Shale of the century – the future for fracking in Ireland

Hydraulic fracturing, or “fracking” as it has become universally known, is a technique for extracting reserves of oil and gas that would be otherwise impossible or uneconomic to extract. The technique, which involves injecting rock with a mixture of water, chemicals and sand, has become one of most contentious issues in British and Irish politics. Advocates of fracking say that more widespread use of the technique could bring cheaper energy and reduce reliance on (not always friendly) foreign suppliers. Opponents point to a range of potential harmful impacts on the environment, associated possible risks to human health from polluted groundwater, and even an increased risk of earthquakes due to increased seismic activity.

Locally, it is unlikely that there will be much fracking activity any time soon.  The Australian company Tamboran, who were granted a licence in 2011 to look for shale gas in County Fermanagh, had their licence revoked in September 2014 with no drilling having taken place. Scotland announced a moratorium in January 2015, and there has been no activity in the Republic of Ireland.

The United States has seen a significant amount of fracking activity, and as a result natural gas prices in the US have fallen precipitously. However, attempts to recreate the shale gas boom in Europe have failed miserably. Poland, which was considered to have the largest reserves of shale gas in Europe and was the best shot of a viable European fracking industry, has had estimates of reserves slashed, and the industry is in disarray.

Ireland has far less favourable geology, with a complex system of shallow aquifers meaning that the risk of calamitous pollution affecting drinking water is much higher. If a viable fracking industry has not been able to sprout in Poland, then the prospects for one in Ireland are even dimmer. There is also a simple matter of economics. The excellent blog, The Gas Man Cometh!, estimates that fully loaded breakeven costs for Fermanagh shale gas would be in the order of $14 per million thousand cubic feet. This would not have been profitable even at the peak of the market for local gas prices, which was $12.01 per million British Thermal Units (BTUs), or $12.30 per million thousand cubic feet on the 4th of December 2013. At the time of writing, the ICE index that the price of British and Irish gas tracks is $7.58 per million BTUs. It is apparent that there is currently no economic argument for fracking in County Fermanagh.

So why the interest in fracking for shale gas in Fermanagh in the first place?  To understand this, it is necessary to look at how the market for oil and gas are intertwined with each other, and what has happened in the oil market over the last decade or so. The graph below shows how the price of crude oil (West Texas Intermediate) has moved since 1986. Prices were broadly stable and predictable until 2003, when a change to the rules by which banks operate would prove to have significant repercussions. The Central Bank of the United States, the Federal Reserve or Fed, decided to allow banks to trade physical in commodities such as oil, metals, and even food. This means that physical commodities begun to be traded as if they were intangible, financial assets. This marked the start of increased volatility and a “boom and bust” cycle in markets such as oil.

Oil WTI

The price of crude oil rocketed until the financial crash in 2008, when prices fell down to close to their historical level. However, a new intervention by the Federal Reserve then started to have a big impact on oil prices. Rounds of quantitative easing, effectively the central bank creating money out of thin air, meant that yields on financial instruments such as bonds collapsed. As such, people trying to generate a return on capital shifted out of financial assets and into tangible assets, such as oil. The three rounds of quantitative easing by the Fed pumped up the price of oil again. With the end of quantitative easing in the US, and the expectation of higher interest rates, capital is flowing back out from commodities and into financial assets. Oil has been uncoupled from its original purpose as something to heat your house, or fuel your car, and instead acts as if it was an intangible asset, and this is the principal reason why prices have soared.

However, the market interpreted this signal (a hike in the price of oil) as an increase in demand for energy, and began to explore alternative sources. Traditionally, the price of gas and oil was closely linked. However, the high price of oil encouraged new technology and innovation in areas such as fracking. The fracking boom led to a vast increase in the supply of gas in the United States, and it is for this reason that gas prices in the US have stayed stable, whilst the price of oil-linked gas in Europe increased.

The graph below shows how natural gas prices in the UK and the US, on the left axis, have moved in comparison to the price of crude oil on the right axis (all UK gas prices were converted to US dollars at the daily spot rate). It can be seen how the financially driven increase in the price of oil drove the price of natural gas higher and higher, whilst the large amounts of fracked gas in the US kept prices low. It now makes sense why it may have appeared to make sense to frack in Europe.

You said oil was cheap, you were the sale of the century

What looked like increased demand for energy led people to believe that there may be money to made from $14 gas. But the increase in the oil price was not, in the main, demand led, it was the result of perverse incentives arising from distortions due to American Central Bank policy. It is incredible how, in our interconnected and globalized world, how obscure changes in banking regulation rules, and the monetary policy of foreign countries, can lead to a situation where it can seem like a good idea to carry out manifestly insensible schemes, such as injecting the lakelands of County Fermanagh with chemicals in order to extract gas.

