In this episode Dominic spoke to Charles McAllister, the Director of Policy, Government and Public Affairs at United Kingdom Onshore Oil and Gas about fracking as an alternative for overcoming the energy crisis, debunking myths and discussing its benefits and associated risks.
The United Kingdom Onshore Oil and Gas is the trade association for onshore conventional and unconventional hydrocarbon production. Charles’ work there focuses on seeing that onshore oil provides energy, tax revenue and is outsourced reasonably. He has five years of experience as a Policy Officer in oil sourcing and production.
The International Risk Podcast Transcript
Dominic
Charles, it’s great to have you on the podcast today. And I understand as the director of policy, government and public affairs at UK onshore oil and gas. Your work focuses on seeing that onshore, conventional and unconventional hydrocarbon production provides energy tax revenue and is outsourced responsibly. Can you unpack for the listeners today? What does that mean? And what are the sorts of risks and opportunities that you come across in your daily work?
Charles
Sure, so totally fair question. So I think the most important thing to start off with is the case for fracking in particular, but onshore oil and gas more generally. So currently, the UK imports 50 percent of its natural gas by the 2030s, that can be as high as 80%. And it’s really important to understand that in pounds and pence, in my view, so between 2022 and 2050, the UK will spend at current gas prices in and around a trillion ponds, importing natural gas, that is unacceptable from an economic because it’s more costly, there’s no jobs, and there’s no tax for an environmental point of view. Because our alternative, the alternative to UK shale gas production is liquefied natural gas and the climate change committee agree with that. liquefied natural gas is four times as carbon intensive as domestic shale gas would be at the point of delivery. And then geopolitically, you know, energy security is key. We had the former head of MI six, coming out to say we need to start fracking in the UK, for some mystical reasons for political reasons. The government has gone against that recently.
Dominic
Now there’s nothing new from an infrastructure perspective that can mitigate the 2022 and 2023 energy crisis. And some of our previous guests have done a really great job in unpacking what that means. But can you explain to us what why is this a legacy issue? What are the risks that we’ve ignored? And how did we end up in this position? We’re living through these realised risks?
Charles
I think describing it as a legacy issue is absolutely correct. So there is nothing from a new infrastructure point of view. So the 2020 to 23 energy crisis cannot be solved by new infrastructure. That is because energy more broadly, takes time to develop. And that’s for a planning point of view. And just from a time of construction point of view, Ignite, the UK government’s energy policy for the last decade has been in one word terrible. So there have been 11 energy ministers in the last 11 to 12 years. So it’s quite difficult to get a coherent energy policy over that time. Now, the there was interest in developing shale gas in sort of 2010 1112. Then they introduced a moratorium, then there was a few years of lukewarm support. They introduced a moratorium again, then the government lifted it, and now it’s been reintroduced. So energy policy, decision making is just absolutely all over the place. There was a trail of thought in government, the civil service if I’m honest, that there will be cheap wholesale gas available to import for decades, and that has been proven totally wrong. On. And this is not just about the Russian invasion of Ukraine, look at the gas price between September 21. And January 2022, there is a huge hike that has absolutely nothing to do it was because there was a lack of supply. And the British government hadn’t backed the offshore sector as much as they needed to. They didn’t buy gas because they introduced a moratorium. And they didn’t introduce the planning reforms needed to facilitate renewables. Because if you look at the statistics on this, you know, I’m speaking to CEOs of various energy bodies, thermal and renewable, and there is absolute uniform clarity, that there needs to be reformed to the planning system in order to encourage development. But the government over the last 10 years has been really unwilling to do that.
Dominic
Now, we know that the UK Government has now extended the windfall tax until 2028, which is perhaps a long extension for what was a temporary extension, but nonetheless, it’s to 2028. And it’s increased from 25% to 35%, making the effective tax on oil and gas to about 75%. Now, there is some support for new investment in offshore oil, but not for onshore oil. Now understand, the government has announced that this windfall tax has been increased and extended in order to fill a significant gap in public finances. So they’re trying to mitigate the risk that’s presented by the gap in public finances. But what risks does the increase windfall tax actually bring two industries outside of oil and gas? So there are other industries that are also going to have to change their business models are going to have pain because of this?
