A Country on the Fracking Brink?

The discovery and introduction of the unconventional gas from shale rock formations, has dramatically altered the landscape of the US energy market. The development of this gas, via the fracturing of sedimentary rocks, increased the United States’ production of its own gas, making the world’s largest economy more than just energy independent (with regards to […]

The discovery and introduction of the unconventional gas from shale rock formations, has dramatically altered the landscape of the US energy market. The development of this gas, via the fracturing of sedimentary rocks, increased the United States’ production of its own gas, making the world’s largest economy more than just energy independent (with regards to gas supplies).

The US’s shale gas production, which mainly consists of methane, surged from 1% in 2000 to more than 20% by 2009 (Chatham House Report) while prices at the Henry Hub trading platform, plummeted from the peaks of $15/MMBtu to the lows of $4/ MMBtu in 2012 (Bloomberg data). The big turnaround not only enabled higher economic activities, but also enabled the return of previously outsourced business.

Shale Discovery in the UK

Unlike its US counterpart, the development of shale gas in Europe (including the UK), has remained constrained by regulation, geology and, until recently, lack of tax incentives in addition to the environmental regulations hurdles (Stevens 2010). The main issue, however, is public opposition. Due to fears of water-well contamination and seismic activities that have been linked with “fracking”, public opposition has been the biggest force in contention with the country’s move toward what may be energy independence (supplies to replace the depleting North Sea reserves).

Economic impact

Similar to the boom observed on the other side of the pond, the UK is in place for a possible energy revolution. This is could be a result of fracking, should the production of shale gas become commercially viable for further exploration and extraction. With the current market environment resulting in a higher import requirement from Norway, the UK may see downside pressure on its wholesale cost for gas by the early 2020s thanks to this unconventional gas.

Where to stand – the line

The UK, which can meet up to 60% of its gas demand (Reuters) from imports, would greatly benefit from the commercialisation of shale gas, as it holds the potential to usher in an era of lower prices.

A forecast by the Department of Energy and Climate Change adjusted to account for the shale gas introduction to the economy, shows downside pressure on the future prices of the commodity, raising the benefit of such move for the struggling economy. Going forward, the UK will have to reconcile its split personality when it comes to “fracking”, with the nation either choosing to accept that the benefits of shale gas outweigh the costs, or rejecting the fracking process entirely with the backlash being more expensive gas imports.