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Unconventional oil and gas: Economic Impact Assessment and scenario development of unconventional oil and gas in Scotland

Published: 8 Nov 2016

Research into Economic Impact Assessment and scenario development of unconventional oil and gas in Scotland.

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Contents
Unconventional oil and gas: Economic Impact Assessment and scenario development of unconventional oil and gas in Scotland
5 Measuring the economic contribution of UOG to Scotland

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5 Measuring the economic contribution of UOG to Scotland

5.1 Summary of key findings

In this section, we summarise our key findings regarding the economic impact of each of the scenarios we considered.

Table 5.1 presents a summary of economic impacts from UOG development in Scotland. Key metrics are described below:

1) Total spend: Represents the industry's total spend for the extraction of shale gas, associated liquids and CBM. Total spend includes the monies invested in Scotland, the UK and the rest of the world.

2) Spend in Scotland: Represents the UOG industry spend in Scotland (only) for the extraction of shale gas, associated liquids and CBM. It is the monies invested by the UOG sector in other Scottish businesses/sectors - i.e. the direct spend in Scotland by the UOG sector. Assumptions on localisation are set out in Appendix C.3.3.

3) GVA/ GDP contribution: Represents the Gross Value Added of the spend in Scotland. CBM is presented for illustrative purposes only.

4) Employment: The total number of jobs at peak, i.e. peak year employment.

5) Total tax receipts: Represents the total at UK level, including both from devolved Scottish Government taxes ( e.g. income tax partially and rates) and UK income tax, NI and corporate tax from direct (corporation and labour taxes) and indirect ( VAT) taxation as well as rates. Total tax receipts are derived from Total spend. CBM is presented for illustrative purposes only.

5.2 Contribution to GVA/ GDP

To arrive at our estimates of GVA we passed the assumptions on capex, opex, gas and oil prices and output for the three production scenarios (discussed in earlier sections) through our Input-Output model. The results of our analysis are shown in Table 5.2 overleaf. The total GVA (cumulative to 2062) comes to £1.1 billion in our Central scenario [32] , with £0.1 billion in GVA generated directly added to £1.0 billion in indirect and induced effects (including CBM). As outlined in Section 3.4, the numbers we present are gross impacts and do not take into account of any price effect.

The economic benefits shown in Table 5.1 should be considered in the context of the alternative case in which exploration for UOG in Scotland takes place but resources are not economically viable for development. In this case, expenditure on exploration would take place (our cost estimate for exploration activity in the Central scenario is £240m) but no actual development would take place.

Table 5.1 Summary of economic impacts from UOG development in Scotland [33] .

Cumulative £ billion to 2062 Central High Low
1) Total spend (£bn) Shale gas and associated liquids 4.4 10.8 1.5
CBM 0.4 0.4 0.4
Total 4.8 11.1 1.9
2) Spend in Scotland (£bn) Shale gas and associated liquids 2.2 6.5 0.5
CBM 0.2 0.2 0.2
Total 2.4 6.6 0.7
3) GVA/ GDP contribution (£bn) Shale gas and associated liquids 1.2 4.6 0.1
CBM -0.1 -0.1 -0.1
Total 1.1 4.5 ~0.0
4) Peak year employment Shale gas and associated liquids 1,400 3,100 470
CBM - - -
5) Total tax receipts UK (£bn) Shale gas and associated liquids 1.4 3.8 0.5
CBM 0.1 0.1 0.1
Total 1.5 4.0 0.6

Table 5.2 Estimated direct, indirect and induced GVA for Scotland from UOG development [34] .

Cumulative £ million to 2062 Central High Low
Total direct GVA Shale gas and associated liquids 473 2,515 36
CBM -334 -334 -334
Sub-total 139 2,181 -298
Total indirect GVA Shale gas and associated liquids 658 1,804 92
CBM 183 183 183
Sub-total 841 1,987 275
Total induced GVA Shale gas and associated liquids 90 234 15
CBM 24 24 24
Sub-total 114 258 39
Total impacts 1,095 4,427 17

It can be noted that the estimated GVA impacts for CBM are negative. This is a result of revenues from sales of methane produced at anticipated market prices being less than the costs of extraction. The development of CBM would be unlikely in an environment where the costs of extraction exceed revenues. The negative economic contribution for CBM in Tables 5.1 and 5.2 are presented for illustrative purposes only.