Charles
Great question. So first point is the fact that it’s extending out to 2028 shows that the government thinks there’s going to be high energy prices, until then, that has serious knock on effects. Because if we look at let’s take gas, mostly, for example, because that’s tend to be what’s used in heavy industry gases, key and electricity generation, home heating, and then heavy industry, they’re the three. So heavy industry in particular, needs a cheap, reliable flow of natural gas in order to keep their costs down. an over reliance on imported natural gas poses huge economic risks. And we’ve seen that, you know, we have CF fertilisers in the north of England there to fertiliser facilities have been shut down, because of high costs. We’re seeing, look, I mean, look across the Atlantic look in America, the natural gas prices are a fraction of what they are here. They’ve obviously been fracking in the US for quite some time. And we’re actually seeing industry being reassured to America, whereas in the UK and Europe, industry is disappearing overseas, and from the budget today, I see absolutely nothing in it to try and secure the reshoring. of industry. What will if we continued on the business as usual model, which today’s announcement seems to suggest, industry will vanish. And I don’t mean just the oil and gas industry. I mean, fertilisers, chemicals, we could see a huge hit on that that has really big public policy implications. employment tax. Yeah, it’s it’s a serious issue.
Dominic
Now China has this soaring energy soaring oil and gas prices in the wake of Russia’s invasion of Ukraine have sent household energy bills to record highs and I think everyone around the world is experiencing that. And in Britain in particular, I think we’re seeing the worst cost of living crisis definitely in generations. But notwithstanding that fracking has been a controversial point on the British political scene for a long time, and the Labour Party strongly opposes fracking for environmental reasons. However, at the same time, it’s clear that gas and oil are in great demand. And the British government along with many governments around the world really are being pressured to do more to relieve the brunt of the energy crisis after the publication of a new scientific review by the British Geological Survey into fracking. And with this energy crisis, worsening globally and leaders scrambling to secure energy supplies, the former Prime Minister Prime Minister trust, reinstated fracking, and that was about five or six weeks ago, however, she obviously was very short lived. And after she stepped down as prime minister, Rishi Sunak reinstated the fracking ban about five weeks after the fracking was reintroduced. It’s getting a bit confusing already believe that the reintroduction of fracking would have had a greater economic merits then the current arrangements do.
Charles
So again, let’s look at to business as usual means LNG imports, no jobs, no tax, no energy security, more carbon intensive. I mean, my members so I worked there five fracking companies in the UK, they were prepared to put put 33 billion pounds into the north of England to develop shale gas 65 and 75,000 jobs. We could have been self sufficient in Natural Gas again by the 2030s. And we could have reduced our gas supply carbon footprint, every single measurable metric overwhelmingly supports the case for fracking. The decision to reimpose the moratorium is in our view and of the view of I would argue the majority of the energy industry, a political decision, because if I can just run through why it was introduced, so it was introduced in 2019. On seismicity grinds, or earthquakes, basically very, very small seismic events following a 2.9 event in Lancashire. Okay. And the reintroduction of the moratorium this time a few weeks ago, was on the same grind, the written ministerial statement is practically identical. Let’s just run through the regulatory framework and why this is a perverse, illogical decision. So the regulations that were set for us meant we had to stop if we hit a 0.5 on the Richter scale during operations, according to a study by Liverpool University, that is the same as sitting down on an office chair. Now if you look at what the moratorium itself, it was based on a report done on the Preston new road, one Zed Well, in Lancashire, the largest event of that well, was 1.5 on the Richter scale, which again, according to the study from Liverpool University, is the same as dropping a honeydew melon in your kitchen. And then if we look at the largest event, the 2.9, the surface vibration, so that’s the key, it’s the most important factor to consider. The surface vibration from that event is half the maximum permitted at construction sites in the UK. So what I’m saying here is, if the government was applying its logic fairly in introducing a moratorium on fracking in the UK, it would also ban the construction, geothermal quarrying and coal mining industry. Because if they had the regulations, even though they all call surface vibration, if they had the regulations that we had, they would not be able to operate.
Dominic
If we unpack that, you know, when we look at seismic risks and seismic risks is often stated as one of the concerns when it comes to fracking and noting liveable universities study, and, you know, their comments that one was the equivalent of dropping a honeydew melon on the floor, and the second was still half of that, which is led in UK construction sites. And that event only lasted for about two seconds. If that is the case, why do people continue to talk about the risks of seismic activity from fracking? What’s the merits? Where’s the basis for it?
