U.K. Shale Will Fail to Unleash U.S.-Style Price Drop

The U.K.’s efforts to build a shale gas industry will fail to unleash the decline in prices that has benefited U.S. fuel consumers as its cost of extraction will be too high and output too slow, Bloomberg New Energy Finance said.

“The cost of shale gas extraction in the U.K. is likely to be significantly higher than in the U.S., and the rate of exploitation insufficient to offset the decline in conventional gas production, meaning market prices will continue to be set by imported gas,” the London-based researcher said today.

U.K. Chancellor of the Exchequer George Osborne plans tax breaks to spur shale development after a boom in the industry in the U.S. saw the nation become the world’s biggest gas producer. Britain in December lifted a ban on hydraulic fracturing, the technique used to tap fuel from shale rock, and imposed safety controls after drilling triggered minor earthquakes in 2011.

“We don’t want British businesses and families to be left behind as gas prices tumble on the other side of the Atlantic,” Osborne said in his Autumn statement to parliament in December. His plans placed Britain ahead of efforts in other parts of Europe, where some countries hesitated to endorse the technique known as fracking because of concerns it pollutes water.

Prices in the U.S. fell to $1.80 per million British thermal units in March 2012 from a record $12 in 2008 and are trading at about $3.40, according to BNEF. U.K. gas costs are about $10 because of reliance on higher-price imports.

New Dawn

“Shale gas might seem to offer a new dawn of low energy prices for the U.K.,” Guy Turner, BNEF economics and commodity research chief in London, said in today’s report. “Shale gas may help replace some of our declining conventional production, but it is unlikely to arrive quickly enough, in sufficient volume, to drive U.K. prices below international levels.”

Extracting shale gas in the U.K., which imports half of the natural gas it consumes, will cost from $7.10 a million British thermal units to $12.20, according to BNEF estimates. That compares with $4.54 to $4.83 in the U.S., it said.

The U.K. needs to produce 4 billion to 4.5 billion cubic feet of gas a day and drill about 10,000 wells over 15 years to reduce imports, BNEF says. The country is more densely-populated than the U.S. and has tougher local planning rules, it said. That, coupled with a stronger environmental movement, may lead to slower development than in America, it said.

The U.K.’s Cuadrilla Resources Ltd. says its Bowland basin in northwest England may hold as much as 200 trillion cubic feet of gas. A fraction of that may be recoverable.