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Fracking Bribe
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May’s empty fracking bribes are not worth the risk

One of the reasons fracking took off in the USA is that landowners also own the mineral rights beneath their land.  So when energy companies decided that oil and gas prices were high enough to make fracking possible, they had to pay landowners directly for the rights.

The UK is different.  Everything beneath the topsoil belongs to the Crown.  So ordinary householders have little say in whether fracking will take place; and little compensation if it does.  New Prime Minister Teresa May has identified this issue as a pressure point that might break the logjam of opposition to fracking across Britain.

The ‘posh boys’ could not quite bring themselves to do anything quite so vulgar as to compensate householders directly.  Instead, in typical English fashion, they set up a scheme to allow up to 10 percent of the profits from fracking to be distributed to local ‘community groups’ in the affected areas.  From experience, we all know how that works.  Most people are deemed ‘undeserving’; while the local great and good together with the town hall bureaucrats use their weight to allocate the funds to their chosen causes.  Little wonder that Osborne’s ‘Shale Wealth Fund’ got little traction.

May’s idea appears to be to cut out the middlemen and simply divvy up the spoils of fracking directly among landowners in the affected areas.  The exact details are unclear, and we can envisage all sorts of problems arising out of who wins and who loses.  Tenants will most likely be excluded, but their landlords will benefit.  Large landowners will benefit at the expense of ordinary households.  Those with the most expensive houses will enjoy a bigger kickback.

The big flaw in this form of ‘bribery’ is that, unlike in the USA, there is no up-front payment.  Were fracking companies obliged to buy the right to frack beneath Britain’s towns and villages, the cost would be so high as to render the industry unprofitable on day-one.  Instead, householders and local authorities are to get a ten percent share of the profits.

Another way of stating this is that – if the US experience is anything to go by – councils and householders are going to get a ten percent share of a big fat zero!  In the US, surplus income – over and above operating costs – from fracking has been entirely consumed in servicing the enormous debts that were needed to allow companies to start drilling in the first place.  These loans were taken out on the basis of oil and gas prices remaining high.  Since prices crashed in 2014, US fracking companies have been going bust because they cannot even pay the interest on their debts.

The UK has several additional problems that make fracking much less viable than it has been in the USA.  First, the geology is against it.  Whereas the US shale deposits are flat and relatively fault free, the UK’s stressed and fractured rock foundations make horizontal drilling much harder; and may, in any case, have caused any gas that they used to contain to depressurise to the point that they are unrecoverable.

Geography is a problem too.  US shale plays in regions like Texas and North Dakota are in wide open, sparsely-populated regions where access is much easier.   In Britain, shale drillers will have to find a way of shoe-horning thousands of drill sites between the cities, towns and villages on these densely-populated islands.

Then there is the infrastructure.  American frackers enjoy access to drill sites along straight wide roads.  UK frackers will have to navigate lorry conveys through the narrow winding country lanes that connect the rural locations of their drill pads.

There is also an operational problem.  The UK does not have a reserve of fracking engineers and technicians waiting for a call to arms.  Nor do we have a depot containing idle drilling rigs or a warehouse full of fracking equipment and materials.  Indeed, it is even doubtful whether Britain has sufficient spare transport capacity to manage the logistics of fracking on any serious scale.  All of these will have to be imported – at high expense – in the event of UK fracking going ahead.

Even the initial test drilling comes with problems of its own.  Operations in Lancashire in 2011 were shut down because of the earth tremors resulting from the process.  We are talking tremors not disastrous earthquakes here.  Nevertheless, in the US these relatively small tremors have caused sufficient local subsidence and damage to render homes uninsurable.  Local authorities in the USA have also been left out of pocket as the tax take from fracking has proved to be significantly less than the damage to infrastructure caused by fracking.  If these issues are compensated appropriately – either by building the costs in up front or by councils and property-owners pursuing the fracking companies through the courts – they also add significantly to the cost of doing business.

Finally, UK and European environmental regulations are much tougher than those in the USA.  Our frackers will not be allowed to simply leave their toxic waste to evapourate in open ponds next to their drilling pads.  Rather, they will have to pay for toxic waste products to be transported to special treatment facilities for processing.

All of those problems have to be ironed out before sufficient drilling can be conducted to allow anyone even to gauge whether there is any gas in the UK shale deposits.  And even if the gas is there, the cost of solving all of those problems will have to be weighed against the volume of gas that can be recovered and the price for which it can be sold.  At present, world gas prices are about half of the price needed according to the most favourable estimates of UK shale gas profitability.

It may turn out that a handful of fracking operations in a couple of UK sweet spots will turn a profit – most likely those that involve fracking disused conventional gas wells in areas where proven gas reserves exist.  But a golden age of gas power it most certainly isn’t.  And if you’re the kind of person who thinks Mrs May’s promise of a share of 10 percent of the profits is a good deal, then I’ve got some bottles of snake oil that you might be interested in.

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