Can the shale gas revolution come to Scotland?
GEORGE KEREVAN reports on the potential for an energy revolution North of the Border...
WHY did Barak Obama win the Presidential election when US unemployment is stuck at nearly 8 per cent?
Answer: shale gas. Obama’s re-election was secured by victories in swing states like Ohio and Pennsylvania, where a revolution in natural gas production has created a mini jobs boom. In July Ohio’s unemployment rate was down to 7.2 per cent, the lowest since 2008. Job growth in the state was the fourth-fastest in America. Ditto in Pennsylvania, where unemployment is also below the national average.
But there is more to come. The US is set to overtake Saudi Arabia and Russia to become the globe’s largest energy producer by 2020, according to the International Energy Agency (IEA). By 2035, America could even be self-sufficient in energy production. Again, the reason is shale gas.
The cause of this revolution is hydraulic ‘fracking’ – the use of high-pressure water and chemicals (injected horizontally at great depth) to break open shale deposits and release trapped natural gas. Fracking has already unlocked huge deposits of hydrocarbons in the United States.
The IEA predicts the US will be producing 11.1m barrels per day (bpd) of oil equivalent by 2020, compared to 10.6m bpd from Saudi. Yet only five years ago, the prediction was for US output of gas and oil to fall.
The potential impact on the American economy is staggering. Gas prices in the US are about a fifth of those in the EU. That is unlikely to change in the short term because of the difficulty for the US in exporting gas. Instead, shale gas will be used domestically, driving down costs for domestic industry and allowing US manufacturers to undercut international competitors.
In addition, over new 600,000 jobs will be created directly in US oil and gas production by 2020. The shale gas boom has been responsible for creating some 33,000 jobs in America this year alone – to the political benefit of President Obama.
But the impact downstream could be even greater. Access to cheap energy and natural gas liquids is prompting a massive revival of the US petrochemical industry. Royal Dutch Shell is planning to build a $2bn ethane cracker plant in western Pennsylvania that will create 10,000 construction jobs.
SHALE IN EUROPE
CAN Europe repeat America’s energy success? Probably not.
There could be as much as 1.5 trillion square metres of shale gas in Europe.
But there are three problems. First, while US shale seams are quite thick and relatively easy to access, those in Europe are thin and fractured, making it more difficult to extract the embedded gas.
Second, there is a legal problem: unlike the United States, in most of Europe mineral rights do not belong to private land owners but to the state. In the UK, for instance, the Crown is the legal owner of all oil, gas, coal, gold and silver under the ground, not the private owner of the surface property. Pressure from environmental bodies has made governments in Europe reluctant to issue licences for fracking shale gas.
Thirdly, the US has a lot of small independent energy companies that are used to taking a punt on this kind of wildcat project. In most of Europe, the big energy majors (some state-owned) are not as inclined to take this kind of risk, or court political opposition from environmental groups.
As a result, the shale gas revolution has stalled in Europe.
“PARAFFIN” YOUNG
WHAT are the prospects for sale gas extraction in Scotland?
It is often forgotten that the world's first commercial oil refinery was established near Bathgate in 1851, by James "Paraffin" Young. He built a global export industry extracting petroleum from shale found beneath West Lothian. At the height of the original shale oil industry in 1912, Scotland accounted for 2 per cent of the world oil production.
Scotland and the UK have substantial shale gas reserves, though the first serious estimates will not be published till next month when a detailed report is expected from the British Geological Survey, commissioned by the Department of Energy. Likely reserves could be worth more than those in North Sea.
In Scotland there are potential shale formations across the Central Belt and Fife. As well as shale gas, Scotland also has reserves of what is known as coal bed methane, or CBM. Shale gas is trapped in sandstone while CBM is found in traditional coal seams. Shale gas is usually found at twice the depth of CBM. Hydraulic fracking can be used to extract CBM, but in European conditions it is more common simply to drill multiple wells into the coal seams, releasing trapped water to allow the methane to escape.
Exploring for shale gas and CBM has been slow to develop in Scotland, partly because of opposition from environmental groups, partly because mineral rights are owned and licensed by the Crown, and partly because the Scottish Government has focused its energy policy on renewables, particularly offshore wind.
A licence to prospect for CBM was recently awarded to Greenpark Energy, for a site near Canonbie in Dumfries and Galloway. Greenpark, which is based at Berwick Upon Tweed, has the largest onshore acreage position of any oil and gas company operating in the UK.
Another company, Singapore-based Dart Energy, has applied for permission to extract CBM from a depth of 850 metres, at a site near Airth, between Falkirk and Stirling. Dart has already signed a five-year, £300 million deal with SSE to supply gas from next year. Dart does not intend to use fracking, but eventually it could drill up to 35 production wells on site.
Dart expects to invest £50m in the project in 2012-13 – a not inconsiderable sum in the present economic climate. That could rise to £200m if the field is developed further. Dart is currently carrying out an IPO on the London AIM market. This is expected to raise more than £30m in development capital.
A BLUEPRINT FOR SCOTLAND?
Nevertheless, these are only small developments. Can Scotland hope to emulate the shale gas revolution in the USA?
The Scottish Government remains wedded to offshore wind power. However, to develop, this will require truly staggering amounts of investment capital. It is also the case that, to be profitable, the electricity generated from offshore turbines requires to be exported at a guaranteed premium price – a premium that will have to be mandated by Westminster for environmental reasons.
