Economics

Study Notes

Shale Gas and the UK Economy

Level:
AS, A Level
Board:
AQA, Edexcel, OCR, IB

Will successful exploration and extraction of shale gas provide a crucial kick start to UK economic growth and help lower the price of fuels whilst increasing the UK's energy security?

Suddenly the opportunities and risks of investing in shale gas have become hot topics. Fracking has produced a glut of natural gas in the USA and pushed down the price to the benefit of households and industry - could it do the same in the UK?

Background on the shale gas sector

UK production of natural gas in 2012 was the lowest since 1985. The UK has been a net importer of gas since 2004, our trade deficit in gas has been rising

North sea oil production is also on a long term declining trend'Shale gas' is found within shale beds - Gas is accessed through a technique called “fracking" Fracking involves injecting water, sand and chemicals under pressure into dense shale rock to release the oil and gas trapped inside,Potentially recoverable resources of shale gas in the UK are highly uncertain but the British Geological Survey has recently confirmed that the UK has substantial onshore shale gas reserves.The largest business involved in shale gas at the moment is Cuadrilla ResourcesRecovery rates for shale gas are low - around 15-30% of original gas in placeThe overhead costs of exploration are high, a single test well operation costs around £10 millionIn 2000, shale represented just two per cent of US natural gas supply. By 2012 it was 37 per cent. Last year, the surge in output pushed the US gas price to 10-year lows.

For shale extraction

  • 1.Supporters of fracking claim that investment will bring down the cost of energy bills, create jobs in Britain and bring money to local neighbourhoods. For example, shale gas companies have agreed to pay £100,000 to communities near wells, plus 1 per cent of revenue if gas is extracted.
  • 2.Lower energy bills will help to make British businesses more competitive in global markets
  • 3.Reduced gas prices would help to reduce fuel poverty concentrated among low-income families

In 2013, the Coalition government announced tax incentives for shale gas, cutting the tax on profits to 30 per cent compared with the 62 per cent paid by most of the North Sea oil and gas industry.

Opposing arguments

  1. Opponents of fracking are deeply concerned about the carbon footprint and climate risks associated with the extraction and use of shale gas including possible ground and surface water contamination
  2. Shale gas fracking is also highly water intensive at a time when water scarcity is becoming an important economic and environmental issue

Competitive advantage and human capital issues

Britain has decades of experience and expertise in off-shore oil and gas exploration and extraction but it remains to be seen whether the same human capital will be as effective in on-shore fracking. Another related question concerns the possible impact of shale gas on the cost of electricity generated at gas-fired power plants and how will it compare to other forms of generation including coal, nuclear and renewable sources.

In 2013, fracking company Cuadrilla temporarily suspended operations in the village of Balcombe in Sussex following protests from anti-shale campaigners

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