5.3 Contribution to employment

The UOG industry would require workers in construction of pads, the manufacture of equipment, including rigs, etc., and in operations and maintenance. Estimates of the number of jobs based on UOG spend in Scotland required to design, build, maintain and decommission shale gas/oil pads vary widely, as discussed below.

Peak year employment is the metric used to quantify the number of additional jobs that could be created by the UOG sector. Peak employment is dependent on the number of pads being developed and is also affected by the pad development profiles whereby more jobs are needed when a greater number of pads are built at the same time. This study assumes that a maximum of three pads would be built in any given year in the Central scenario (4 in the High and 2 in the Low). We assume that once a pad is built, a given worker would then work on the next pad being built; this results in one single job being maintained over a longer time rather than the creation of additional jobs for every pad built. Table 5.3 summarises the results of our analysis of the number of jobs that could arise from UOG development in Scotland while these jobs are created in Scotland, skills limitations may mean they are filled internationally.

Table 5.3 Peak year employment comparisons.

Peak year employment ( FTE) Central High Low Ocean Gateway Bowland shale area
(with hub)
Bowland shale area
(without hub)
Direct employment Shale gas and associated liquids 930 1,280 430 1,482 5,463 2,179
CBM - - - NA NA NA
Indirect employment Shale gas and associated liquids 410 1,700 20 1,792 4,683 2,383
CBM - - - NA NA NA
Induced employment Shale gas and associated liquids 60 120 20 230 3,002 769
CBM - - - NA NA NA
Total peak employment 1,400 3,100 470 3,504 13,148 5,333

Source: Ocean Gateway (2014) and Bowland shale (2015), Amion Consulting.

The results in Table 5.3 need to be interpreted with caution. Our estimate of jobs differs from the ones presented in the IoD (2013) and EY (2014) studies as our analysis is based on different production development profiles which are specific to Scotland only. The EY (2014) study and the Institute of Directors (2013) study suggest that jobs created in the UK by unconventional gas could be 64,500 ( EY) or 74,000 ( IoD) at peak and that spend could be up to £33 billion in supply chain activities from 2016 to 2032. We understand that the approach used to calculate peak employment in the EY (2014) and IoD (2013) studies is different to our economic multipliers methodology.

Table 5.4 Employment categories and job type.

Employment categories

Job type

1) Planning and licensing

  • Environmental and regulatory approval
  • Surface leasing and permits
  • Site excavation, preparation
  • Drilling
  • Evaluation

2) Exploration

  • Geophysical and geochemical surveys

3) Pad development

  • Designing well pad requirements
  • Installing infrastructure

4) Drilling and completion

  • Mobilising drill rig requirements
  • Cementing casing into bore
  • Sourcing and receiving drilling mud additives
  • Drilling and installing production casing

5) Fracturing

  • Sourcing and receiving fracturing fluids
  • Pumping fracturing fluids
  • Treating/transport waste and waste water
  • Testing for recovery potential

6) Production

  • Confirming well viability
  • Installing surface facilities
  • Installing pipe infrastructure

7) Decommissioning and aftercare

  • Preparing site for decommissioning
  • Decommissioning and aftercare

Comparing our peak employment to studies that have looked at a regional development assists the reader in putting our numbers in context. A report by Amion Consulting (2014) on the UK Ocean Gateway area [35] estimates that 3,504 jobs could be associated with the Ocean Gateway development. This is based on estimated cumulative spend to 2035 of £9.8bn [36] . Another study looking at the potential development of a supply hub for the Bowland shale (Amion Consulting, 2015) estimates that for a total of 100 pads (of 10 vertical wells and 40 laterals [37] ) peak employment could reach 5,333 jobs if a supply hub is not developed. Alternatively, if a supply hub is developed in the Bowland area to support the development of Bowland shale, the authors estimate that employment could peak at 13,148 jobs. The Deloitte (n.d.) study on the Bowland Basin Shale gas development in the north of England provides estimates that between 6,900 and 23,600 jobs could materialise based on estimates from developed US shale gas fields. It is worth noting that more recent jobs estimates (2015) for the Bowland shale indicate much lower employment impacts than previous estimates (2013, 2014). Direct and indirect jobs will fall under a number of different categories at shown in the Table 5.4 below.

