My Lords, it is a privilege to introduce the report of the Economic Affairs Committee, TheEconomic Impact on UK Energy Policy of Shale Gas and Oil. I must declare an interest, in that I chair the pension funds of two energy companies.
I have served on this committee for seven years, four as chairman. I have to say that this subject turned out to be not only one of the most fascinating but potentially one of the most influential. At the outset I was uncertain as to whether we would get agreement, given the wide range of interests of the members of the committee as well as the wide-ranging nature of the issues—energy policy, environmental and safety issues and climate change, among many others.
The committee held 20 evidence sessions with a wide range of opinions from political, business and environmental groups. We had 30 witnesses in all covering government departments, academics, energy companies, government agencies, environmental groups, the European Commission and overseas witnesses. In the final outcome, based entirely on the evidence we received, the questions we asked and our own analysis, our report was unanimous.
I thank all our witnesses and give special thanks to our specialist advisr to the enquiry, Professor Nick Butler, visiting professor at King’s College London. His knowledge and analytical and drafting skills were especially valuable to us. I also pay special tribute to our retiring clerk, Bill Sinton, for whom this was the last report on which he served us. His administrative and organisational skills, always quietly and conscientiously undertaken, have been of great benefit to us. Thanks also to Ben McNamee, policy analyst, and Stephanie Johnson, committee assistant, for their unfailing help. I am also grateful to all the members of the committee, whose widespread interests, skills and experience, and great application to the work in hand, made it a joy to be their chairman.
Why did we choose this subject? It started with our fascination for the huge impact of shale gas and oil on the energy situation and the economy generally in the United States in a comparatively short time—the last decade or so. It led us to look at the production prospects in the UK, the potential benefits and the risks of not going ahead. We covered the progress, or lack of it, to date, the climate change effects, the environmental and regulatory concerns and what more needs to be done. I will briefly speak to each in turn.
As our report makes clear, the experience in the United States has been astonishing. I thought I knew a bit about it but the evidence came as a revelation. New production techniques to release gas from shale rock have brought abundant and growing new supplies of gas to market in a short time. Shale oil production is also growing rapidly. This has meant that the US energy mix has changed fast, with dramatic and beneficial effects for the US economy and customers. Gas prices have fallen to about one-third of the UK price level. Despite recent falls in oil prices on the world market, the benefits of shale oil and gas to the US remain substantial and long lasting, whereas world oil prices will continue to be volatile. Cheap gas has displaced coal from electricity generation in the US, with the result of substantial exports of US coal to Germany and, indeed, the UK, with corresponding climate effects.
Most significantly, energy-intensive and petrochemical industries are returning to the United States and building up their investment there rather than elsewhere as a result of the cheap shale gas now available. North America is expected soon to become self-sufficient in energy—and what a boon that is—and a large exporter of shale gas in the form of liquefied natural gas.
As to the UK, we identified substantial benefits if shale gas could be developed on a significant scale—I stress “if”. These include the obvious point about enhancement of energy security through a decreased reliance on imports, which recent developments in Russia and Ukraine have underlined; decommissioning of high-emission coal-fired generating capacity; reducing the risk of gas price increases or even possibly delivering a fall in gas prices; and, as has happened in the United States, the benefits for energy-intensive businesses and the petrochemicals sector, which could not only retain investment here but enhance it. Of course, there are benefits, too, for employment, and infrastructure, and other increased economic and community benefits for areas where shale is likely to be found and which have often suffered from industrial decline. BIS has supported the view in its response to our report that there could be more than 64,000 jobs at peak, with more than 6,000 jobs on shale gas pads, from a successful UK shale industry, and that these would be highly skilled, high-quality jobs, with pay levels higher than the UK average.
Recent geological surveys, particularly that of the British Geological Survey, have shown where the shale gas and oil prospects are likely to be, but the crucial point—and I must stress this—is that we will not know the extent of actual production capacity until the exploratory wells are installed. So far, not a single one has been.
Apart from the obvious geopolitical risks to our energy supplies from Russia and the Middle East, recent events have underlined the risks of, in the jargon, “the lights going out”. The recent closures at least until the end of the year of nuclear reactors at Hartlepool and Heysham, which supply 4% of total electricity supply, and the fire at Didcot, bringing the reserve over the winter to only 4%, underline the current precarious nature of our supplies.
Some might ask whether the recent fall in oil prices on world markets negates some of our arguments. On the contrary, the benefits of shale oil and gas to the US remain substantial and long lasting. We here in the UK are nowhere near the production stage, and who can say where our oil prices will be when that begins? So the arguments for swift development of our indigenous supplies remain compelling.
Media coverage of the current debate about shale gas and oil tends to be dominated by environmental and local pressure groups, as we found when our own report was published. Detractors and critics occupy the headlines much more than the proponents. I sometimes wonder what the public reaction would be some years hence if our energy supplies and prices were constantly under pressure and we had missed the opportunity of our own shale gas and oil production. Where would the blame then lie? Therefore, we need to do everything can to ensure, first, that environmental and safety questions are totally addressed and, secondly, that the positive case for exploring and developing our own potential and its importance is fully put over.
