The main costs include capital, operational and transportation, as well as taxes
At this early stage, it is impossible to be accurate about the costs of extraction
Cost pressures include; planning and environmental permitting costs and the lack of a defined supply chain in the UK
What affects the cost of shale gas and what will the costs be in the UK?
As the shale gas industry in the UK is still at a very early stage, it is impossible to be completely accurate about the cost to extract onshore oil and gas.
The costs of producing unconventional gas include capital, operational and transportation costs, as well as taxes. These costs are dominated by the drilling of wells and are usually higher than for conventional gas because of the additional expense of hydraulic fracturing (fracking).
There are varying reports on how the UK shale extraction cost will compare to the US, with some commentators predicting the difference as high as three times more expensive in the UK.
Unlike the US however, the UK does already have access to sophisticated gas distribution and transmission systems. Not only would it cost several billion pounds if these systems had to be built today, but it also means that the need for flaring will be far less than in the US.
A number of factors will determine the cost of extraction including:
- How much natural gas you can recover
- Development of a UK supply chain to generate price competition
- Climate change policies impacting on the cost of carbon
- Public perception and the impact on planning decisions
- Environmental and safety related costs
- Well success factors
- Well learning curve – time taken to reduce well costs
- Operator efficiency
While further testing is required, at this stage, it appears that in certain parts of the UK, the shale is significantly thicker than in the US. What this could mean is that a far greater amount of natural gas can be extracted at each well site.
However, the UK still suffers from a number of potential cost pressures which the US does not, in particular, the current lack of a shale supply chain.
For example one recent count showed that there are 863 land rigs in the US compared with 109 rigs in the whole of Europe, but this position will steadily improve as it did in the US.
In addition to the immature supply chain there is also a bigger environmental and regulatory cost of doing business in the UK, with longer lead times particularly around planning making scheduling difficult.