The future is, as ever, uncertain, but there are various reasons why it is unlikely that there will be much fracking taking place in Ireland any time soon. Firstly, it is quite possible that oil markets will fall further. Currently oil prices are being propped up by those embarking on contango, literally where traders are buying oil at one price and then simultaneously selling it in a year’s time for a higher price, meaning that if you have the means to store oil then you are guaranteed a profit, as if you could fill up your tank with home heating oil for £500 and then agree to sell it for £700 in a year’s time. But this trade requires having somewhere to store your oil for a year, and inventories of oil are swelling. Eventually people will run out of places to store oil for their contango trades, and given the current deflationary outlook for the world economy, this opportunity will disappear and the price of oil could start to fall once more.

Another factor is that the gap between the price of natural gas in the US and in Europe is likely to shrink, as technological improvements make it cheaper to convert gas into liquid and ship it to where it is needed. There is no shortage of shale gas in America, and it is therefore likely that gas prices in Europe will fall as the gap between European gas and American gas closes.

The artist behind this excellent piece of political graffiti, as seen in Pottinger’s Entry in Belfast, need not worry. Nobody sensible is likely to want to frack in Ireland for some time to come.

Ban Frackin

 

Edited 2nd March 2015: As pointed out by The Gas Man Cometh, I had mistakenly referred to “million cubic feet” when I should, in  fact, have said “thousand cubic feet”. Also, as alluded to by Melanie Brown and Nevin in the comments, it was remiss of me to discuss fracking in Northern Ireland without discussing the situation on the north coast. You can read more about what is happening on the north coast here.

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  • chrisjones2

    How do you see political factors affecting this though? For example is Russian expansionism not a potentiually destabilising factor in the European Gas Market?

  • salmonofdata

    The problems with Russia could certainly cause price volatility in the short term, but in the longer term technological advances in liquifying and shipping natural gas is likely to close the gap in prices between America and Europe. Australia is awash with the stuff as well. Currently I think the cost of liquifying and shipping gas from America to Europe is about $5/mBTU, and that cost is likely to come down, so it is going to be uneconomic to produce gas in Europe at anything less than the US price plus $5.

    Eventually that might make sense in Poland, although they have had problem after problem, but the small scale of any fracking operation in Ireland would be dwarfed by those in the US, Australia, and even China. It’s hard to conceive of any set of economic conditions that would see fracking locally making any sort of sense, and that’s before you start talking about the environmental, health, and wider economic impacts on sectors such as agriculture and tourism.

  • Practically_Family

    Not really. There are two possible scenarios involving Russia.

    The first is that the EU accept that they aren’t going to admit Ukraine, and that their influence there will necessarily be limited. The second is that the issue is forced and the ensuing war will render all such mediocre considerations moot.

    Frankly, I think that the first is by far the most likely (grudging) outcome, but somebody needs to tell David Cameron before he’s left waving his willy very much on his own, by both EU & NATO partners.

  • chrisjones2

    I assume there are also other factors too ie where do you ship it to and how do you get it into existing piplein networks which are set up for current soucres,

  • Practically_Family

    And who people prefer to buy from, Britain will default to the US, I suspect even at the cost of paying “just a little more”.

    It’s unlikely to be as cut & dried in much of the rest of Europe.

  • chrisjones2

    Its not just price bus security of supoply that is the issue

  • eireanne

    circulated nationwide on frackfree ireland, a good overview of the pros and cons of fracking beyond the contingency of current oil prices, https://eurofree3.wordpress.com/2014/01/09/to-frack-or-not-to-frack/

  • T.E.Lawrence

    You also have to consider the Saudi Factor. These guys will still keep producing and not slow down and don’t care if oil goes down to $20/Barrel. This will kill the alternative fracking producing competition and one might say for a very long period of time !

  • PaulT

    That won’t go down well with the shareholders in the PLCs buying gas for the British market, investors in Centrica and EDF etc are more use to management gouging British people for as much as possible and returning a healthy dividend to them.

    I expect their share prices will crash once this information becomes public knowledge, BTW whats your source?

  • Zeno

    And then bang it up to $150 a barrel to get their money back.

  • PaulT

    not for the free market, which you have been confusing with government for a while. The free market has derivatives and insurance and it can take it’s money and leave whenever it likes. The government is a bit more permanent.

  • Practically_Family

    Quite. And for most Europeans there is no issue with supply from Russia. At least no more so than relying upon the USA.

  • Nevin

    “shale gas in County Fermanagh” ..

    Meanwhile, on the north coast.

  • Melanie Brown

    “Nobody sensible is likely to want to frack in Ireland for some time to come.” Is that so?

