but at a level, as it happens at the moment, that enables unabated gas to continue further, is that mitigated in any way by the commitment to review in 2015 and review that level downwards?

Professor Anderson: The problem with these things is by 2015 we will have invested in more power plants. We have to get off that curve now. Every hour that we delay makes it more strenuous to get off the curve and gives us more reason to avoid getting off the curve. So I think we know what those standards should be now, we have had these discussions repeatedly over many, many years and we should have put them in place previously and we need now to put ones in place that are stringent and ones that you cannot get around. They need to be much stricter than the ones we are talking about.

Tony Bosworth: Friends of the Earth did some calculations a couple of years ago in a report we called Reckless Gamblers that looked at what cuts we needed to make if we wanted to meet the targets that Kevin is talking about. If we wanted a two in three chance of staying under 2 degrees and giving ourselves maybe a one in four chance of temperatures rising no more than 1.5 degrees, which science having moved on maybe now says it is the limit we should be looking at, then the UK needs to be making emission cuts of 7.5% a year from now on, and that was in 2010, but things have moved on since then.

Q184 Dr Whitehead: On the basis of that sort of analysis, what do you think of the suggestion that we improve the European ETS significantly and let people get on with it-i.e. the ETS is then the judge of whether someone invests long-term in gas and the argument then goes that that potentially avoids lock-in in terms of setting the ETS level against likely investment decisions?

Jenny Banks: The ETS at the moment is not a reliable investment signal for anyone. I think we would all support a move to 30% but as things are Poland is blocking progress and it is very ineffectual, which is why I would-and I do not want to get too off topic here-disagree with Kevin about the picking-winners point because I think investors in general do not consider market price for carbon as a good signal to invest on and it is currently too low. They do not view it with any particular certainty. We launched a report (On Picking Winners) that was written by Dr Rob Gross of Imperial College just over a month ago that made that point and said you do need support, particularly for emerging renewable technologies in absence of an effective EPS or a strong carbon price to drive investment in genuinely low-carbon generation.

Professor Anderson: Well, we would actually agree. I do not think price is the right signal to use at all. I think there are some real problems with it. The ETS was not set up to resolve climate change. It was set up to meet our international targets. The caps it has are woefully inadequate and far removed from anything that all members of the EU are signed up to in the Copenhagen Accord and the Cancun Agreement, and indeed our own low carbon transition plan must stay lower than 2 degrees centigrade as it states in there. So it has nothing to do with that framing of climate change and if it did then you might argue that the signals are moving in the right direction but the equity implications would be dire. People are already suffering. 20% of the population are already suffering from fuel poverty. These people will be in a much worse situation if the price went up significantly for energy. The rest of us are thinking it probably would be a good thing.

I would go back to the route that we should be setting standards and use those. I think price is a complete mistake here because price is fine if you want marginal change, if you want small change. The whole theory of neoclassical market economics is premised on very small changes, marginal changes and what we talked about here are very radical, large-step changes and you would not apply theories that have been worked out for small changes to issues where you need big changes. I use the Newtonian analogy here. You would not use Newton physics to understand particle physics. Yet economists repeatedly use price and margin economics to understand the step-change reductions that we need to make if we do not want to renege on our international commitments. Remember they are not my targets, they are our targets; we have all signed up to them.

Tony Bosworth: I think what this means in the UK is the absolute minimum we should be doing is keeping to the 50 grams of CO2 per kilowatt hour in 2030. That is the minimum we should be doing and we need policy certainty around that to signal the direction that the energy sector needs to go.

Q185 Dr Whitehead: That would imply, for example, a much stronger performance standard?

Tony Bosworth: Yes.

Professor Anderson: It is also interesting about the 50 grams, I think Jeff Hammond’s paper that came out just a couple of months ago in energy policy-he was looking at lifecycle assessment emissions for different power sources-and he makes the point quite clearly that shale gas is probably very similar to other forms of production of natural gas; there is not much difference in them. Nevertheless if you burn gas in a combined-cycle gas turbine at pretty high efficiency, if you carbon-capture storage it and take account of the lifecycle emissions, about as low as you can get is 80 grams. So even if we could do carbon-capture storage, which we have not done anywhere around the world in any significant scale yet, the best you could probably hope for is something like 80 grams, which is way outside of what we would need. If the whole of the UK’s grid was supplied by carbon-capture storage gas then we will probably still be talking about 30 to 40 million tonnes of carbon dioxide pumped into the atmosphere in the UK’s register each year.

