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

Part of the debate – in the House of Lords at 6:59 pm on 4th November 2014.

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Photo of Viscount Ridley Viscount Ridley Conservative 6:59 pm, 4th November 2014

My Lords, I, too, congratulate the noble Lord, Lord MacGregor, and his committee on their powerful and evidence-based report. I declare my interests in the energy sector as listed in the register, but I do not think that they include shale gas.

The title of the report is The Economic Impact on UK Energy Policy of Shale Gas and Oil. There has already been a significant impact on UK energy policy even without pumping a teaspoon of shale oil or a cubic metre of gas in this country.

As my noble friend Lord MacGregor said, America’s shale revolution has driven down the price of fossil-fuel energy. It has pushed Qatari and Algerian oil out of the US market, and has done the same for coal and oil, which benefits the UK by lowering energy prices generally. The US has doubled its oil output in six years as a result of the shale revolution. It has overtaken Saudi Arabia as an oil producer. A McKinsey report last year said that the effect of shale gas and oil on the US economy will be such that, by 2020, the economy will be $500 billion to the better, representing 3% of GDP, and it will have 1.7 million extra jobs. These are enormous impacts. And, of course, the oil price is down: from $115 per barrel to about $85 now, and falling further. That is largely because of the shale revolution.

World gas prices have come down despite the fact that the Fukushima accident and Middle East turmoil in recent years would normally have been things that pushed them up, as would the economic recovery. UK wholesale gas prices are down to levels last seen about four years ago. That is largely because of the US shale revolution. As my noble friend Lord Lawson said, shale is definitely a game-changer.

So, yes, we have already felt some benefits from shale, but not nearly as much as we could have felt. That is for several reasons. The first is that we have backed the wrong horse in the decarbonisation race. As my noble friend Lord Borwick and the noble Lord, Lord Giddens, said, the US has cut its carbon dioxide emissions, using gas to replace coal, by three times more than Europe has cut its carbon emissions using solar and wind. Whereas decarbonisation has cost Europe hundreds of billions of dollars, US decarbonisation with shale gas has benefited that economy to the tune of $200 billion. In 2010, the Department of Energy and Climate Change forecast that there would be a doubling of gas prices by 2020. They are now falling, and every fall puts up the subsidy cost of renewable energy and therefore, in effect, insulates us against falling world energy prices.

The second reason for our not having been able to benefit as much as we could from the shale gas revolution is that gas costs a lot to transport by sea, as my noble friend Lord Lawson said. Therefore, even if US gas prices fall, we will not see the full benefit over here—it is not like oil; it is not a fungible commodity with one world price. So we have to produce domestic gas to get the full benefit of lower gas prices. But we have twiddled our thumbs and listened to every discredited theory about environmental harm from shale, including fugitive emissions, flaming taps, aquifer pollution, damaging earthquakes, radioactivity and heavy water use. As the noble Baroness, Lady Blackstone, said, these have been greatly exaggerated.

I hear it said that there has been exaggeration at both ends of the spectrum: that people have exaggerated the potential benefits of this technology as well as its potential environmental drawbacks. I do not think that this is true. Shale’s boosters have, if anything, been found to underplay its impact; they have been too cautious—and I know because I was one of them. Back in early 2011, I went to Pennsylvania, found out what was going on, wrote a report for the Global Warming Policy Foundation of my noble friend Lord Lawson, and worried when it came out that I was overhyping this revolution. But, in fact, if you go and look at what I wrote, you will see that I was far too cautious about what was going to happen. Had we pushed ahead then with shale gas in this country we could have been roaring now.

The third reason why we have not fully benefited from falling world energy prices in this country—and I hate to bring an element of partisan disagreement to this thoroughly bipartisan debate so far—is the impact of last year’s announcement by the leader of the Opposition, Ed Miliband, of an energy price freeze. I would be very interested to hear the response of the noble Baroness, Lady Worthington, to this point. It had the effect of telling energy companies that it would not be a good idea to drop their prices now lest Labour win the election next year. Paul Massara, the head of npower, said in August:

“Then we are acutely aware that if the Labour Party were to implement their proposed price freeze, we will be living with the consequences of our standard rate tariff price for a very long time and beyond the level of risk that we could manage in the wholesale market”.

The effect of our policies has been that we have, to some extent, insulated ourselves in this country against the benefit of falling oil and gas prices. As a result, we face a real economic threat from the shale gas revolution: the threat that the reshoring of energy-intensive jobs to the United States will leave us without so many opportunities in those industries. As the noble Lord, Lord Hollick, said, technology in this industry is getting better all the time. There is no sign of diminishing returns in the improvement of shale; the drilling time per well is down by two-thirds, compared with six years ago in the Fayetteville shale. Gas production per day is eight times as high today in the Marcellus shale as it was in the beginning. Oil production is five times as high in the Bakken as it was a few years ago. The break-even price at which shale is profitable is coming down all the time and is somewhere around $60 a barrel for oil now. It is nonsense to say that this revolution could not happen quickly in this country and could not have a big impact over a relatively short number of years.

What about shale in this country? We thought that there was not very much to start with, but we now know, as the noble Lord, Lord Shipley, said, that we possibly have enough to last us for 40 years if it is economically recoverable. We have one of the biggest, thickest and highest quality shales in the world. As my noble friend Lord Tugendhat said, it exists in an area with high unemployment. In parts of North Dakota where shale oil is being exploited, the unemployment rate is 0.8%.

I will make a few suggestions for the Minister to consider. First, as has already been said, we need to address the streamlining of permitting. We have to be able to drill many wells, because we will not get the recipe right the first time—or at least the industry will not. It was clearly mentioned in the report that you cannot be required to file a separate application every time you drill a well: you have to be able to drill several.

Secondly, there is no incentive at the moment for local government application- handling to be quick. There is nothing to prevent it delaying applications—as we heard in the case of Cuadrilla in Lancashire—several times. Thirdly, we need to keep an incentive in this country to burn gas as electricity. At the moment, we have brand new gas stations that are being mothballed to make way for renewables—indeed, sometimes to make way for coal, which surely is madness. It is important that the Government encourage the use of gas as a heating fuel. That is something that we obviously use a lot of at the moment, but there has been a lot of talk about displacing gas with electric heating in the future. I do not think that is an efficient way to do it, either economically or environmentally. A statement saying that there is a great future for gas in this country would help the industry.

In conclusion, shale gas has already had a big impact, but not as big as it could have had. Letting others do it and not doing it ourselves is a threat to us as well as an opportunity. We must get an energy policy that does not insulate us from falling energy prices.