For an English delegate attending a recent oil & gas legal conference in Texas there seemed to be a surprising number of talks on shale gas. Americans are understandably excited about these new opportunities. Economic benefits are already being felt in the U.S. at both local and national levels.
Meanwhile, over the water, the U.K. government is monitoring developments in the hope that the American experience with shale can be replicated in Britain. To date the United Kingdom (along with the rest of Europe) has been slower in developing shale. The government recently announced a policy change in the hope of encouraging production. Yet, despite this latest development, expansion of shale production in Britain is likely to be slow and modest.
For parts of the U.S. where discoveries have been made there has been an upturn in local economies as resources (including human capital) are attracted to these areas. However, in common with other petroleum developments (whether conventional or unconventional), there have also been unintended negative social consequences, including a strain on local housing and resources, and difficulty in recruiting public sector workers. Some have also raised concerns about the environmental impact of hydraulic fracturing (or fracking).
The boom in natural gas production has transformed the energy landscape in the U.S. and sent prices tumbling. The 10 percent increase in natural gas production between 2008 and 2011 means that concerns about scarcity of supply have been replaced by a debate on what to do with America’s “gas glut”. The abundance and low prices are forecast to cause gas to overtake oil as the largest share of the U.S. energy mix by 2030.
Cheap gas could be consumed domestically or sold internationally. New supply may be used as either a feedstock to encourage an American industrial renaissance or as a product to be exported to the rest of the world. The former promotes domestic manufacturing and jobs. The latter reduces the US’s balance of trade deficit. These are, of course, highly political issues and the outcome of this debate has yet to be decided.
For the U.K. government, these would be nice problems to have. The economy is sluggish and the fiscal deficit remains stubbornly high. Britain does not, however, currently produce shale gas in significant quantities. This may change. Until it does, there will not be the same policy and regulatory concerns. Last year the government concluded, based on advice of independent experts, that it was possible to mitigate the risk of undesirable seismic activity. This led to the lifting of a ban on fracking put in place after two earthquakes in 2011 near Blackpool, a seaside town, better known as a vacation destination than as the location of the U.K.’s largest shale gas reserves.
If you ask a Brit to visualize oil & gas production Blackpool would not be an image that comes to mind. For a start, production of onshore conventional oil & gas makes up merely 1 percent of the U.K.’s total output. Most of the population is not used to this type of activity taking place close to conurbations. Their closest proximity would likely to have been flying over the North Sea and seeing the flaring of natural gas. For those that have visited the city, they may think of Aberdeen – the often-called Energy Capital of Europe – which has an economy dominated by the oil & gas industry. Aberdeen is to Scotland what Houston is to the U.S. However, Aberdeen has thrived as a city servicing the offshore industry rather than being a place where production occurs.
With its new policy in place, is the U.K. about to witness its own shale gas boom? The U.K.’s finance ministers certainly hope so. It would create a new source of activity that could help jump start a slow economy. It would also produce additional tax revenue to assist in deficit-reduction programs. This would be a welcome development given that production from the North Sea (along with government revenue) is in terminal decline and onshore reserves of conventional petroleum are insignificant. Memories of the fiscal benefits that North Sea tax revenue previously gave to the predecessor governments remain fresh in the political memory.
Shale would also benefit Britain’s energy security. The U.K. – for many years, a net exporter of natural gas – became a net importer in 2004 and year-by-year becomes increasingly reliant on foreign suppliers. Gas prices are high and can, particularly during cold periods, be volatile.
However, no one anticipates that U.K. shale production will achieve levels comparable to the US. With reserves estimated at 20 trillion cubic feet, the U.K. has just 2 percent of the U.S.’s estimated reserves and 11 percent of France or Poland’s.
What of individuals? Will millionaires be created overnight as they discover that their land overlays extractable resources? Unfortunately for those individuals, they will not receive a windfall. The U.S.’s ownership-in-place system allocates title to minerals to the landowner. In the U.K. – like most other countries in the world – the State claims exclusive rights to extract reserves and then licenses those rights to explorers. The landowner may, as a consequence, suffer some of the inconvenience of extraction – but without benefitting financially. This lack of reward for the landowner only encourages a debate framed by NIMBY concerns rather than a proper consideration of environmental or economic factors.
The development of U.K. shale reserves may need to take into account another peculiarity of British politics. In 2015 Scotland will vote on independence from the U.K. The majority of current conventional production comes from fields off the coast of Aberdeen and the right to these resources is a key nationalist demand. After independence, these would fall within Scotland’s continental shelf. Many of these fields are old and in decline. In comparison, much of the U.K.’s potential shale gas is currently untapped and located in England. This may, in part, go a limited way to redressing the post-independence energy balance between the two countries. No one, however, is anticipating Blackpool becoming the next Aberdeen.