Unconventional oil and gas: Economic Impact Assessment and scenario development of unconventional oil and gas in Scotland

Appendix D: Contribution from stakeholders

D.1 Workshop with stakeholders on 21 and 22 March 2016

D.1.1 Scottish Environment LINK and Friends of the Earth Scotland

Welcome and introductions

Team introductions and brief description by KPMG of the objectives of the meeting and the work being conducted, and purdah limitations.

Scottish Environment LINK provided a brief overview of their functions. They informed KPMG, AECOM and BGS that there are numerous subgroups within Scottish Environment LINK and that some of these subgroups may want to input into the process. Responses would therefore be collated and returned to KPMG.

Objectives of the research projects An overview of the scope of the research project was provided. KPMG, AECOM and BGS highlighted that the purpose of the study is to increase the evidence base for the Scottish Government on UOG and no formal recommendations will be provided to the Government.

KPMG, BGS and AECOM provided an overview of the six work streams and the public health study that is being produced.

One key point Scottish Environment LINK highlighted was the lack of overall environmental study which would combine all five work streams. They also stated that the five work streams should highlight any gaps in evidence or data.

Economic Impacts Study

KPMG gave an overview of the scope of work and proposed approach for the Economic Impact Assessment study. This also included a discussion of the aspects to be covered in the Economic Impact Assessment and the use of the Scottish Input-Output table to generate the multipliers for the UOG sector.

There was a discussion with the group on the breadth of the project. KPMG informed Scottish Environment LINK that it is not included in the scope to use shadow pricing for externalities or environmental impacts but that wider impacts would be considered despite not being able to formally quantify these impacts within the model.

KPMG described the use of a scenarios based approach, looking at potential development of the industry, costs associated with this and supply chain impact on the Scottish economy. Scottish Environment LINK also highlighted the need for a scenario whereby developers initiate drilling but then do not complete any extraction.

In the detailed Economic session, Scottish Environment LINK raised some further points to be considered by KPMG in the Economic Impact Assessment:

• Whether the development of the industry would affect international gas prices and whether this would have a net greenhouse emissions effect.
• Energy price changes and what effect this may have on the industry and associated supply chain.
• The transitional nature of the industry and how to consider this within a model.
• Further costs of development including heritage costs, environmental costs, public enquiry costs, permitting costs, effects on house prices and costs that may not be incurred by the developer.

KPMG requested further information from Scottish Environment LINK around costs of unconventional oil and gas to understand fully the externalities that could be incurred and what could be a suitable way to approach these.

Following the stakeholder workshop, KPMG received written input from Scottish Environment LINK and Nourish Scotland.

D.1.2 UKOOG

Welcome and introductions

Team introductions and brief description by KPMG of objectives of the meeting, including data requests and purdah limitations.

Objectives of the research projects

An overview of the scope of the research project was provided. KPMG, AECOM and BGS highlighted that the purpose of the study is to increase the evidence base for the Scottish Government on UOG and no formal recommendations will be provided to the Government. KPMG, BGS and AECOM provided an overview of the five work streams and the further public health study that is being produced.

UKOOG stated they would like the opportunity to discuss options and mitigations before they are included in the final report, however it was noted that stakeholder time has to remain equal among the different stakeholder groups.

The regulatory structure for decommissioning is set at a UK level and UKOOG represents the whole of the UK, hence they would like to know any further developments in options and mitigations which could have a direct impact on England, Scotland and Wales.

Economic Impacts Study

KPMG gave an overview of the scope of work and proposed approach to complete this, including discussion of Economic Impact Assessment and Input-Output modelling. KPMG informed UKOOG that as part of this Economic Impact Assessment, environmental impacts are only considered in terms of cost drivers rather than creating any shadow pricing for externalities. KPMG described the use of a scenarios based approach, looking at potential development of the industry, costs associated with this and supply chain impact on the Scottish economy.

KPMG requested any further industry data from UKOOG that could assist in refining scenarios and completing assumptions.

Key discussion topics were:

• The difficulty in splitting the impacts between Scotland and the UK in terms of skills, jobs etc. This is because the industry is framed in a UK wide context. It was also discussed that demand would leak into the international market.
• The difficulty in determining where the supply chain may reside. It could be that the supply chain will go to the initial production areas which currently look like it will be England. In this case, the longer Scotland takes to develop the industry, the more Scotland will miss the benefits from the supply side. It could be that English companies operate in Scotland in which case some of the benefit would still remain with England.
• Technology development: More activity would lead to more R&D in the industry, which is then exportable. This learning then could give rise to lower costs. Better technology has also resulted in higher production per site in some cases in the US. KPMG informed UKOOG that they would use I-O tables to reflect the relevant sectors that benefit from the increased R&D.
• KPMG mentioned that the project considers recoverable resources in the Midland Valley. There was discussion on what impact this assumption would have. The consensus was that it was only worthwhile looking at this area, as it does not appear to be economical or even feasible to develop smaller and remote areas.
• KPMG highlighted that a key assumption is that there are not enough resources in Scotland to affect European/ GB prices. The consensus was that this was a sensible assumption given EU market dynamics.
• KPMG provided an overview of their initial thinking around cost and production profiles. UKOOG expressed their view on this and informed KPMG that the methodology used in the IoD/ EY study may not be directly applicable to the Scottish context. The consensus was that it would be very difficult to create a new cost base but KPMG could take the existing cost base from the EY or IoD studies and make adjustments based on recent economic changes. UKOOG suggested comparing the unit cost (p/therm) with the conventional oil and gas sector in the North Sea.
• KPMG modelling assumptions: UKOOG suggested that the model could be a bottom up analysis rather than top down. UKOOG informed KPMG that the UKOOG members would have an internal discussion before sharing with KPMG industry data and estimates. Other assumptions such as the production time frames that should be used and the use of multilateral wells were discussed. UKOOG informed KPMG that they would provide further insight on well productivity and how it can be applied to the Scottish context.
• UKOOG informed the group that there has been recent investment in centres and universities for industry-specific courses to acquire the skills required to ramp-up the national supply chain. UKOOG assume that the skillsets produced from this would stay in Scotland and the rest of the UK.

