Talking Fracking: a consultation on unconventional oil and gas

Economic considerations

Unconventional oil and gas has had a major impact on manufacturing and energy in North America. This section discusses the potential economic implications of unconventional oil and gas in Scotland, including in the context of Scotland's energy and manufacturing industries.

Economy and draft Energy Strategy

Scotland's Economic Strategy sets out an overarching framework for achieving a more productive, cohesive and fairer Scotland. It is underpinned by four priorities for sustainable growth:

• investing in our people and our infrastructure in a sustainable way;
• fostering a culture of innovation and research and development;
• promoting inclusive growth and creating opportunity through a fair and inclusive jobs market and regional cohesion; and
• promoting Scotland on the international stage to boost our trade and investment, influence and networks.

Sustainable growth also means securing the transition to a more resource-efficient, lower carbon economy, which will reduce the cost to the economy of climate change.

Our actions to tackle climate change by reducing greenhouse gas emissions represent a fundamental transition in all sectors of the economy, including energy.

Scotland needs safe, clean, reliable and affordable energy to underpin the Scottish economy and contribute to the wellbeing of our society. This is why the Scottish Government has consistently made better energy provision a guiding objective.

On 24 January 2017, we published the draft Scottish Energy Strategy for consultation. The draft Strategy sets out our long-term vision for the future of the energy system in Scotland:

• a modern, integrated, clean energy system, delivering reliable energy supplies at an affordable price, in a market that treats all consumers fairly; and
• a strong, low carbon economy - sharing the benefits across our communities, reducing social inequalities and creating a vibrant climate for innovation, investment and high-value jobs.

The Strategy's central approach is 'systems-based' - that is, an integrated view of the challenges of meeting Scotland's heat, power and transport needs.

The Strategy recognises the importance of maintaining a flexible outlook on the combination of energy sources available to us as we transition towards a decarbonised energy system. This will allow Scotland's energy system to react and respond to changes in supply and demand, and to market conditions.

The draft Energy Strategy also considers the overall role of hydrocarbons in Scotland's energy mix (Box 5).

More information on Scotland's draft Energy Strategy can be found at: https://consult.scotland.gov.uk/energy-and-climate-change-directorate/draft-energy-strategy/

Box 5: Draft Energy Strategy: exploring the role of energy sources

Advances in technology mean that new and innovative ways of using hydrocarbons are emerging, and will continue to do so in the decades ahead. Some of these advances could have a transformative impact on the energy system and lead to lower net carbon emissions, such as:

• Production of hydrogen as a low carbon energy carrier; in stationary power and Combined Heat and Power ( CHP), in the gas mains supply for heating, or to power fuel cells in cars, vans, buses or even marine vessels; and
• Liquid Natural Gas, Compressed Natural Gas and Liquid Petroleum Gas - in particular, biomass-derived versions of these - to join liquid biofuels as options for replacing fossil diesel and petrol as cleaner fuels in internal combustion engines.

To support the emergence of new technologies and energy sources in a way that maximises their benefits to the their benefits to the economy, for consumers, and in an environmentally sound way, the Scottish Government will draw on the range of powers available to it to support this transformation, including the planning system, energy consenting and licensing.

In some cases, the Scottish Government may choose not to support particular technologies, on environmental or social grounds, or because of their potential negative impact on greenhouse gas emissions. Underground Coal Gasification is an example of a technique the Scottish Government has chosen not to support, following a thorough assessment of the scientific evidence ^[7] , and it is proposed that UCG will have no place in Scotland's energy mix ^[8] .

The Scottish Government is committed to examining the evidence and engaging with the citizens of Scotland to gather their views and understand their needs and perspectives. Our approach to evaluating the potential impact of unconventional oil and gas is an example of this evidence-led and measured approach.

The Scottish Government also recognises the importance of understanding how new energy sources and industries can be developed or introduced in a way that promotes economic opportunity, while minimising any significant additional long-term pressure on meeting Scotland's climate change targets, or other sectors.

Research findings: potential economic implications

Shale gas has also had a considerable impact on the North American energy market; gas production had plateaued in the early 1970s at around 24 trillion cubic feet per year, and has risen dramatically since the mid-2000s to an all-time high of 33 trillion cubic feet in 2015 ^[9] .

The Expert Panel also noted that in North America the development of shale gas has led to investment in the chemical and manufacturing industry of over $100 billion. As a result, US chemical products are now nearly half the price of similar European products.

There has been no unconventional oil and gas production in Scotland, and therefore very few studies examining the potential impact of unconventional oil and gas on Scotland's economy have been conducted.

To gain a better understanding of the potential economic implications in Scotland, we commissioned research to examine the impact that unconventional oil and gas could have on jobs and the wider Scottish economy under a range of potential production scenarios. The scenarios developed through this project are described on PDF page 29.

