IGas Energy, a British energy firm, confirmed that it had reached an agreement with French oil giants Total, to give them a 40% interest in two shale gas exploration licences in Lincolnshire. As a result, Total will have to deposit $46.5m into a work programme and give $1.6m in back costs. This also comes with a $19.5m minimum commitment. This large investment by Total allows a substantial expansion in the number of shale gas sites in the UK – Michael Fallon, the energy minister – has claimed that he believes around 40 shale gas locations will be drilled into in the UK over the next two years.
As our infrastructure is dependent on oil and cannot switch to a substitute good with much ease, the price of energy is rather inelastic. It is a necessity and the amount demanded doesn’t fluctuate significantly much with a change in price. Lord Browne, the chairman of Cuadrilla, a company specialising in shale gas, admitted that any impact on energy prices was uncertain.
“It will depend on the scale of success,” he said. “Moderate success probably won’t move the price that much.”
However, although the price is inelastic, it does not mean the UK economy will not grow. The investments into shale gas, of which the UK has a great supply of, will result in more money flowing into the UK economy and therefore result in a growth.
However, it’s not all good news. The extensive use of fracking concerns many. The first issue is that many environmental campaigners claim that energy firms should be more interested in renewable sources of energy and not fossil fuels, shale gas being non-renewable. Furthermore, fracking uses a large amount of water. This water needs to be transported to all sites – resulting in plenty of damage to the environment. Also, many carcinogenic chemicals used can escape and, consequently, groundwater may be contaminated, conversely it is argued that this is a result of bad practice and not something that will arise every time.
But, of course, fracking also has its advantages. It allows firms to reach resources of oil and gas in place they otherwise couldn’t. It has enhanced domestic oil production and driven down gas prices. Fracking also provides the chance to generate electricity at half the CO2 emissions of coal.
Fracking may have environmental consequences but the industry implies that fracking of shale gas may significantly chip in to the UK’s future energy requirements. A report by the Energy and Climate Change Committee stated that shale gas in the UK may help to secure energy supplies but may not bring down gas prices, again illustrating the price inelasticity of oil and gas. The Prime Minister himself has claimed that the UK would be making a great mistake if it missed the chance to extract clean, low cost gas. As a result, I would expect the UK to persevere with the production of shale gas.
Contributed by Daniel Parshad