The Take

Fracking envy

Fracking envy

Posting in Energy

Energy analyst Chris Nelder reports from a foreign country deep in the throes of shale gas fever.

How ancient Britain used to generate heat (and may need to again, if its shale gas resources don't pan out).

The country has "potentially massive" shale gas resources, enough to "heat all homes for 100 years!"

No, wait! Make that 1,500 years!

This development is "undoubtedly a game-changer" that will transform the energy industry and could create 30,000 jobs, bestowing greater energy security. The "stumbling blocks are political," notes one conservative elected official. Other senior conservatives have promoted the potential to reduce energy bills and cut the country's dependence on imports.

“Natural gas from shale has the potential to transform the [...] energy market and boost the economy, create thousands of jobs, generate significant tax revenues and reduce our reliance on imported gas,” declared the CEO of a major gas company.

"Shale gas is part of the future, and we will make it happen," swore the nation's top economic official as he delivered the 2013 budget.

Sound familiar?

No, it's not the United States. It's our cousin across the pond: the United Kingdom (UK).

Wild speculation

For the past two weeks I've been in the UK, where the talk about shale gas has been all the rage since the ban on hydraulic fracturing (fracking) was lifted by the government in December. The ban was imposed in 2011, after the fracking of Britain's first shale gas well was blamed for two small earthquakes and gas contamination of groundwater.

More than 500 articles have been published about UK shale gas this year, according to my quick Google search.

So it must be a really big deal, right? With massive proved reserves, and all that stuff?

Actually, no.

So far, only two exploratory wells have been drilled, both by Cuadrilla Resources in the Bowland shale gas play, which is in the Lancashire area in UK's northwest. The first well, in Preese Hall, Weeton, was fracked. The second, in Grange Hill, Singleton, was drilled but not fracked.

Neither well is in production yet.

Based on the Preese Hall well, Cuadrilla Resources estimates that the play could contain 200 trillion cubic feet (tcf) of gas, with a market value of £136 billion. At least, those were the numbers blared in the headlines.

A second company, Island Gas (IGas), plans to begin drilling for shale gas in the UK this summer at two sites: Irlam in Greater Manchester and Ellesmere Port in Cheshire. If its exploratory wells find useful quantities of gas, it hopes to begin fracking the wells next year.

The latest rash of gushing headlines stemmed from the February leak of a new estimate from the British Geological Survey (BGS, the UK's equivalent of the U.S. Geological Survey), which reportedly increases the UK's total shale gas resources to between 1,300 and 1,700 trillion cubic feet (tcf). Again, that information was leaked, and the actual new BGS assessment has not yet been released. According to an April 28 report in the Financial Times, "the energy department is understood to have asked it [BGS] to redo its calculations, a process that is taking several months. A final report is still a few weeks away and could see a downward revision to the estimates."

A nicely detailed and transparent piece of work by Damian Kahya, a former BBC energy reporter now writing for Greenpeace, is the only post I found that actually attempted to do the math and sort out fact from wild speculation on UK shale gas.

Kahya cites work by The Carbon Brief, which determined that The Times' "1,500 years of gas" claim stemmed from multiplying the 26.4 million UK households by 47,000 cubic feet (the average annual gas consumption of a UK home), then dividing that into 1,800 tcf (above the high end of the reported BGS estimate).

But, as Kahya points out, such simple math assumes that all of the gas is economically recoverable, when it isn't. The Times article even mentioned that only 16 percent to 20 percent of the resource might be recoverable, so the disconnect between the article and its headline is curious. If 20 percent of 1,700 tcf were recoverable, Kahya finds that this would amount to a 119-year supply. But other estimates Kahya cites suggest that only 20-40 tcf might actually be recoverable, which would only be good for "a decade or two." Cuadrilla's CEO reckons that it can only extract about 10 percent, or 20 tcf, of the 200 tcf gas-in-place it estimates for the Bowland shale.

Even the 200 tcf estimate is undoubtedly speculative. As BGS stated in its October 25 2012 remarks to the UK Parliament, Cuadrilla "drilled two wells in 2010-11 (Preese Hall and Grange Hill) from which (we presume) the company derived gas content values for shale and figures for the thickness of shales. We assume that they extrapolated these values over their 1,200 square kilometres licence area."

