Articles from 2013
What could shale gas do for UK prices?
- Written by Nick Grealy
- Published: 16 July 2013
The issue of what impact UK shale gas would have on energy prices should be fairly straightforward but the reality is entirely unclear. The Original Sin of UK energy, is the complete lack of transparency consumers face in domestic utility bills.
On that front, I’ve pointed out in the past how easy the solution is: Make UK domestic consumers bills as transparent as they have been to business consumers who choose market based prices. You can read more on the complex subject with the easy answer in my post of last year, What’s wrong with UK with UK energy prices - and how to fix them.
Even in the dying days of the Buchanan era at Ofgem, progress was being made, and we can hope that the new regime will complete that work so UK consumers will ultimately get billing as straight forward as US ones. It's not rocket science. It's not "controversial". Clear customer information should be a bill payer's - and voters' - right. An example is how default customer bills appear at the UK National Grid’s New York retail arm.
This example is a gas bill, but one can get a separate electricity bill in similar format. A key issue in the UK is the dual fuel costs make bills even more arcane. That especially makes it hard for consumers to see the impact, or not, of efficiency measures in insulation (for gas) or demand reduction at the light switch. Supplying information will lead to reduction in demand - and thus reduction in cost and CO2. But how could we tell without the information US consumers have a right to?
In the New York example, it’s nice and easy: Gas Delivery Charge are the system costs, and the Gas Supply Charge is the commodity cost. Why would any consumer NOT want this? Bizarrely, Ofgem says we don't want it. EDF Energy propose what they call petrol pump pricing, but will only introduce it if everyone else does. But if UK domestic user could see this we could settle two simple problems:
Gas Delivery Charges include the fixed costs of transporting gas and a transparent view in the UK would mean settling the issue, one way or the other, of the alleged extra costs, or not, of investment in infrastructure. The GWPF could prove their view of UK consumers paying huge sums for green infrastructure and Greens could prove their view that any costs aren't very high and/or are worth paying. On this one, for the avoidance of doubt, I'm firmly with Greenpeace, but I think consumers, which includes me, have the basic right to see the numbers.
The Gas Supply Charge is different in each state according to regulation and local gas prices, but as a general rule it is fixed directly each month to wholesale prices and goes up, and down, with the market. Here in the UK, we simply don’t see any correlation between wholesale costs and prices. We get told there is a connection, but to be brutally frank, in the past suppliers simply made them up, knowing Ofgem would believe anything. By the way, I'm not making that up.
This demonstrates how arguments about whether or not UK shale gas would lower customer bills is pointless until Ofgem support more transparency. In the happy event they will, we could see the wholesale cost of gas reflected in bills.
One should expect the basic rules of supply and demand would mean increasing production would at least put downward pressure on prices.
But it is not as easy as that, because as Greenpeace and others (again!) rightly point out, the UK is connected to European wholesale gas prices. The point I would make is that the Green view of world gas price dynamics is out of date. The notoriously incompetent 2009 Project Discovery of Ofgem, still touted as valid as recently as February this year, led to a perception of peak oil and gas worldwide leading to the UK being at the mercy of “volatility” as Asian economies competed for a declining supply of gas. But today, the impact of US shale is already spilling into world markets, with the structural shift where prices linked to oil are being disrupted even ahead of either US LNG exports or world shale gas production. The subject of gas pricing is very complex and the narrative of world economic and population growth causing price rises sounds nice and simple.But it's wrong. Here's an educated comment that makes one see how intertwined issues are: Howard Rogers of the Oxford Institute for Energy Studies put his view recently, as reported at Platts.
Shale gas production in the UK could boost tax revenues and improve the nation's trade balance, but is unlikely to reduce gas prices, and is no short-term fix for national energy needs, according to Howard Rogers of the Oxford Institute for Energy Studies.
In a commentary released Wednesday, the director of the OIES gas programme says that the recent "media frenzy" occasioned by new resource estimates for shale gas has ignored "the practicalities" of production.
Rogers, who worked at BP for three decades, says that because the UK market is linked to European markets by pipeline and to Asia and North America through LNG trade, UK shale production is "unlikely" to materially reduce wholesale gas prices.
Senior consultant John Williams at energy consultancy Poyry gave a similar view recently, arguing that "unless the whole of Europe is self-sufficient in shale gas I don't think you'd get a big price impact."
Poyry's models show the gas price set by marginal supply sources such as imported LNG or Russian and Norwegian supplies.
Rogers of the OIES adds that it could take 10-15 years for production to reach plateau, even if the industry does take off.
Interestingly, Howard’s comment here is significant:
Some two years of exploration activity is needed, Rogers writes. But even if the results are positive, "the sheer scale of drilling required to achieve meaningful UK shale gas production will require the industry to engage in a major public persuasion exercise."