Q186 Dan Byles: Does that not mean that 50 grams by 2030 is simply impracticable? If we came out with that as a Government target, it would simply be not credible?

Professor Anderson: It depends on what you think about climate change. I would argue that Fatih Birol, the Chief Economist for the IEA, when he said we are on a trend, perfectly in line with 6 degrees Centigrade this century that is also not politically credible. So we have got ourselves into a position where the future is politically incredible; the mitigation rates are politically incredible and the dealing with climate change is politically incredible.

Q187 Dan Byles: He also said the development of unconventional oil and gas is the biggest thing to hit the energy market since World War 2 and is more important even than nuclear power?

Professor Anderson: Yes, and he also pointed it out-we could do Fatih’s quotes repeatedly-in his Golden Age for Gas, this was not a golden age for climate change; that we are heading to at least 3.5 degrees Centigrade, which he refers to one as having devastating consequences to the planet. What I am saying here is that all the futures are unrealistic and let’s be realistic about it today, we should have done something about this a long time ago. We did not.

Chair: Can we just return to the subject of shale gas, please.

Q188 Sir Robert Smith: With all the other known levers you are talking about, if we just do them in the UK while still being part of the EU ETS we then just reduce the cost of carbon for our European neighbours and do not impact on emissions from the EU as a whole?

Professor Anderson: It is hard to imagine reducing the cost of carbon in the EU at the moment because it is virtually nothing and it has been nothing for a long time. So at the moment the EU ETS is damp squib of a thing. If there was a significant price in the EU ETS I think your concerns would be ones we would have to reflect on. But at the moment the price in the EU ETS is irrelevant.

Q189 Sir Robert Smith: We have done a lot of this already but what is the impact of the Government’s gas strategy?

Professor Anderson: I would not call it a strategy, or a gas policy. It is a promote and provide strategy or policy. I do not think it is part of a coherent energy policy or strategy for the UK. It is completely at odds to what we signed up to internationally. George Osborne suggests, I think, 37 gigawatts of new gas is just incompatible in the recommendations coming through the Committee on Climate Change. Ed Davey is now saying 26 gigawatts might be viable; he previously said 20. I do not think we have a clear view from this gas strategy as to what direction we are going in.

Q190 Sir Robert Smith: Do you see, though, it is the use you make of the generation because if the wind is not blowing you need something at that time but you do not need it all the time when the wind is blowing, so the overall emissions?

Jenny Banks: You do need flexibility, of course. I think we all know that. But the issue is partly if you build too much gas then there is a temptation not to build the low-carbon generation alongside it, particularly when we all know that there are divisions within the Government on the direction of energy policy.

Q191 Sir Robert Smith: But if you are offering a contract for difference to build a renewable, which gives you are return on capital, the fact that someone is building a gas power station does not make much difference because you are getting a return on your capital from the contract for difference.

Jenny Banks: Yes, up to 2020 I think that is the case. I think beyond that there is an uncertainty as to what incentives for low-carbon generation there will be. There are other forms of flexibility as well. Demand side response, storage. Currently we have nothing in the Energy Bill that promotes energy efficiency but reducing demand could be a very effective way of reducing the amount of gas generation we need. I think we would argue that diversifying your flexibility should be prioritised and things like demand side response, storage and interconnection should all be prioritised over simply building gas generation, which would probably-it is unclear as far but we may need a capacity mechanism and the reason for that would be that the gas was operating at low-load factors. If you have less gas and you can use other forms of flexibility then that is a much better way of doing it.

Tony Bosworth: I agree with what Jenny says. We definitely need flexibility but seeing flexibility as only being provided by gas is a rather blinkered view and I think we can see, as Jenny said, demand side response, interconnections and storage but also the use of a basket of renewables options; not putting a whole range of renewables options as being another way of providing that flexibility.