Charles
That’s a good question. I think the decision to reintroduce the moratorium, what it shows to me is that, you know, fact and logic are out competed by political ideology and fiction. So if we were taking this on a purely factual and risk based approach, fracking should be going ahead, because the risks can be managed the study by the Royal Society, Royal Academy of Engineering, Public Health England, pick one, they’ve all said the risks can be managed under the UK regulations, which more broadly, are incredibly strong, not just for the oil and gas industry. So we frankly, we do not understand there is no scientific merit for the reintroduction of the moratorium. Now, why there is still public concern? I don’t know. I do think government could have done a better job in explaining exactly what they were doing. And under the trust regime, they were prepared to do that. But the moratorium has been reintroduced for political expediency, not for scientific reasons or any other reasons, because my question to what was the Labour Party before and that is now being extended to the government? What is the government’s natural gas supply plan? Over 2050? And what are the geopolitical economic and environmental risks of that plant?
Dominic
You mentioned the north of England earlier on, Charles, and it’s been argued that the failure to develop natural gas resources under the north of England locks the UK into a reliance on more carbon intensive and more expensive imports for decades. But if we look at the environmental aspect of fracking, is it not still a harmful practice in the long run? And if it is, what are the ways of regulating and mitigating these risks?
Charles
Fracking started off first of all in mostly in the United States? Now, there’s a difference and regulation, regulatory definitions here, so I’m gonna get this absolutely right. The method that we’re using is called associated high volume hydraulic fracturing. And what that involves is drilling down vertically by two to two and a half kilometres, and then drilling horizontally to two and a half kilometres, and then pumping water down with sand and chemicals. I’ll go into more detail on that in a minute. Now, there have been 2300 wells drilled on shore in the UK, and about 10% of those have been hydraulically stimulated, they’ve been fracked but not in a vertical manner. They’ve gone into the conventional for me Asians and refract them to improve recovery. No, we’re able to take the best available techniques developed in the United States, and then homed here, because you do hear scare stories for about fracking in the United States, but I always say what part of the UK regulations are so weak that they allow any of these issues to happen? Again, I’ve never had a good answer to that. If I can just explain the regulatory frameworks or some of the points. So let’s go water. First of all, water contamination. So the infrastructure act in the UK bans fracking shallower than a kilometre. That’s because the potable water the drinkable waters or supplies are about two 300 metres deep. That’s no problem with us because the shale is two kilometres deep and the maximum fracture propagation, the fractal, the fracture lengths, do not exceed about 300 metres. So you’ve got a huge amount of rock in between, we’re also regulated by the Health and Safety Executive for borehole quality. And if they haven’t saved executive aren’t happy with the quality of the drill of the cement job, they do not allow you to proceed if we also look at what chemicals were allowed to use, because I do a common criticism as well, we’re going to use these dangerous chemicals. Absolutely not. Any chemical we use must go through a process called jagged dug, as part of the Environment Agency, any chemical used has to be designated non hazardous to groundwater, or we can’t use it, then I also hear but Oh, what about if you’re using something on site like diesel trucks or whatever? How do you make sure that doesn’t contaminate percolate down? Again, a fair question, what we do is we have to put impermeable liners, they called containment correctly, and you’ve got primary secondary and tertiary containment to make sure that anything spilled on site does not leave that site. So the extent of regulation is huge. Another example from the US, and we’re going to pick some not great examples, as they use basically, swimming pools, and they are the flowback fluid that comes out once you’ve finished fracking the well. They’re called open flow back lagoons. And this is sort of left on site and then taken away, where we are not allowed to do that any any flow back that comes back up out of the well has to be put into a truck and taken to a licenced facility, which isn’t a problem, because these facilities in England are used to taking waste from the offshore oil and gas industry and the composition is very similar. And then if we look sort of on broadly on water use, so I always hear oh, the industry is going to use too much water. Why is that appropriate and adroit when it was a drought a few months ago, etc. Two things on that. Number one, even at full pelt, to maximum output of shale gas in the 2030s, we would use less than 1% of what industry, agriculture and households would use in any one year. And then secondly, every local authority the government has the power to restrict water use during times of drought. So if there is an issue with shale gas development from a water use perspective, there are many other industries which have faced that criticism, but don’t so the regulations in the UK are unbelievably tight. I have not I’ve not seen any credible criticism of UK regulations for environmental protection. And the Royal Society agree with that.
