Myth 1 – Cheaper Energy

Fracking will mean cheaper energy

In simple terms the argument is put to bed by Ed Davey, The Energy Minister’s comments in September 2103

“North Sea gas didn’t significantly move UK prices – so we can’t expect UK shale production alone to have any effect.”

but let’s look in more depth at some of the arguments.

The myth that shale gas will mean cheaper energy price sin the UK is perpetrated on a regular basis and it is very seductive – after all who can argue that being able to keep Granny warm in winter isn’t a desirable thing, and obviously anyone who opposes something that will make this possible must be an evil extremist with a hidden agenda.

Oddly enough though, it is often the same people who criticise opponents of fracking for using the American experience to highlight potential health issues, who are trying to extrapolate from the temporary reduction in gas prices in America to show that fracking will mean cheap long term gas prices here in the UK. The words “having” “cake” and “eating” spring very much to mind.

So what can we learn from the US experience

The low gas prices that appear to have bottomed out this year make fracking simply uneconomical for the energy corporations.

In February 2012 The Independent reported that British Gas’s “decision to scale back its fracking activity comes after US gas futures prices fell 39 per cent in the past year, as a result of greater gas production and milder winter weather.”

In August 2012 The Independent reported that “BHP Billiton is about to become the next victim of the latest asset bubble to burst – US shale gas, the rock-based hydrocarbon that is released via the controversial process of fracking. A fortnight after writing $2.84bn (£1.84bn) off the value of its Fayetteville shale gas business in Arkansas, BHP is poised to reveal on Wednesday that the charge helped push down its profits by a massive 40 per cent – to $14.2bn – in the year to June 30. The FTSE 100 mining giant was forced into the writedown after a decade-long stampede into the brave new world of US shale gas produced so much of the stuff that its price tumbled to 10-year lows, taking the value of its producers with them.

BHP’s chief executive Marius Kloppers and Mike Yeager, the group’s petroleum head, will forgo their bonuses as retribution for paying $4.75bn for the Fayetteville assets in February 2011. Just 18 months later, the business had lost more than half its value as the US gas price fell from $3.88 per thousand cubic feet when the deal was struck to as little as $1.91 in April, before recovering slightly to now hover around $2.75.

tellingly, this article concludes with the opinion that

.. given the relative scarcity of Britain’s estimated recoverable shale gas reserves, compared to the US, and the need to make up for the energy shortfall left by dwindling supplies of North Sea oil, such a move would be unlikely to herald an age of exceptionally low gas prices in the UK.

The Financial Times reported in October 2012 that that

US natural gas prices …hit a 10-year low earlier this yea.. While the number of rigs drilling for gas in the US has plunged, dropping 53 per cent in the past year.

The Telegraph reported on 15 December 2012 in an article titled “Do not be seduced by a ‘fracking’ gas bonanza” that

US shale energy looks cheap, because domestic prices are cheap. But that’s down to unsustainable tax breaks and laws that stop American energy exports.

And Exxon’s CEO, Rex Tillerson, privately told a meeting at the Council on Foreign Relations:

We are all losing our shirts today. We’re making no money. It’s all in the red.

In January 2103 Total announced that it will halt making new investment in dry shale gas in the United States while gas prices remain low. The French giant shelled out $2.25 billion for a 25% slice of Chesapeake Energy’s Barnett Shale assets in January 2010. Chief executive Christophe de Margerie said:

Our investment in Texas shows a serious loss which, of course, does not question Total’s results or development,” he said. The Total chief said the company had invested in Texas on the basis of gas at more than $6 per British thermal unit, but that “today we are at $3.2 (per btu). It does not work.

So to sum that up, gas prices fell in the US to levels that rendered the the process unviable economically and they are on the way back up having given a few bruises to some companies that maybe ought to have known better along the way.

Why is it going to be different here

Quite simply the situation over here has very different dynamics and it is highly unlikely that we will see the depressed gas price effect that they had in the States and which caused the fracking companies so much of a problem.

To begin with the UK is far more densely populated that most of the USA. The land above the Bowland Shale in Lancashire is over 10 times as densely populated as the land above the Barnett Shale in Texas. Planning permission is more difficult to obtain here (currently that is – we are not sure how the government’s attempt to remove planning powers from local government in the new Infrastructure bill will affect this in future.) The reserves are deeper and harder to get at than they are in the States, and local opposition creates more problems for the frackers when they can’t get the support of landowners because over here we don’t own the mineral rights under our own land (the Crown does).