As noted in Section 3.5, we have also taken into consideration the indirect and induced employment effects on industries that form part of the supply chain through the Input-Output table analysis. These sectors include, but are not limited to, repair and maintenance, electricity, gas, water transport, financial services, legal activities, architectural services, etc.

Scotland is host to a large petrochemical sector with 150 manufacturing companies involved in the manufacture of chemical and chemical products as well as refined petroleum products (Fame Databased). The sector currently employs over 3,500 workers (Fame Databased, SIC codes 1920 and 20). Section 5.6 explains how the development of UOG could provide additional employment opportunities in the petrochemical sector and its supply chain and potentially help to provide increased competitiveness to existing industries.

Also noted in section 3.5, economic impacts from the potential development of the UOG sector could be dispersed across large areas of Scotland and it is not clear exactly where these jobs would be created. As shown in Figure 5.1, we note that a large concentration of areas classed as deprived are located in the Midland Valley of Scotland [38] . The development of the UOG sector in the Midland Valley could offer some new employment opportunities as UOG development takes place.

Figure 5.1 SIMD zones in the Midland Valley of Scotland.

Figure 5.1 SIMD zones in the Midland Valley of Scotland.

Source: UK Data Explorer (2012) & British Geological Survey (2014)

5.4 Contribution to tax/government revenues across the United Kingdom

The activity of the UOG industry and its supply chain has the potential to lead to the generation of tax revenues. In 2013 the UK Government announced a package of measures designed to support the development of shale gas, including streamlining the permit process, new planning guidance in England and Wales and working with operators to seek community benefits payments ( HM Treasury, 2013). Subsequent to the 2013 Budget, the Government announced that the full business rates income in England and Wales would be retained locally. The development of tax regimes for UOG is still in early stages and as result of this early stage of development we have made no explicit assumptions regarding the inclusion of specific onshore oil sector tax costs or benefits, our assessment is based on the typical company taxation regime in the UK.

The government held a consultation throughout 2013 but since then very little has been pushed forward with regard to a new tax regime.

As part of the macroeconomic analysis, we assessed the likely impact on tax revenues. This relates to the direct extraction costs and sale of gas/oil as well as the indirect and induced effects from the supply chain [39] . We assess four sources of tax revenues for the UK government from Scottish UOG development:

  • Direct taxes on corporates developing UOG;
  • Direct taxation on employees in the UOG and other impacted sectors;
  • Indirect taxation ( VAT) on the goods and services purchased in the supply chain to support UOG development; and
  • Local government taxation receipts.

As shown in Table 5.5 we have estimated total tax over the period to 2062 to amount to up to £1,400 million in the Central scenario. These broad estimates serve to illustrate the potential size of the tax revenue across the UK. These receipts have not been further split between Scottish and UK governments, as currently there is no allocation of tax receipts from the sector between Scotland and the remainder of the UK.

Table 5.5 Tax receipts from UOG across the United Kingdom to 2062.

(£ million) Central High Low
Direct tax Corporation tax 110 860 25
Labour (Income/ NI) tax 250 610 90
Indirect tax ( VAT) 890 2,140 310
Rates 150 240 75
Total 1,400 3,850 500

Jobs supported by the industry would also lead to reductions in benefit payments, where workers would otherwise be unemployed. This would also add to the exchequer, although these benefits are not counted here. Tax rates are kept constant over time in our analysis.

The Deloitte study (n.d) on the Bowland Basin Shale gas development in the north of England provides estimates of possible tax revenue generation of up to £580 million per annum by 2020. The study points to considerable uncertainty in terms of fiscal impact estimates given the absence of any large scale extraction facility in the UK.

5.5 Contribution to communities

As part of the 2013 package of measures designed to support the development of shale gas, the Government sought to work with operators to seek (at least) a £100,000 community donation per exploratory well and a community revenue stream of (no less than) 1% of revenues during production ( HM Treasury, 2013). This forms part of UKOOG's Community Energy Charter and a number of other UK studies on UOG have used this to calculate community benefits payments.

We note that a licence holder announced in 2014 that it would be giving 6% of the shale gas and liquid revenues to homeowners, landowners and communities close to its wells [40] . In our study we have assumed a contribution of 4% of revenues to local communities, which is an approximate midpoint between the Community Energy Charter and the licence holder's position (Community Energy Charter fact sheet, n.d.). Tables 5.6 and 5.7 show the likely contribution to communities from UOG development.

