UK Turns to Gas: Osborne Announces New Natural Gas Strategy
In a shift to the trajectory of UK energy policy, on 5 December 2012, the British government announced its new ‘Gas Generation Strategy’. The proposals establish a new Office of Unconventional Gas and Oil, encourage the construction of up to 30 new gas-fired power stations by 2030, and demonstrate renewed resolve to harness shale gas reserves in the UK. The ‘Autumn Statement’ by the Chancellor of the Exchequer, George Osborne – a close ally of Prime Minister David Cameron – received headlines for its extension of public spending cuts, yet it was accompanied by new energy proposals that are likely to prove more significant in the long term.
In the face of an extremely challenging macroeconomic environment, the financial crisis in the eurozone, and rising energy costs, Osborne increasingly sees shale gas production as an important factor in the long-term recovery of the UK economy. Having witnessed the dramatic expansion of the industry in the United States, it is clear that the government in London is seeking to emulate its success in the UK. Innovative hydraulic fracturing (fracking) techniques in the US have allowed large shale gas reserves to be exploited, causing the price of natural gas to plummet. This has had significant spin-off benefits for the industrial and manufacturing sectors, in addition to domestic consumers, who have all benefitted from low natural gas prices.
Yet, such developments are not without risks for Cameron and Osborne. There are a number of factors which make the UK a less welcoming environment for companies seeking to invest in shale gas production. The UK is more densely populated than the US – making it more likely that industrial development will be closer to residential populations than in the US. The issue of mineral rights is also more problematic in the UK. Typically the state has ownership of the subterranean gas reserves where fracking would likely take place, rather than individual landowners. This will increase the likelihood of local opposition as the direct benefits to communities will be more nebulous than in the US. The environmental risks associated with shale gas production – mainly the purported links with earthquakes and water pollution – are also likely to generate large opposition from the environmental lobby, which has typically been more powerful than in the US.
The new position of the government in the UK stands in sharp contrast to developments elsewhere in Europe, where political opposition has been stronger. In France, a moratorium on fracking is in place and President Hollande has pledged to maintain the ban for the duration of his five year term in the Elysee Palace. In Germany, Chancellor Merkel’s government is also opposed to shale gas production for the time being. Although Poland has made the first tentative steps towards exploiting its shale gas reserves, there have been setbacks due to disappointing results from initial shale wells and a scaling back of reserve estimates.
In the UK, the energy company, Caudrilla – chaired by former BP CEO Lord Browne – voluntarily suspended its fracking operations in the north-west of England in 2011 after minor earthquakes were linked to its activity. However, the company has been bullish about the prospects for shale in the UK and is expected to join with its competitors in welcoming the Chancellor’s announcement. Estimates vary considerably on the extent of UK shale reserves, but if the most optimistic assessments are realised then the impact of an expansion of shale gas production in the UK could be very significant. Shale gas production in the US – where reserves are thought to total over 1,000tr cubic feet – has seen the price of natural gas plummet to approximately four times cheaper than it was in 2005. In contrast the price in Europe is currently over three times more expensive than it is in the US.
Osborne’s announcement has opened the divide in government between the two coalition partners. The Conservative Party enthusiastically supports the expansion of shale gas production, while the junior Liberal Democrat wing of the government has expressed much more scepticism over shale, and is thought to continue to favour a larger role for renewables in the energy mix. Conservative Environment Secretary Owen Paterson and Liberal Democrat Energy Secretary Ed Davey perhaps best personify this divide, with the former an enthusiastic backer of shale gas, and the latter more associated with championing wind energy. With this announcement of government policy, however, it appears that opportunities for the shale gas industry are set to expand, although it remains to be seen whether public opinion can be persuaded to support this development. Much will likely depend on whether shale gas production can translate into tangible cuts to energy bills for domestic consumers.
Dr. Mark McClelland, Principal Analyst North America and Europe, Maplecroft