Infrastructure for Business Getting shale gas working Infrastructure for Business 2013 #6 2 Getting shale gas working About the report On 21 September 2012, the IoD published a report, Britain’s Shale Gas Potential,1 which concluded that shale gas has the potential to create jobs, generate tax revenues, reduce imports, accelerate the move away from coal and support the growth of renewables. Although exploration is still at an early phase, the UK has substantial quantities of shale gas in place that have the potential to support the creation of an important new industry in parts of the country that need it most. The report also detailed the results of a survey of over 1,000 IoD members, which found that businesses are in favour of careful, well-regulated shale gas development in the UK. On 13 December 2012, the Government lifted the temporary moratorium on exploratory hydraulic fracturing, the technique used for extracting shale gas, and announced new seismic controls.2 Following the lifting of the moratorium, the IoD has studied in detail how a new shale gas industry could develop. This report, which has been sponsored by Cuadrilla Resources Ltd, examines the history of comparable developments; the economic potential of a UK shale gas industry, focusing on Lancashire as an example of a part of the UK that could gain substantially; and the main barriers to its establishment and growth. It also investigates the partnerships that will need to be set up between the industry, its supply chain, local and national government, education and training institutions, and communities to ensure that local businesses, and local people, benefi t from exploration and production. Written by Corin Taylor, Senior Economic Adviser at the Institute of Directors. Chapter 2 written by Dan Lewis, Chief Executive of Future Energy Strategies (www.future-es.com) and Energy Policy Adviser to the IoD. Foreword by Dan Byles MP, Chair of the All Party Parliamentary Group for Unconventional Oil & Gas and member of the Energy and Climate Change Select Committee. Designed by Jen Cogan Front cover image kindly supplied by Shell 3 Infrastructure for Business 2013 #6 Scope of the report This report examines the potential of a shale gas industry in the UK, and how to overcome the barriers to its establishment and growth. In order to remain focused, this report does not examine the safety of hydraulic fracturing, either in the UK or overseas. Other expert bodies have looked into the process in detail, including the Royal Society,3 the International Energy Agency,4 the Energy and Climate Change Select Committee5 and the report commissioned by the Department of Energy and Climate Change (DECC) on seismic issues.6 We support their calls for strong regulation of all aspects of the drilling and hydraulic fracturing process, and also note the exploration and appraisal guidelines issued recently by the UK Onshore Operators Group (UKOOG).7 For the same reason, this report concentrates on the potential of shale gas. Other unconventional hydrocarbon resources in the UK, including unconventional oil8 and coal-bed methane, also have considerable potential, and they will be examined in future publications. Finally, there are potentially large offshore shale gas resources, but as extraction would be considerably more expensive, we focus on the potential of onshore shale gas. Conversions In this report, for simplicity and consistency, we have tended to convert gas measurements into billion cubic feet (bcf) or trillion cubic feet (tcf). A helpful converter for many of the various energy measures can be found here: http://www.bp.com/conversionfactors.jsp 4 Getting shale gas working Acknowledgements This report has been sponsored by Cuadrilla Resources Ltd. Its purpose is to: ● Study and apply the lessons of previous energy developments; ● Investigate the economic impacts of potential UK shale gas production at scale; ● Work out the practical steps, for both government and the private sector, to overcome the barriers to the establishment and growth of a UK shale gas industry. This report represents the independent assessment of the IoD. The IoD is exclusively responsible for this report and its content, analysis and conclusions. We would like to thank the numerous people we have met and spoken to during the course of the research for this report, including from national and local government agencies, academic institutions, business development bodies, representative bodies of the UK offshore and onshore oil and gas industry, exploration and production companies, supply chain partners, heavy industry, investors, and other experts. We are also grateful to the Members of Parliament who have taken the time to share their thoughts and concerns. We are also very grateful to the many people who took the time to review earlier drafts of this report, provide valuable feedback and point out errors. All conclusions and remaining errors are ours alone. We would also like to extend particular thanks to Graham Dean, Director of Reach Coal Seam Gas Limited, for his assistance with the calculations presented in Chapter 4. All conclusions and any errors are ours alone. We are also very grateful to CambridgeIP for supplying the data and analysis in the innovation section of Chapter 3, although it should not be taken necessarily to imply endorsement of the wider report on the part of CambridgeIP. Finally, we would like to thank Dan Byles MP, Chair of the All Party Parliamentary Group for Unconventional Oil & Gas and member of the Energy and Climate Change Select Committee, for writing the foreword to this report and for his work, on behalf of both the APPG and the Select Committee, to ensure that the UK debate around shale gas is carried out in a level- headed way. 5 Infrastructure for Business 2013 #6 Contents FOREWORD _________________________________________________ 7 EXECUTIVE SUMMARY ________________________________________ 9 INTRODUCTION _____________________________________________ 22 1. CONTEXT ________________________________________________ 25 1.1 Energy _________________________________________________ 25 1.2 Tax____________________________________________________28 1.3 Jobs ___________________________________________________29 2. HISTORICAL NARRATIVES ___________________________________ 35 2.1 Lancashire ______________________________________________ 35 2.2 Aberdeen _______________________________________________38 2.3 Wytch Farm _____________________________________________ 41 2.4 The US _________________________________________________44 3. ENERGY DEVELOPMENTS IN DETAIL __________________________ 51 3.1 UK oil and gas ____________________________________________ 51 3.2 US shale gas _____________________________________________ 75 3.3 Onshore wind and nuclear in brief ____________________________ 103 3.4 Key lessons ____________________________________________ 105 4. SHALE GAS POTENTIAL ___________________________________109 4.1 Overview of shale gas benefits _______________________________109 4.2 UK shale gas resources ____________________________________ 111 4.3 Advantages ____________________________________________ 114 4.4 What could shale gas production potentially look like? _____________ 115 5. BARRIERS _______________________________________________ 135 5.1 Overview of barriers ______________________________________ 135 5.2 Infrastructure, resources and equipment _______________________ 137 5.3 Skills and supply chain ____________________________________ 143 5.4 Finance _______________________________________________ 147 5.5 Regulation _____________________________________________ 151 5.6 Reputation ____________________________________________ 156 6. RECOMMENDATIONS _____________________________________161 6.1 Overcoming the exploration hurdle ___________________________ 161 6.2 Developing a shale gas industry _____________________________ 162 ENDNotes ________________________________________________169 6 Getting shale gas working Foreword By Dan Byles MP, Chair of the All Party Parliamentary Group for Unconventional Oil & Gas, and member of the Energy and Climate Change Select Committee Unconventional gas is simply natural gas. There is nothing unusual or mysterious about the product. It is the gas we already use to generate 28% of our electricity and heat 83% of our homes. Much of the controversy around shale gas comes, not from the product, but from the extraction technique used to access that gas. Hydraulic fracturing (fracking) is widely and mistakenly seen as a new technology and some fear the potential impact of fracking for shale gas on their local environment. In fact hydraulic fracturing has been used commercially in the US since 1949, and many people might be surprised to learn that around 200 onshore wells have already been fracked in the UK for conventional gas extraction – out of some 2,000 onshore wells in total. Worldwide, the total is around 1.1 million. The safety record of fracking is outside the scope of this report, but there is a growing library of research from reputable expert organisations such as the Royal Society, the International Energy Agency, the Royal Academy of Engineering and others looking at the safety and regulatory issues. The weight of evidence so far suggests that unconventional gas can be developed safely with effective regulation, and I have no doubt that we will see further and more detailed work in this area. The UK now has the opportunity to marry up our gold standard oil and gas regulatory experience from the North Sea with lessons