D.1.3 COSLA

Welcome and introductions

Team introductions and brief description by KPMG of objectives of the meeting, including data requests and purdah limitations.

COSLA provided a brief overview of their functions. COSLA informed the group that a summary of the stakeholder session would be fed back to the local authorities and responses would be collated and returned to KPMG.

COSLA clarified that they do not take a particular political view regarding the potential development of unconventional oil and gas - currently they have a neutral opinion towards hydraulic fracturing.

Objectives of the research projects

An overview of the scope of the research project was provided. KPMG, AECOM and BGS highlighted that the studies will not make any formal recommendations to Government. The group informed COSLA that there might be a formal consultation process by the Scottish Government after the completion of the five research studies and interested stakeholders might wish to engage with this more formally.

COSLA were keen to understand who else had contributed at this stage. The group provided a description of the stakeholders that had been engaged at the request of the Scottish Government.

Economic Impacts study

KPMG provided an overview of the scope of work and proposed approach to complete this, including a discussion of the Economic Impact Assessment and Input-Output modelling.

KPMG informed COSLA that as part of this Economic Impact Assessment, environmental impacts would only be considered in terms of cost drivers rather than creating any shadow pricing for externalities. KPMG are to use a scenarios based approach, looking at potential development of the industry, costs associated with this and supply chain impact on the Scottish economy.

KPMG requested further information on policy monitoring and associated costs and they are keen to understand how/if these could be inputs into the model.

KPMG described their key assumptions including the fact that the study would focus on the potential development of shale gas, associated liquids and coal bed methane in the Midland Valley.

COSLA enquired whether the study would account for impacts on local enterprises rather than multi-nationals. KPMG responded that this would not be analysed explicitly within the study as the model developed for this study would be an aggregate for sector-by-sector analysis. It was highlighted that traditionally most oil and gas companies sub-contract their work, some of which will be likely to go to SMEs.

KPMG and COSLA also discussed the degree to which it can be assured that the impacts will be within Scotland. This would imply that the gas produced in Scotland would be consumed domestically.

COSLA made the following points:

• Whether there would be an appropriate local supply chain. KPMG responded that currently there is an offshore industry in Aberdeen where some resources and skills could potentially be transferred onshore.
• Whether there is the appropriate expertise in Scotland. Investment in local skills is occurring in Scotland but there is also quite a lot of recent investment in England. These factors will be considered in the written report but not formally quantified.
• Whether to consider regeneration effects for deprived areas.
• Whether to consider procurement: for example the extent to which the government can mandate suppliers to pay the living wage. This could factor into a cost base.
• New regulations regarding landowner tax for derelict land which could be positive for the industry.

Following the stakeholder workshop, KPMG received written input from COSLA.

D.1.4 Broad Alliance

The Broad Alliance was not able to participate in a stakeholder workshop. Instead, they provided written input for KPMG to consider. A summary of this is provided below.

In their written submission to KPMG, Broad Alliance raised their concern regarding the potential use of a Cost Benefit Analysis ( CBA) as a tool for quantifying economic impacts (please note however, this Report is not based on Cost Benefit Analysis by Economic Impact Assessment). Broad Alliance argued for a different approach to assessing the economic impacts of UOG, for example the Scottish Government's National Performance Framework ( NPF) or Oxfam's Humankind Index.

Broad Alliance highlighted that the shale gas industry in the US is an example of a boom and bust case. In their opinion, the overall impact of the shale industry in the US has resulted in:

• Greater economic instability;
• Devastation for communities (environmental destruction and industrialisation of rural area); and
• Devastation for families who have staked their future, including borrowing and mortgages, on this industry and now face unemployment.

Based on US experience, Broad Alliance concluded that the extraction of UOG would negatively affect Scottish communities and industries. Regarding employment, Broad Alliance stated that there would be some scope for job creation during the production phase in communities surrounding the wells. However the spend in the local economy and with supply companies would be temporary and minimal.

Broad Alliance highlighted their concern regarding the level of indebtedness of UOG players in the UK. It emphasised the need for examination and assessment of the economic standing of the key players.

Broad Alliance also provided some commentary on the costs associated with regulation and decommissioning, the potential negative impacts on house prices and other businesses, the health-related issues that may arise from UOG exploitation along with the associated costs for the NHS and the negative impacts the UOG industry could have on renewables, including emissions resulting from the development on UOG in Scotland.