Is shale gas the answer to declining production?

It has long been gathering momentum across the Pond, with first exploration having occurred in the 1970s, leading to an increasingly important source of natural gas for the country. In 2000, the US recovered just 1% of its gas from shale; today that figure stands closer to 30%.

Little wonder, then, that the UK's ears have pricked up at the suggestion that this source of energy could help to offset the decline in more conventional sources.

"A decline in domestic production is already well underway in the UK, with volume dropping by 9% annually on average since 2004. Even in the Netherlands, one of Europe's largest exporters, gas production will likely begin to fall towards the end of the decade," explained a commodity analyst at Deutsche Bank.

"Recent estimates of the total reserves contained in UK shale-gas deposits hold out the hope that the decline in UK production could be slowed in coming years."

Cuadrilla Resources announced last month the discovery of 200 trillion cubic feet of gas in Lancashire, noting that commercial production could start as soon as mid-2013.

With huge swathes of the country now up for grabs in a new round of gas exploration licences, interest in unconventional gas has reached fever pitch.

The British Geological Survey has estimated the UK shale-gas reserve potential at 150 billion cubic metres (bcm), while the US Energy Information Administration (EIA) estimated technically recoverable reserves at 560bcm in April.

"The potential for unconventional gas is far higher than that of conventional gas," said John Westwood, chairman of Douglas-Westwood. "I believe unconventional gas drilling and production is going to soar."

For more on the UK gas industry, read: Gas hailed the fuel of the future.

And in a boon for the industry, the UK government's position on unconventional gas is positive for shale-gas prospects.

The UK Environment Agency has previously reviewed and approved drilling plans in the Bowland Basin, while Charles Hendry, minister of state for the Department of Energy and Climate Change, has been a vocal supporter of unconventional gas exploration for its potential in increasing energy security.

But it doesn't come without its complications.

Shale gas, the by-product of shale rock, has come under fire from protestors for being environmentally unsound.

Campaign groups have expressed concern over the effect hydraulic fracturing, or fracking, will have on the environment, as it involves the high-pressure blasting of rocks with a mixture of water, sand and chemicals.

There is also considerable uncertainty regarding the size of the recoverable resource and the production rates that could be sustained.

And in addition, one must take into account the expense. European shale-gas ventures are looking at high well costs in the region of $6.5 million (c£4.1 million) to as much as $14 million, in comparison to $4 million in Pennsylvania.

"As exploration investment rises, new drilling companies enter the market, and competition increases, costs are likely to fall. However, we would be hesitant to claim that this would necessarily reduce costs to the level of current US projects since labour costs, health and safety regulations, and more stringent environmental requirements may result in a persistently higher cost base," said Deutsche Bank.

Owing to advantages in drilling services infrastructure, mineral-rights law and population density, the US is arguably better equipped to develop shale-gas resources.

But this won't stop the UK and its European compatriots.

Deutsche Bank concludes: "Overall we believe that shale-gas developments worldwide have the potential to add meaningfully to gas production in the long term, provided that the industry can allay environmental fears and cost-effectively minimise the impact felt by local populations."

Are you looking for more on what's in store for the domestic oil and gas industry? Watch what George Godber from Matterley Asset Management has to say in: The future of North Sea oil.