U.K.'s Shale Outlook and Praise for Margaret Thatcher

Does Maggie Thatcher deserve her economic canonization? There is no doubt her voracious appetite for lower taxes, light-touch regulation and union bashing pushed Britain up the growth curve. There is also no doubt that she got a lot of help from North Sea oil production, which surged during her stint as prime minister between 1979 and 1990.

Britain’s next prime minister – whether a re-elected David Cameron or someone else – might also see an energy bonanza, but not from oil, coal, green energy or nuclear power. It would come from natural gas of the shale variety. As the North Sea runs down, shale gas is set to sprint onto the scene. Its arrival could transform not just the British economy but radically alter the geopolitics of energy throughout Western Europe.

Russia beware. Western Europe is the most lucrative market for state-controlled Gazprom, the world’s biggest gas exporter. A shale gas revolution in Britain and elsewhere in Europe would not be to its liking.

Britain has always been a respectable energy supplier in spite of its small size. The country has produced oil and gas since the mid-1850s (an oil field in Dorset produces 11,000 barrels a day). In the last century, the country became a big coal producer, though Mrs. Thatcher fixed that when she emerged on the winning side of the 1984 coal miners’ strike. Next came the North Sea and – lucky Britain – it is now gas’s turn.

Some time in the next week or two, the British Geological Survey is to release its estimate of Britain’s shale gas reserves. The speculation points to an eye-popping amount, perhaps 1,800 trillion cubic feet. Britain’s annual consumption is 3-tcf. The math suggests a 600-year supply, but the figure is highly misleading. Most of that gas, if it really exists, probably cannot be commercially produced because of geological, technological and environmental constraints. But even if 10 per cent can be pumped to the surface, the supply would be enough to keep the lights on almost until the end of the century.

The other potentially limiting factor is regulation. The American shale gas and shale oil industry went from walking pace to gallop in a few strides because landowners in the U.S. have the rights to the resources below the land. That little perk meant that the owners were motivated to cut deals with the energy companies that wanted to install drilling rigs next to the barn.

Not so in Britain, where the Crown owns the muck beneath your feet. That means the regulatory equation is far more complex and no template exists. The Crown and landowners will want big pieces of the action; so will the local government authorities, which will have the power to issue or deny the drilling and development permits. The revenue pie-chart is a work in progress and political problems are inevitable.

Getting the environmental side right is also crucial. In 2011 in Britain, an 18-month shale gas drilling moratorium was put in place after a gas flow test apparently triggered two “seismic events” – very small earthquakes. In parts of Europe, notably France, shale drilling is banned because of fears of earthquakes and groundwater pollution. To “frack” the shale, that is, crack it open to release the gas from the rock, a mixture of water, sand and chemical-laden fluids are pumped under pressure into the bore hole. What goes down must go sideways or come up.

The economic benefits, such as the possible reduction of British energy costs, and job creation, are largely unknown because the extraction costs, the revenue-sharing agreements and other factors are still guesses. But given the potential size of the resource, shale gas could pump up Britain’s deflated economy. In the United States, shale gas is bringing down average household energy costs, attracting investment from manufacturers, such as chemicals companies, that are heavy users of gas, and triggering energy gold rushes in struggling regions, like the Midwest.

Ken Cronin, CEO of the United Kingdom Onshore Operators Group, the newly formed shale gas lobby body, notes that the gas would come at an opportune time in Britain because so many other forms of energy are in decline (coal, oil), very expensive because of subsidies (wind, solar) or both expensive and in need of replacement (nuclear). “At minimum, shale gas will have an arresting effect on prices increases in the U.K.,” he says.

When any new compelling technology or industry traipses into a market like a flat-footed giant, old technologies and industries can get trampled. So who might the losers be if Britain, like the United States, goes from energy importer to energy powerhouse?

Coal producers, to be sure, would be victims. So would no-growth, high-unemployment France. If British energy costs drop, luring energy-sucking industries to Britain, and the exchequer gets fattened with tax income from gas production, the French economy would be put at a competitive disadvantage. France too is sitting on vast amounts of shale. You can bet its drilling ban will disappear the moment it figures out that what’s good north of the English Channel would be good south of it.

But it is Russia that stands to suffer most if Britain, and then France, unleash the drilling rigs. Gazprom, President Vladimir Putin’s favourite company, has treated Western Europe like a milk cow for many years. The region is responsible for 40 per cent of its profits because of the huge export volumes and the supply contracts that are linked to (high) oil prices. The gas glut is breaking the price link between the two fuels. At some point, Gazprom will have to recognize that high oil prices can no longer justify high gas-contract prices.

If Maggie Thatcher were alive – she died last Monday at 87 – she would approve of the shale gas development. She never shed a tear for old industries, nor countries that resisted change to their detriment.