In August 2016 HMT launched a consultation on the Shale Wealth Fund. The purpose of this consultation is for Government to seek views on the delivery method and priorities of the Shale Wealth Fund with a particular focus on five key issues:

  • What the government's priorities should be for the Shale Wealth Fund;
  • The allocation of funding from the Shale Wealth Fund to different stakeholder groups;
  • The extent to which the industry community benefits scheme and the Shale Wealth Fund should be aligned;
  • The potential delivery models for the Shale Wealth Fund - to ensure that households and communities benefit; and
  • To decide how funds are spent, and how any process should be administered.

This consultation should provide further clarity on how communities could benefit from the exploitation of shale resources in their local communities.

5.6 Contribution to feedstock for other industries

Development of UOG could also generate some spillover effects for large scale industry. UOG could be a source of feedstock to existing manufacturing companies. An increase in the amount of domestically produced liquids/oil and gas through the development of UOG could allow companies to substitute imported energy sources for domestic ones.

Table 5.6 Total cumulative benefit payment under 4% Community benefits payments.

Central High Low
Shale gas £m 187 578 63
Associated liquids £m 30 85 1
Total £m 217 663 64

Table 5.7 depicts what community benefits payments may be if operators give 6% of total revenues to local communities.

Table 5.7 Total cumulative benefit payment under 6% Community benefits payments (sensitivity).

Central High Low
Shale gas £m 280 867 94
Associated liquids £m 45 127 1
Total £m 325 994 95

One of the main uses of UK oil and related products ( NGLs) is for feedstock in other manufacturing industries. Currently around 30% of Britain's oil consumption is used as petrochemical feedstock in UK based manufacturing plants ( UK Oil & Gas, 2016). These are companies that use NGLs such as ethane, propane, butane and pentane in the manufacture and production of everyday consumer goods such as plastics, rubber, fertilisers and certain types of fuel. The Scottish chemicals manufacturing sector generates approximately £9.3 billion revenue in Scotland ( UK Trade & Investment, 2009) and basic chemicals account for about 40% of the industry's gross value added (Chemical Sciences Scotland, 2010).

In the UK and Scotland there is an established industry for petrochemicals. In Scotland itself there are 150 manufacturing companies involved in the manufacture of chemical and chemical products as well as refined petroleum products. (Fame Database).

Most of these companies are large and well established organisations. These include the likes of INEOS which operate Scotland's largest petrochemical refinery in Grangemouth. The 10 million tonnes of chemical products produced annually at Grangemouth are used as building blocks for a range of everyday consumer goods such as emulsion paint, car fuel tanks, plastic used for plastic bottles, wrappers, food film, carpets, cabling, water pipes, camping gas and many more (Chemical Industries Association, 2012). Increasingly in the UK, sites are beginning to operate in a similar way to Grangemouth whereby the refineries (which use crude oil/ NGLs to produce the feedstock) are closely integrated with adjacent petrochemical plants ( UKpia, n.d.). However Grangemouth has been unable to operate at full capacity due to lack of feedstock, and have advocated the use of shale gas as a feedstock announcing they will be using US shale gas ethane to run the plant at full rate (INEOS, 2016).

There is also a large ethylene plant in Fife which was the first plant specifically designed to use NGLs from the North Sea as feedstock. This has an annual capacity of 83,000 tonnes of ethylene and around 50% of this is distributed via the UK ethylene pipeline network (Chemical Industries Association, 2012).

The development of UOG could provide a positive effect on the petrochemical industry in Scotland. One of the key drivers for the petrochemical sector is the increasing demand for refined and petrochemical products and the new discoveries of types of oil and gas such as UOG ( BIS, 2012). In both the UK and Scotland imports of petrochemical products exceed exports hence there is an opportunity for import substitution if the UOG sector were to develop to domestically provide feedstock to existing manufacturing plants (Chemical Industries Association, 2012). Current manufacturing companies, for example a number of petrochemical companies, could see a positive impact on their supply chain if UOG is developed - this could be translated into lower costs as they would avoid the costs of importing/transporting their primary input. UKOOG suggest that UK-wide the impact of shale gas development could safeguard up to 100,000 jobs in petrochemicals alone ( UKOOG, n.d.) [41] of which a sizeable proportion is located in Scotland.