A summary of the main research findings are as follows:

Under different production scenarios, what is the potential cumulative impact of unconventional oil and gas development on the Scottish economy?

Gas and oil production through to 2062

• Under their central scenario ^[10] , the study estimated that total, cumulative gas production through to 2062 would be 947 bcf (billion cubic feet), equivalent to around 5.5 years of Scottish consumption at current levels.
• The study estimated that total associated liquid (oils) production through to 2062 would be 17.8 mmboe (million barrels of oil equivalent) in their central scenario.

Potential economic impacts

• In their central scenario, the study estimates that the total, cumulative industry expenditure in Scotland would be £2.2 billion through to 2062.
• The study estimates that this would add £1.2 billion to Scotland's economy over this period, which is approximately equivalent to 0.1% of Scottish GDP - a measure of Scotland's economic output - per year over the lifetime of the industry.
• In their central scenario, it is estimated the industry would support 1,400 jobs in Scotland at its peak. This includes indirect jobs in the supply chain and jobs created in other sectors of the economy, for instance hotel and taxi businesses.
• In their central scenario, the study estimates that the cumulative, additional tax receipts (for the UK and not including coal bed methane) would be £1.4 billion.

Market conditions

• The study observes that if oil and gas prices were to remain at today's historically low levels, it would be unlikely that unconventional oil and gas resources in Scotland would be economically viable to develop at scale.
• The study also notes that exploration work would be required to determine the commercial feasibility and production potential of the resources contained in the Midland Valley of Scotland.

With reference to the potential economic impact of unconventional oil and gas in Scotland, what sectors and groups are likely to be affected?

• The study observes that Grangemouth petrochemical facility has been unable to operate at full capacity due to lack of feedstock.
• The study notes that a number of petrochemical companies could see a positive impact on their supply chain if unconventional oil and gas is developed as they would avoid the costs of importing/transporting their primary input.
• The study also considers a number of other economic factors, including potential impacts on local house prices, road use, agriculture, visual amenity, environmental costs and health costs. The study sets out a number of potential issues and costs reported in the literature, alongside concerns raised by stakeholders, and highlights some of the uncertainties associated with assessing
  these costs.

What is the potential nature and extent of any community benefit payments?

• As discussed on PDF page 37, in their central scenario, the study estimates that the cumulative value of community benefit payments through to 2062 would be £217 million. This is based on an assumed contribution of 4% of revenues to local communities.

The role of natural gas in Scotland's energy mix

Total annual gas consumption in Scotland in 2014 is estimated to be 150 billion cubic feet/year ^[11] .

As outlined in our draft Energy Strategy, the consumption of heat accounts for 53% of the energy consumed by Scotland's homes and businesses. Around 1.9 million Scottish households (79%) use mains gas as their primary heating fuel.

These figures show that Scotland currently relies on natural gas to supply the bulk of energy demand for heat, and natural gas will be an important part of Scotland's energy mix for the foreseeable future. Gas is also central to the global energy mix, with demand forecast to increase until 2040. Addressing this demand represents a key challenge for the future in balancing the needs of consumers with a lower carbon secure energy system.

The majority of the UK's domestic sources of natural gas historically came from the North Sea. The production of natural gas from the North Sea is declining. By 2025, the UK is expected to be importing 67% of its gas from outside the UK ^[13] .

Our current supplies of gas are a mixture of gas from North Sea gas fields and imported supplies from pipelines within continental Europe, or from liquefied natural gas from international markets.

Our future demand for gas is likely to change as we move towards a largely decarbonised energy system. For instance, in the short to medium term (<20 years), increased emphasis on energy efficiency and heat networks is likely to lower demand for gas. A key challenge in this longer-term transition is finding cost-effective substitutes for energy and manufacturing, without increasing our dependence on imports.

Longer term, trends in supply and demand are more difficult to forecast. The pace of innovation in hydrogen and biogas as new gas grid sources, alongside energy storage, are likely to play a significant role in the future of gas. Furthermore, the commercial viability of Carbon Capture and Storage will have a considerable bearing on the long-term role of gas.

In terms of a role for unconventional oil and gas, the economic study estimates that total production up to 2062 under their central scenario would be 947 bcf (billion cubic feet), which is equivalent to around 5.5 years of Scottish gas consumption at current levels. Under the low and high production scenarios, the economic study estimates that production would be 316 bcf (about two years of Scottish gas consumption) and 2,934 bcf (about 20 years of Scottish gas consumption).

The economic study concludes that the volumes of natural gas that are likely to be recoverable from unconventional oil and gas reserves in Scotland would not have an impact on global gas prices. This suggests that there would be no noticeable effect on energy costs for households.