    Rathlin Energy Ltd has, currently, a planning application lodged with the Planning Service to drill an exploratory well into the shale layer at Ballinlea in Co. Antrim. A cross-section of the proposed well by Geological Survey of NI (part of DETI), submitted recently as part of the Environmental Impact Assessment, describes the layer as follows: “2450m Carboniferous Visean Murlough Bay Formation is the equivalent to the Bowland Shale and is a possible source rock for the region. It is a potential target for shale gas development in the region.”

    Rathlin Energy’s “Ballinlea 2 Environmental and Waste Management Plan, Exploratory Operations” document states that its operations will include a “Carboniferous shale mini fall-off test”, also known in the industry as a ‘minifrac’ which provides information about the permeability of the reservoir, and whether a full fracture would be worthwhile.

    There is a hint in the air that GSNI/DETI is the driving force behind the desire to drill into the shale—the company is adamant their ‘primary target’ is conventional oil… and they once mentioned that they were “expected” to drill into the shale….

    Is it the Rathlin Energy Ltd or DETI that wants to drill into the shale here?

    And why were licences granted in Northern Ireland without a Strategic Environmental Assessment being undertaken?

    Read more at: http://www.protectournorthcoast.com/ponc-requests-action-stormont-committee/

  • salmonofdata

    I’m going to have to hold my hands up on this one, my research was focused on Fermanagh and I wasn’t fully aware of the situation on the north coast. Although, in my defence, I only said that “sensible” people would be unlikely to want to start fracking in Ireland. Insensible people, perhaps. I will need to do some homework.

  • Mister_Joe

    According to The Economist, the fall in prices is the result of deliberate action by Saudi Arabia to drive marginal producers out of business. (The OPEC cartel has ceased to function). It is so cheap to produce there, they still make huge profits at $40 per barrel. As Zeno says, wait until they succeed and watch prices rocket again.

  • T.E.Lawrence

    Saudi Oil Minister Al-al Naimi has already stated that Saudi would not hesitate to issue sovereign debt for the first time in order to make up for lost oil revenues, meaning that Saudi would tolerate far lowerr prices to wipe out the competition. Once the compo is gone add these costs also into the price of a barrel !

  • thegasmancometh

    Slugger, mcf = thousand cubic feet, rather than million cubic feet, but the premise is correct. Shale Gas viability depends on a number of factors – 1, price of gas, 2 cost of extraction, 3, recovery rates, 4. Investment (huge capital costs) 5. ability to roll over loans. Indeed it was the change in PUDs and finance rules in 2009 which allowed the capital investment for fracking to take off – Shales are as much about drilling on Wall st as drilling into the rock, and in any boom/bust activity there will be winners and losers, and a whole economic cycle approach (rather than our 5 year electoral approach) needs to be taken of Shale Gas, and indeed Energy needs in particular. There are a number of trends happening worldwide – it seems developing countries are skipping mass fossil fuel generation and going direct to community owned solar, Developed economies are becoming more energy efficient and these trends are happening by virtue of the ‘market’ rather than through any serious policies with regard to climate change. Wind is already cheaper than fossil fuel for generation (Denmark) and Solar is becoming price competitive in the US even without subsidies. The missing piece to the renewables jigsaw is storage – and with the Gigabattery factory being opened by Tesla and other such operations worldwide, that element is shortly going to become available at a price point that will make gas and fossil fuels redundant over time. Indeed AES have announced a large battery array for storage and grid stability at Kilroot in Northern Ireland – perhaps we should be focussing on working with them to become a leader in grid level storage rather than transient shale gas development. Renewables require significant capital investment, grid upgrades and storage solutions but these are not insurmountable. Fossil Fuels have served us well and will continue to do so for a while into the future BUT they require ever more Capital investment, Harder to find sources, and riskier extraction. Even after all of that one is left with having to pay for the source fuel itself leaving one at the mercy of those who control the resource (OPEC/Russia etc..) and those who control the Market (Traders). [There is an investigation into the 2009 spike in oil price still ongoing by SEC]. If one wants true Energy Security there is only one horse to back in the Energy race, just so long as one agrees the race is a marathon not a series of short 100m sprints.

  • salmonofdata

    The Gas Man Cometh,

    Thanks for the feedback and apologies for the error regarding units, I will correct this later. I find the link between financial regulation and commodities fascinating, and was not aware of the changes in 2009 so I will check this out. I’m also very interested in what is going on with regards to the economics of renewables, and completely agree that we should be aiming to be a world leader in renewables rather than obsessing about marginal shale plays that don’t make sense on either an economic or an environmental level.

  • Nevin

    Salmon of Data, a search of the Assembly site, including questions, would have taken you to the North Coast as well as to Co Fermanagh. I’ve just updated my NALIL blog and posed the following question:

    Why then is the DOE minister putting those with concerns at the expense of challenging a non-independent environmental impact assessment?

    It seems most unfair that members of the public are being left to do the work that should be done by the DOE.