In the US, the development of shale gas has led to significant investment in the downstream activities of the chemical industry of over USD 100 billion linked to UOG development and has also resulted in US feedstock products now nearly half the price that of the European identical products (Independent Expert Scientific Panel, 2014).

5.7 Development of the supply chain

Should the UOG industry in Scotland develop, there may be a larger product market for potential suppliers and opportunities for investing in research and development, skills and training.

5.7.1 Developing the supply chain

The prospect of being closer to that market may attract downstream elements of the UOG supply chain and, potentially, research and development activity. Scotland is one of the leading economies in Europe in the conventional oil and gas sector and so should the UOG supply chain develop to a size comparable to the conventional oil and gas sector, the country may be well placed to compete within Europe for elements of the UOG industry once its domestic industry has reached a critical size. However, there may be a limited window of opportunity for attracting such activity as other 'centres of excellence' may have started to develop elsewhere. For example, there is an appetite for creating a shale gas supply hub for the Bowland Shale, as emphasised in a recent report by Amion Consulting (April 2015). Once a supply hub/chain is established in other parts of the UK or other European countries it will be more difficult to compete and develop a similar hub in Scotland.

A critical success factor for sustainability is a robust and competitive supply chain strategy. Establishing a supply chain for a group of companies wishing to market their specialisms would be crucial. Critical to the success of the supply chain is the participation of strategic supply chain partners (first tier suppliers) who need to be willing to develop long-term relationships. Research suggests that a limited number of first tier suppliers might be a manageable objective at the outset and could be expanded in subsequent years (Constructing Excellence, 2004). For example, there is a need for critical partners capable of reliably supplying products and services at competitive prices. There are already a number of existing suppliers in Scotland that offer products and services for the conventional oil and gas sector. By leveraging their expertise, there could be a significant opportunity to expand product and service offering to supply the UOG sector. This could also attract other specialist suppliers that may be willing to invest in Scotland in response to this window of opportunity. The supply chain opportunity lies in potential new markets such as the manufacturing of high tonnage drill rigs and suppliers to supply existing materials, equipment and services which currently do not exist in the UK. The authors of 'Getting ready for shale gas' ( EY, 2014) suggest there is potential for a new £1.6 billion rig manufacturing industry. They further state that there is the potential for £17 billion worth of specialised equipment and skills for manufacturing. Using existing suppliers and logistics channels could contribute to faster supply chain development. For example, there is already an existing logistics chain for the conventional oil and gas sector in Scotland and this could be used for the UOG sector as well. This demonstrates that there are a number of possible synergies that could be captured by developing a supply chain hub in Scotland. Additionally, Scotland already has the critical infrastructure and pipe network in place, and as such the country is well positioned to cope with the potential UOG demand. As more opportunities arise there may be potential for developing new businesses - in water, rail, road, etc. - to service the industry as well.

5.7.2 Contribution to skills, training and research and development

Training and development would be key to bring the Scottish supply chain up to speed with the potential development pathways modelled in our scenarios. Investment in education, especially in the areas of geology, chemicals process and engineering would be required.

'Getting ready for shale gas' ( EY, 2014) highlights the fact that the UK does not currently have a developed supply chain and that there is currently a shortage of domestic skills in this industry. Critical roles for the shale sector include petroleum engineers, geoscientists, drillers, hydraulic fracturing personnel, planners and health, safety and environmental experts. Those are skills where the UK does not have extensive onshore expertise. There will also be a need for both specialists and general skills at different levels, therefore the development of UOG provides an opportunity to upskill the existing Scottish talent pool, especially in the context of developing an UOG centre of excellence in Scotland. Many of these critical jobs for UOG development command up to six times the national average salary providing further benefits to the economy.

However, with no substantial development of UOG yet, Scotland may find it difficult to attract overseas experts. Similarly upskilling the current workforce may take a significant amount of time. The EY (2014) study recommends the UK starts to plan for this as early as possible, for example to build modular conversion courses specific to shale and offer international secondment opportunities to accelerate skills transfer. Research councils and universities [42] may also want to support skills development, research and innovation in technologies

The promotion of access to employment opportunities could also play a major role in upskilling the existing talent pool as well as attracting specialists. There may be a role for public sector organisations or economic development agencies such as Scottish Enterprise and Skills Development Scotland and local authorities in promoting employment and training opportunities.