However, the research also notes that there may be opportunities for natural gas from unconventional oil and gas developments to provide a cost-effective gas supply to local energy networks, particularly for high energy- use industries.

Potential manufacturing implications

The economic impact study highlights that natural gas liquids produced from shale reserves can be an important feedstock (a raw material to supply or fuel an industrial process) in manufacturing industries.

Manufacturing can play a crucial role in boosting Scotland's productivity. The sector can support inclusive growth, a central part of our economic strategy, by helping to address regional imbalances through local spillovers and supply chain linkages, whilst providing jobs that are typically high-skilled and well-paid.

However, energy-intensive manufacturing and petrochemicals sectors require certainty that energy and feedstocks will be secure and competitive. This is an important factor for investment decisions. The long-term decline of local supplies of natural gas liquids presents a challenge.

As shown in Figure 8, North Sea natural gas liquids production has fallen from 10.3 million tonnes of oil equivalent (mtoe) in 1999 to 2.9 mtoe in 2015, with the quality/blend of North Sea Natural Gas Liquids also diminishing over this period.

As outlined on PDF page 25, shale reserves can hold quantities of natural gas liquids, such as ethane. Exploratory work would be required to understand whether Scottish shale contains high levels of ethane or methane that are economically and technically viable for industry.

The economic impact study discusses the Scottish chemicals manufacturing sector. It highlights that in Scotland there are 150 manufacturing companies involved in the manufacture of chemicals and chemical products supporting around 3,500 direct jobs.

These companies are involved in the manufacture of primary chemicals, chemical products for industrial applications, pharmaceuticals, and plastic manufacturing. The chemical sciences industry is estimated to support a direct employment of 9,000 in Scotland and around 70,000 people are employed in dependent services ^[14] .

Figure 8: Trend in natural gas liquid production from the North Sea ^[15] .

Most of these companies are large and well-established organisations, and include Scotland's largest petrochemical refinery in Grangemouth (Box 6). The 10 million tonnes of chemical products produced annually at Grangemouth are used in the manufacture of a range of everyday consumer goods such as emulsion paint, car fuel tanks, plastic bottles, wrappers, food film, carpets, cabling, water pipes and camping gas ^[16] .

There is also a large ethylene plant in Fife which was the first plant specifically designed to use natural gas liquids from the North Sea as feedstock. This has an annual capacity of 83,000 tonnes of ethylene and around 50% of this is distributed via the UK ethylene pipeline network ^[17] .

The economic study observes that the development of unconventional oil and gas could provide a positive effect on the petrochemical industry in Scotland.

Box 6: Grangemouth Ethane Supply Project

INEOS, the owner of the Grangemouth petrochemical facility, has recently begun importing ethane from North American hydraulically-fractured shale reserves, and has stated publicly that a cost-effective and long-term supply of ethane is vital to their long-term plans for Grangemouth.

The Grangemouth site received £450 million of investment by INEOS to build a storage facility and gas import terminal. Even after factoring in the transportation costs of shipping the ethane across the Atlantic, INEOS has stated publicly that it is a competitive source of raw material.

This new source of ethane has enabled the ethylene cracker at Grangemouth to move from operating at half of its capacity to full capacity. The Grangemouth facility has one of only four gas crackers in Europe capable of using ethane gas to manufacture ethylene.

Scottish Government Observations on the Evidence

The amount of unconventional oil and gas that could be economically or technically recovered in Scotland is not known. Further exploratory work (including core sampling) would be required to better understand the resources that could be commercially exploited.

The total economic impact of unconventional oil and gas is estimated to be relatively low, and is not comparable to the current offshore industry in Scotland.

An unconventional oil and gas sector in Scotland could provide a cost-effective gas supply for local energy networks, and increase security of supply, particularly for high energy use industries.

However, as the scale of production in Scotland would be relatively low in comparison to European or international gas production, it would be unlikely to have an impact on global gas supply prices, and therefore on consumer energy costs.

Scotland's petrochemical sector is a major employer and contributor to Scotland's economy. In response to declining domestic sources of natural gas liquids, imported ethane is enabling the petrochemicals sector to significantly expand production. An unconventional oil and gas sector in Scotland could provide important benefits to Scotland's petrochemical sector.

Consultation Questions

This section has discussed the potential economic implications of an unconventional oil and gas industry in Scotland, including in the context of Scotland's energy and manufacturing industries. The findings from the evidence we have commissioned to examine these issues has also been discussed.

In answering the following questions, please consider whether, in your view, there are any specific gaps in the evidence presented.

Q3: What are your views on the potential impact of unconventional oil and gas industry on Scotland's economy and manufacturing sector?

Q4 What are your views on the potential role of unconventional oil and gas in Scotland's energy mix?