Chapter 2 - International context - Economic impact and Geopolitics
2.1 The emergence of unconventional oil & gas as a commercially-available fossil fuel source has had a dramatic impact on the global energy system. The effects of relatively cheap shale gas availability in the United States has had knock-on effects globally, which have also been felt in Scotland.
2.2 In this chapter, the Expert Scientific Panel has reviewed the evidence on the global impact of unconventional hydrocarbons and looked at the potential level of global and national resources. The Panel has also considered what the development of an unconventional oil & gas industry could mean for Scotland from an economic perspective.
The United States
2.3 In 2003, the Energy Information Administration ( EIA) forecast that United States gas imports would more than double, increasing from 104.8 billion m 3 (3.7 trillion cubic feet - tcf) in 2001 to 220.9 billion m 3 (7.8 tcf) in 2025. It was widely anticipated that the US would be a primary destination for future global natural gas exports.
2.4 However, by 2012, dry shale gas production rose to 271.8 billion m 3 (9.6 tcf) from 8.5 billion m 3 (0.3 tcf) in 2000 ( US Energy Information Administration Outlook and Analysis Report 2013) - making up 40% of US dry natural gas production; and the share of imports in US natural gas consumption dropped from 16.5% in 2007 to 11% in 2010 (Dreyer, 2011). "Dry" in this sense means methane gas without additional hydrocarbons that contain more carbon atoms in their molecules.
2.5 The EIA commented in its 2013 Analysis and Projections report that there are 18.04 trillion m 3 (637 tcf) technically recoverable dry shale gas resources, including proven reserves of 2.66 trillion m 3 (94 tcf) of shale gas. This compares to a 2012 production rate of 736 billion m 3 per year (26 tcf per year). Given that there is potentially much more commercially available resource to be recovered, it is unlikely unconventional gas is a short-term phenomenon for the USA.
2.6 The International Energy Agency ( IEA, 2012) expects that the US will surpass Russia as the world's largest natural gas producer in 2015, and become a net gas exporter by 2020. It also estimated that the US will be able to produce enough energy resources to fulfil its domestic requirements in 25 years.
Drivers and Impact
2.7 There are several factors which have supported the development of unconventional oil and gas production in the US.
2.8 Principal among these are a perceived lenient regulatory regime, and a resource ownership structure which enables swift decision making. Moreover, the US has developed technological expertise over many decades through its onshore oil and gas industry in the techniques of horizontal drilling and hydraulic fracturing which are particularly important in the exploitation of unconventional oil and gas reserves. This places the US with competitive advantages that have supported the rapid development of the industry.
2.9 A key result of the US shale industry has been to effect a change in the US energy mix. There has been an acceleration in the long-term trend of gas and, to a lesser extent, renewable energy replacing oil and coal in power generation; added to which the increased availability of domestic gas has led to a significant drop in domestic gas prices. The share of natural gas in total US primary energy consumption reached 26% in 2011, rising from 23% in 2007 (Dreyer, 2011).
2.10 In 2010, prices were less than $5.00 per million British thermal units ( MMBTU) for the second consecutive year despite the fact that in 2010 gas consumption, at 682.4 billion m 3 (24.1 tcf), was at a historic high (Stevens, 2012). Analysis from the International Gas Union (2013) indicates that the 2012 wholesale gas price was close to $10 per MMBTU in the UK, compared to just over $2 per MMBTU in the US.
2.11 Another key effect has been a consistent reduction in US energy-related CO 2 emissions over the last few years which has been predominantly due to the increased use of shale gas instead of coal in power generation. According to US EIA statistics, the US achieved a reduced level of CO 2 emissions in 2012 (5.29 billion tonnes), similar to that in 1995 (5.32 billion tonnes), which represented a 3.8% reduction on the 2011 figures and 12% less than the 2007 peak. It is noteworthy that this also coincided with a 2.8% increase in US GDP ( US Department of Commerce Bureau of Economic Statistics, 2013).
2.12 The increase in the production of shale gas and liquids has also had a major impact on the downstream activities of the chemical industry. The American Chemistry Council announced in February 2014 that potential U.S. chemical industry investment linked to natural gas and natural gas liquids from shale formations had topped $100 billion. It was noted that this could lead to $81 billion per year in new chemical industry output and 637,000 permanent new jobs by 2023, with more than half of the investment by firms based outside the United States.