Dominic
I was actually going to ask you about some of the risks of fracking and no doubt, these are common concerns that people have and noting you said the infrastructure Act which bans you know, fracking above one kilometre and noting that potable water doesn’t exceed 300 metres and you’re already at two and a half kilometres, knowing the jagged dag ensuring that chemicals use and not risk to water that containment miners use the OpenFlow rate we’re going to mitigate it but local governments tracking and mitigating these risks to me who’s not an engineer, but as a general member of the public who makes voting decisions and has to decide what sort of energy I buy in which suppliers I buy my energy from. That seems reasonable emphasise for our listeners, I’m not an engineer, but that what you just said, sounds reasonable. There were risks. And you know, these next couple of questions I did have for you were around the contribution towards a lot of risks around that. So that seems reasonable to me. So why if that’s the case, then why is industry Why is the government we’re not doing a better job at explaining these risk? Because I understand that government will make decisions often not based on risk, which is what we should be making decisions on based on intelligence based on risk based on opportunity. So what is influencing the government decisions?
Charles
If I had an easy answer to that there wouldn’t be a moratorium. I think that the government look, the government’s in a very perilous position right now. And I think they have taken a decision to try and to remove as many barriers as possible. So we hear a lot about protest, onshore oil and gas sites. I think I’d like to make the point that protests are not exclusive to the onshore oil and gas industry. And if you look at what the government is doing with onshore wind, you know, we’re big fat, we’re big fans of onshore wind and solar. They’re not too keen on their on those technologies, either. The government’s current energy policy seems to be out of sight, out of mind. They don’t want anything because there’s a big big NIMBY problem in the UK, not in my backyard. I mean, look at look at our track record. We can’t build shale sites can’t build solar can’t build onshore wind can’t build houses. It’s a serious, serious issue. We can’t even build reservoirs, which is why it was interesting, the National Infrastructure Commission have said that reservoirs need to be built, regardless of local opinions, because they are nationally significant infrastructure. Now, we would argue that should apply to energy as well, because the failure to grapple this means we will continue to drift deeper into reliance on imported energy. In terms of the public, I would say a big issue. And I don’t necessarily blame them for this because I did my I did my Masters on fracking at Durham University. And only when I got to my second year of university, did I have my undergraduate level? Did I realise the difference between what was being reported on what electricity demand is and what energy demand is really commonly confused in the media? Because you’ll hear people at the Labour Party do this as well, you’ll hear reports about how 40% of our energy comes from renewables. Nope, 40% of our electricity comes from renewables, electricity is only 15% of energy demand. So what that actually means is that wind and solar represents 3.8% of UK primary energy demand. And I don’t think that gets out there enough. And the reason why the government won’t want to push that out, is it makes it makes it look like they haven’t done a good enough job to decarbonize the UK economy, because oil and gas are still 75% of primary energy demand in the UK, they are the key fuels, but they put a windfall tax on it, they’re bound, or they introduced a moratorium on fracking. As I said, it’s not a logical thought process. It’s purely for political expediency.
Dominic
So if we look at during COOP 27, the UK Government announced a new Liquefied Natural Gas Energy deal with America perhaps was strange timing, but nevertheless, that was done. Now wholesale gas prices have soared in recent months as economies reopen from COVID huge demand for LNG in Asia and at the same time as much as Europe is attempting to diversify away from Russian oil and gas supplies. What’s the risks for the UK when relying on LNG imports from other countries?
