An alternative perspective
01 August 2010
The Coming of Shale Gas: the Implications for Oil and Energy
PROF. DIETER HELM, UNIVERSITY OF OXFORD
To this potential Armageddon are added fears about gas supplies, particularly in Europe. The two interruptions of supplies via Ukraine by Russia have created nervousness, and a number of European countries have started to intervene to try to head off further investment in gas-fired power stations.
A QUIET REVOLUTION
But whilst these oil and gas panics have been maturing, and have lent support for the renewables and nuclear programmes, a quiet revolution has been taking place in energy markets which turns the conventional wisdom on its head.
Put simply, we now appear to be potentially awash with gas – and that gas may well provide the fuel for electricity generation, which may in turn power the cars of the future, instead of oil.
This revolution is centred on unconventional gas – notably shale gas, though extending to coal-based methane and tight sands gas. Shale gas is gas which is dispersed in shale rock structures. It is widely distributed – notably in the US, China and Europe – and its existence has been known about for a long time. What is new is the ability to get it out in commercial quantities and at costs which are economic.
The technology has to do three things: drill at considerable depths horizontally; fracture the rocks to allow the gas to flow; and have the IT necessary to seismically map the rock structures, directing the drills to the gas pockets. Of these, fracturing is the specific breakthrough – the other two have been deployed in conventional oil and gas exploration.
With this breakthrough, an enormous number of reserves are now potentially available. The first priorities have been onshore in the US, and already the US produces a lot of shale gas. To give some idea of the potential, it has been claimed that the US now has sufficient gas reserves to meet present consumption levels for 100 years, and at the global level, reserves have been doubled in recent months.
In Europe, things are moving much more slowly. The reserves are large, centred on Poland, but with fields extending across the north European plain and under the North Sea towards Britain. However, the environmental constraints of a densely populated Europe are of a different order to those in the US, and it will take time for the resources to be developed.
Poland will probably lead the way, as much because of its particular energy problems as because of its reserves. Poland is over 95 per cent dependent on coal for its electricity generation, and hence is under considerable pressure from the EU over emissions. Germany and Russia are building the Nord Stream gas pipeline around it despite it being much cheaper to go through Poland directly, and despite Poland being a member of the EU. Given its history – and the repeated invasions by Russia and Germany over the past two centuries, it is unsurprising that energy independence is a political priority.
The benefits of shale gas will not, however, have to wait for European domestic production. The scale of the resources in the US means that the US will effectively stop being a gas importer. The result is that all the LNG investments in countries like Qatar which have been built with US demand in mind will now have to go elsewhere. The price and the security of LNG supplies have therefore been significantly changed. Europe is already benefiting from a lower price, and this will persist for a long time – and time enough for European shale gas to be developed.
In itself, this turns the energy world on its head. But there is more to come: coal-based methane is now being liquefied in Australia, turned into LNG and then shipped to China at competitive rates – something quite unthinkable until now. Coal-based methane is, like shale gas, widely distributed. And then there are lots more conventional gas reserves to come.
THE IMPLICATIONS FOR OIL
Technological developments do not stop at fracturing and horizontal drilling. They extend through not only the production of energy, but the demand for it too. Traditionally, oil is regarded as a discrete fuel and its demand growth is predicated on transport growth. As China adds hundreds of millions of cars, the assumption is that this increases the demand for oil and, as supply peaks, the price goes up. The weakness in this argument is that cars may not need oil in the future. The electric car is moving from concept to deployment. Battery technology is advancing rapidly, and over the next two decades a significant shift is in prospect – first to hybrids and then to full electric cars.
Electric cars beg the question of the fuel for electricity generation. This may well increasingly come from gas. So oil is no longer a discrete fuel: gas may displace oil in its core market. Hence the predicted demand for oil may not materialise, and hence the oil Armageddon the peak oil advocates predict may not come about.
Peak oil theories suffer from other weaknesses too. Most oil wells are abandoned well before 50 per cent of the oil is extracted. In other words, more than half the reserves are left in the ground. Technical progress works away at the depletion boundaries – and a bit more technical progress means that even existing wells may significantly increase supplies. Then there is lots and lots of oil still to find and exploit – notably in the Arctic. Add in Iraqi, Iranian and Russian reserves, and unconventional oil, and the notion that we are about to run out of oil in any physical sense is nonsense. It is all about costs and technology and these can, and will, change.
THE IMPLICATIONS FOR RENEWABLES, NUCLEAR AND COAL
If gas is abundant and cheap, then it follows that renewables, nuclear and coal are likely to be relatively more expensive than currently assumed. In the renewables debate, it is regularly asserted that rising oil and gas prices mean that technologies that now appear uneconomic will become competitive. Subsidies, in consequence, are temporary – a bridge to this high fossil fuel price world. But if gas is cheap and plentiful, temporary subsidies will turn out to be permanent.
Cheap plentiful gas is bad news too for nuclear and coal. In the nuclear case, the key variables are the cost of capital and the fossil fuel price. Long-term fixed and sunk investments are risky for investors – and that risk is compounded if gas-fired power stations, which can be built quickly, turn out to have a cheap fuel supply.
For coal, too, gas is a big threat. The case for new coal stations in Europe has been as a precaution against gas and the Russians. With the threat weakened, the cost advantage for gas is reinforced by the carbon advantage of gas over coal. Gas generation emissions are typically about 45 per cent lower than those of coal.
GAS AND CLIMATE CHANGE
If gas is bad news for low carbon renewables and nuclear, it is not necessary bad news for climate change mitigation. What abundant cheap gas offers is a major transition fuel. By switching from coal to gas, emissions can be quickly reduced at very low cost. In particular, the opportunities in the US and China for a coal-to-gas substitution (and hence a sharp reduction in carbon emissions) dwarf Europe’s efforts with windmills.
To give some idea of the cost difference for carbon reductions, the UK plans to spend about £100 billion on offshore wind by 2020. The same sort of emissions reductions could be achieved by now building a couple of gas-fired power stations and closing the equivalent existing coal capacity. That might cost around £5 billion. In other words, the ratio of costs for given emissions reductions between offshore wind and gas might be as great as 20:1.
Gas is not, of course, a long-term solution to climate change. But it does get us big, cheap reductions in emissions as a transition through to 2030. After that, all sorts of new technologies may well become available.
THE CHALLENGE TO POLICYMAKERS
From a policy perspective, the appropriate assumption now is in effect to assume that gas is plentiful and cheap. But for policymakers who have become convinced by the peak oil scares and predictions of rising oil and gas prices, the new world is challenging. Almost all of existing energy policies are based upon suspect foundations. It will take courage to think again about the dash-for-wind and the constraints being applied to gas. Past form suggests that it will take quite some time for policy to be adjusted to the quiet gas revolution. The longer the process takes, the greater the costs and the higher the emissions.
Dieter Helm, Professor of Energy Policy, University of Oxford & Fellow in Economics, New College, Oxford
Dieter Helm is an economist, specialising in utilities, infrastructure, regulation and the environment, and concentrates on the energy, water and transport sectors in Britain and Europe.