UK Shale no “Get out of jail card”
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.
In the US, exploitation of shale gas has led to a dramatic reduction in gas prices, from highs of around $12/MMBtu in 2008 to a low of $1.80/MMBtu in March 2012, since when they have recovered to around $3.40/MMBtu. These very low natural gas prices have resulted in a windfall benefit to US consumers, accelerated a large-scale shift in power generation away from coal and helped re-energise the US’s industrial economy. UK gas prices were also around $12/MMBtu in 2008, but are still in the $10 to 12/MMBtu range today due to continued reliance on high priced imports.
UK shale resources are certainly significant. In a few weeks the British Geological Society is expected to issue the first significant update since its 2010 estimate of 5.3 trillion cubic feet (tcf) of recoverable reserves. It is expected to revise these figures up sharply. Cuadrilla Resources, the company exploring shale gas reserves in Lancashire, has estimated up to 200 tcf of “gas in place” in its concession alone. Commentators are talking of 1300-1700tcf of “gas in place”, of which up to 130tcf may be recoverable. This can be compared to annual current UK natural gas consumption of 3.5 tcf, leading to estimates of over 40 years’ worth of consumption at current rates.
According to Bloomberg New Energy Finance, however, the impact on the UK gas market and wider economy is likely to be quite different to the US experience. Two factors are likely to combine to limit the development of shale gas in the UK compared to that seen in the US. First, shale gas will cost more to exploit in the UK than in the US. Second, a host of legal, planning and environmental factors will slow down the rate of development of UK resources. As a result, the rate of expansion of shale gas in the UK is likely to be too slow to offset fully the need to import gas. Even if UK shale gas can be produced at a cost below that prevailing in international markets, it will be higher-priced imported gas that will continue to set the price in the UK gas market.
Bloomberg New Energy Finance estimates that the cost of shale gas extraction in the UK will be between $7.10 and $12.20/MMBtu, against comparable costs for dry US plays of $4.54 to $4.83/MMBtu. These figures are based on capital expenditure estimates from leading oil and gas engineering companies that
suggest that wells in Europe will cost 2-3 times their US counterparts, coupled with ranges in possible flow rates based on comparable US sites. It should be noted that these UK cost estimates exclude the potential additional costs of building local pipelines and processing equipment to get gas to market. In the event that the UK plays are not dry (i.e. they produce liquids that can sell into the oil market), the additional capital cost of infrastructure would be significant.
Our cost range of $7.10 to $12.20/MMBtu is similar to the range of market prices for natural gas seen in the UK during the course of 2012.This suggests that even proven shale gas resources in the UK might struggle to secure finance. Assuming capital is available – and there is no shortage of companies lining up to participate in the sector – it is still unlikely that the resulting gas would come online quickly enough to offset the reduction in production from the UK continental shelf.
The UK currently imports around 50% of the natural gas it consumes. To bridge the gap and eliminate imports would require shale gas production of between 4.0 and 4.5bcf per day. Bloomberg New Energy Finance estimates that this would require the drilling of around 10,000 wells over a 15-year period, based on optimistic assumptions for flow rates. Activity would peak at around 1000 wells per year. A lower flow rate might mean up to 20,000 wells would be required, draining an area over twice the size of Lancashire.
Compared with the US, the UK has a higher population density, a stronger environmental movement and tougher local planning rules. In addition, the structure of mineral rights differs from the US, where subsurface rights are generally the property of landowners. In the UK, state approval will be required to exploit each new resource; even if this is expedited by the proposed Office for Unconventional Oil and Gas, landowners will have little incentive to welcome development. The net effect will be a slower development of shale gas in the UK than that seen in the US – a rate that will not eliminate the need to import gas.
Guy Turner, head of economics and commodity research at Bloomberg New Energy Finance, said: “Shale gas might seem to offer a new dawn of low energy prices for the UK. Our analysis suggests such hopes should be treated as wishful thinking. The UK imports half of its natural gas, a proportion set to grow. Shale gas may help replace some of our declining conventional production, but it is unlikely to arrive quickly enough in sufficient volume to drive UK prices below international levels.”
Michael Liebreich, chief executive of Bloomberg New Energy Finance, said: “The only way to be sure about the volume, cost and speed of exploitation of the UK’s significant shale gas reserve is to continue exploration with all reasonable speed. Meanwhile one should be realistic about the likely impact on UK energy prices. An energy policy that leaves the country at the mercy of international gas prices would be reckless: the UK needs to maintain a diversified mix of energy sources.”