I’ve noted before that in my opinion public acceptance isn’t the great barrier the conventional wisdom makes out. I had an interesting discussion last week with Emily Gosden of the Daily Telegraph at the All Party Parliamentary Shale Group event where I noted that despite Ed Davey, Secretary of State for Energy and Climate Change opening his remarks with “I love shale gas” and that the hundred or so present were far in excess of any at most anti-shale events, journalists would continue to talk about “controversial” shale gas. I made the point that we don’t hear about “controversial” theory of evolution much these days, nor of the “controversial” Copernican view of the universe despite similar membership levels at both The Flat Earth Society and Frack Off. There are for instance 1,172 Twitter followers of @FlatEarthToday versus 323 at Resident’s Action on Fylde Fracking ( @RAFF_Group) for what that metric is worth.
Back to prices and Platts put my reaction to the Oxford study out on their subscription only news wire, this is the full story:
UK shale production could benefit from new technology: consultant
London (Platts)--11Jul2013/1158 am EDT/1558 GMT
Production of shale gas in the UK could benefit from new technology, allowing the industry to develop in a different way from the US, according to
shale gas consultant Nick Grealy.
That means it may not be possible to make easy comparisons between the US and the UK, Grealy told Platts by email Thursday.
"We need to understand that UK shale will move from the technology oftoday to the future," he said. "I realize extrapolating from past experience is all we have, but the story of shale in general is of disruptive technology rapidly making past assumptions out of date."
Grealy, who publishes the No Hot Air website, and is a consultant on shale gas acceptance, said that drilling for shale gas might not lead to"excessive disruption" to the UK countryside.
He said shale gas explorer Cuadrilla had said it would never have more than 10 well pads at any one time in an area of 1200 sq km, and he said
that the UK has "a huge amount of empty space," with over 90% of thepopulation on less than 12% of the land.
The director of the Oxford Institute for Energy Studies, Howard Rogers,Wednesday published a comment warning against over-hyping expectations forshale gas, given the practical complications of a massive drilling program.
Rogers said that, for the UK to produce 8 billion cubic meters/year ofshale gas would require drilling 300 new wells per year, from 25 new wellpads per year.
"The sheer scale of drilling required to achieve meaningful UK shale gas production will require the industry to engage in a major public persuasion
exercise," Rogers said.
Rogers's calculations assumed each well pad would drill 12 wells.
Grealy, however, said Thursday that this was "very conservative" and that the industry had seen up to 70 wells from a single site in British
In the UK, the long-standing Wytch Farm oil field in Dorset, southern England, had three well pads serving over 140 wells, he said.
Grealy also said that UK shales were thicker than US shales, over a mile thick in Cuadrilla's license area, compared with 300 feet or less in the US,allowing more gas to be produced from a single site.
Grealy said that drilling would not necessarily involve spoiling the countryside. Northwest English cities in the Bowland shale, such as
Manchester, have "huge swathes of empty industrial property" that could be used, he said.
Grealy added that new technology made it easier to find "sweet spots" for drilling than in the past.
"Much of the US wells are trial and error, but we can learn from theirmistakes," he said.
GAS PRICES FACE DOWNWARD PRESSURE
Rogers, and others, have argued recently that shale gas production inthe UK is unlikely to significantly reduce UK gas prices, since the UK will
remain influenced by the wider regional and global gas markets.
New production might be exported overseas, or counterbalanced by lowerproduction elsewhere.
But Grealy said Thursday that, while UK shale production would be pricedat world price levels, there were a number of downward factors that could pull world prices themselves lower in coming years.
Shale gas production in the UK could be one new source of supply, but there could also be new shale production from many other locations in Europe, or even from Russia and Algeria in the future.
Grealy also pointed to future exports of LNG from the US and Canada, new East African LNG projects, and gas production from Israel and Cyprus.
China has also been exploring for shale, he noted, which could be a "global and climate game changer," in the future, he said.
Shale gas exploration is still at an early stage in the UK, with onlyone company, Cuadrilla, having carried out any fracking tests to date.
However, after a government fracking moratorium ended late last year, the industry has been gearing up to restart activity.
Cuadrilla is planning a multi-well exploration program. It said thismonth it is applying to frack its existing site at Grange Hill in Lancashire
and also plans fracking at up to six new sites in the Fylde area, as well as three further exploration wells without fracking.
Another company, IGas Energy, is planning drilling to start in the
fourth quarter of this year to appraise its northwest England shale licenses. It has ordered long-lead items and started talks with drilling companies.
The British Geological Survey in June said the north of England couldhold some 1,300 trillion cubic feet of gas in place. If 10% of that could be produced, it would equal almost 50 years of current UK gas demand.
I may be right, Howard may be right. Time alone will tell, but unless Ofgem starts off with a new leaf and provides simple default energy pricing, consumers will never get the right to discover the answer themselves.