While most anti-fracking concerns centre on the potential environmental damage it can cause, and a few raise doubts around unsuitable geology and geography, the industry’s Achilles ’ heel is in the way that it is financed.
In the UK, proponents of fracking reference the apparent economic miracle in the USA that has supposedly delivered “a century of energy independence.” As we have seen, that “century” turns out to be eight years’ worth of US consumption; less if we subtract the 1.5bn barrels that the USA is now exporting. Less obvious, though, are the huge levels of debt and hidden state subsidies that have kept the shale bubble going long after it would otherwise have deflated when the price of oil dropped below $50 per barrel.
In a new paper in the journal Nature Energy, Peter Erickson, senior scientist at the US Centre of the Stockholm Environment Institute argues that without subsidies, half of the oil now being produced in the USA would be left in the ground:
“Subsidies are not cash handouts. They’re a mix of tax breaks, tax credits, and regulations that forego government revenue, transfer liability, or provide services at below-market rates. Another significant subsidy takes the form of uncompensated government costs for fixing roads damaged by heavy fracking trucks. Governments justify these as supporting economic growth and job creation.”
Erickson’s paper looked at the $4 billion a year production subsidy given to US oil companies. However, according to Janet Redman at Oil Change International, this amounts to just a fifth of the state subsidies provided to the US fossil fuel industries.
This, of course, is the same “fracking miracle” that the UK government is so desperate to inflict upon an unsuspecting British public. It is also why government assurances about potential employment and economic benefits are insufficient. As we reported in July, representatives of the UK fracking industry have been in discussions with the UK government over profitability concerns. We now need transparency about what subsidies – of the kind highlighted by Erickson – the UK government has offered them… and what the cost will be to the rest of us.
Across the USA, local authorities discovered too late that the additional income that came from the fracking boom was insufficient even to cover the cost of repairing roads that had been devastated by daily heavy truck movements. In the long run, local taxpayers effectively paid to have a fracking industry that few wanted. Unless concrete measures are taken, UK council tax payers are likely to face a similar bill.
One solution would be for the UK government to insist that fracking companies set up a separate clear-up trusts to cover the cost of the damage. This would prevent local taxpayers losing out in the event of the companies going bust or, more cynically (but all too common) declaring insolvency precisely to avoid the clean-up costs. Unfortunately, the UK government looks more likely to follow the US down the hidden subsidy road.
The one ray of sunlight in this otherwise gloomy scene is that private investors have demonstrated the kind of scepticism that a prudent government ought to have. With greater awareness of the very different UK geology to the US shale plays, the wide boys in what remains of the post-Brexit City of London are putting their money elsewhere. It is very likely that the UK fracking industry will go bust before a single Btu of profitable shale gas ever reaches the surface. And that will be a saving for us all.