Wednesday 17 June 2015

Scotland's Got Gas: Royal Society of Edinburgh Report

The Royal Society of Edinburgh have released a new report into Scotland's future gas use and supply today.

It outlines the importance of natural gas to Scotland's economy. Compared to the rest of the UK (rUK), gas isn't much used for electricity generation - only 10%, but it is vital for domestic heating and as an industrial feedstock. Even in the best-case scenario, Scotland will need 39,400GWh of gas per year in 2035. This demand can either be met by increasing offshore production, extracting unconventional gas from onshore, or by importing gas from abroad. Each poses its own technical, economic and social challenges.

Focussing on onshore unconventional gas, the report concludes (my emphases):
"Onshore production of unconventional gas would allow Scotland control over all regulation surrounding extraction and production. The impact of unconventional gas production on the environment is considered to be comparable to conventional gas. The areas of health, wellbeing and safety surrounding an onshore industry do not appear to present significant risks, although a degree of uncertainty is present. Domestic production onshore could improve energy security, create jobs and ensure Scotland takes responsibility for its energy consumption."
"Public opinion relating to onshore unconventional gas development, particularly surrounding safety, in Scotland is often negative and this could make developing an industry difficult. The characteristics of onshore production are notably different from the offshore industry with which the country is familiar. Increased traffic and noise and light pollution occur during early stages of development." 
Meanwhile, it is critical of the alternative option of relying more and more on gas imports from abroad:
"Relying on imported gas from abroad appears inconsistent with Scotland taking responsibility for its energy use. While such reliance may serve to decrease the recorded carbon emissions attributed to Scotland and respond to public desire not to develop gas onshore, it would do so at a cost. Health and safety regulations and environmental regulations in supplying countries may not be at the standard they would be in Scotland, with a higher risk of injury and death to workers and a higher risk of environmental impacts local to production
"The transport of gas via pipeline or tanker across the globe also results in fugitive emissions, leaks and a considerable use of energy which add to the global carbon footprint. Hence, the global carbon footprint of the gas that Scotland consumes, and the impacts at the point of production, are likely to be far higher for imported gas than for Scottish onshore or offshore production."

There is one section, however, where I think this report gets things wrong, and that is in conflating, taxes, subsidies and investment. The report concludes that:
"Considerable uncertainty exists over potential reserves of unconventional gas, meaning the significant government expenditure that would be required to kick-start a fledgling industry could be for nought."
Which is surprising to me, because governments (either Scottish or rUK) are not making any significant expenditure to develop this industry. Sure, they have funded a few reports and a few research projects, but this could hardly be described as remotely "significant".

The investment for shale gas development - the geophysical surveys, the exploratory boreholes, the nursing of project applications through the planning system - is all being paid for by the operators themselves, funded either by private capital or their shareholders. This is as it should be, and I'm not aware of any operators saying anything different. This is an important difference between domestic shale gas and other options like offshore wind and/or nuclear, in that shale gas development doesn't really need any government subsidies or investments.

Digging into the detail of the report, it says the following:
"Like most fledgling industries, unconventional gas would require substantial government support, most likely in the form of tax incentives, in order to develop.  Even with investment from the government, the geological risk (i.e. the size of resource and/or the cost of extraction) is significant and an unconventional gas industry may simply fail to take off, creating no jobs or return on that investment."
So the only "investment" from the government is a tax break. Firstly, it's worth noting that if an operator does successfully produce shale gas, it'll be paying tax at a rate of 32%. Most non-oil-and-gas companies pay corporation tax at 20%. The major producing fields of the North Sea pay tax at 62%. So although shale operators are getting a tax break relative to some North Sea producers, they'll still be paying more tax than most companies in most other sectors, so it's all relative.

More importantly, this only matters if operators are making significant profits. If it does turn out that the geological conditions aren't quite right and shale gas can't be extracted profitably in the UK, then the tax level set by the government is completely irrelevant, because you only pay tax on your profit, not your turnover. The government would receive no tax, regardless of whether the tax rate is 32% or 62%. From the government's perspective, it has nothing to lose, it can only gain. The only people who stand to lose if a UK shale industry is unsuccessful are the private investors with shares in the onshore operating companies, and I don't think the general public will be too worried about those "bankers".

So to conclude, the report is very strong on the science and technical aspects, and the environmental side of things. But probably needs to brush up a little on the economics side of things.


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