In a recent Economic Bulletin, we highlighted the challenges facing the UK oil and gas sector. Maturing fields are pushing up decommissioning costs, which tightens margins especially in the context of much lower prices. Alongside this, heavy taxation of the sector remains a burden despite some positive steps take in the March Budget. Britain has the highest operating costs in the World for oil production and we are now seeing a vicious circle of lower investment and lower production. The OBR’s recent Fiscal Sustainability Report also highlighted the fact that North Sea oil and gas is now in quite a stark long term decline.
Whilst the North Sea may be suffering, Oil and Gas as a sector is still highly productive, skilled and well paid. Indeed, the extraction of shale gas through fracking is one area which still has huge potential. Energy security, industrial competitiveness and job creation will all benefit from the growth of fracking in Britain. So it is very disappointing that Lancashire County Council has delayed a key decision on the approval of the Preston New Road site for fracking exploration.
The legal advice on the planning application is clear; rejecting it on the basis of the visual impact or landscape issues would be “unreasonable.” However, the sheer intensity of the anti-fracking protests could lead to the Council buckling under the pressure. This would be a terribly wasted opportunity to boost a crucial sector; Lancashire County Council must resist the pressure and give the green-light to fracking.
Fracking is the procedure of drilling deep into the earth before a high-pressure water mixture is directed at the rock in order to release the gas inside. The UK’s shale gas reserves are not fully known but it seems that the Bowland shale formation beneath Yorkshire and Lancashire alone has the potential to deliver trillions of cubic feet of gas. Even if the UK’s reserves are not as high as is currently thought, shale gas can still be a tool to help reverse the decline in domestic energy production. A recent report from energy consultants Poyry outlined the consequences for import dependency if fracking does not take place in the UK. If Lancashire shale gas production is allowed to proceed, gas prices will be between 2% and 4% lower from 2021.
Furthermore, by 2030, gas import dependency will reach 58% compared to 79% without any shale gas production. This does matter because it will make us increasingly dependent on volatile, unreliable countries such as Russia for our energy supplies; hardly a welcome prospect. Setting an energy policy which would effectively ban fracking would condemn Britain to ever higher energy import dependency and damage our reputation as an open economy. The result would be higher prices, lower investment and fewer jobs; just look at the economic success of North Dakota in the US which has embraced fracking. Even the GMB union is now in favour of fracking because it knows the benefits for its members could be transformative.
There are of course also important environmental reasons to support fracking. As is made clear in a CPS report, “Why every serious environmentalist should favour fracking” the extraction of shale gas can be used to help fight against the terrible PM2.5 air pollutant from which millions of people die a year. In addition, in a conclusive report, The Royal Society and the Royal Academy of Engineering argue that the “health, safety and environmental risks can be managed effectively”. Concerns over water pollution can be easily mitigated by a clear regulatory framework and scare stories about earthquakes are overblown. The small tremors experienced back in 2011 were even smaller than would be generated by coal mining.
The struggle to obtain planning permission even just to drill exploratory boreholes in low population density areas is a real barrier to the growth of the sector. Fracking operators need to be able to show that they can do their work safely through pilot projects and also that local people will gain a clear financial benefit from the growth of the industry.
One suggestion to boost the sector would be to allow exploratory drilling to go ahead without requiring express planning permission if other relevant environmental permits are in place. Exploratory drilling operations are temporary, speculative and have only a minimal environmental impact. The need to spend hundreds of thousands of pounds to gain planning permission merely for exploring projects of uncertain value is a barrier to the growth of fracking. The Government should examine reducing or eliminating this barrier and when Lancashire County Council next meets, it should remove the remaining obstacles for exploration at the Preston New Road site.