Charles
So I was stunned that the government seemed to announce this during COOP, I think, for several reasons. One, they just introduced a moratorium on the very process that the Americans are using to extract that natural gas because the liquefied natural gas that’s being sent across to Europe now and has been since 2017. That is shale gas. It’s coming from the big shale fields in Pennsylvania called the Marcellus Shale, and in Texas, the Barnett Shale, the sum of the two major ones. And then what happens is it sent to the south coast of the United States, some of the LNG facilities frozen to minus 163 degrees Celsius, and then shipped across the Atlantic 1000s and 1000s of miles. So number one risk, I would argue is environmental. So the climate change committee did an assessment of the carbon footprint differences between a liquefied natural gas reliant UK and a shield gas reliant UK, and in one year alone 2030 2035 That emission savings are about 11 and a half million tonnes. pretty hefty. It’s more than three, it’s about three to 4 million homes, equivalent worth of emissions. So that’s not that not to be ignored. What are the other risks? So the United States is no question a more reliable geopolitical supplier, but if we look at LNG that we get from other places around the world, so we get it from we used to get it from Russia. We spent an between four and 6 billion pounds on Russian liquefied natural gas since 2017, although we haven’t had any since March of this year. And Qatar, where the World Cup was due to start in three days, we’ve been a huge purchaser of their energy and I need to hone these calculations but a roughly 55 billion pounds we have spent on Qatari liquefied natural gas since 2010. And geopolitically, I think the big issue with LNG is we are buying it on what’s called the spot market. So what happens is an LNG tanker leaves wherever it’s coming from. And effectively, there’s this international game of tug of war to get LNG supplies. So what happens is, of one of the 43 countries, including the UK, sticks up a flag with a price on it. And then these tankers would say, oh, that’s the highest price. Problem is as we get into a tight LNG market to less fewer tankers, higher demand, those prices go up and up and up. And it’s effectively a bidding war. So we have no guarantee that we’re actually going to get these supplies. The alternative to that is to do contracted deals. So the UK Government had set out to explore that with Norway, Qatar and the United States. So the deal with Norway has collapsed. I don’t know what price the Norwegians wanted. But clearly, it was too high for the Treasury, there seems to be a deal in in the running with the United States to supply 10 billion cubic metres. No, that is not for this winter has been misreported in that in that manner, that will be over an annual basis, because 10 billion cubic metres, is the equivalent of one month’s exports from the United States. And I can tell you, they are not going to give that cheap. They will be they will, they will fight for their interests, which is totally understandable. And then we need to see if there is a deal done between Qatar and the UK. But my issue is the rank hypocrisy and saying no, we’re not going to produce shale gas in the UK, we’re going to import it from the United States. No tax, no jobs, no improvement in balance of payments. To me, it makes absolutely no sense. We I mean, they’re talking about looking contracted supplies with imported sources, we had offered to sell gas or to engage to sell natural gas or contracted prices to, for example, the blue hydrogen production facilities of the future or heavy industry, such as steel and chemicals. And that makes lifecycle sense.
Dominic
So how would you rate the current resilience of energy suppliers within the UK? And would it be drastic to say that UK residents and businesses could face blackouts is winter? Are we still a long way off that putting in an international context?
Charles
Probably the most resilient nations are now probably definitely the most resilient nations from an energy perspective, are the ones that produce the most so North America, Middle East, Russia, all other regions of the world. So Aegir, South America, Europe, are in a perilous position. Now. Will the UK have blackouts this winter? It is a very difficult question to answer. National Grid, and often have said that the UK is at the highest risk of loss of energy supply, ie blackouts for decades. But it’s quite unseasonably warm at the minute and European gas storage is full. So we’re not seeing this demand that we would expect at this sort of time. So my my case would be the whether or not we’ll face blackouts will depend on will we be able to get natural gas from Europe across the interconnectors, that’s not a guaranteed will we will we be able to get imported electricity from Norway and from France? Again, not guaranteed, because two thirds of the nuclear fleet in France is out because of strikes and repairs? And will we be will we be able to out compete the 42 other countries, which rely on liquefied natural gas again, not a guarantee. Now, the risk I would argue next winter is going to be much much higher. And that’s not because I can predict the weather next winter. It’s because because of the destruction of Nord Stream one and two the pipelines coming from Russia to Germany. The ability for European countries to fill up their gas storage is less. Therefore they’re infinitely more reliant on LNG and there isn’t enough LNG. And if I may, another key point that seems to be missed on this was noted by the UK Energy Research Centre. In Europe we are paying vast amounts for liquefied natural gas. So for context here in America, there there, the natural gas price was between four and $8 per MMBtu million British thermal units, and in Europe, it hit 90. So some American investors described it to me as one of the greatest arbitrage opportunities in a generation. And then some European companies have said to me that, you know, the Americans are taking advantage of the situation. So I think that basically explains both sides of the Atlantic and their views. So, yeah, it’s it’s, it’s, it’s a very, very dangerous situation, it’s really dangerous. And again, there isn’t I do not see a credible plan that solves this in the because in the very short term, as you correctly said, at the start, there is next to nothing we can do from a new infrastructure perspective, but from 2025 to 2030. are absolutely things we can be doing 2030 to 2040, many things we can be doing. It was credible. The trust government said we wanted to be an energy exporter, a net energy exporter, by 2014. With onshore wind with offshore wind with nuclear with enhanced North Sea and with shield that was credible, that was totally achievable. No, if the government wants to do it, that is not credible. That is not achievable.