As Professor Paul Stevens from Chatham House has argued

“The geology for shale gas is much less promising than in the United States. In general the deposits are deeper, the materiality in terms of gas deposits lower and the basins smaller. The plays are more fragmented and the shale is richer in clay.”

Putting all this together consultants Wood Mackenzie suggested in late December 2012 that the economics of shale gas in the UK just don’t stack up unless the gas price rises to a level of $9.68.

Wood Mackenzie estimates that in order to develop UK shale reserves, potential operators would need a gas price of $9.68 per million British thermal units (mbtu) for the project to make economic sense. This is considerably more than this year’s average UK spot price of $8.69 per mbtu and the $8 per mbtu that Bloomberg forecasts it will hover around between 2015 and 2020.

What does that mean? Yes – you’ve followed that correctly – Wood Mckenzie are saying that the only way that shale gas is going to be economically viable in the UK is if prices go up to a level higher than is predicted for the energy market without shale gas. That means that shale gas will NOT result in cheaper gas.

Who else agrees that it won’t mean cheaper energy?

Are Wood Mckenzie alone in believing that shale gas isn’t going to reduce our energy bills? Well, hardly. The Government itself appears very doubtful about the prospects of cheap gas, and it is the government which appears to be behind much of the push to get shale gas drilling going – presumably because they can see easy tax revenues coming from it.

The Telegraph reported on 23 December 2012 that:

The Conservative MP Charles Hendry, who served as an energy minister until the September reshuffle, has told The Telegraph that shale gas extraction was “unlikely” to be a major industry for the UK or bring down energy costs significantly.

The BBC reported on the day the government gave the go ahead for continued exploration

government advisers warn today that shale gas may be unlikely to bring down energy prices much in Britain. In fact, the Committee on Climate Change warns that relying heavily on gas for future electricity supplies would leave households vulnerable to higher bills in the long run as the price of gas on the international market is volatile.

The Committee on Climate Change were indeed scathing about prospects for price reductions as a result of unabated gas -fired generation compared to the more modest increases that it believes would result from development of low carbon technologies. (Of course these low carbon technologies would not offer Mr Osborne the easy tax revenue he would get from shale gas exploitation)

The second report by the Committee on Climate Change assessing the impact of carbon budgets on energy bills confirms that annual household energy bills could increase by £100 in 2020 to support development of low-carbon technologies.
The report, Energy prices and bills – impacts of meeting carbon budgets, says expected bill increases beyond this timeframe are likely to be limited. In contrast, continued reliance on unabated gas-fired generation carries the risk of electricity bills for the typical household being up to £600 higher than under a low-carbon power system over the next decades.

So, will shale gas exploitation mean that granny stays warm in Winter?

Not unless she is quite well off it seems.

So why do we keep hearing this myth from the fracking companies and certain sections of the Government – notably the Treasury?

We’ll leave the last word to Liam Halligan from the Daily Telegraph

When the big energy companies and Western governments push in the same direction, they can, for a while anyway, create any conventional wisdom they like, even one with little regard for the facts.

Post script:

Bloomberg, quoted by stated in February 2013 that

Exploitation of the UK’s significant shale gas resources is unlikely to result in low natural gas prices, according to new research by leading energy analysts Bloomberg New Energy Finance. The cost of shale gas extraction in the UK is likely to be significantly higher than in the US, and the rate of exploitation insufficient to offset the decline in conventional gas production, meaning market prices will continue to be set by imported gas.

and in September 2013 Lord Stern, author of the hugely influential Stern review on the financial implications of climate change, stated in an an interview with The Independent, that

he was puzzled by the prime minister’s claim this month that “fracking has real potential to drive energy bills down… gas and electric bills can go down when our home-grown energy supply goes up”.

“I do think it’s a bit odd to say you know that it will bring the price of gas down. That doesn’t look like sound economics to me. It’s baseless economics,” said Lord Stern, chair of the Grantham Research Institute on Climate Change at the London School of Economics.

That’s Lord Stern of Mr Cameron’s Christmas card list then.

And in October 2013, Peter Voser, retiring CEO of Royal Dutch Shell, was quoted in the Daily Telegraph that

“the idea of “cheap US gas going into the rest of the world and therefore changing the pricing structures across the world” was a “myth”.
The price impact of US exports would be “not that significant” because the additional costs of liquefying, transporting and then re-gasifying the gas would mean its eventual cost was comparable to existing market prices, he said.