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Utility Week 11th October 2013

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Markets & Trading Analysis US shale gas to the rescue? Whether championing UK exploration or demanding that the US share its new-found bounty, politicians hail shale gas as a gamechanger. Megan Darby looks beyond the hype. A s Labour and the Conservatives compete to present themselves as the party getting tough on rising energy bills, Chris Huhne has weighed in. The former Liberal Democrat energy secretary has paid his debt to society after an unfortunate episode involving his ex-wife and some speeding points and is returning to the fray. The forced break from politics has given him a reprieve from the pressure to make populist promises. He is not so distant from the debate as to forbear from criticising the "counterproductive" interventions of Ed Miliband and David Cameron, however. With the weary introduction "heaven help the planet, because dealing with climate change is going to cost something (although a lot less than not dealing with it)," he uses an article in The Guardian to propose an alternative: we should "get tough" on the US. The key to cutting energy bills is not fracking for shale gas on our own soil, he argues, but making the US export their gas glut. The wholesale gas price in the UK is nearly three times that across the pond. The shale gas boom has transformed the US from being a net importer to a potentially significant exporter. There are 20 or so liquefied natura ch only four have been approved. There has been resistance to exports from energy-intensive industries in the US, keen to protect their competitive advantage. Huhne says the EU "should be jumping up and down about unfair trade practices" and take legal action if necessary. The impact that shale gas and oil resources at home and abroad could have on household energy bills is a hot topic. The House of Lords Economic Affairs Committee has launched an inquiry into that very matter. Following bullish claims from the likes of chancellor George Osborne, hopeful the Bowland shale could be this generation's North Sea, peers will ask what impact the resource can really have on bills, energy security and carbon emissions. Meanwhile, representatives from Europe and the US are negotiating a Transatlantic Trade and Investment Partnership to remove barriers to free trade. If the US were putting up obstacles, this would be an opportunity to knock them down. Analysis from Bloomberg New Energy Finance (BNEF) supports the argument that US imports would be more significant than UK production. In a submission to the House of Lords, the research agency estimated that over the next five years, imports from the US could ramp up to 7-8 billion cubic feet a day (bcd). That is nearly twice the analysts' most bullish scenario for UK shale gas production, at 4.5bcd, which in any case is not expected to reach peak production until the early 2020s. If the gas were to flow more slowly from UK wells, the output would be just 2.02.1bcfd, they say. In terms of price, they predict that shale gas from the UK and US will come in at a similar level, and one that "will not have a noticeable impact on UK household energy bills". Differences of geology, land rights, drilling services provision and infrastructure will make it more expensive to extract gas in the UK shales than in the US. This means prices of $7-12/MMBtu (million BTu), according to BNEF's models, compared with $5-6/ MMBtu in the US. The costs associated with shipping to Europe mean US gas will cost closer to $10/MMBtu when it arrives, evening the score. Both are close to the $8-11/MMBtu UK spot price gas has traded at over the past two years. Mike Lawn, head of power and gas at BNEF, is less convinced by the idea that acting tough is necessary or helpful. "The US government is well capable of delaying things if they want to, but they have not at all delayed export terminals in any serious way," he says. "The idea that UK politicians 'getting tough' on America will increase imports… maybe it makes good politics but I can't see it having a lot of power here [in the US]." Murdo MacLean, energy partner at law firm Pinsent Masons, agrees that there is little evidence the US industrial lobby has succeeded in thwarting exports. He says: "There is a procedure under which the Department of Energy must approve applications to export gas but the strong evidence is that the tendency is very much in favour of allowing exports." The jury is still out over whether shale gas, US or UK, can really dent household bills. All the same, it appears to be a more popular case for politicians of all stripes to champion than that insuring against climate change is worth a few pounds extra. Breakeven gas price for 15% after-tax equity IRR ($/mmBtu) 15 12.20 12 10.72 9.05 9 5.23 6 3 0 2.78 Eagle Ford 5.39 6.29 7.10 3.60 SW Haynesville Barnett NE Marcellus Marcellus Wet US plays Dry US plays $8m D&C $11m D&C UK – 4,250mcfd $8m D&C $11m D&C UK – 2,100mcfd Source: BNEF UTILITY WEEK | 11th - 17th October | 27

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