Professor Anderson: I think the big problem is that we are thinking about 21st century problems with a 20th century mindset, which has traditionally been supply. There is this idea that you think of it as a system, and the system is the energy system not just the supply system. When you start thinking like that you might have intelligent metering and active demand management, you might have different progressive metering tariffs that could be available, which we have virtually never had or even if we have had we have hardly ever used. If you start to look at wind, if you spread the wind out you get some benefits from that but you still get very lengthy anticyclones and problems with that. Then if you look at wave power, the wave collects the energy over a much longer period of time. So wave and wind, there is some benefit there, producing a level of intermittency. If you use tidal stream, tidal barrage, you start to develop a portfolio of supply technologies that can help reduce the level of intermittency but not solve them altogether. You have to think about issues of storage. Can you produce hydrogen or can you use biogas that you can run through a turbine? I think you have to think of it like that. Unfortunately we have never done that and I expect no other country has either, but I think we have to start to think differently about the systemic problem, the systemic issues that we are looking at today rather than just using one hammer to crack one bit of it and then surprisingly there is another bit over here that you have to hit with a different tool. We need to step back from it and think of it in a much more systemic, sophisticated and intelligent way than we have done traditionally.

Tony Bosworth: Going back to Mr Byles’ earlier point, I think if we take that approach, the approach of having a range of options, a range of technologies, then the 50 grams target is not unrealistic. It is something that we definitely-

Q192 Dan Byles: By 2030? You are talking about technologies that are a long way off being commercially viable.

Tony Bosworth: No, it is certainly achievable by 2030. Friends of the Earth has developed one path, we have looked at one model, one scenario, that does get us down to 50 grams by 2030, even with having an increase in-

Q193 Dan Byles: At an affordable cost to the consumer?

Tony Bosworth: Certainly it is an affordable cost to the consumer if you are talking about a potentially increasing gas price.

Dan Byles: And if you are not?

Tony Bosworth: Well, we are also talking about decreasing costs of onshore and offshore wind and solar coming down to grid parity. That means solar coming down to grid parity very soon; onshore wind coming down to grid parity very soon; offshore wind coming down a lot over the next 10 years.

Professor Anderson: When you say "realistic"-

Q194 Dan Byles: My concern is that that is not realistic and therefore-

Professor Anderson: I do not think the alternative is either; both are very challenging. We are talking about a suite of new nuclear power stations. Some people would suggest that is unrealistic. We know technically how to do it and there are lots of challenges to go ahead with it but we can also of course build a Severn barrage that you could argue with the RSPB-

Chair: We have debated these other issues on a large number of occasions and we will do so again but I want to finish session in the next 10 minutes, if we can, so please address the questions of shale gas, and answer the questions of shale gas too.

Professor Anderson: We are just responding to the questions that we are asked.

Q195 Sir Robert Smith: I suppose that is the problem, that it all interconnects, but on the specifics of shale gas what do you think the role of this body of office for unconventional gas and oil will be? Will it be a poacher or a gamekeeper?

Professor Anderson: Disturbingly it is both and that is the concern. It is the fox looking after the chickens. It does seem an odd thing to set up something that will promote and regulate. That is not to say you may want to have a separate regulatory agency, there are merits and protocols there because it is another separate agency. People were talking before about the problems of regulation, that there are many people regulating and now you have a new one regulating, there will be some crossovers with others. But to have both wrapped up in the same one, I think very few people would suggest that is wise.

Tony Bosworth: It comes back to the point, the three words that we used in the Government’s gas generation strategy, we were saying that regulation would be robust but that the aim of the office for unconventional gas would be to simplify and streamline this. I think, as Kevin was saying, there is a potential conflict.

Q196 Mr Lilley: You began by talking down the prospects of shale gas saying there was probably far less of it than the companies are saying; that it would be more difficult to extract; it would cost more, it would run out sooner. Yet you then said if we give so much as a hint that we are going to allow its development no one will do anything else because it is so attractive. Which half of your thesis should we believe because the two are incompatible?

Professor Anderson: I do not think I said any of the things you just said.

Q197 Mr Lilley: I am sorry, I am not saying just you. Jenny Banks said she believes that geological estimates are not accurate. I think you were saying that it was going to be much shorter lived and uncertain than the industry and the so-called hype say. Mr Bosworth, who can speak for himself, has been talking it down. If you were talking it up I would say you are not a very good salesman.

Professor Anderson: I think we said it is very uncertain; that the future is very uncertain.

Q198 Mr Lilley: But it sounds as if even the prospect of this uncertainty is more attractive than the certainty, in your minds, that the cost of wind is going to come down to economic levels.