2.13 The impact can also be seen in the development and use of infrastructure. For example, Liquefied Natural Gas ( LNG) facilities which were being built before the shale industry development to allow the import of gas are now being developed into platforms that can allow the US to export gas for the first time. The most likely export market will be Asia (particularly China, Japan and Korea), where the demand for gas imports increased almost 500% between 2000 and 2011 and is expected to continue upwards (Dreyer, 2012).
2.14 Although there have been positive impacts in the US - stimulating the economy, reducing CO 2 emissions, reducing consumer bills - the knock-on effects are felt globally. One example is the sudden lack of competitiveness from European petrochemical plants - where feedstock prices can now be double those of rival plants making identical products in the US. Consequently, if this trend continues, the environment in which these plants operate will be challenging unless low-cost imports can be achieved, or low-cost domestic production of ethane and naptha can be substituted for established higher cost North Sea sources.
2.15 Lower coal consumption in the US has led to an excess supply on the global market. This has resulted in less demand for more expensive coal produced in the UK, for example, and contributed to company failures in the Scottish opencast mining sector in 2013. Cheaper coal is being used increasingly for electricity production, particularly in China and India. Consequently, the displacement of coal by cheaper shale gas in the US may not necessarily lead to a global reduction in greenhouse gases such as CO 2.
Continental Europe and the rest of the world
2.16 Estimates from 2011 ( US EIA, 2011) suggest that technically recoverable shale gas could increase total global gas resources by 40%. Outside the US, the largest estimated technically-recoverable shale gas resources are thought to be in China (31.6 trillion m 3 - 1,115 tcf), Argentina (22.7 trillion m 3 - 802 tcf), and Algeria (20 trillion m 3 - 707 tcf) ( US Energy Information Administration, 2013).
2.17 China is now the world's biggest CO 2 emitter and is heavily reliant on energy imports. To help address this, they are actively trying to develop their unconventional gas reserves, with the aim of increasing the share of natural gas in the country's energy consumption to 8% by 2016. However, China faces significant hurdles in developing their unconventional reserves due to geological, infrastructure and water supply issues. China has also recently signed a 30 year, $400 billion dollar supply contract for natural gas from Russia ( BBC News, 2014) - this may also have a strategic impact on the degree to which China will develop indigenous unconventional hydrocarbons.
2.18 In continental Europe, the largest estimated (unproven) technically recoverable shale gas resources are in Poland (4.2 trillion m 3 - 148 tcf), France (3.9 trillion m 3 - 137 tcf), Romania (1.4 trillion m 3 - 51 tcf), Russia (8.1 trillion m 3 - 287 tcf) and Ukraine (3.6 trillion m 3 - 128 tcf) ( US Energy Information Administration, 2013).
2.19 While it may prove more difficult to replicate the unconventional gas boom witnessed in the US, there could be significant drivers for its development in Europe.
2.20 In some parts of Europe, there has been a traditional and enduring dependence on gas imports from Russia. Therefore, access to domestic sources of gas could help to increase energy security in European countries and reduce risks around security of supply.
The United Kingdom and Scotland
2.21 The development of unconventional oil & gas in the United Kingdom and Scotland is at a very early stage. However, the British Geological Survey has recently published resource-in-place estimates for shale gas and shale oil (but not CBM) in the Midland Valley. It is estimated that there could be between 1.4 and 3.81 trillion m 3 (49.4 - 134.6 trillion cubic feet) of shale gas and between 3.2 and 11.2 billion barrels of shale oil in the Midland Valley study area (Monaghan, 2014). Further details can be found in Chapter 4.
2.22 There are diverging views on the impact of unconventional hydrocarbons in the UK and Scottish context.
2.23 The UK Government is supporting the development of the shale gas industry with the aim of delivering a reduction in domestic prices; a corresponding increase in security of supply; and providing economic growth and jobs. In order to enable this, the UK government announced fiscal incentives with a view to stimulating commercial investment. These incentives include refunds of business rates, payments to affected communities, and low tax rates on hydrocarbon production.
2.24 It is also clear that, to achieve the success seen in the USA, four factors would need to coincide in the UK:
(i) the ability to overcome public concerns;
(ii) a variety of operators - to identify the most effective and efficient methods to develop UK shales;
(iii) a skilled workforce and an effective supply chain to enable low cost drilling;
(iv) rapid, expert, and rigorous licensing and regulation.
It is far from clear whether any such coincidence could occur here.
