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Peter Jones: More fuel for the fracking debate

Shale fracking, as at this facility near Preston, continues to divide opinion. Picture: Getty

Shale fracking, as at this facility near Preston, continues to divide opinion. Picture: Getty

  • by PETER JONES
 

If the environmental concerns could be overcome, extracting oil and gas from shale has many attractions, writes Peter Jones

Producing oil and gas from shale has become one of the big hopes of the developed world for sparking economic recovery and sustained growth, albeit that there are serious worries about causing further environmental damage. Could Britain and/or Scotland get in on the act? Yes, I think so, but only if there is a major change in the law that could make some people quite wealthy and could give a lot of people a little extra income without having to do anything for it.

America’s shale boom is turning into a real economic game-changer. US natural gas prices are roughly a quarter of European prices. Imagine what that would do to your home heating bill or, if you are running a big office or hotel, what it would do to your company costs.

Gains from similar cost reductions are being made by big gas users, such as steel-makers, in transport by conversion to liquid or compressed gas fuels; by the chemicals industry for which natural gas is a feedstock; and by manufacturers which use chemicals industry plastics.

There is even some suggestion that it can be a political game-changer. Fellow Scotsman commentator George Kerevan has contended that Barack Obama won re-election as US president despite national unemployment being at 8 per cent because, in the crucial swing states of Ohio and Pennsylvania which he won, oil and gas shale fracking has reduced local unemployment to way below these levels.

No wonder, therefore, that the UK government has become noticeably more enthusiastic about the prospect of exploiting the oil and gas shale deposits that do exist in Britain.

The rationale for so doing is two-fold. First, if we don’t, Britain risks much of its manufacturing industry being undercut by cheap American competition. And if we do, we can not only head that off, but also give British industry an edge over continental European rivals whose governments seem remarkably reluctant to have anything to do with shale oil and gas.

The hesitancy has to do with worries about the environment. I am not going to examine them here. Suffice it to say that it does not seem entirely clear to me whether fracking does the damage claimed by opponents, or that getting more hydrocarbons out of the ground is injurious to global warming, especially if the gas is used to displace coal in electricity generation.

There is clearly a debate here which has got some time to run before any clear answer emerges. But let’s suppose the answer is that, on balance, fracking oil and gas shale does no particular damage and possibly a bit of good.

Even if that is so, there are a number of other reasons for thinking that these shales are unlikely to be exploited in Britain to anything like the same extent as in the US. One is that the geology appears to be different and, though it is still being evaluated by the British Geological Society, that the shale deposits are either thinner or more fractured than they are in America.

Others are that we do not have the spare drilling rig capacity to get at the stuff nor the pipelines to transport it. But the big reason was succinctly put by Charles Hendry MP, when he was energy minister. He noted: “The situation here is very different from that in the United States, where, for example, landowners own the mineral rights beneath their homes. That is not the case in this country, so there is not the same economic driver.”

Discussing this recently with two Scottish economists, Gavin McCrone and Donald MacRae, the answer suddenly occurred to me. Why don’t we create the economic driver?

Simply put, we could do that by changing the law so that the rights to minerals in the ground under our feet belong not to the Crown (ie the government) but to the landowner.

In North Dakota, where shale oil production has boomed from next-to-nothing a decade ago to production of seven million barrels a month, many locals have gone from being poor to rich almost overnight. Typically, a landowner gets a one-off payment of between $300-500 (£186-£311) per acre to permit drilling, and royalty payments of between 10 and 15 per cent of the value of production sold.

Tales of farmers now earning up to $50,000 (£31,000), not per year but per month are, well, ten a penny. Even in small towns, where residents own fractions of an acre, royalty cheques can amount to more than $1,000 (£620) per year.

Back in Scotland, why have onshore wind turbines multiplied? Partly, it is because the owners of the land on which they sit, mostly moorland with otherwise little economic value, get an annual rent with payments also often going to nearby communities. Without that income, I doubt that the onshore wind industry would be half the size it is.

By changing the law, the same could be done to popularise shale oil and gas. There are obvious problems. Britain is densely populated so compiling a register of land ownership and distributing relatively small payments would be an immensely bureaucratic and expensive task.

There is a simple solution. Individual payments could go to owners of more than, say, 100 acres. For lesser landholdings, a total payment could then be made to the local council. It could take off a percentage according to the land it owns – parks, schools, etc – and distribute the rest to all council tax payers.

This could be in the form of a council tax rebate to emphasise to residents that money is being gifted to them. It could be either a flat rebate, disproportionately benefitting smaller (and usually poorer) householders, or graduated according to the size of the council tax bill.

If the UK government is serious about developing oil shale and gas, it may have to contemplate such a law change. There is another possibility, of course. Alex Salmond could offer to make the same change, but in an independent Scotland. Central Scotland is where most Scots live and is also where most of Scotland’s shales with potential oil and gas are.

How much potential there is has yet to be clarified, though we know from the history of West Lothian shale mining that there is definitely something there. If it turns out to be big and Mr Salmond acts on my suggestion, shale could be a Scottish economic and political game-changer.

 

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