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Shale gas - why the Government's approach is flawed

"The shale gas boom in the US has caused natural gas prices to drop significantly and there are hopes that the UK can emulate this example. It is true that cheap natural gas has helped energy-intensive US manufacturing sectors giving them a cost advantage, most pronounced in certain export markets, but it is quite unlikely due to the structural differences between the US and the UK.


Similarities
• The United Kingdom is (as is the United States)a net natural gas importer, with a widening gap between domestic production and consumption, mainly due to natural gas reservoirs in the north east being depleted and increased/ steady domestic demand.
• In 2004, the UK became a net importer of natural gas. The UK imported 1.5 Tcf of natural gas in 2014, with about three quarters imported via pipelines and the rest imported as liquefied natural gas (LNG).


Dissimilarities
• Distances between major points of planned extraction, mainly in Southern England, are much closer to major demand hubs in the UK as well as in mainland Europe.
• The UK is reasonably well integrated into a European Energy market, with millions of customers at the UK’s doorsteps and infrastructure available to carry natural gas from the UK to mainland Europe.
• It is anticipated that due to market integration with mainland Europe with two pipelines (the Interconnector UK pipeline that connects the UK to Belgium and the Balgzand-Bacton line connecting to the Netherlands) there is potential export capacity of up to 2.3 trillion cubic feet per year, twice the current daily natural gas consumption.
• All this implies that, unless export quotas are imposed which would cause prices to drop in the UK, British manufacturing is much less likely to benefit substantially vis a vis their European competitors: the main effect is going to be a relatively modest drop in natural gas across the UK and Europe.
• Local Opposition against Fracking is going to continue
• Property right structures (1) are vastly different in the UK compared to the US in two dimensions. In most of the more densely populated eastern states of the US, mineral rights are owned by surface owners, meaning that drilling there creates sizable local income effects as around 10-20% of the value of gas extracted is going to the owners of the mineral rights owners which often is the same as the surface owner. That royalty income is what creates significant buy in from local stakeholders as there is direct compensation for the disamenities. This creates buy in from local land owners.
• Property rights structures (2) In the Western states of the US, a lot of the land is in the public domain owned and managed by Federal bodies such as the Bureau of Land Management or the Bureau of Indian Affairs. This implies that negotiating leases is much easier on these bodies due to limited involvement of local stakeholders, who also happen to live quite far away from extraction sites due to low population density, again implying much less organized opposition.
• Property rights in Europe? In the rest of the world, mineral rights are typically owned by the state (or the Church), which means that local income effects are much lower, thus it is very likely that fierce opposition against fracking is to be expected, due to the known and suspected negative local externalities."

Thiemo
Thiemo Fetzer, assistant professor in Economics at the University of Warwick

For further details please contact Nicola Jones, Media Relations Manager, University of Warwick 07920531221 or N.Jones.1@warwick.ac.uk