2.25 Moreover, some commentators believe that the interconnectedness of the gas market in Europe means that the benefits to the UK economy from unconventional gas production in the UK will be limited. The main rationale for this belief is the likelihood that any such production would enter the European wide market under normal procedures and consequently any national impact on prices and supplies would be marginal. Analysis by Bloomberg also suggests that the UK, as a net importer of gas, would be able to absorb up to 113 million m 3 per day (4 billion cubic feet per day) of natural gas into the market without altering the fundamental dynamics. The figure of 113 million m 3 per day (4 billion cubic feet per day) is the highest figure for UK shale gas production under Bloomberg's most optimistic scenario (Bloomberg New Energy Finance, 2013).
2.26 Despite the uncertainty surrounding the potential impact on supply and price, there could be other positive benefits flowing from the development of indigenous unconventional oil and gas reserves in Scotland. This could be particularly so in respect of the petro-chemical industry, which is a significant component of the Scottish economy.
2.27 Suitable petrochemical feed-stocks from the North Sea are declining, particularly ethane and other light hydrocarbons. The price of feedstock is typically 50 - 80% of most products. Consequently, petrochemical plants are looking to develop facilities to allow them to achieve low-cost import of such feed-stocks, such as are obtained from unconventional oil and gas reserves from the US.
2.28 The Grangemouth plant is one of only four gas crackers in Europe which can use ethane gas to manufacture ethylene. Consequently, the operators are constructing an import terminal capable of receiving ethane from imported US shale gas during the next 15 years. This will enable the ethylene cracker at Grangemouth to increase its throughput from less than half of its capacity today, to 100%. Ineos plan a similar project at its smaller Rafnes facility in Norway, allowing it to bring in ethane gas from the US from 2015.
2.29 The Grangemouth refinery, which is connected to both the Forties oil pipeline from the North Sea, and by a 93km pipe, to the Finnart oil terminal on Loch Long (which can receive deepwater oil tankers of 324,000 tonnes), has the capacity to process 210,000 barrels (33,000 m 3) of crude oil per day and to produce around 9 million litres of fuels per day - including ultra-low sulphur ( ULS) diesel and ULS petrol. The Ineos chemical plant can produce 1 million tonnes of petrochemicals per annum. The ability to potentially source these products from the production of Scottish hydrocarbons could place Scottish plants at an advantage in an increasingly competitive world market.
The Potential Economic Impact of Unconventional Gas Development
2.30 As noted earlier, the development of unconventional oil & gas is at a very early stage in Scotland and the UK - therefore, any analysis of economic impact will be subject to a great degree of uncertainty. For example, the economically recoverable reserves will be largely unknown until further test drilling is undertaken. Equally, there is no readily available information on the potential economic impact of unconventional oil production in Scotland or the UK. Much of what is available only relates to unconventional gas, and shale gas in particular.
2.31 The cost of extracting unconventional hydrocarbons will ultimately determine whether it will be economic to do so and analysis by Bloomberg suggest the experience of low cost extraction in the US is unlikely to be repeated in the UK. It cites the main reasons as being differences in geology, ownership of land rights, lack of a drilling services market (noting that the vast majority of required equipment is currently in North America) and lack of midstream infrastructure (such as connecting pipelines and gas processing equipment, which is capital intensive) (Bloomberg New Energy Finance, 2013).
2.32 The analytical uncertainty is shown in available figures for potential economic and employment impacts of commercial scale unconventional gas industries operating in the UK. A report from the Institute of Directors (IoD) suggested that a multi-year development of 100 shale gas pads with 40 lateral wells could result in a peak capital and operating expenditure of £3.7 billion, supporting up to 74,000 direct, indirect and induced jobs (Lewis and Taylor, 2013).
2.33 Based on this high case scenario outlined by the IoD report, a subsequent industry report commissioned by the UK Onshore Operators Group ( UKOOG) on supply chain and skills requirements indicated that the industry may need to spend up to £33 billion in supply chain activities, to realise the vision of 4,000 lateral (horizontal) wells over an 18 year timeframe (2016 - 2034). Interestingly, this report noted the potential for up to 64,500 direct, indirect and induced jobs at peak (Ernst & Young, 2014).
2.34 Both of these reports vary significantly from the jobs estimate in the Strategic Environmental Assessment written by AMEC for the UK Government. Under a high case scenario of industrial development, it is noted that between 16,000 and 32,000 full-time equivalent jobs could be created. However, caution is required in comparing the two figures, due to differences in methodology and industry development scenarios ( DECC, 2013).
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