Anyone possessing a passing familiarity with how shale gas resources are estimated knows that gas shales are not uniformly prospective; they typically have highly productive "sweet spots," as well as large areas that are not commercially viable, and the sweet spots are usually found and drilled first. If Cuadrilla has applied data from just two wells uniformly to an entire area that has not yet been drilled, its estimate should be taken as highly uncertain.

In response to my query, Cuadrilla's media representatives confirmed that its £136 billion valuation for the gas in the Bowland shale applied to the 20 tcf it believes is recoverable, not to the 200 tcf of gas-in-place. I verified that at the current UK spot price of £0.6894 per therm, 20 tcf would have a market value of £137.88 billion.

Absurd hyperbole

The mere fact that more than 500 articles have been published about UK shale gas this year, repeating Cuadrilla's resource estimate without any independent verification, when only two wells have been drilled in the entire country, of which only one has been fracked, before any commercial production of the wells has commenced, should tell us something.

The UK has a serious case of fracking envy.

As the current BGS report on UK shale gas prospectivity clearly notes: "The UK shale gas industry is in its infancy, and ahead of production testing there are no reliable indicators of potential productivity... For that reason, resource estimates can only be made by analogy with producing shale gas plays in America, although again ahead of drilling, hydraulic fracturing and flow testing these analogies may ultimately prove to be invalid," and "[t]here are no known studies focused on the gas content of UK shales."

Regarding its 5.3 tcf reserve figure for British shale in that report (before the recently leaked higher estimate), the BGS noted in its October 2012 remarks to Parliament: "No UK drilling had taken place at the time of this estimate, and so the BGS figures were necessarily defined as tentative. Unfortunately commentators have subsequently quoted the estimates without reference to their tentative nature." [Emphasis mine.]

That a headline asserting "Britain has shale gas for 1,500 years" could even be printed on the basis of so little information betrays either breathtaking ignorance, or a desperate desire to tell an optimistic story to a populace that is still in the grips of economic malaise and really struggling to pay its gas bills.

I'll be charitable and assume it's the latter.

The fact that the BGS report isn't even released yet would halt a responsible press in its tracks. And that fact that the energy department has asked BGS to redo its calculations is, at the very least, odd.

It is, of course, all sadly reminiscent of the hyperventilating press around U.S. shale gas in recent years, which has died down a bit since the growth trajectory of U.S. gas production appears to have stalled in January 2012. As I explained last October, the "gold rush" phase is over for U.S. shale gas. But it's only beginning in the UK, albeit on the basis of far less hard evidence. It was straightforward enough in late 2011 to debunk the claim that the U.S. has 100 years of gas; at this point, there isn't even enough information about UK gas estimates to begin such a debunking.

Speculating about the number of jobs that British shale gas might create and the tax revenues it might generate before it has even begun commercial production, let alone calling it a "game changer," is simply absurd.

Even if significant resources are proved out and the wells are able to achieve respectable production rates, there is no guarantee that the UK can replicate the U.S. shale gas success. Public opposition to fracking is already extraordinarily well-organized in the UK, partly because many of the wells would have to be drilled in close proximity to homes, agricultural operations and business. The sparsely populated wilds of North Dakota simply don't exist in this country, which has been thoroughly occupied and well-used for many centuries. Drilling tens of thousands of shale gas wells in the UK will be an entirely different challenge than it is in the United States. So yes, there is certainly an element of politics in it, but the stumbling blocks aren't just political. It remains to be proved just how much gas can be produced, even if there were no political stumbling blocks.

The UK is hugely dependent on natural gas. Its main supply in the North Sea has long been in decline. It has suffered Russia's export gamesmanship in the dead of winter. It pays nearly two-and-a-half times the price that the U.S. does for gas. Consumers struggle to pay their gas bills. And the public coffers could really use a fresh tax revenue boost from natural resources. I understand all that, and I sympathize with it.

But seriously, UK media and politicians need to chill out until they actually know something about how much gas they've got and how much of it can be produced.

UK Chancellor of the Exchequer George Osborne should not be counting these chickens until they've hatched, no matter how strong his resolve is to support the gas industry. Hyperbolic speculation at this point can only harm the progress of the UK's renewables industry, which has the advantage of being proven and real, and which is on its way to being a cheaper way to generate grid power than the fossil-fueled alternatives by the end of this decade.

(Photo Credit: Chris Nelder)

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure