by Mondiu Jaiyesimi

Mondiu Jaiyesimi (Y! Policy Hub)

Another key consideration is the public acceptance of shale gas drilling. It is still unclear how this will impact on the development of the industry when drilling begins on a large scale in the UK. Considering how important public opinion is in the UK political terrain…

The American example of how the intensive exploration of shale gas potentials can change the economic fortunes of a nation within a decade looks to have positioned the policy makers in the United Kingdom on the horns of a dilemma.  Owing to the shale gas boom, the United States has begun its journey from being over-reliant on the importation of natural gas to being a net exporter of the same in the next few years. However, when you bring the environmental impact of the drilling of shale gas into question, the American model might not necessarily be your best example due to various political and technological factors especially for the likes of the United Kingdom whose shale gas industry is still in its development stage and is leading the campaign for a greener future.

It has been widely reported that the UK’s newly discovered shale gas reserves will be enough to serve the country’s energy needs for approximately 25 years. However, as it stands no European country has been able to extract shale gas in commercial quantities since the United States embarked on the large scale extraction of this energy resource.  One of the key reasons for this is the controversial technique used in extracting this energy source called hydraulic fracturing.

THE FRACKING STORM

Hydraulic fracturing (also known as fracking) is the process of drilling and injecting large volumes of fluids (water, chemicals, bactericides, buffers and stabilizers) and sands into the ground at a high pressure in order to fracture shale rocks to release natural gas inside (EIA, IEA*).  The process was developed in 1947 to aid the extraction of oil and gas resources.

Although shale gas is a cleaner energy source compared to coal and oil as it produces the least carbon dioxide and carbon monoxide, the main concern of policy makers is the impact of fracking on the environment.  Hydraulic fracturing has already been temporarily banned in some European countries;   in France, any company found using this technique will have its license revoked immediately. Bans have also been put in place in Bulgaria, Czech Republic, Netherlands and some parts of Germany for extensive research to be carried out to fully assess the environmental and health implications due to widespread public opposition and criticism.

According to researchers and various environmental activist groups, the use of hydraulic fracturing can lead to widespread groundwater contamination due to the accidental release of methane gas and toxic chemical. Hence drinking this contaminated water could lead to various respiratory and sensory health problems for both humans and animals. There are also potential risks to air quality when methane and other dangerous chemicals are exposed on the earth surface after fracking and its long term impact on the ecosystem. Some critics of this technique have also argued that it might lead to earth tremors in drilling areas.

With this in mind, as expected, concerns are beginning to grow within the public and stakeholders circles about the viability of a shale gas business governed by strict regulations which might be deemed unfriendly by potential investors and energy companies.

THE SHALE GAS SOLUTION?

Amidst the negative press about the environmental implication of the drilling of shale gas, there are potential economic benefits accruable to resource rich nations who embark on large scale exploration of this resource. The shale gas success in the United States is an example for the proponents as the North American giant will by 2035 produce approximately 424.5 billion cubic meters of shale gas tripling what was produced in 2010. The British Geological Survey (BGS) has indicated that the UK currently holds shale reserves up to the tune of 1300 trillion cubic feet of gas. Although, the EIA has predicted that only 4% of this will be recoverable, the BGS is looking at a possibility of extracting 10% of the possible reserves.

Based on this possibility, the shale gas advocates like the chancellor George Osborne, Boris Johnson and Michael Fallon have already been talking up the benefits to the UK economy. Propositions include a £100,000 incentive given to the host community for every fracking well created, cheaper bills, building new recreation facilities and tax incentives to potential investors. On the revenue angle, the government will also expect to benefit from tax income when the industry develops and a corresponding reduction in gas prices.

POTENTIAL DRAWBACKS

Unstable regulation and volatile policy formulation due to pressure on policy makers could affect potential investment. Stakeholders will be keeping a watching eye on the shale gas situation in Poland- a country tipped to mirror US model in Europe. According to the EIA, Poland has the largest shale gas reserve in the European Union. By virtue of this, polish government has implemented friendly policies in a bid to attract foreign energy companies and investors. However, the news of geological difficulties, unclear regulation and tax policies is making it difficult for the energy companies operating in the industry.

In 2011, the EIA estimated that Poland has approximately 187 trillion cubic feet in recoverable shale gas resources. However, as we speak, every attempt to extract the gas in various wells has been unsuccessful. Exxon Mobil pulled out in June 2012, Talisman and Marathon Oil have also followed suit and Chevron is requesting a clearer picture of the country’s shale gas drilling regulations. While we can’t conclude that the UK might suffer a similar fate, it will be logical to bring Poland into the argument since it offers the best hope for the European Union on shale gas.

Another key consideration is the public acceptance of shale gas drilling. It is still unclear how this will impact on the development of the industry when drilling begins on a large scale in the UK. Considering how important public opinion is in the UK political terrain, policy makers will be looking to introduce tougher regulations to check any possible excesses of the drilling companies. This brings us to our second point of consideration, energy companies frown at tight regulations when shale gas is concerned considering the geological and other technical difficulties they encounter when looking for shale deposits in rocks, Poland is a good example of this.  More so, the UK does not have a well established engineering expertise in shale gas compared to Canada and the United States. This might also play a key part in negotiating with the North American drilling companies who presently dominate the industry.

It is evident that the exploration of shale gas has its own social costs and economic benefits. However, we have insufficient examples to draw from without considering the American case study. More so, with the stiff opposition the proposal has faced in some parts of Europe and the current situation in Poland, I believe it might take a while for Europe to have fully developed shale gas industry and the United Kingdom could play a key role in actualizing this dream.

 

- EIA- US Energy Information Administration

- IEA- International Energy Agency

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Mondiu Jaiyesimi is an Energy Economist passionate about energy and public policy, empirical research and energy finance. He studied Energy Economics and Policy at the University of Surrey and has done extensive research work in Liquefied Natural Gas markets, UK energy markets, shale gas revolution and energy demand in developed countries.

He currently engages in independent energy consulting focusing on energy modelling, climate change and trends in oil and gas supply in Africa and other emerging markets. He is a member of the International Agency for Energy Economics and the British Institute of Energy Economics. He currently works with Deloitte, London.

 

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