Leo Drollas: go for fracking
Energy analyst Leo Drollas sees fracking as a necessity for Northern Ireland’s economic development. He discusses his views on the gas market and climate change with Peter Cheney.
Northern Ireland, according to Leo Drollas, must go ahead with fracking if commercially viable reserves are discovered. If the region relies on wind energy and other renewable sources, it “won’t be able to attract industry.”
Drollas is Director and Chief Economist at Centre for Global Energy Studies, based in London. He is a former Head of Energy Studies and Econometric Analysis at BP.
He elaborates: “Countries should be self-sufficient in agricultural products if they have the right weather, which you do. No problem about that but if you want to attract industries here back again, that requires cheap energy today. If you want to revitalise some of your industries, you need cheap energy.” In terms of natural resources, Northern Ireland is “fuel-poor” and “if you’ve got a resource, you mustn’t allow it to be in the ground.”
He continues: “There are always going to be people who object. You’re always going to have people who would prefer us to de-industrialise but they’re a small minority, who also depend on energy by the way. They drive cars like you and I. They heat their homes. Do they want us to go back to a pre-industrial era?”
Some objectors contend that, based on economies of scale, Northern Ireland is a small region compared to the shale gas fields of North Dakota. The local reserves therefore may not deliver the promised results.
Drollas maintains that Tamboran’s estimate (2.2 trillion cubic feet) represents a “huge resource” which could potentially meet local energy needs for 30-50 years.He acknowledges that the environmental cost of production needs to be “minimised” with the ground returned to its natural state when operations end.
Predictions that US shale gas will cut energy prices in Europe may be too optimistic, according to Drollas, as rising domestic demand will limit the level of exports into the global market.
The general consensus among energy analysts is that the US shale gas revolution will cut energy prices in Europe. America would run a surplus and have large quantities of liquefied natural gas (LNG) available for export.
Drollas, though, dissents. “I have my doubts about it,” he explains. “The sensitivity of gas demand to price changes is higher than certainly I thought and it’s higher than the price sensitivity of oil demand.”
Current gas prices per million Btu are around $15 in Japan, $10 in Europe and $5 in the USA. The general thinking is that US shale gas exports will equalise the prices around (or under) $10.
The growth of shale gas has reduced prices but gas demand also surged up within a few years. US gas imports initially went down but then started to rise again slightly in 2012.
“Gas prices fell so much and that has deterred incremental production because rigs started moving away from gas and some shale gas firms went bust,” he points out. “That effect is slowing up the production increase but [there is] surging demand because prices are so low.
“My contention is that as supply keeps on rising, demand catches up with it and then the imports don’t decline to zero.”
As a result, LNG exports from the USA probably will not happen at the expected rate and less LNG will come into Europe than would be expected. “Therefore prices in Europe won’t go down as much,” he adds. “They’ll come down a bit but not as much as people think.”
A climate change sceptic, Drollas regrets that the UK has “pushed faster than any other country in the world” to cut its carbon emissions. China and India are growing rapidly and using up massive amounts of coal in the process, pushing up global emissions.
“The rest are surging ahead and, even if you believe in global warming, it’s a waste of effort,” he remarks. “Why should we immiserise ourselves when the rest of the world pay no attention?”
In Drollas’ view, the theory of anthropogenic climate change sustains vested interests. For governments, subsidies are a means of gaining control over industry and energy and environmental taxes are “a huge source of revenue.”
Climate research funding runs to several billion dollars, and, in his opinion, it is therefore in the interest of universities to take that view. Some data suggest that the world has cooled over the last 15 years. Sceptics see this as the start of a global cooling period while those who accept climate change interpret this as a ‘pause’ before a further temperature increase.
Arab embargo impact: 40 years on
The 40th anniversary of the Arab oil embargo has just passed. The move, during the Yom Kippur War in October 1973, had a long-lasting impact and Leo Drollas was completing a university thesis in economics at the time.
“The embargo came in suddenly and the panic was so great that the price started shooting up in spot markets,” he recalls. “The prices ended up four times higher within a space of three months.” High prices continued after the embargo ended in March 1974. The Arab states started to become involved in the pricing of oil and the companies continued production.
“They were panicking because they thought that the embargo could be re-imposed. It became a weapon so the companies were trying like mad to continue buying oil and stockpiling it,” Drollas explains. The real change came from 1975 onwards as OPEC countries nationalised their industries.
OPEC countries continue to derive their revenues from high oil prices. In global terms, per capita GDP has doubled since 2000 but the nominal cost of oil has tripled. This has led to “fuel poverty on a gigantic scale” in the developing world and millions of people “could have been taken out of poverty but they haven’t.” Instead, Arab governments can maintain high public spending at home “to keep themselves in power and, as long as that structure remains, this will continue.”
