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Put the lights back on: shale gas has arrived

George Trefgarne says we can look forward to an era of abundant and relatively cheap gas extracted from rock

4 November 2009

12:00 AM

4 November 2009

12:00 AM

Fretting about an impending energy apocalypse has long been a diverting parlour game of the chattering classes. Projections are drawn up showing that the last drop of petrol will be squeezed into the last 4×4 in about 50 years’ time. It is said that Britain, forced by the European Union to retire a third of its coal-power stations, will soon be unable to meet its energy demands; the lights will go out within a decade. It seems almost a shame to spoil the gloom by discussing something that has already turned the American energy debate upside down: shale gas.

Held in your hand, a piece of shale looks distinctly unrevolutionary. It is a heavy black sedimentary rock found all over the world. Extracting gas from it has for years been seen as a fool’s game: technically possible, but sadly uneconomical. So shale took its place on the fringes of the energy debate — until a few years ago, when new extraction technology changed everything. Now, American discoveries in this field could overturn the global balance of energy power.

It turns out that America has vast deposits of gas-bearing shale. Since starting to bring these resources on stream, its gas storage facilities are now almost full, despite an early snow this winter. The glut of gas has sent the benchmark price of natural gas tumbling by about two thirds to $4.50 (per million British thermal units) over the last two years. These are real, tangible benefits. American gas reserves, expressed in years’ worth of supply, have risen dramatically. According to one estimate, shale gas has increased them by 20 years to 75 years. Gloomy predictions of energy shortage crises are having to be rewritten.

The full potential of the shale gas revolution can be understood only in connection with another vital development: a proper global market in gas. This links Britain to gas supplies from America, in the form of Liquified Natural Gas. The technology of LNG (which essentially freezes gas so it can go on ships) has existed for decades but only in the past few years have terminals begun popping up across the world. Britain now has four, two in Milford Haven on the Pembrokeshire coast, and another two at the Isle of Grain in Essex.


Whisper it softly, but LNG and shale gas are tributes to that most unfashionable of concepts: markets. This winter, lovely LNG ships from Qatar, Egypt and Trinidad, to name but a few exporting nations, will be docking and unloading their cargoes. Unlike pipelines, ships can change direction. That means that a trader in the City can re-route a cargo at the press of a button, making supply infinitely more flexible to demand. Thanks to gas trading, the world can respond quickly to the shale developments in America.

All this raises a wider issue. While politicians fret about the possibility of a future without power, energy businesses have been doing the opposite — adapting to a new era of cheaper, cleaner fossil fuel. Wholesale gas prices have fallen, partly as a result of the recession depressing global demand, but also because of shale-enhanced confidence in the future abundance of natural gas. In Britain, the price of gas is currently around 28p per therm (which equals 100,000 British thermal units) down from about 70p last year.

As natural gas becomes more available and easier to transport, gas-poor nations can look forward to being less and less dependent on countries such as Russia and Iran for their fuel. This, of course, considerably diminishes the potential for such countries to play politics with gas pipelines. A study by the Texas-based Baker Institute earlier this year said that shale ‘could be pivotal in curbing Russia’s ability to organise an energy weapon against European consumers’.

It is, of course, too early to tell. The impact of shale gas may be far smaller than expected, as production on this scale is a new phenomenon. Or it may be even bigger. Just last April, the biggest discovery yet was announced in Louisiana, known as the Haynesville Shale: it could add another 18 years’ worth to US reserves. A study by IHS Cambridge Energy Research Associates, a consulting group, found that the amount of recoverable shale gas outside the US could give Americans enough natural gas to keep them going for 700 years.

The technology can work in any part of the world, and exploration is already underway in Poland and Estonia. The European Commission, forever keen to implement a common energy policy, will soon start to have its own say in the prospects of European shale.

Shale reserves exist in the southern UK and perhaps even in Scotland’s Central Belt — which was the birthplace of shale extraction in the 19th century (abandoned when cheaper oil reserves were discovered). It would be David Cameron’s dream for an energy resource to be discovered that could bolster his government’s finances and Britain’s energy security in the same way that North Sea oil underpinned the Thatcher administration.

As policymakers head towards for the Copenhagen Summit on Climate Change next month, the lesson of shale is worth bearing in mind. The world of energy is strange and unpredictable — and computer models of apocalypse can be quickly rendered out of date. Markets have a habit of delivering dramatic surprises, pleasant as well as unpleasant. Sometimes policymakers have no idea what’s going right instead of wrong.

In Britain, we have very little storage capacity for gas, so new facilities need to be built if we are to adapt to the changing energy market. New energy sources, of course, bring new risks, and new disaster management scenarios. Some energy analysts have asked whether the Royal Navy has enough ships to protect LNG trading routes should this prove to be the energy of the future. These are the questions that British policymakers were asking two years ago when drawing up the most recent White Paper on energy — based on the assumption that North Sea reserves are running out and we would consequently depend on imports from Russia et al.

So it is extremely unlikely that the lights are going to go off, and soon the cost of heating your home may actually go down. Even in Britain, new gas power stations are being built. Every summer National Grid — whose job is to balance supply and demand — produces a review called Transporting Britain’s Energy. The latest edition shows that the potential supply from UK power stations is 28 per cent above demand, and forecasts that this excess will continue through to 2016 and beyond; the most serious threat to this prospect would be if the proposed new nuclear power stations do not get built.

All this presents us with an unexpected problem. Gas is cheap, abundant and low-carbon. There could well be vast untapped resources of it in Europe. The Chinese may find their own supply, turning the global gas equation from one of excess demand to one of too much supply. All told, shale could be the biggest energy breakthrough since the North Sea oil discoveries of the 1960s. If so, it will be time for our energy planners to head back, once again, to the drawing board.


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