Shale Gas and Oil (EAC Report) — Motion to Take Note

Part of the debate – in the House of Lords at 5:51 pm on 4th November 2014.

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Photo of Lord Hollick Lord Hollick Chair, Economic Affairs Committee, Chair, Economic Affairs Committee 5:51 pm, 4th November 2014

My Lords, I thank the noble Lord, Lord MacGregor, not only for introducing the debate and chairing the committee during the inquiry but for his excellent chairmanship over the past four years. He has managed to keep a group of members, always of strong opinions and often unafraid to express them, in fairly good order. He has done that with quiet authority, charm and good humour. As he mentioned in his introductory remarks, he has kept us focused on the evidence. That has enabled us to reach unanimity on all the reports that he has chaired, which has given those reports a particular authority, helped to shape the debate and, in many cases, led to important change.

A couple of weeks ago, National Grid warned that the tightening balance of generating capacity and demand had forced it to enter into agreement with some customers to allow their supplies to be interrupted to keep the lights on. That extraordinary state of affairs has come to pass courtesy of a shambolic national energy policy and incompetence in Westminster and Whitehall. Although it has been evident for many years that our generating capacity was reaching a crunch point, the Government have failed to devise an attractive environment for encouraging the private sector to invest in new generating capacity to provide consumers with competitively priced energy and reduce emissions.

We are now using the most carbon-intensive fuel—coal—to generate 40% of our electricity. We are investing in very high-cost renewables but because those are intermittent, gas and some coal stations have to be held in reserve at very high cost, to be borne by the taxpayer in the form of capacity payments. As Sam Laidlaw of Centrica pointed out last week, we—that is, the consumer—are paying at the same time to replace coal and to keep coal capacity on standby.

The new nuclear generating capacity at Hinkley Point, built partially to replace our ageing nuclear fleet, comes at a dizzyingly high price. At a time when energy costs generally are falling, the Government have entered an agreement to pay EDF—partially owned by the French Government—twice the current wholesale price for electricity, index-linked for 35 years. The PM’s concern about the £1.7 billion payment to the EU pales into insignificance when compared with the payment to EDF to be borne by every household in the land for each of the next 35 years.

Professor Nick Butler, our excellent specialist adviser, called last week for an independent review of our energy policy before the situation deteriorates further. He is right. Does the Minister agree that such a review is a priority?

How would shale gas improve the energy picture? If shale gas can be developed in the UK it could play a valuable role in our energy mix, to the benefit of consumers and the overall economy. It will help to fill the gap as North Sea gas declines; it will halve emissions by replacing coal; and it will provide a home-produced source of energy which can help us to transition to affordable renewable sources of energy. Yet the search for shale gas in the UK, as the noble Lord, Lord MacGregor, said, has yet to start in any meaningful way. To date, only one well has been fracked—and that was in 2011. As the noble Lord said, the expectation in the industry is that there will be three wells drilled in 2015.

The British Geological Survey has identified sizeable reserves of gas, and in some cases oil, in Lancashire and Yorkshire, southern England and the Midland valley of Scotland. But until test drilling takes place no one knows whether those reserves are sufficient in scale and accessibility to make exploitation economic. The BGS survey suggests that the shale gas deposits identified could supply gas for up to 40 years at the current level of consumption, which means that shale gas could make a significant contribution to the UK’s energy needs. Shale gas would then reduce dependence on imports and provide important security of supply at a time when, as recent events in Ukraine have shown, overreliance on imported fuel carries risks.

While shale is unlikely to have the same downward impact on UK gas prices as it has in the US, because our gas supply is part of a Europe-wide interconnected network, it can moderate price rises. There is also a financial windfall. The public purse will benefit from taxes levied and, importantly, local communities will derive significant benefit from their share of the revenue generated by gas supplied from wells in their localities. Up to a quarter of a million jobs in highly energy-dependent industries will be preserved and an estimated 20,000 to 70,000 jobs will be created by the shale gas industry itself.

Communities where shale drilling is planned to take place have understandably raised concerns about its impact in their local environment, pointing to evidence from the US about groundwater pollution and the use of toxic chemicals. A seismic event in 2011 at Preese Hall, outside Blackpool, further heightened concerns. In 2012, the Royal Society and the Royal Academy of Engineering produced an extensive report into shale gas extraction, which concluded that the risks associated with fracking could all be managed with suitable regulation and care.

We took evidence from a wide range of academics and industry experts from the UK and the USA, and from UK regulatory bodies. Based upon the broad range of evidence we received, there was general agreement that while an industrial process like drilling for shale gas brings with it a level of risk, these risks can be satisfactorily managed by scrupulous adherence to best practice. We can take advantage of some of the significant technological advances in the United States in recent years, which have improved safety, eliminated toxic chemicals and reduced water depletion.

Mining and drilling are not new activities in the UK; we have long experience of managing such activities well. The regulatory regime in the UK is in some ways more rigorous than in the US, and although it remains to be tested in the shale gas industry, its excellent record in regulating offshore and onshore oil exploration gave us confidence that the shale industry can be effectively regulated. Companies with the necessary finance and expertise stand ready to explore shale gas opportunities. At the highest level, the Government have voiced their enthusiasm. The Prime Minister wants to go “all out for shale”, the Chancellor is offering tax incentives and legislation has been introduced to allow companies to drill horizontally under adjacent land.

What, then, stands in the way of rapid development of this promising natural resource? In a word, it is bureaucracy. The regulatory regime is complex, unwieldy and slow with many government agencies sharing responsibility for approving fracking applications. The process is bedevilled by complexity; it lacks transparency, accountability and consistency. Cuadrilla, one of the companies seeking to drill for shale gas, estimated that it could take up to 16 months to navigate the process of obtaining permission to start drilling. We were told that local authorities were not adequately resourced to deal expeditiously with the approval process. Will the Government take steps to ensure that local authorities have the necessary resources?

We recommended that the Government appoint a lead regulator to address these shortcomings. To get an overall grip and provide authoritative leadership of this important opportunity, we also recommended that the Chancellor chairs a sub-committee of the Cabinet to turn the Government’s enthusiasm into action. The Department of Energy and Climate Change’s frankly flaccid, complacent response to our report provides ample evidence of why that leadership is so badly needed.