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Fracked promises

Image: WCN 24/7

There is an irony to Cuadrilla restarting its fracking activities in the UK in the same week that the Intergovernmental Panel on Climate Change published its dire warning that we have just 12 years to transition to a zero-carbon economy if we are to stay below the 1.5oC above pre-industrial temperature target.  Nor does it bode well for our future that within hours of the first frack the region experienced a series of small earth tremors; possibly precursors of bigger quakes to come.

To many, the decision to press ahead with fracking is irrational.  For example, Daniel Nyberg and Christopher Wright at the London School of Economics ask:

“How could a technologically advanced society choose to destroy itself?..

“Interestingly, both proponents and opponents to fracking frequently linked fracking to climate change. For example, the industry group Energy and Utilities Alliance argued that shale gas from fracking is both cleaner than both coal and oil ‘so its use will enhance the ability of the UK to achieve its climate change obligations’. For proponents, fracking was constructed as a ‘bridge fuel’, with the temporally immediate interest of energy security focused on ‘keeping the lights on’.

“In contrast, opponents to fracking linked the national expansion of shale gas with the global imperative of rapid decarbonisation. Dr Jon Broderick from the Tyndall Centre for Climate Change asked the simple question in the final inquiry, ‘the central issue is: do we want to avoid dangerous climate change and how do we go about doing that?’”

This suggests that the parties on either side of the fracking debate are talking past each other.  One reason for this given by Nyberg and Wright is timescale – those who see shale gas as a transition fuel view climate change as something in the far future; while those who oppose fracking see evidence of climate change all around us.  This, however, may be too simplistic an argument.  While climate change may be one axis of the problem, energy is a second axis all on its own.

The “transition fuel” argument may actually have more to do with Britain’s growing energy deficit than with climate change.  As Megan Darby at Climate Change News notes:

“As she considers setting a date for the UK emissions to hit net-zero, the energy and clean growth minister [Claire Perry] said fracking for new gas resources remained ‘pragmatic policy’…

“Natural gas supplies around 40% of UK electricity and 80% of home heating. It is part of the energy mix in ‘every major pathway’ to reduce emissions modelled by the CCC, Perry said. ‘I have not seen a single bit of modelling that shows 100% renewables is viable’.”

As regular readers of this blog will be aware, a 100% renewable economy is entirely possible and easily achieved – it is, after all, how human beings have lived for all but about 250 of the 250,000 years we have been around.  What Perry means is that there is no 100% renewables scenario that doesn’t involve a massive economic collapse and a severe decline in living standards across the developed and developing economies of the world.  Insofar as Britain’s fossil fuel reserves have been in steep decline since 2000, then government has been obliged to turn to nuclear, wind and solar (and imports) to fill the growing gap.  Insofar as these cannot deliver the energy required to pay back all of Britain’s public and private debt, then some new energy source will have to be found.  Insofar as shale gas is the only untapped reserve available, it will have to happen (because the alternative cannot be contemplated).

The economy is, of course, the third axis of the fracking debate.  This is not simply because the British economy cannot grow without the hypothetical energy from shale gas; but also because a there are vested interests in the banking and finance sector that stand to make a lot of money from UK fracking if it takes off.  It is, however, precisely in this corner of the debate where the real seismic events are likely to occur.  As Gaurav Sharmaat Forbes warns:

“Over the last two fiscal years, the government has kept up the momentum maintaining onshore tax allowances, licensing acreages and fast-tracking planning applications. The Department for Business, Innovation and Skills said: “We have been clear that any shale developments must be safe and environmentally sound.

“’Shale gas has the potential to be a new domestic energy source, enhancing our energy security and delivering economic benefits, including the creation of well paid, quality jobs’.

“However, the expected returns have more to do with long-term hopes and potential tax revenues, rather than short-term gains. Will Scargill, Senior Oil & Gas Analyst at GlobalData, said: ‘Although the beginning of fracking is an important step for the industry, we’re still a long way from shale gas playing a significant role in the U.K. energy sector’.”

