Managing Director & Partner
Related Expertise: Climate and Environment
The lines appear to be drawn in the battle over the U.K.’s energy future. On one side are those who see the United Kingdom following in the footsteps of the United States. Thanks to technologies that have enabled U.S. energy companies to extract huge quantities of oil and natural gas from shale rock formations, the United States has transitioned in less than a decade from a large net importer of oil and natural gas to a soon-to-be net exporter.
This camp, which includes Prime Minister David Cameron and the Institute of Directors, argues that exploiting the U.K.’s newly accessible energy reserves, located primarily in the Bowland shale formation in the central U.K., would lower energy costs, help restore industrial competitiveness, and boost job creation.
On the other side of the energy divide are environmentalists and community activists, who see the British Geological Survey’s new, higher estimate of U.K. shale resources as an invitation to harm the environment through the controversial technology of hydraulic fracturing, or fracking. This method of extracting oil and natural gas from rock formations, they say, could despoil the landscape and pollute underground water reservoirs.
To resolve such questions, British policymakers and citizens should look closely at the U.S. experience, where fracking has been used to produce natural gas since the 1950s, though it didn’t become commercially viable until the early 1990s, after the late Texas oilman, George P. Mitchell, combined the fracking technology with horizontal drilling.
By now, the economic benefits of the fracking revolution should be self-evident. Using Mitchell’s technique, U.S. energy producers have been able to increase shale-gas production from virtually nothing in 2005 to the equivalent of more than 5 million barrels of oil per day in 2012, an amount equal to the annual production of Iraq and Nigeria combined. This, in turn, has driven down the wholesale price of natural gas by more than 50 percent. As a result, the price of natural gas today is some 2.5 to nearly five times higher in Europe and Japan than in the U.S.
The low gas price also has driven down the cost of electricity in the U.S., placing European manufacturers at a disadvantage. When combined with other factors, low U.S. energy prices suggest that average manufacturing costs in the U.K. will be 8 percent higher than in the U.S. by 2015.
As Matthew Lynn wrote recently in the Wall Street Journal’s “MarketWatch” column, “shale gas is going to rearrange the winners and losers in the global economy.” There’s no way around this fact. “Cheap energy,” he noted, “is the most important competitive advantage for factories.”
So the real question for the U.K.—and other countries, including France and the Netherlands, which have preemptively banned fracking, as have several U.S. states—is this: Can shale resources be developed without damaging public health or the environment?
To some, any drilling rig, gas well, or pipeline will be seen as de facto evidence of environmental harm, no matter how highly regulated by government or carefully executed by industry.
To others, however, the U.S. experience might be instructive. Indeed, as America’s very green organization, The Breakthrough Institute, noted in a June 2013 report titled Coal Killer: How Natural Gas Fuels the Clean Energy Revolution, cheap natural gas is not only among the most environmentally friendly energy sources there are, but it is also vital to the green movement’s sought-after transition to “renewables,” providing the grid with needed energy when solar and wind technologies don’t.
As for fracking, the report compared its impact with that of the most likely alternative for power generation: coal, the energy source that currently provides 40 percent of the U.K.’s electricity. The institute’s conclusion: “Natural gas production generally and shale fracturing specifically have a far smaller impact on mortality and disease, landscapes, waterways, air pollution, and local communities than coal mining and coal burning.”
The U.K. has two very clear choices: It can fall behind, or it can move forward. The first challenge is political, because the global shale-gas revolution will proceed with or without the United Kingdom and the Bowland shale.
The proper role for the U.K. government is to both encourage and keep tight control of shale-gas development. To earn and maintain the public’s trust, the government’s policies and activities—from its licensing and permitting systems to its water management strategy and fiscal and regulatory framework—must be totally transparent. The public needs to understand the risks, benefits, and monitoring procedures. In particular, instead of fixating on the water requirements and noise of drilling rigs, organizations need to pay attention to the logistical aspects of development, such as the significant increase in truck and rail traffic and its impact on communities. Often logistical feasibility, rather than ideal geology, will dictate the locations where shale-gas wells will be located.
Every significant advance involves tradeoffs. The fracking revolution is no exception.