Professor Anderson: I think in the evidence we submitted to you would suggest the cost of wind-when we did not look at the operating costs, we were purely looking at the capital costs-would tend to err in favour of the shale. If you take account of the power station, of the CCS plant and of the actual capital cost of the well pads to provide per kilowatt of capacity, it is about the same as offshore wind. But people never do that.

Q199 Mr Lilley: Somebody must in the system because they are bearing the cost. Who is subsidising gas if you are saying that these costs are not somehow borne even though they exceed the costs or equal the costs of offshore wind? If people will not go ahead with offshore wind but will go ahead with all these excessive costs of gas, someone is bearing those costs.

Professor Anderson: No one is going ahead with excessive costs of shale gas at the moment, we have just-

Mr Lilley: But you are saying they would if they were allowed to. I thought you were trying to dissuade us from us allowing it to go ahead.

Professor Anderson: No. I am trying to from a climate change perspective, yes, without a doubt. But I thought you were talking purely about economics now.

Q200 Mr Lilley: You were talking about economics. Is it backing up what you said earlier or what you just said now? You said that the total cost was as great or greater than offshore wind.

Professor Anderson: Yes, the capital costs are. These are quarterly estimates from the consultants used by Cuadrilla for estimating their costs per well pad, not our estimates. If you add them up I am simply making the very straightforward statement-

Q201 Mr Lilley: Why is there the remotest chance then of shale gas being exploited in preference to offshore wind?

Professor Anderson: Well, for the same costs, if you were an industry that has done that for the last umpteen years, you might think, "Actually, we know how to do that". We know this from all the social science and institutional work out there. We get locked into certain ways of doing things. So effectively if you are a hydrocarbon country, which we are, as most countries in the world are, then the things we are familiar with are innately more attractive to us and indeed to industries as well. All I am simply saying is if you add up the costs given by independent consultants, not by us on this, they are the same capital cost roughly as offshore wind. Whether we like that or not we can go back to the consultants they employed and say, "Did you get the numbers wrong?" but we are using their data.

Q202 Mr Lilley: They have a much higher tax burden, so it is sheer stupidity on the part of the industry that they are going to go ahead.

Professor Anderson: We do not know if they are going to go ahead; they are just doing exploration at the moment.

Q203 Mr Lilley: That is right, but we can let them go ahead because they will only go ahead if they are stupid.

Professor Anderson: Sorry, in the States, my understanding at the moment-again all the people who worked on this could be wrong, you may well be correct-that they are making a loss on virtually all of their shale production in the US.

Mr Lilley: But production is half the price here.

Professor Anderson: No, I am saying they are making a loss. The practice in the States is the companies are making loss over a relatively long period of time now and are still proceeding with it.

Q204 Mr Lilley: If you seriously believe that the oil industry in the United States is so altruistic they produce gas at a loss-because they have made a capital investment they produce it, and because it is a co-product of shale oil they produce it. That is not making a loss, that is a co-product of shale oil.

Professor Anderson: On most of their wells at the moment they say it is unsustainable for them to carry on like that and effectively they expect the price to go up to a level where they can make it sustainable. But they have not for quite a long time, that is the point I am trying to make to you here.

Jenny Banks: The point that I was trying to make is that there are two things. There is what is actually happening on the ground now, which is that we have a lot of uncertainty about how much shale gas there is and how much will be economic or socially acceptable to get out of the ground and it may or may not be that significant amounts of shale come out of the ground but the concern that we have at the moment is what is happening politically. We have just had the gas strategy come out, which has two scenarios that are not compatible with what the Climate Change Committee has recommended and are looking at much higher gas scenarios than we think are compatible with meeting our carbon budgets, or indeed the CCC think are compatible with meeting carbon budgets. What concerns us is UK energy policy going in a direction that is predicated on there being large amounts of cheap gas in the future when to us it is very unclear whether that is going to be the case or not.

Q205 Mr Lilley: Just one final question. Say in a year or two year’s time, they have done lots more drilling, they have tested and fracked and found what the extraction rates are, if you were sure that there was going to be a lot of gas there available at a much lower price than the current price, would you still be against us exploiting and using it?

Jenny Banks: On climate change grounds, yes.

Professor Anderson: I would ask you collectively what your commitments were on climate change. I know what they are at the moment and I would ask you to restate them explicitly and then I can do the analysis for you on those grounds. But at the moment if we stuck to the commitments you and others have signed up to, we have all signed up to, via our democratic processes, then at the moment it is absolutely, categorically clear that shale gas cannot be part of that portfolio of energy for the UK or other annex 1 countries. There is no doubt about that.

