Energy Crunch newsletter – July 26

NOTE: Images in this archived article have been removed.

 

Energy Crunch? What energy crunch? To listen to news recently you could be forgiven for thinking all the energy supply worries of the last few years have been miraculously solved. Peak oil is dead, the UK is floating on a bed of shale gas and everything’s rosy. There has certainly been a shift in the debate, but when you dig beneath the surface, it’s not at all clear how much the energy supply picture has actually improved. Let alone the greenhouse gas emissions.

 

George Osborne fired the starting gun on what he hopes will be a shale gas boom by slashing production tax rates to just 30% – half the normal level.  The announcement came shortly after the release of a British Geological Society (BGS) report which doubled the estimated gas resource of the Bowland Shale formation under Lancashire and Yorkshire, leading to exuberant claims that this alone could cover Britain’s gas needs for 50 years. The government, gas drillers and some of the media would have you believe this locally produced gas will keep the lights on, kickstart the economy and slash gas prices. So what’s not to like?

 

First, there is a major question over how much gas is ever likely to be produced. Most of the optimism around shale gas is based on the US experience, but conditions here are very different. Art Berman, an American industry consultant, has analysed the BGS assessment and reckons Bowland has recoverable reserves – always much smaller than the total gas that exists in the rocks – of 42 trillion cubic feet, or about 15 years’ supply at current levels of consumption. To produce this would mean drilling around 30,000 wells, and that level of industrialisation seems likely to provoke a major backlash. Perhaps that wind turbine doesn’t look so bad after all?

 

Second, even if there were substantial shale gas production, it is unlikely to put much of a dent in UK gas prices, whatever ministers suggest. The Telegraph reported that an analysis by consultants for the Department of Energy and Climate Change had found that shale production could cut UK gas prices by a quarter, without mentioning this was only one of a series of scenarios. However, the overwhelming consensus among gas experts is that the impact would be minimal, since UK prices would still need to be high enough to attract imports from Europe, and would be buoyed by European demand for UK supplies. Those who argue this include: Oxford Institute of Energy Studies; VTB Capital; BP; the Energy Contract Company; Poyry and others.

 

Third is the issue of potential water contamination – always hotly contested by the frackers – which was raised again last week by Water UK, the industry trade body. Fourth is that burning all this non-conventional gas is in almost certainly incompatible with our legally binding emissions reduction targets.  But perhaps it’s no surprise this awkward fact has been conveniently ignored: it has been clear for some time that George Osborne has largely relieved Ed Davey of responsibility for UK energy policy.

 

Of course, fracking can be used to produce oil as well as gas, and this has led to surge in US oil output in recent years –  after decades of decline – prompting a rash of stories that ‘peak oil is dead’.  John Kemp of Reuters was one of a slew of commentators to claim that new technology has trumped the doom mongers once again.

 

These writers seem not to have noticed that the oil price is more than 10 times the level of the late 1990s, and last year recorded its highest ever annual average at just under $112. Nor that that the decline rates of the new shale oil wells are much steeper than conventional wells – losing as much as 40% of their production capacity every year – which means the industry really must ‘drill baby drill’ simply to stand still (check out our chart of the week). Nor that rising consumption among major producers is cannibalising exports – Saudi Arabia will become a net oil importer in the 2030s on current trends. Nor that – with much of the world economy in the doldrums – current prices appear to be an effective cap on economic growth. Perhaps the anti peak oilers are right to suggest we can produce some more oil at higher prices, but they seem to miss the broader point: we can’t afford it.  Far from peak oil being disproved, it’s right here; economic peak oil.

 

For a truly disruptive plan this week take a look at the Centre for Alternative Technology’s 3^rdZero Carbon Britain report. Even the International Energy Agency is forecasting that globally renewable electricity will exceed output from natural gas and double generation from nuclear by 2016. The prospect of 30,000 gas wells might give the anti wind brigade pause for thought. Perhaps there is still a chance of a real energy policy rather than the Jekyll and Hyde struggle currently being played out in Whitehall.