Fracking the high-tech drilling technique for shale oil and gas is a subject that's constantly in the news. But what exactly does fracking entail, and what are the pros and cons?
What is fracking'?
Hydraulic fracturing (known as fracking') is the process of using water, sand and chemicals to release deep deposits of oil and gas.
A company first drills a deep vertical well near the shale deposits. It then creates horizontal branches from the main vertical shaft. Next it blasts a mixture of water, sand and chemicals at high pressure into these branches. The pressure smashes the nearby rocks, enabling the oil and the gas to flow into the branches, and therefore the main well.
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Despite all the recent attention, this process is not new. It was first developed as long ago as 1947.
Why are people paying attention now?
Despite a brief period of interest in fracking during the energy crisis of the 1970s, up until recently it was considered to be too expensive to be of much use. However, the rise in energy prices over the last decade, combined with improved technology, has made the process economically viable.
In fact, the technique has led to an oil and gas boom in various parts of the US. According to America's Energy Information Administration, the amount of crude oil produced in American oil fields has risen by 50% over the last six years. Around 40% of that is down to shale oil. It's had a huge impact on the US economy, which we've explored in several of our stories on investing in shale
How does this affect the UK?
With politicians across the globe looking enviously at America's new-found oil wealth, many other nations have been investigating whether they might have previously inaccessible shale deposits to exploit. And Britain is one of the lucky ones.
Last year, experts from the British Geological Survey announced that they think there could be up to 2,281 trillion cubic feet (tcf) of gas in the ground underneath Lancashire. To put that into perspective, this is more than four times the size of the main American shale field.
It's not the only shale field in Britain either. There are several belts of shale in England, as well as smaller areas in Midlothian in Scotland, and Fermanagh in Northern Ireland. While not all of these will prove fruitful, it is likely that given time, and the right development policies our total reserves could transform Britain into a major player in the world energy markets.
So why is it controversial?
Opponents have seized on the fact that in a few American cases, fracking has been linked to the contamination of groundwater supplies. More notoriously, preparatory drilling was blamed for several earthquakes in Blackpool in the spring of 2011, leading to a temporary moratorium.
Campaigners also point out that the UK is far more densely populated than North Dakota (the main shale boom' state in the US), which in turn means that the potential disruption could be much greater. Another major problem as our own Matthew Lynn has flagged up is that landowners don't own the mineral rights under their land, so they can't benefit from it. On the other hand, they can currently block development so they don't have much incentive to welcome the drilling rigs with open arms.
Are these objections valid?
The latest evidence suggests that water supplies are safe provided there is a sensible level of supervision. As for earthquakes, Professor Ray Davies of the University of Durham thinks that fracking "causes as much seismic activity as falling off a ladder".
It's also worth understanding that this really isn't new fracking has been taking place on a small scale in mainland Britain for decades. The Beckingham Marshes oil rig in Nottinghamshire has been fracked four times between 1963 and 1989. The Royal Academy of Engineering estimates that 200 oil wells in the UK have employed fracking at some point, in order to boost their flow.
Rather than mass pollution and earthquakes, probably the most significant and worrying objection is that because fracking uses large amounts of water, it has been linked to drought. For more on the pros and cons of fracking, take a look at this report on the process that my Fleet Street Letter colleagues have put together.
How is the British government promoting it?
Having finally lifted the ban on fracking last December, George Osborne announced that he plans to cut the tax on onshore exploration to 30%. That's one of the lowest rates in the world, and a big incentive to explorers.
Local opposition is also being circumvented with a mixture of carrots and sticks. To reduce opposition, 1% of revenue and a fee of £100,000 per well will go to the local communities directly affected by the development. Local councils will also be allowed to keep 100% of the business rates, which could make fracking worth up to £1.7m per site, according to the BBC. Finally, the government is moving to change trespass law so that landowners will not be able to stop companies from drilling under their land.
What about consumers and firms?
There is general agreement that the glut of shale gas has pushed down domestic gas prices in America. This has given heavy manufacturing firms a cost advantage, and led to the movement of formerly outsourced jobs back to the US (known as reshoring').
However, the UK is far more integrated into the European energy network, so the price benefits will be spread over a wider population. Even in the US, the gap is starting to disappear, thanks to more countries building gas terminals and US politicians moving to ease export restrictions. There are also worries that increased gas exports from the UK could eventually lead to Dutch Disease' where demand for commodity exports drives up a country's currency and hollows out its other export industries.
What about global energy prices?
While shale gas has pushed down gas prices, its effect on the oil market has been much more limited. This is because oil is traded globally. While shale oil isn't the most expensive source of oil, it still costs about $70 a barrel to produce. This means it will have the biggest impact on high-cost producers, such as those in North Africa. However, while it won't cause prices to plummet (not while the cost of production remains at current levels) it still helps to reduce the power of oil cartel Opec, and will probably provide something of an anchor to prevent the price from drifting upwards.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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