5.8 Sensitivities

Figure 5.2 shows the difference in total direct, indirect and induced GVA under alternative DECC fossil fuel price projections. One can note that GVA varies considerably under different price assumptions. It is worth noting that 2015 DECC fossil fuel price scenarios are higher than current broker/analyst estimates.

There are also greater tax revenues in a higher price environment. This is because operators would be in a position to generate higher profits sooner and thus contribute to corporation tax.

Figure 5.2 Sensitivity analysis on economic impact: Total GVA under DECC fossil fuel price projections

Figure 5.2 Sensitivity analysis on economic impact: Total GVA under DECC fossil fuel price projections

5.9 Carbon mitigation costs

When we take into consideration the additional expenditure costs of mitigating carbon emissions, the additional economic benefits to the Scottish economy are negligible in terms of GVA. Spend associated with emission technologies is very small in proportion to overall costs. Yet, there would be some capex and opex related jobs for the installation and operation of carbon emission equipment. Our analysis suggests that carbon mitigation measures would generate c100 jobs in the Central scenario, 160 in the High scenario and c40 jobs in the Low scenario.

Table 5.8 presents the results of our analysis.

Table 5.8 Estimated cumulative economic impact to 2062 including carbon mitigation costs

Estimated cumulative economic impact to 2062 Excluding carbon mitigation costs Including carbon mitigation costs
Central High Low Central High Low
Total spend (£bn) 4.4 10.8 1.5 4.4 10.8 1.5
Spend in Scotland (£bn) 2.2 6.5 0.5 2.2 6.5 0.5
Total additional economic impact of UOG spend in Scotland (£bn) 1.2 4.6 0.1 1.2 4.6 0.1
Additional jobs created (at peak employment year) 1,400 3,100 470 1,500 3,260 510

5.10 Other considerations

This study has evaluated the economic impacts of UOG in terms of its contribution to GVA, employment, tax/government revenues, community benefits payments, feedstock for other industries, supply chain and skills, training and development. In this section we provide commentary analysis on other economic and environmental/societal impacts UOG may have on the Scottish economy. This includes considerations such as house price trends, roads, water and health. As these considerations are harder to quantify, we have considered these qualitatively as they are important in relation to the development of UOG.

5.10.1 Other economic considerations

Housing prices

Living in satisfactory housing conditions is one of the most important aspects of people's lives. Housing costs take up a large share of the household budget and represent the largest single expenditure for many individuals and families ( OECD: Better Life Index, n.d.). Changes in house prices can have considerable effects on the rest of the economy. For example, a change in house prices affects the value of household wealth.

The evidence around the effect on housing prices in relation to the potential development of UOG is mixed. For example, there is a concern that it could lead to a significant reduction in housing prices for the surrounding areas due to reluctance of residents to be within close proximity to a perceived noise and air pollution. In the areas close to the Cuadrilla site in the UK, UK mortgage and estate agent industry blogs have reported a drop in house prices (Independent Expert Scientific Panel, 2014) (Property and Land Information, 2012). Similarly perceived effects have also been seen in Canada (Barth, 2013) and other parts of the US (Munasib & Rickman, 2014). One study by the US National Bureau of Economic Development has found that those living within two miles of a shale gas field in the US could see house prices fall due to perceived groundwater risk (Muehlenbachs, Spiller, & Timmins, 2012). In their submission on Economic Impact and Scenario development, Scottish Environment LINK noted that "a Defra report and an investigation by journalists at the Ferret, have suggested that fracking could have an adverse impact on house prices, estimating house prices may be affected by up to 10%" (Department for Environment, Food and Rural Affairs, 2015).

In contrast, other studies suggest that, at least temporarily, there is a positive effect on housing prices in areas near UOG production sites. The construction peak of a large mining project requires a large workforce and this is likely to increase the demand for accommodation in local areas. Areas surrounding CBM sites in Queensland saw house prices rise versus the Queensland median (Australian Government, 2015). This is similar in some areas in the US where Colorado saw significant increases in housing prices in surrounding areas (Independent Expert Scientific Panel, 2014) (Witter, et al., 2008).

Without further UK specific evidence, it may be too early to conclude what the effect on house prices could be.

Roads

The potential impacts of UOG on roads were raised in our consultation with key stakeholders. This issue is discussed in the research project on understanding and mitigating community level impacts on transport commissioned by the Scottish Government.