Banking on those “long-term hopes and potential tax revenues” may well prove to be a fool’s errand if the experience of the fracking industry in the more advantageous US shale plays is anything to go by.  As Nick Cunningham at Oil Price reports:

“Oil prices are down a bit, but are still close to multi-year highs. That should leave the shale industry flush with cash. However, a long list of U.S. shale companies are still struggling to turn a profit.

“A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute detail the ‘alarming volumes of red ink’ within the shale industry.

“’Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June’, the report’s authors write. The 33 small and medium-sized drillers posted a combined $3.9 billion in negative cash flow in the first half of 2018.

“The glaring problem with the poor financial results is that 2018 was supposed to be the year that the shale industry finally turned a corner.”

It is no accident that when Barclays pulled its investments from UK fracking last year it cited financial rather than environmental concerns.  In the USA, fracking has been likened to a Ponzi scheme that depends upon a growing queue of institutional investors (i.e. your pension pot) desperately seeking 5% returns in a 0.5% interest rate environment.  The frackers can, just about, pay the interest on the capital already sunk, but they will never repay the original investment.

Missing from the debate on fracking is any understanding (on both sides) of the concept of “net energy.”  To a government desperate to keep the lights on and the economy moving, the huge potential volumes of shale gas beneath the British Isles is all that matters.  To the opponents of fracking, the environmental destruction that would ensue if that gas was ever burned is all that counts.  Neither, however, has questioned whether it is actually possible to recover even a fraction of the shale gas that may or may not be there.

The obstacles to recovery are legion.  They include geographical considerations – somewhere between two-thirds and three-quarters of the potential drilling sites are inaccessible because they are beneath housing developments or because they would involve diverting major roads, railways, pipelines, canals or rivers.  Unlike the USA’s giant wide, flat shale plays, Britain’s tortured geology (which rendered its coal industry unprofitable a century ago) makes horizontal drilling difficult; while the presence of large numbers of small fault lines may have already caused the gas that was there to have vented into the atmosphere millennia ago.  Logistics present a growing problem.  In the USA, fracking companies are already experiencing shortages of fracking sand and are exhausting local water supplies.  These are likely to be even greater obstacles in the UK.  Skilled labour may also be at a premium in the event that a UK industry does develop.  Since the wage bill is likely to be the largest overhead, rising wages are also a major barrier.

What these obstacles all add up to is a huge energy investment before a single Btu of gas has been brought to the surface.  Ultimately to be viable, the shale gas brought to the surface must be a multiple of the energy required to obtain it.  If it takes more energy to secure the gas than it provides in return, it is better to leave it in the ground.  Indeed, if the aim is for shale gas to maintain economic growth, then it needs to provide at least a 20:1 return.

In the end, though, profitability will be the obvious proxy for net energy.  After all, it will be investors’ money that will be used to overcome or work around the many barriers facing UK fracking.  When all of that money has been spent, the UK fracking industry will have to produce and sell enough gas to pay back that investment with interest while retaining enough cash to continue to operate.  Given that the UK economy is currently too poor to afford the (much cheaper) conventional gas that provides most of our heating and cooking and a large part of our electricity, the UK frackers will need to sell their gas into a political climate in which energy price caps and public ownership are the order of the day.  Neither will be particularly attractive to potential investors.

Ironically, protests against fracking may be the one thing that has kept the fracking companies in business.  By successfully preventing the fracking companies from drilling, the protests have allowed them to maintain the fiction that there is money to be made from Britain’s shale deposits.  As I noted prior to the election last year:

“Up until now, they have been able to blame their failure to extract a single profitable BTU of gas from beneath the British Isles on the various bureaucratic impediments to shale drilling.”

Unlike the US industry, which benefited from the post-2008 central bank stimulus, UK fracking is late in the game.  The UK industry is opening operations in a far less forgiving financial climate.  That means that, unlike their American counterparts, they are unlikely to be given the luxury of a decade of negative returns.  By restarting drilling in Lancashire, Cuadrilla has moved the UK fracking industry into the “put up or shut up” phase.  If the gas turns out not to be there or if it proves too expensive to recover, then we could see a fairly rapid investor-flight.  The ensuing bankruptcies will see then end of the fracking chimera once and for good.

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