#2 Fracking hell – why shale riches are a myth

Shale gas isn’t a road to riches. But it might be a sign of energy desperation.

To the understandable concern of those living in shale-prone areas, the Government has puts its authority (and its fiscal largesse) behind the plan to use fracking (hydraulic fracturing) to extract gas from tight sands.

But there is one big question about shale gas that hasn’t even been asked – why are we doing this at all? The answer should worry everyone.

Of course, the reasoning behind boosting shale development might seem obvious if you believe even a fraction of the hype coming from the other side of the Atlantic. If media reporting is to be believed, shales will give the United States “energy independence”, and could even create “Saudi America”. If this is true, why wouldn’t Britain want a piece of the action?

The problem is that shales aren’t all they seem. To be sure, tight sands production has boosted US gas output, to the point where prices have slumped in a market where a weak economy has depressed demand.

But think about this for a moment – investment in the American shale gas industry is heading towards $2 trillion. That sum buys you a lot of wells and, not surprisingly, also buys a lot of initial production. That, of itself, doesn’t prove anything.

Please note that word “initial”. Data emerging from the American shales patch strongly suggests that output falls away very rapidly indeed after start-up. Production declines are normal in the petroleum industry, of course, as pressure is dissipated and flow rates tail off. The problem is that, compared to an annual decline rate of around 7-10% from “normal” oil and gas wells, shale output seems to fall much more rapidly, perhaps by as much as 65% in some instances, in the first year of production. Fields whose production lives were reckoned to be around forty years may actually last for as few as eight.

Decline rates like these put you on a “drilling treadmill” because, if you don’t keep drilling new wells, gas production falls away very rapidly indeed. Instead of developing a field over a period of two or three years and then sitting back and watching it produce, operators get caught in a “drill till you drop” syndrome if they are to have any chance of keeping investors happy.

That’s bad news, of course, for locals, because it means a continuous drilling programme, not a one-off development phase. It’s bad news for the Treasury, too, because “pay-back” (the point at which taxes start to become due) will be delayed by an ongoing programme of drilling (and shale wells, incidentally, cost far more than “normal” ones). Indeed, pay-back might never be reached at all.

Why, then, is Government so enthusiastic about something which, as well as being unpopular, is beginning to look a lot like an energy industry version of the dot-com bubble? Well, of course, it could be that Ministers and their officials are taking the “Saudi America” hype around shales at face value. But there’s a darker possibility, which is that Government might see shales as a short-term answer to Britain’s looming energy shortfall.

Since 2007, energy consumption in Britain has dropped by 8% (from 235 million tonnes of oil-equivalent to 216 mm tonnes), which isn’t too surprising given the economic slump. From here on, though, Government expects energy demand to fall further (to 198 mm tonnes over the next ten years) even though it also expects brisk economic growth.

If energy demand doesn’t fall, we’re in big trouble, as supplies are on a sharply downwards trajectory. The North Sea is critical, of course and, despite having been a net exporter until 2004, we imported close to half of our gas consumption last year. We also imported more than a third of our oil needs, even though we were net exporters until 2005.

About four-fifths of our remaining coal-fired electricity generating capacity is slated for early closure, and our fleet of nuclear reactors is ageing rapidly. Even if energy demand does continue to fall, we could be in a supply squeeze by the winter of 2014-15. It has been rumoured in the media that plans already exist to cut back on gas supplies to industry in order to prevent shortfalls in the home.

In short, Britain’s energy strategy, such as it is, rests on a shaky tripod of declining demand (despite assumed economic growth), a dramatic increase in the production of renewables, and an escalation in imports of gas.

Let’s be clear that this Government is not to blame for most of this. Blair and Brown spent a decade ducking the need to order new nuclear power stations even when it was clear that we were facing severe energy shortfalls in the not-too-distant future. In fact, it was the pre-1997 Tory administration that allowed, not just the “dash for gas”, but exports from our vital, always-limited gas reserves in the Southern North Sea as well.

But Governments must play the hand they are dealt. Late though it is, we need to order new nukes now. The type of contracts needed to get projects moving will push prices up, but that’s where prices are going anyway, and delay will only make this worse. We also need to press ahead with unpopular (but effective) solutions like extracting power from waste.

But what we do not need to do is to waste tax-payers’ money on the shale chimera.          

4 thoughts on “#2 Fracking hell – why shale riches are a myth

  1. Tim..are you saying that the Major Conservative government exported our strategically important north sea gas reserves at a time when crude was trading at around $25 a barrel..that is madness!!

    • I can’t think of a better example of the short-sighted thinking of our ruling elite. No doubt Major only cared about getting re-elected and keeping growth figures high but at what cost – the gas could have been used to keep prices low for British consumers. Was Gordon Brown also a gas exporter – he must have seen that the production figures were declining but still didn’t turn off the export tap until it was too late ?

      I share your scepticism over shale gas – another point worth mentioning is that we keep hearing wild talk about how shale gas will last for 500 years etc. But that’s at present rates of consumption. If we add in exponential population and energy use age the figure looks a lot lower……even more worrying when the the other problems with fracking are factored in.

    • Major’s government was pretty dreadful, as was shown by the 1997 election result.
      The big problem with fracking is that gas flows at impressive rates in the beginning, but then output slumps to a trickle within a year or so. The only way to meet investor expectations is to keep on drilling, and frack wells are roughly twice as costly as normal ones.

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