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A ‘Golden Age’ of Shale ... or Just a Pipe Dream?

Schroeders Research Paper - A review of the challenges facing the shale energy industry. April 2014.

Executive Summary

Whilst shale energy exploitation is not new, the game changer has been the improved cost economics resulting from advances made in shale energy extraction techniques. These have come against a favourable backdrop of rising oil prices and governments facing challenges in encouraging the development of energy solutions which bring about sustainable, affordable, secure and reliable energy supply. The US shale energy experience has provided a tangible example of the transformational effect of shale energy.

The growing recognition that many other countries may also hold significant shale resources means attention is increasingly turning to the potential elsewhere. However, the US shale story is unlikely to be replicated, since the context generally differs markedly from the US. So, while there will most likely be a ‘golden age’ for shale energy in certain countries, it will not be universal. We have developed a framework incorporating the main policy, regulatory, legal and ‘natural’ factors which we view as important to shale energy exploitation on a country basis (focusing on the US, China, Russia and the UK). Of these, the US is positioned most favourably, while China and Russia also have significant shale resources. Whereas China is a net importer of energy with strong political will but technical, infrastructural and environmental challenges, Russia has fewer natural hurdles but less political will given the abundance of conventional natural gas and a less favourable fiscal regime. The UK, in contrast, has much lower reserves and a relatively favourable set of natural attributes for developing shale energy.

However, the industry faces significant public opposition in light of the potentially adverse social and environmental impact of extraction. Certain non-governmental organisations and parts of the general public have environmental and social concerns about the widespread commercial production of shale energy as extraction techniques present an array of risks. It would be wrong for governments and the industry to ignore such concerns as they could be a ‘wildcard’, adding costs to shale energy projects, or even leading to them being prohibited altogether. We agree with the International Energy Agency’s assessment that there is a critical link between the way governments and industry respond to these environmental and social challenges and the prospects for shale energy. Just as some natural challenges can be addressed by technological developments and changes in operational practices, so can environmental ones to a certain extent.

However, many of the social issues and outstanding environmental challenges require approaches which are as much geared towards changing attitudes as operational practices. Efforts can – and should – be made to ensure safe, responsible and environmentally sustainable shale energy practices, thereby establishing a social ‘licence to operate’. Encouragingly, recommendations on good and best practice for the shale energy industry do exist. However, despite calls for greater and more proactive transparency by operators about their operations, the evidence to date reveals that it remains inadequate.

The industry should expect to see continued scrutiny and some level of opposition to its shale efforts until the deficit between actual performance and expectations is closed. Otherwise, there is a risk that a ‘golden age’ of shale energy will never be realised.

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