Yet if Britain or Europe sour on subsidising renewable energy in the face of competition from a US economy reinvigorated by cheap shale gas, then risking Scotland’s future on one power source may prove problematic. That is even truer if Scotland votes for independence.
Scotland needs energy security. To achieve that requires having a variety of competing energy sources. One way of promoting that goal would be for an independent Scotland to transfer its inherited Crown ownership of onshore minerals rights back to private ownership.
At a stroke - and at no upfront cost to the taxpayer - that would raise land values, proving a boost to private wealth and investment. Further, by transferring prospective profits to private hands, it would draw capital investment into mineral and energy prospecting. We might even see a new generation of Paraffin Youngs.
SCOTS SMEs 'MORE CONFIDENT THAN UK'
Scottish small business confidence is now higher than the UK average, the latest Federation of Small Businesses’ (FSB) quarterly report shows.
The FSB’s Voice of Small Business Index, published yesterday shows that while small business confidence is growing across the UK, an average firm in Scotland is currently more bullish than its counterpart in England and Wales.
The analysis also shows that, as spare capacity in small business falls, recruitment intentions are at their highest level since the research began in the first quarter of 2010.
The Scottish Small Business Index, the FSB’s measure of small business confidence, rose substantially to plus 44 points in the second quarter of 2014, up 8 points from quarter one. This represents a substantial improvement from this time last year, when the index stood at just plus 9 points. Half of the small businesses surveyed expect business prospects to improve over the next three months, compared to just 12 per cent who expect them to deteriorate. Across the whole of the UK, the Small Business Index rose from plus 35.7 points to plus 39.7 points over the first quarter 2014, while the share of UK businesses expecting conditions to improve held steady at 47 per cent.
The proportion of Scottish firms reporting that they are running below capacity fell from 52 per cent at the start of the year to 46 per cent this quarter. Looking ahead, only 33 per cent of firms expect to be running below capacity during the next three months. Revenue and profits are looking healthier, too, with 37 per cent of respondents expecting revenues to increase over the next quarter. A balance of 16 per cent reported increased profits during the last quarter and 26 per cent of firms anticipate higher profits in the coming year. Further, 19 per cent of businesses plan to increase capital investment over the next year, compared to 8 per cent at this point in 2013.
Says Andy Willox, the FSB’s Scottish policy convenor, “While it is nice to see Scottish small business confidence climb above the UK average, more significant is the continued rise in small business confidence across the UK. Further, reduced levels of spare capacity means that more businesses are looking to recruit.
“This is good news for unemployed Scots and for the recovery – as is the fact that one in five businesses plan to increase capital investment this year. More businesses placing orders with suppliers means more full order books, more materials to be sourced and more staff to be hired. That is the key to rebuilding our economy.
“No matter how confident we are, though, none of this investment will happen without finance. Although the position has improved since this time last year, it has hardly moved in the last three months. We’ll need to keep a close eye on this trend and ensure things don’t start to slip back. Having worked so hard to build a recovery, we can’t have it stifled by a lending market which lacks our members’ ambition.”
Economy Forecast
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RETAIL LEVY 'PUSHING BUSINESS OUT OF SCOTLAND'
Scotland’s £95 million large retail levy “looks designed to push retail investment elsewhere”, the Scottish Retail Consortium claims in a pre-budget submission to Holyrood.
It argues that the non-domestic rates system “is no longer fit for purpose. It is a disincentive to invest in commercial premises, the tax seems to only ever rise, and retailers pay disproportionally more than other sectors.”
A comprehensive longer term overhaul of the business rates system is required, which would increase retailers’ confidence about investing in property, create more jobs and help revive high streets.
The large retail levy or ‘Tesco tax’ was brought in to assuage small firm concerns that the retail super-stores were sapping business from the high street and putting traditional and family businesses in jeopardy. Others saw it as a pure and simple tax grab by the Holyrood administration.
And there other improvements, the SRC argues, that can be made to support the retail industry. “The small firms’ relief is a welcome acknowledgement of the need to keep down costs, and avoiding the repatriation of control over the poundage rate to local authorities is sensible.”
However, it argues, the £95 million large retail levy was a significant departure from poundage rate parity.
“It has meant that for three years 240 retail outlets are paying 28% more than equivalent stores in Wales or England. The levy has been a conspicuous blot on the Scottish Government’s claims to have the most competitive rates regime in the UK.
“Indeed, the policy appears designed to push retail investment elsewhere in the UK, rather than attract it to Scotland, the very antithesis of the argument that the First Minister has been making recently in seeking to “rebalance the economic centre of gravity across these islands”. We welcome the pledge not to continue with the levy.
The SRC recommends that Scotland’s rate poundage rises no faster than that in England, it comes good on its promise not to renew the £95 million levy and rejuvenate the Business Rates Incentivisation Scheme to ensure that revenues accruing to local government from it are transparently re-invested in aiding town centre regeneration.
Transport is vital to the success of the retail industry. With 23,000 outlets in Scotland, located in every town and village, retailers rely on access to good quality and reliable transport for the daily operation of their businesses – for ease of access for customers, to deliver goods, and to enable employees to reach the workplace.
“We fully support the Scottish Government’s plans to dual the A9 between Perth and Inverness, and the A96 between Inverness and Aberdeen, but would urge a more ambitious timescale for delivery rather than the two decades currently envisaged. Improved connectivity to the North and North East will help unlock the economic potential of these two regions, help get goods swiftly to retail outlets as well as, as is increasingly the case, direct to customers.
