The fracking fixation
Written by Marc Jones
Declining North Sea oil reserves have led to a heightened interest in fracking. But with public opinion divided, Marc Jones finds out what the future holds for this energy source
When most people think about energy supplies in the United Kingdom, a simple phrase tends to come to mind: North Sea Oil. But times have changed now that the UK government has embraced hydraulic fracturing of shale rock for oil or gas with a vengeance.
Prime Minister David Cameron has spoken publically about the attractions of fracking, as has Chancellor of the Exchequer George Osborne. And in May, Michael Fallon, the Minister of State at the Department of Energy and Climate Change, said in the House of Commons that the coalition government was looking at proposals to reform the procedure for securing underground access to oil or gas deposits and geothermal energy. These reforms could make it easier to for companies to access such deposits.
These attractions are potentially substantial – on the same day as the Minister’s announcement, the British Geological Survey (BGS) and the Department of Energy and Climate Change announced that they estimate there could be anything between 2.20 and 8.57 billion barrels of shale oil in the Weald Basin in South-East England alone. Other potential areas containing shale oil or gas stretch across the UK and are being investigated by the BGS.
The increase in interest in fracking has naturally come about because of declining oil and gas reserves in the North Sea. However, as CIR Magazine reported in March this year, it has had a knock-on effect as fears grow that more investment by energy companies in the fracking industry will as a consequence mean less investment in the renewable energy industry.
Asked by CIR Magazine if there had been any change in demand for renewable energy, or insurance for it, in the UK, Ian Harris, senior underwriter, technical lines at ACE, explains there has been an increase in electricity generated from renewable sources globally and a subsequent increase in the demand for insurance. “The need for insurance for individual clients has not changed but the fact that more energy is being created from waste has altered the mix of the risks being insured,” he says. “A number of waste fires has reduced insurers’ appetite to insure in the waste to energy sector but there remains plenty of appetite to insure wind and solar risks.”
On the future of renewable energy in the UK, Harris said, “One long-term view is that at some time after the next general election the current subsidy programme supporting renewable energy will either drastically reduce or stop. If this is the case we may get the position where either the renewable energy sector stops growing or alternatively the price of electricity and gas will have to rise to a point where subsidies are no longer needed to require new investment.”
He explains this could lead to a possible worsening of claims ratios as maintenance is possibly cut leading to an increased claims incidence. “As a plant moves out of warranty and into ‘middle age’ it is likely to lead to an increase in claims as equipment wears out. The recent growth in the renewables sector has been on the back of low returns on cash invested either in savings accounts or government bonds. As the UK bank base rate rises in the next few years this will make some other alternative investments more attractive to possible investors.”
According to Fraser McLachlan, chief executive officer of GCube Underwriting, the risks surrounding renewable energy such as wind farms are now better understood by the insurance industry. “Wind [turbines] have largely moved offshore, presenting a huge opportunity for the insurance market but the risk profile is massively different,” he explains. “If something goes wrong on a wind turbine on land it’s easy to fix. When something goes wrong out to sea it’s different – you have to mobilise a crew, get a boat, get the spare parts and above all you can’t work above a certain wind speed or sea state. Notwithstanding I still believe there’s more potential for renewables offshore than for fracking on land here in the UK.
He believes the potential in the North Sea for renewable energy to be huge. Supporting this are better technology, better funding and better research for renewable energy, which is very important from an insurance and risk perspective.
ACE’s Harris agrees that the long-term risks around renewable energy are becoming better defined: “On one hand the risks are becoming better understood over time, while on the other they are growing in scale. There is a demand for ever bigger plants – be it larger turbines, or plants with higher efficiency in output or new technologies and, particularly on the waste side, there is a demand for newer technologies which are less proven. As risks developed during the recent growth spurt in the renewable sector age and mature, and items come out of manufacturer’s warranty, there is likely to be some increase in claims incidence and costs.”
Across the pond
While fracking is a relatively new idea and process in the UK, the same cannot be said for the US, which has for some time piqued the interest from its government. In his State of the Union address in January, President Barack Obama commented favourably on the potential advantages of fracking for the US, a country that has long been notoriously hungry for oil and which has been fracking for decades.
However, there are a number of clear differences in attitude towards fracking between the two countries. “Public opinion in the United Kingdom is very different [to that of] the United States,” says McLachlan. “We have a finite amount of land to frack on – and the same when it comes to renewable energy. Whilst there is the political will to frack, there are practical difficulties.”
These difficulties include identifying the most efficient areas to frack at, the treatment of fluids derived from fracking, concerns about leaks and a number of other geological issues.
It must also be said that there does exist a difference between the public perception of fracking and renewable energy in the UK. Although there is a certain amount of unwillingness to see wind farms in some areas, renewable energy is still quite popular.
However, the attitude of the general public towards fracking might be said to be souring somewhat, with one survey by the University of Nottingham claiming that that support for fracking has fallen over from 58.3 per cent of those surveyed in 2013 to just under 50 per cent in 2014.
One reason for this fall might be some of the headlines that fracking has generated recently. A number of stories have emerged from the US about worries over the impact that it is having on the local geology. Some scientists have claimed that the mechanics of fracking might cause earthquakes, as the fluid could be entering long-dormant fault lines and disturbing them. Similarly, in the UK there were claims that fracking caused a small earthquake in Blackpool in 2011. Further research into this is being carried out.
As a consequence of such negative headlines it’s possible that plans for more fracking in the UK might have a political impact due to local objections – the majority of MPs in South-East England (where the Weald Basin is) are Conservatives, and local objections might blunt the zeal of those who support fracking.
GCube’s McLachlan had another point: “Public opinion [in the UK] is also quite anti-fracking. In addition there [are] also the risks from fracking – what potential environmental damage are you doing to the surrounding area when you frack? I don’t think that anyone fully knows what the long-term impact is yet. It’ll take a few years before it becomes apparent as to what the environmental and long term risks are.”
Indeed, one environmental element certainly sets hydraulic fracking in the UK apart from the US. In the UK the Environmental Agency has laid down environmental standards regarding the fluid that is pumped into the rocks at fracking stations. Any company wishing to frack in the UK must show that the fluid is non-hazardous. However, in the US companies carrying out fracking operations have no obligation to give out information about the chemical composition of the fluid that they are using. Given that there have also been stated fears about the chances of any fluid entering the water table in different areas and possibly getting into the water supply, this difference might have an impact further down the line.
With less than a year to go to the 2015 general election in the UK, the political situation with regard to fracking will remain in flux until the next parliament. If the next government is formed by the Conservative Party, then the interest in fracking will very likely continue. The position of the Labour Party has been more ambivalent and it will be interesting to see if this changes in the run-up to the election.
Whatever the future holds for fracking, revelations around the process do not seem to pose a risk to the future of renewable energy in general, or indeed to the insurance of that energy. And if the Conservatives do win the 2015 election then it is highly likely that the green light will be given for increased fracking in the UK.
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