Radical thinking on INEOS’ part in 2009 will start to pay dividends next year when the first shipments of low-cost ethane from the US begin arriving at Rafnes in Norway to help reduce operating costs at INEOS’ gas crackers in Europe. But why stop there? That’s the question INEOS is now asking itself.
INEOS hates waste. And that includes squandering opportunities to run its businesses more efficiently.
Having already clinched game-changing, 15-year deals with two American companies to import low-cost, shale-derived ethane gas from the US to Europe to help reduce the operating costs at its European plants, INEOS is now looking to the UK.
A new team, led by Gary Haywood, is now weighing up the pros and cons of pursuing shale gas exploration and production starting in the UK, currently one of the few countries in the EU to accept the importance of hydraulic fracturing, or ‘fracking’ – the process by which gas and liquids can be extracted from shale formations.
Gary said the British Government’s support for shale gas exploration had been an important factor in INEOS’ decision to invest in its own project team, which was set up in February.
“Without Government support, the development of shale gas production would be virtually impossible,” he said.
The British Government has now created an Office of Unconventional Gas and Oil to promote the safe, responsible and environmentally-sound recovery of the UK’s shale gas and oil resources, and has promised tax incentives to encourage investment.
“The Government has recognised that shale gas has the potential to provide the UK with greater energy security, growth and jobs, and help the UK’s chemical and energy-intensive UK manufacturing industry to succeed,” said Gary.
There are currently 176 Petroleum Exploration and Development Licences (PEDLs) for onshore oil and gas in the UK. More licences are due to be awarded this year.
The US shale gas revolution has transformed America’s petrochemical industry.
Gas prices in the US are now about a third to a half of those in Europe (and a quarter of Asian prices), and cracker feedstocks have also benefitted. Dennis Seith, CEO of Olefins & Polymers (USA), said the effect of reduced energy costs for American industry had been nothing short of phenomenal.
US chemical companies are set to spend more than $70 billion before 2020 on new manufacturing facilities – fuelled by these cost advantages. The factors impacting gas prices in the UK are complex, and in some ways different to the US. It is unlikely that the impact of significant shale gas production on gas pricing will directly mirror the US situation, but there is no doubt that the development of this national resource will only improve the competitiveness of the UK gas market, as well as boost energy security, the balance of payments – and jobs.
In January UK Prime Minister David Cameron, buoyed by what has happened in America, urged the European Union not to impose premature regulatory burdens on shale exploration because investors would look elsewhere. “Oil and gas will still be plentifully produced but Europe will be dry,” he told the World Economic Forum.
Instead he urged the EU to embrace the opportunity.
“I understand the concerns some people have,” he said. “We need the right regulations and governments need to reassure people that nothing would go ahead if environmental dangers were present. But if this is done properly, shale gas can actually have lower emissions than imported gas.”
Gary’s team have already started work.
The UK is estimated to contain vast and untapped reserves of shale gas. The question is whether the gas can be extracted economically. Part of the INEOS team brief is to study UK geology to identify the most prospective areas for economic production. Of course, economic production of shale gas will also require the right surface conditions, including available land, and the required infrastructure.
The team has also been working with other chemical companies, energy-intensive users, and shale gas production companies to decide how best to communicate to a now sceptical public that shale gas can be extracted in a safe and environmentally-sound way.
“The environment at the moment is difficult,” said Gary. “People are concerned but what we need to do is to get our message out to people, to balance those messages of concern, which can sometimes be emotional and not necessarily based on sound science or indeed knowledge of the facts.”
INEOS has already adopted a strategy to help persuade the public about the very real need for shale gas exploration – by its involvement in discussions in Parliament, in the media and through INCH, and highlighting the benefits to its own employees in the hope they too will share the facts.
“We need to keep driving home the message that the chemical and energy intensive industries in the UK need to be competitive, or they face a very bleak future,” said Gary. “At the moment Europe is seeing increasing competition from America and the Middle East where energy and feedstocks are very low cost.
We need to explain that the development of our shale gas resource is one way that we can help here.”
INEOS can use shale gas as a feedstock or energy source for its ethylene crackers but it also owns land, pipelines and storage in some of the key areas being explored in the UK.
“All that, coupled with INEOS’ clear manufacturing excellence, strong safety focus and good relationships with the communities in which it operates, means that INEOS may bring something unique to this emerging industry,” said Gary. “So INEOS may ultimately opt to drill for shale gas itself.”
INEOS has brought substantial external experience into the team to help with the evaluation of this exciting opportunity. Tom Pickering has 10 years’ experience in on-shore gas exploration and production in Europe, and has also applied for – and successfully obtained – the largest number of UK onshore licences of any applicant. Gareth Beamish has 30 years’ experience as a geoscientist with major companies such as ExxonMobil and BG Group, including five years’ experience in shale gas exploration globally.
“We are looking at what makes sense for us,” said Gary. “We are certainly big supporters of shale gas production. Whether we are merely cheerleaders, or directly involved in exploration and production, or something in between, will depend on our assessment of the benefits and risks across our options, and then ultimately on how INEOS Capital assess those benefits and risks, and how they want to deploy the resources of the company.”
If the UK does manage to tap into its vast reserves of shale gas, Gary believes it could have a knock on effect across Europe.
“We can’t be sure, but we do believe that positive progress in any European country will set the tone for the rest of Europe,” he said. “People want secure, competitive and environmentally-friendly energy options, and we believe that if they had all the facts around shale gas production, then they would be supportive.”