Q206 Chair: Not any part of it?

Professor Anderson: No, not part. This is the big problem in the UK is that we have not got around to understanding the plethora of targets that pick randomly to fit whatever we are trying to look at. So in the UK we have the carbon budgets that are premised on a global view that we are going to have a 63% chance of exceeding 2 degrees Centigrade. That is according to the Government’s own stats using their own modelling. So that is all the Government views on that, 63% chance. That is the global number. But then it has allocated the proportion to the UK, a part of that cake that is completely at odds with the Copenhagen Accord components to do with equity. So that is completely unfair, what we have done to the UK. That again is not in agreement with what we have signed up to internationally. So we have carbon budgets here that are inappropriate for what we have signed up internationally and we have never yet-

Q207 Mr Lilley: Sorry, they are not severe enough, is what you are saying?

Professor Anderson: The carbon budgets fall far, far short of what we signed up to internationally and you can see a very clear causal link, in the science each time you go along-a numerical account of it-and you can show what it should look like for the UK. The budgets we have here are far, far weaker.

Q208 Chair: Be that as it may, I want to just pursue this point. You say there is no role for shale gas at all?

Professor Anderson: Absolutely, categorically, there is no role for shale gas at all in the UK because we are already exceeding the budgets that we should be allowed under what we have signed up to internationally. But even if you give a bit of flexibility and the probability of 2 degrees C, which is what you have to do in the world we live in today.

Q209 Chair: No, I am just asking about whether there is any role for shale gas. Never mind about 2 degrees or 4 degrees. You are saying there is no role for shale gas at all?

Professor Anderson: Under our international commitments, no.

Q210 Chair: But we could, technically, achieve a carbon intensity target from electricity of 50 grams even incorporating some contributions from gas, could we not?

Professor Anderson: For 50 grams you could but that would not be keeping to the carbon budget we have signed up to internationally.

Tony Bosworth: I think if we go for a 50 grams target then, yes, there is a role for gas, but the proviso is what Kevin is saying about whether that target is compatible with our international commitments. But if we assume that is the target we are going for, then, yes, there is a potential role for gas, a small role for gas on that system but it is nothing like the role that the gas generation strategy foresees. It is a role as balancing, not as baseload.

Professor Anderson: I will agree with Tony there, if you broadly stick with the CCC’s budget, which, as I say, are far removed from our international commitments, then there is a potential small role for gas in that. A small role. If you stick to international ones, there is no role.

Q211 Albert Owen: If there are only small roles for gas but not for baseload, what is going to provide that baseload? One thing that we have not discussed since I have been here this morning is the large price increases in electricity. If we are going to just develop into renewables, is that a given that they are going to continue to rise and rise if we do not have an alternative source of baseload?

Tony Bosworth: We have a scenario in which we are talking about 75% of our power coming from renewables with offshore wind forming the bulk of that but also with the balance of technologies, which I talked about earlier, there is also a role for wave, tidal, hydro, solar, onshore wind.

Q212 Albert Owen: Sure, and I personally support that, but they are underdeveloped.

Tony Bosworth: Yes.

Albert Owen: The high cost of electricity is what industry and the consumer is facing at the moment. Are you suggesting that we forgo an opportunity to extract gas and continue with this development of renewables alone, and that will provide the base as well as providing the low carbon in the future?

Tony Bosworth: I am suggesting that the way in which we provide our electricity in the future has to be overwhelmingly based on renewables, yes. The projections for the cost of that show-and it is not Friends of Earth projections, it is Friends of the Earth analysis of independent projections-the cost of renewables continuing to fall in coming years.

Q213 Albert Owen: But do you not accept there will be a period where there will be gap and it will be difficult to produce the baseload for electricity and that we would have to import that and there will be a cost on the market? That we will pay market price and each household will be paying more?

Tony Bosworth: There is going to continue to be a role for gas out to 2030, the question is how we provide that gas. I think it is an open question about whether we decide that we want to carry on importing that gas or whether we want to develop that with shale gas. I say we should not be going down the shale gas route because of the potential of things like the local environmental impacts.