Regulatory costs

Both the Broad Alliance and Scottish Environment LINK expressed their views regarding the costs of UOG regulation and that this should not be borne by the public. Similarly, COSLA noted that "costs in relation to proposed or actual UOG activity should not be borne by planning authorities, or have to be extracted from difficult to source operators to fund restoration/aftercare". We acknowledge the importance of taking into account the costs of developing and applying a regulatory and enforcement regime for UOG, including the costs of ongoing monitoring. This topic is covered in the site restoration and aftercare study. In developing our scenarios, we have included a number of additional costs to reflect those related to the development and enforcement of a regulatory regime. The same cautious approach was used in developing our cost base for decommissioning and aftercare costs.

5.10.2 Other environmental/societal considerations

The Independent Expert Scientific Panel report concluded that "many of these social (and environmental) impacts can be mitigated if they are carefully considered at the planning and application stage. Added to which, there are already considerable legislative safeguards to ensure such impacts are not realised" (Independent Expert Scientific Panel, 2014).

Water use, water contamination, wastewater disposal and impacts on biodiversity

UOG activities could have an impact on water, for example there is a possible risk of water contamination through any escape of 'flowback fluids' into the ground that contain chemical additives associated with hydraulic fracturing. In their submission to KPMG on Economic Impact, the Broad Alliance noted that the National Farmers Union journal, Farmers Weekly, reports concerns regarding UOG development on possible damage to properties, contamination of groundwater and the potential for damage to land, crops and livestock (Farmers Weekly, 2016).

In addition, Scottish Environment LINK expressed their concern regarding the quantities of water needed to fracture a well and the disposal of the flowback fluids given the current limited number of waste facilities able to treat waste fluid of this sort.

A report by the Environment Agency ( EA) suggests there is low risk of groundwater contamination at the exploratory stage (Environment Agency, 2013) but does not comment on the longer term risks during the production phase. The EA's views on groundwater contamination at the exploratory stage is consistent with what has been observed in Queensland, Australia, where water contamination risks have been managed and hence no sub-surface equipment leaks have been reported (Australian Government, 2015).

The UOG sector is sometimes associated with possible impacts on biodiversity. Biodiversity is the variety of plant and animal life in a particular habitat which is considered to be important and desirable.

Possible methane leaks associated with UOG exploration/operations are also a concern given that methane is a greenhouse gas and may impact biodiversity. Scottish Environment LINK expressed their concern regarding groundwater contamination from well leakage and migration of contaminants from fractured shale/coal seams, as well as accidental surface spillages of waste fluids and the related impacts on biodiversity. Yet, it is worth noting that estimates from the National Assembly for Wales (2015) suggest the risk of pollution by possible fugitive emissions at the exploratory stage are low. We do acknowledge Scottish Environment LINK's view in that despite a low risk of pollution, the potential for long-term impacts and costs associated with any potential incident could be important. A recent publication by Dalzell (2016) suggests that the cost to mitigate these methane leaks may exceed the lifetime revenues generated by the well which produced them. The author also stipulates that the UK has a poor record of ensuring adequate decommissioning and restoration bonds which may lead to further public funding being required (Dalzell, 2016). Further analysis of this issue and potential regulatory approaches/mitigations are considered in the Climate change impacts and Decommissioning site restoration and aftercare research projects.

Air quality, air emissions and climate change

The concern around air quality and air emissions relates to both CO 2 and methane which are produced as part of the UOG production process. The National Assembly of Wales alluded to the idea that UOG could reduce the UK's carbon emissions as it is considered by some to be a low carbon fossil fuel (National Assembly for Wales, 2015). Emissions from electricity generated from shale gas are estimated at around 2% to 10% lower than electricity generated from conventional pipeline gas located outside of Europe (AEA, 2012), LNG imports also result in higher emissions as a result of carbon emissions from transportation vessels.

Climate change is an aspect considered in the CCC research project. Costs associated with monitoring carbon emissions have been included in all of our scenarios. We have also considered the costs of mitigating emissions in Sections 5.9 and C.7. The CCC has performed some analysis on the UOG scenarios developed in the study in the context of national carbon budgets.

