Significant doubts are now emerging in many key areas about the real benefits of fracking. Two months ago Peter Voser made public that his biggest regret as boss of Shell was the $24bn his firm invested in North America’s shale beds. Over the months before it had caused his company to take a big write-down on this investment and slash its production targets. Also in October BHP Billiton, which spent $20bn in 2011 on a bet on shale, announced it would auction half its oil and gas acreage in Texas and New Mexico. Then in November economists at Goldman Sachs published a report arguing that even at its current cheap price, shale gas would provide only a ‘modest boost’ to the US economy as a whole. They also noted that the energy industry creates relatively few jobs, and they doubted both the pace of innovation in fracking and the degree to which cheap energy will prompt other industries to invest more.
It goes further. There are real fears about the rate at which shale-bed wells run dry. The combination of the low price of gas and the heavy spending needed to keep it flowing casts doubt on whether the exploitable reserves of unconventional oil and gas are as big as they are fracked up to be. Moreover, while gas prices remain at historic lows, it will remain unattractive to invest in wells producing only gas, as opposed to ones that produce oil or a mix of gas and ‘natural-gas liquids (NGLS) like butane and propane.
What this adds up to is that as new gas has poured on to the US market since 2008, its price has fallen by two-thirds to less than $4 per million BTU (British thermal units). It has been estimated that the average price needed to cover all the costs over a well’s life cycle is around $6. It is expected to stay below that level for 3-5 years, if not longer. This means US gas exploration is increasingly being determined by the prices of oil and NGLS. Even where they are high enough, the gas still can’t be got to market affordably and is simply burned off, an incredible waste of a crucial energy source in ultimately short supply.
The question marks over US shale oil and gas supplies, particularly the rapid peaking and then very fast decline rates, are too little understood in the UK and therefore don’t provide the check to resist Osborne’s hyperbole that they should. There is also the important constraint that the areas most profitable for shale drilling in the UK have middle class neighbourhoods where resistance is likely to be determined and persistent. For all these reasons it’s likely that Osborne, out of desperation over a flat economy, may yet again be chewing off more than he bargained for.