Jenny Banks: The Committee on Climate Change have estimated that up to 2020 there will be around £100 on the total energy bill as a result of environmental policies. After that I think it is much more uncertain but we commissioned a report from Cambridge Econometrics that came out last week, which suggested two scenarios, one of which you rely heavily on gas, the second one after 2020 you continue to invest in offshore wind as you have done up to 2020 to meet the renewable energy target. The difference between overall energy bills in 2025 in that scenario is 3.5% reducing to only 1% in 2030. So by that point, because the cost of renewables, including offshore wind, has fallen to that extent, there is a very small difference in bills and GDP was found to be £20bn higher in the offshore wind one.

Q214 Albert Owen: What would be providing the baseload? I am still not clear from what both Mr Bosworth and yourself are telling me. You are quoting various reports and scenarios but what would be providing the baseload. It would either be imported gas or it would be nuclear or it would be dirty coal.

Jenny Banks: In a scenario where you meet climate change targets you don’t have gas providing baseload any more, you have gas providing backup. Depending on what scenario you look at, if you look at the CCC scenarios, for example, then you have nuclear providing a lot of the baseload. Obviously environmental NGOs like ourselves do not support nuclear. You have a lot of renewables on the system. As Kevin said earlier, you are really moving to a different kind of electricity system to the one we have seen before.

Professor Anderson: One needs to bear in mind that if we talking about 2030, which I think is what you are talking about, is it not? If we imagine by 2030 the CCC suggests a lot of heating-and I am not saying this is good or bad thing-

Albert Owen: I am talking about between now and 2030 as well.

Professor Anderson: Yes, and one thing for that is having life extensions for some of the nuclear power plants. My big suggestion would always be the cheapest thing to do at every time on this is going to be energy demand. But if we park the low hanging fruit for a moment then I think the life extension is certainly one way forward. If you have a portfolio of renewables you can start, if it is wind, it is offshore wind and it is geographically spread, to derive some baseload capacity from those but you will get times when they go off, in the same way that nuclear power stations went off and the lights went out in Marseilles because the river water was too warm a few years ago. So these things do happen from all supply systems, but I think we have to make this almost mindset shift from where we are today to where we going to be heading to 2030, by which time if we did imagine that heating and transport were also partly on the grid then there are certain storage and inertia benefits that come along with that that fit with a different way of thinking about the grid; batteries in cars can be used to store and feed back into the grid and with heating you get thermal inertia if you stored it in water, for instance, for heating. That gives you some capacity for flexibility for a slightly more intermittent baseload system. So we have to think quite differently about this but I think the points that you raise are very important ones as to how we are going to proceed to that particular period and I think there are a lot of uncertainties still about what that system could look like.

Tony Bosworth: I gave you the figures for where, if you like, the end point is by 2030, about what the various shares of capacity would be. We have the figures for the intervening points up to 2030, I do not have them with me but I would be very happy to send them in, if that would be useful.

Q215 Mr Lilley: According to my colleague’s app here, at this moment the electricity and heating we are consuming in this room, the electricity is 47% provided by coal, 34% by gas, 15% by nuclear and 0.4% by wind. If you are seriously suggesting we can expand wind and there is another 0.6% from storage and hydro to replace not only all coal but all gas, do you not think you might just possibly be living in a dream world?

Professor Anderson: Sorry, are you suggesting that we are making the point that wind should provide heating?

Mr Lilley: Wind or other things. Ms Banks wants to get rid of nuclear as well. What I am saying is we have to replace more than 90% of our capacity by 2030 if you are going to have a gas-free future, a nuclear-free future and a coal-free future. We do not have any significant reliable, continuous, non-conventional energy.

Professor Anderson: I am sure you know the figures, but as you are aware the renewables in the UK are about 1.5 times larger of the energy we demand than nuclear.

Mr Lilley: Not now.

Professor Anderson: No, no, they both begin in "e" and they both end in "y" but one is electricity and one is energy. Electricity represents 18% of the energy we consume and the other 82% is not electricity. I think we have to be quite careful we do not muddle these things up.

Mr Lilley: Yes, change the equation by all means but-

Professor Anderson: No, I was referring to the energy system not just to the electricity system. I think we often get those muddled up; we focus just on one particular small part of the energy system. As was pointed out earlier, most of the gas in the UK is not used in the electricity system, it is used in the heating system.