Agriculture

The impact on agriculture comes from the reduction of available agriculture land and potential contamination as it is used for oil and gas extraction. Dalzell (2016) highlights the fact that "[a] rapid boom may lead to rapid industrialisation and subsequent collapse of a rural community leading to a loss of identity as what may have, in one example, previously identified as a 'fishing village' becomes a derelict industrial estate". Input from Nourish Scotland (through Scottish Environment LINK) suggests there could be a reputational impact on farmers and producers, retail and catering in case of actual contamination and the perceived risk of contamination, looking both at internal consumption and exports.

Agricultural producers are also concerned about the possible risks related to UOG development, specifically both groundwater and soil contamination. Some commentators assert that both crops and animal stock could be poisoned by possible adverse chemical spills from UOG activities into the soil and water (Drouin, 2014) (Wilson, 2014).

The role of renewables

Both Scottish Environment LINK and the Broad Alliance expressed their concern regarding the impact of the UOG sector on energy produced by renewable sources. Scottish Environment LINK drew our attention to a report by the International Energy Agency ( IEA) which state the following: "An abundance of natural gas might diminish the resolve of governments to support low and zero-carbon sources of energy: lower gas prices (and therefore lower electricity prices) can postpone the moment at which renewable sources of energy become competitive without subsidies and, all else being equal, therefore make renewables more costly in terms of the required levels of support" (International Energy Agency, 2012). The IEA goes on to add that "[…] an expansion of gas in the global energy mix can also facilitate greater use of renewable energy, if policies are in place to support its deployment, given that gas-fired power generation can provide effective back-up to variable output from certain renewable sources. Moreover, lower electricity prices can encourage customer acceptance of a higher component of electricity from renewable sources. Ultimately, the way that renewables retain their appeal, in a gas-abundant world, will depend on the resolve of governments" (International Energy Agency, 2012).

Our analysis demonstrates that the industry would not be large enough to have an impact on international gas prices. As such, it is not directly obvious that the potential development of UOG would suppress investment in renewables.

Visual amenity

Scottish Environment LINK and the Broad Alliance expressed their concern regarding landscape impacts and visual amenity. Scottish Environment LINK noted that DECC's Strategic Environmental Impact Assessment for the 14 th onshore oil and gas licencing round plans highlighted that "there is potential for a significant negative effect on landscape associated with onshore oil and gas activities. This principally reflects the potential landscape and visual impact of construction activities and associated machinery such as drilling rigs" ( DECC, 2013). Scottish Environment LINK added that networks of access roads, pipelines, gas and water treatment facilities, vents and flares can also have an impact on visual amenity [43] .

Yet, the Independent Scientific Expert (2014) study asserts that "the use of drilling rigs where multiple pads are developed in a given area is considered to have a moderate risk of significant visual effects especially in residential areas". This is due to the size of parts of the drilling rigs which can be up to 30 meters in height. Once production is complete, the drill hole is capped with an extraction point and protective cage which is approximately 3 meters high suggesting the permanent visual impact is much less after hydraulic fracturing completion (Independent Expert Scientific Panel, 2014).

There have also been cases where impact on visual amenity is limited. The often-cited example of Wytch farm in Dorset, UK, is one of the largest onshore oilfields in Western Europe. The oilfield is within an area of outstanding natural beauty and local residents claim "most people don't even notice it's there" (Gray, 2013). The National Assembly for Wales highlighted in their research paper on UOG the fact that hydraulic fracturing and drilling can take place beneath areas of natural beauty providing the well site is located outside the boundaries (National Assembly for Wales, 2015).

Health related costs

The impact on public health is also referenced in relation to UOG development. There are various associations of UOG to public health risks such as hazards to workers on site, hazards associated with the impacts on infrastructure and also possible risks from atmosphere. Some evidence suggests that chemicals used in hydraulic fracturing could have adverse health impacts (Independent Expert Scientific Panel, 2014). However, for the majority, any undesirable impacts would only occur from exposure to very high concentrations of the substance which is something that could be controlled and hence the risk could be limited/mitigated with robust regulation (Independent Expert Scientific Panel, 2014). The impacts on health are covered in a separate research project (Public Health Impact Assessment) being undertaken on behalf of the Scottish Government.

The House of Lords analysis concludes that for the UK "potential risks to public health from exposure to the emissions associated with shale gas extraction are low if the operations are properly run and regulated" (House of Lords, 2014). This is similar to the conclusions made in a CBM report commissioned by the Australian Government, i.e. there are very few studies that demonstrate a correlation between CBM activities and adverse health outcomes, much less a causal relationship (Australian Government, 2015).


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