We devoted a great deal of our report to the concerns, because it is clear that they need thoroughly to be examined. On climate change, we found persuasive the conclusion that the carbon footprint of shale gas, including fugitive methane emissions, is similar to that of conventional gas production and substantially less than coal. We endorsed the recommendation for a monitoring programme to measure the level of fugitive methane when shale gas extraction begins in the UK. We considered not only that the development of shale gas in the UK is compatible with the UK’s commitments to reduce greenhouse gas emissions, because of the acknowledged role for gas, but that substitution of British shale gas for imported LNG would reduce the carbon footprint.
A large section of our report is concerned with examining environmental impact of shale gas in the UK, covering ground water contamination, disposal and treatment of flow-back water, effect on UK water supply, seismic activity and so on.
We also had an impressive amount of evidence about the robustness of the UK regulatory regime in relation to all these matters, and that is crucial. There is an impressive amount of scientific evidence that, with a robust regulatory regime, the risks to the environment and public health are low. We concluded that, with such a regime in place, the environmental risks are small, whereas the benefits, if shale gas development can take place, are substantial.
The one area where environmental concerns are undoubted is the increase in traffic and disruption in places close to the development of shale, especially in the exploratory stage and where the wells are drilled. We acknowledge that, as with any industrial activity of that nature, there would be these problems and they would be significant for that period. This is why an important role for the industry’s community benefit scheme is to compensate the communities and the individuals directly affected. However, once that initial work has been completed, the impact should be low. Who even in Dorset knows where Wytch Farm—the land outlet for one of our major undersea oil wells—actually is?
We heard much evidence that the UK’s regulatory framework is more rigorous than that of the US but, even so, we argued that it was crucial that the Government explicitly continue to address the safety issues. I warmly welcome the Government’s response on this aspect, which points out that the UK has more than 50 years’ experience of regulating the onshore oil and gas industry nationally and has an effective system for addressing safety risks; and stresses that the Government will continue to set this out.
However, while the UK’s regulatory framework for oil and gas exploration and production is highly regarded internationally, it is, as we say in our report, also dauntingly complex in this area and untested by large-scale onshore development of shale. While the Government’s response points out what they are doing on this front, many complexities remain; despite the attempts at co-ordination, many responsibilities are divided between different agencies. Are local authorities sufficiently resourced and geared up with the skills for the necessary technical challenges?
I welcome the Government’s swift response on one question where the UK is at a disadvantage compared with the US—namely underground access—and their proposal in the Infrastructure Bill for companies to be given a right of access below 300 metres, in return for a voluntary payment and notification to the community. However, there continue to be concerns about the costs, complexities and delays involved in the planning process.
I do not have time to go into all the aspects of the streamlining of the planning process that are listed in our report and the Government’s response. However, one of our American witnesses, when asked if he would consider applying for an exploratory well in the UK at present, concluded that it was clear that he would not, and for these reasons. However, the proof of the pudding is in what is happening on the ground, given the urgency of getting material, practical progress. The plain fact is that not even one application for an exploratory well is likely to be granted this year. At best, there might be three or four next year. This is an area which needs continuing urgent action by Ministers. We need to see results; otherwise, developers—which, at this stage, are largely private or comparatively small in terms of the industry as a whole—will be discouraged.
The Government’s response to our report on this area said:
“Development and production will take time. The first successful shale fracking demonstrations in the United States were in the early 1990s, but production at commercial scale did not get under way until the early 2000s”.
I hope that is not the timescale by which the Government intend to judge themselves. We simply cannot wait that long.
Let me be clear: our verdict was not to criticise the general policy of the Government or to oppose their direction. Indeed, we strongly endorse it. We simply feel that, for all the welcome developments in pulling together the planning complexities, in the encouraging fiscal measures that the Chancellor has introduced, and in the Prime Minister’s and the Chancellor’s own speeches earlier this year about,
“going all out for shale”,
not enough is being done.
We want a more strongly co-ordinated government campaign, and one given higher priority to put over the message constantly repeated and speed up the process. That is why we recommended in our report as one of our conclusions that,
“since several Departments share responsibility for policy on shale gas, the Government should take measures to improve coordination, clarity and speed of policy making and its implementation. We recommend in particular that the Prime Minister should establish a Cabinet Committee or Sub-Committee, chaired by the Chancellor of the Exchequer, to direct and coordinate policy on development of shale gas, with a mandate to promote well regulated exploration and development of the UK’s shale gas resource”.
However it is done, we need to ensure that the important potential benefits are constantly emphasised and the relevant measures urgently pursued. In short, exploration and appraisal of our shale resource has been too slow. Here is a potential economic prize which we should grasp without further delay. We need to get on with it.