Jenny Banks: We launched a report last year called Positive Energy, which was basically looking to answer the very question that you have asked. Clearly we do get these anticyclonic periods in the winter, particularly where it is a day exactly like today. As you correctly point out the wind is not blowing. So, yes, we need the flexibility to meet demand and in the scenarios that we looked at-we had modelling done by an energy consultancy to do that-there were two key ways of meeting the demand when the wind was not blowing. One of them was simply building a lot of gas generation, but we have discussed today some of the issues with doing that, having to run the gas at low load factor. The other one was having a significant amount of gas generation but also importing electricity from the Continent.

Mr Lilley: None is coming through at the moment from either France or Ireland; they are using all theirs. When you said only a third of the gas is used in electricity, that means the problem with replacing it is three times bigger, not smaller, than just replacing it in electricity.

Professor Anderson: No, I think it is really important for there to be a debate about this, and I do not have a problem with people pointing that out. It is not quite three times bigger because I think the opportunities for doing something about heating are probably better than they are for other areas in terms of reducing the demand for heating and indeed cooling, because the cooling load in London is higher in the summer now than the heating in the winter.

These are huge challenges. I do not think anyone is pretending otherwise than that these are enormous challenges. There are enormous challenges if you can provide them all with nuclear. They are enormous challenges if you are you going to provide them all with this extremely uncertain shale gas of which we one exploratory well somewhere in Lancashire. To bet your future on an exploratory well in the middle of Lancashire I think is also tricky. So whatever route you go down the future is awash with very major energy challenges. We all know we should have done these things a long time ago, we did not. We are where we are today. There is an array of ways of doing this, some of them are a nuclear routes, some of them are gas routes. We may have to use a lot more imports if the shale gas does not play out but we do not know whether they will or will not, and other routes are that we can go down a much more renewable route. We then have to think of that in relation to other things that may be important; price, affordability, security, and climate change. We have to relate into those and if we have particular climate change commitments, which we have, we can do the maths around whether some of those scenarios are viable or not. The gas one is not for climate change. The nuclear and renewable ones are. They are still enormously challenging and there may be ways to bring together in some sort of synergistic way of thinking of these things, but the other part that must go with this all the time is the energy demand side and we have to think how does that work with a flexible supply system. But we must think about energy not just electricity because, as you note, if we have to put the heating on to the grid, domestic heating in the UK is the same size as the total electricity consumption in the UK. So if you shoved that on the grid the grid would have to be twice as big if there was no improvement in efficiency and then there is another side of heating that is not domestic.

So these are enormous challenges. No one is trying to say otherwise and the sort of work that we have done, and we have done our work very differently, using different types of technologies and different assumptions of demand, show that there are alternative ways of skinning this cat but they are all going to be difficult, they are all challenging, and I do not think anyone is pretending otherwise.

Q216 Chair: You can be sure that we are very seized of the contributions that can be made from the demand side. We had a private discussion about the DECC pathways to 2050 model last week, which, among other things, pointed out that that getting people to heat their houses to a slightly lower temperature has a dramatic effect on emissions, much greater than what we talk about.

Professor Anderson: No, I agree. I have spoken to Dave MacKay before and others in the strategy team there, the level 4 energy demand is one they could imagine being ratcheted up quite considerably. The level 4 on some of the supply targets, the solar one for example, is pretty high but they recognise there is scope for going further with the demand one.

Q217 Sir Robert Smith: But it is not the low-hanging fruit because otherwise we would have picked it by now. I agree with you, it is the obvious and crucial thing to do because reducing demand solves your supply problem much more effectively but I think we have to be realistic that we are going to have to work very hard to achieve it because I have gone out to promote warm homes and I have watched them put a chain down between that and the neighbouring house to make sure it doesn’t get any cavity-wall insulation because the neighbour did not want it.

Professor Anderson: I think it is fair to say the demand side is never going to be easy but I think it is also fair to say that for lots of us out there it is awash with low-hanging fruit. For most of us energy prices are basically irrelevant in our lives, and for others it is not the case, and I think we have to find different ways of incentivising changes in behaviour, progressive metering tariffs and so on. But this is getting away from shale so I will stop there.

Q218 Chair: Do any of my colleagues have any further questions they want to ask?

Dan Byles: On shale gas.

Chair: On shale gas indeed. Okay, thank you very much. A very useful exchange and we look forward to seeing you all again in due course.

Professor Anderson: Thank you very much.

Prepared 10th January 2013