Race for shale gas a long and difficult journey, argues Sabien Technology

Investor news

Published: 04 February

Type: Investor news

Year: 2014

Race for shale gas a long and difficult journey, argues Sabien Technology, and The Government's commitment to a shale programme could threaten 2020 renewable targets.

  • International Energy Agency warns David Cameron’s hopes for a US style shale gas ‘revolution’ highly unlikely

  • Severe regulatory and technical infrastructure impediments to successful shale implementation

  • Unlikely UK shale alone will affect wholesale gas prices

The Government’s stated commitment to shale gas mining is likely to be a long and difficult journey – with any benefits to business, the economy and consumers taking up to ten years to come into effect, argues Sabien Technology.

While David Cameron has recently announced huge tax breaks for local councils which are willing to approve fracking projects in their areas (see Note 1), Sabien Technology Group plc (AIM: SNT), the manufacturer and supplier of M2G, a boiler energy efficiency technology, suggests that a robust and effective shale gas production programme could conflict with the Government’s current renewable energy target.

The company also warned that substantial regulatory, technological and infrastructure constraints must be addressed before the UK can make substantial progress in its pursuit of shale gas.

"The Government is legally committed to meeting 15% of the UK’s energy demand from renewable sources by 2020 in order to help achieve the UK’s energy security and carbon reduction objectives, (see Note 2), said Sabien Technology’s CEO Alan O’ Brien.

"While it all very well being bullish about the creation of thousands of new jobs and adding billions of pounds to the UK economy, in our view David Cameron runs the risk of ‘biting off his nose to spite his face’.

"There are a number of mitigating factors to consider," added O’Brien.

"If shale gas production takes off and recoverable yields fill the declining gap in domestic production while delivering a substantial surplus, we feel this will present a very real threat to renewables."

"In the past gas was seen as a bridge to Renewables, now with the UK’s commitment to shale exploration gas is now being described as a ‘destination’ fuel when given the right market dynamics and conditions would leave his 2020 Renewables target completely stranded.

"The major stumbling block at the moment is the international wholesale ‘spot prices’ for gas – whichever way you look at it, the UK cannot ring fence itself from wider international market conditions, and in our view, other countries with large shale reserves - like France and Poland – will also need to drill if supplies are to significantly swell and influence international wholesale spot prices," he said.

Alan O’ Brien also cited the views of Fatih Birol, chief economist and director of global energy economics at the International Energy Agency.

"The UK has significant shale gas resources but people shouldn't expect a US scale energy revolution in the UK – the conditions are not as favourable as in the US," said Mr Birol in an interview with The Daily Telegraph (30 January 2014 – see Note 3)

Mr Birol's comments come after Energy Minister Michael Fallon unveiled a raft of incentives designed to encourage shale gas fracking across the country.

The Government hopes that cheap energy from shale will provide a boost to the economy on a scale seen in the US where fracking has played a major part on the nation's economic recovery.

"If shale gas plays out the way experts are predicting perhaps an artificial floor price for gas to head off the potential threat to renewables could be on the cards," said Alan O’Brien.

"But frankly, we cannot see how the Government will meet its long established commitment to reduced carbon emissions and lower gas prices if the UK is to forge ahead on its own with a shale programme."

Formidable obstacles lay ahead, O’Brien predicts:

  1. "We do not know at this stage whether or not shale gas can be extracted at commercially viable levels - test drilling results should give early predictions and the conversion rate of exploration licenses into production licenses will be another lead indicator.
  2. "In addition to this unknown, international gas prices could become an additional threat to the commercialisation of UK shale. If Europe’s leading gas exporters lower natural gas prices, expensive shale exploration could end up in ‘limbo’ becoming less cost-effective, thus further reducing investors’ appetite and confidence.
  3. "Shale gas exploration faces a formidable host of enemies from competitors within its own industry, local communities and environmental groups.
  4. "Fracking undoubtedly carries environmental risks, which may be overplayed and exploited to generate public concern and to kill it at conception.

"Despite all the above manifest considerations - the lure of dividends, the prospect of boosting the economy, taxes and profit sharing for communities and Councils - the dash for shale gas looks inevitable," said O’Brien.

"But in our view, the Government is missing a trick here: what has been and still is the most overlooked and underrated sector in the energy diversification debate is energy efficiency.

"Reducing energy demand alongside broadening supply will be crucial to reducing the cost of energy and securing supplies - there is already a carbon neutral energy source available to us. And that is the energy we don't use

Notes

Note 1

The Independent, 20 January 2014

http://www.independent.co.uk/news/uk/politics/david-cameron-promises-fracking-tax-boost-for-councils-willing-to-approve-projects-9055280.html

Note 2

Department of Energy & Climate Change and Department for Transport, January 24, 2014

Note 3

The Daily Telegraph

http://www.telegraph.co.uk/finance/newsbysector/energy/10606438/Britain-needs-more-nuclear-not-fracking-says-IEA.html