Stuart Paton: UK can benefit from shale revolution

Picture: Getty
Picture: Getty
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IT IS almost impossible to overstate the impact of the shale gas and shale oil boom in the United States.

Here are some numbers: the US has increased its oil production by 23 per cent in the last two years; gas production has increased by 30 per cent in the last five years; US wholesale gas prices have dropped 75 per cent in five years. At the same time, the US has reduced its CO2 emissions, while emissions have increased in both Germany and Japan.

This transformation did not happen overnight. Mitchell Energy started developing hydro-fracturing (“fracking”) technology for shales in the 1980s, to the ridicule of most of the industry. As is often the case in the oil industry, new technology has been slow to be adopted, but once adopted, application is rapid and the improvement in technology astounding. Recovery from individual wells has increased by a factor of 30 in ten years.

There are four main reasons for the success of shale gas and oil development in the US. First, the US is big – Texas alone is three times the size of the entire UK and there is shale potential throughout much of the US. Second, the onshore oil service sector is more active in the US than anywhere else in the world; there are more rigs in North America than the rest of the world combined. This dynamic sector develops new techniques, then rapidly implements and improves them. Third, access to capital is much easier in the US, with a plethora of private equity funders largely non-existent elsewhere and large US public companies redirecting capital from overseas to the US. Finally, and critically, US landowners hold mineral rights rather than the Crown or government as in most countries. Companies negotiate with individual landowners for rights to drill and develop oil and gas.

Inevitably, there are concerns with this boom. The biggest issue is the impact of increased fossil fuel consumption leading to increased CO2 emissions and global warming. The big prizes from the shale boom are, first, the conversion of cars from petrol and diesel to gas and, second, the Chinese switching from coal to gas in power generation.

A wide range of other concerns have been raised, including contamination of groundwater, seismicity and excessive 
water usage during “fracking”. Each of these issues is important, but manage-able with proper oil field control and strict regulation.

Is it possible that the boom in the US can be exported to the UK? It is very early days. There have been no more than a handful of shale wells in the UK and no adequate hydro-fracture tests – there is currently not a single rig capable of doing these tests in the UK. Scotland has much smaller shale resources than England and there has essentially been no exploration to date.

In terms of the success factors in the US, it is a mixed story in the UK. Scotland has a very strong oil service sector, with some experience of shale development in the US. The mineral rights issue has been helped to a limited extent by the Westminster government’s initiatives. Access to capital is challenging, although the recent deals by Centrica and Gaz de France with, respectively, Cuadrilla and Dart Energy suggest money is becoming available.

The concerns from the US are manageable in the UK. Overall, the UK oil and gas industry, both onshore and offshore, has a good track record in field management, and environmental and safety issues, with rigorous regulation. Local communities remain to be convinced, but given that shale potential is largely in previously 
industrial areas, a good case can and should be made.

However, it is very difficult to envisage the scale of the US industry being replicated in the UK. Shale gas and oil are likely to have an impact on the UK’s energy supply, but that is probably some years away. In the meantime, Scotland in particular has to seriously consider its energy mix. Can we satisfy all of its needs through onshore wind farms, which industrialise the rural environment to a much greater extent than shale gas development – and do we need to look sensibly and dispassionately at nuclear? «

Stuart Paton is an adviser to the oil and gas industry and former chief executive of Dana Petroleum. He speaks at The Scotsman’s The Fracking Question conference on 11 December: