The new gold rush ?
Energy companies are lining up to release our gas potential… but will they be able to cash in on strong prices – and can they persuade the public and green groups of the benefits? A special report by Steven Vass
IT has been described as the 21stcentury equivalent of the California gold rush. America’s embrace of so-called unconventional hydrocarbons has over the past few years made it the first country to become a major producer of shale gas and oil.
The country’s petroleum reserves have soared, spurring talk that the US will no longer need to depend on the Middle East and may even be able to start exporting to the rest of the world. For the first time in eight years, countries in the Organisation for Economic Co-operation and Development (OECD) last year achieved a rise in crude oil production.
Gas prices in the US have also come down by about two-thirds, which has provided a big boost for the economy at a time when it might otherwise have been on its knees.
The American success has not gone unnoticed on this side of the Atlantic. Last week, the British Geological Survey (BGS) published its study into the potential for shale gas in the north of England. It reckons that the region might contain as much as 1300 trillion cubic feet of the stuff – a massive increase on its estimate from three years ago, coming on the back of more recent announcements about the area’s potential from exploration licence holders Cuadrilla Resources and IGas Energy.
Although the BGS’s figure is an order of magnitude more than will be extractable, it believes the reserves could last the country for 25 years. And that is before it gets around to properly surveying the deposits that exist in the rest of the country, including some in central Scotland.
Britain has gone from being a net exporter of gas at the turn of the century to now relying on imports for almost half of our requirement. As well as having to rely on the likes of Qatar and Nigeria, this is a serious drag on the country’s trade figures and creates inflation.
Many experts believe that the UK quickly needs to build new gas-fired electricity plants to replace the coalfired ones that are closing and to provide back-up when the wind turbines are not turning. If the UK is more heavily reliant on gas-fired power, goes the argument, it will be cheaper to get it out of our ground, even by unconventional means, than to get it from elsewhere.
There are several methods of exploiting unconventional hydrocarbons. One involves extracting coal-bed methane out of deep coal seams (gas is more traditionally found in more porous rock, such as sandstone).
Another method produces shale gas, which can require more laborious and controversial techniques such as hydraulic fracturing or “fracking”, involving sending water and chemicals at high pressure several kilometres below the Earth’s surface to fragment the rocks and allow the gas and oil to escape and be brought to the surface.
Fracking has raised serious concerns from environmentalists worried about potential pollution to the water table, and earthquakes. The procedure was the ‘‘likely cause’’ of earth tremors near Blackpool in 2011, a report found.
Despite those concerns, the UK Government has announced plans for everything from tax incentives to encourage shale gas production to payments for communities in the vicinity of fracking.
THE big question is how long this filip will last. Not long, say some observers. For one thing, most shale gas production is no longer commercially viable because of the price drop. It generally depends on a price of about $5 (£3) per million cubic feet, rather higher than the current sub-$3.50 price.
This is said to be why the focus has switched much more to oil in the past couple of years, where the market is to a greater degree international and not so susceptible to events in one country. According to Statoil, which is producing shale oil in the Bakken area of North Dakota in the US, it needs a barrel price of about $60 – far below today’s price of around $100.
However, some question how much oil is recoverable. According to a recent report by the Energy Policy Forum, reserves have been over-estimated by between 100% and 500%.
Jean Laherrere, one of the world’s most influential petroleum watchers, blames a change to the US stock market reporting rules a few years ago that broadened what energy companies could include in their proven reserves statements, plus a flood of investment cash unleashed by the Federal Reserve’s quantitative easing policy.
He says: “The numbers published of reserves of unconventional hydrocarbons are just pure guesses. Nobody can say they are wrong because there are a lot of resources in the ground.”
As well as the price problem, he suspects that the number of so-called “sweet spots” – places where oil can be extracted at commercial rates – is less than previously thought. “This is why I believe that shale gas production in the US will peak in 2015, and will peak for oil just a few years later,” he says.
While the world waits to see whether this sobering prediction turns out to be correct, unconventional hydrocarbons in Britain face tougher challenges. Above all, most experts agree that they will be more expensive to extract than Stateside, touting rates for shale gas around the $8 per million cubic feet mark.
Professor David Elmes, an energy