How could UK fracking impact energy prices and the wider economy in the short and long term?

How could UK fracking impact energy prices and the wider economy in the short and long term?

  • 159 onshore block licenses issued in 2015 (Oil & Gas Authority)
  • Just 19% of Brits support exploration for shale gas (DECC)
  • UK shale producers would require £33 billion worth of infrastructure (EY)

Fracking – the process of drilling into the ground and then using high-pressure water to release trapped gas – has been one of the most controversial subjects in the energy industry for years, but the tale took a further twist in May 2016 when North Yorkshire County Council approved Third Energy’s application to frack a well in Ryedale. The decision has been hailed as an important step forward for the UK’s fledgling fracking industry by supporters of the process and as a betrayal of the environment by those who are against it.

But leaving aside the ‘should we, shouldn’t we’ debate, what could fracking in the UK do for energy investments and the wider economy in the short and long term?

Nikolas Xenofontos, Director of Risk Management at leading online trading services provider easyMarkets, comments,

“It’s no secret that the UK’s government has advocated for the production of shale gas, an industry it purports could help the world’s fifth largest economy strengthen its energy independence. However, with public support for hydraulic fracking at all-time lows, the Conservatives may have a few hurdles to clear before bringing this industry back online anytime soon.”

In 2015, 159 licences for onshore oil and gas fracking blocks were issued, a move that pushed the UK one step closer to establishing a viable fracking industry. The US shale boom of the past five years has brought fracking back into focus, with UK energy producers seeking planning permission to begin hydraulic drilling, hence Third Energy making headlines last month by formally seeking planning rights to begin the controversial process.

Economic prospects

For energy investors, a UK fracking boom is almost too good to pass up. If the US shale boom is any indication, shale production is an extremely lucrative enterprise that has the potential to disrupt the entire industry. UK energy companies have already identified billions of pounds’ worth of oil trapped beneath rock layers. Recent advances in fracking technology also mean that shale producers would be able to maintain output levels at competitive prices.

UK shale prospects are bright. There are about 1.3 trillion cubic feet of gas alone in the northern Bowland shale region. Extracting even a fraction of those reserves could be worth billions and the economic benefits wouldn’t stop there. Shale producers would also require an estimated £33 billion worth of infrastructure to effectively realise this market, according to accountants EY. Infrastructure development stimulates construction spending and employment, which have numerous multiplier effects on the economy.

According to the British Geological Survey, other regions with high shale gas opportunities include southern England’s Weald Basin and Scotland’s Midland Valley. Scaling up production capacity in these regions also means greater investment opportunities in field development, subsea technology and operations.

Downside risks

There are many downside risks associated with fracking. The first and most obvious is the environmental degradation that is associated with this unconventional drilling practice. Greenpeace has cited concerns over frack fluid, a highly toxic chemical compound that is needed to make this method of drilling viable. Frack fluid is further contaminated by the heavy metals and radioactive elements naturally found in shale rocks. This is a major cause for concern because a large portion of the frack fluid returns to the surface, where it could contaminate rivers, streams and even underground water supplies.

Greenpeace also notes that in the US alone, up to 10 million gallons of water are needed each time a well is fracked: an enormous drain on resources.

A negative public backlash is the last thing a UK shale industry needs in order to be successful and sustainable. Four out of five Brits have a negative view of the practice, with the strong majority favouring renewable energy sources. Only 19% of Brits support exploration for shale gas, according to a recent survey conducted by the Department of Energy and Climate Change (DECC). That’s down from 29% two years ago.

While oil prices have recovered in recent months, they remain well below pre-crisis levels. What’s more, the latest rally has been driven mainly by hopes of a production freeze among OPEC producers and supply disruptions in places like Canada (wildfires), Nigeria (militant attacks), Libya (war) and Venezuela (economic collapse). All of these countries would pump more crude oil if they could, which suggests the latest rally is anything but sustainable.

In other words, spending billions of pounds on a cyclical industry with an uncertain future may not be the best way to grow the economy. With electric cars becoming even more affordable, some analysts are concerned about a final death blow to the oil and gas industry by the turn of the decade. While this is certainly speculative, it raises a lot of questions about the future of oil and gas, especially in the current context of a slowing Chinese economy. Beijing has made it abundantly clear that it is prioritizing consumption-led development over export and investment-led growth, as it seeks to steer its massive economy in a way that mirrors its advanced industrialized peers.

Regardless of your stance, the UK government appears poised to give oil and gas companies the political backing to pursue fracking: it seems the fracking conversation has come full-circle over the past five years.

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