Regional insight: Scottish coal and unconventional resources

With the issue of Scottish resources raised in the recent independence referendum, Sam Dodson takes a look at Scotland’s coal and other resource industries.

Much of global media attention has recently been focused on Scotland – where the strength of the country’s union with the rest of the UK was tested in an independence referendum. While Scotland voted by a margin of 55 – 45% in favour of continuing the union, the debate raised a number of key questions concerning Scotland and its resources. 

In this regard, much of the debate focused on the vast reserves of oil and gas in the North Sea, while Alex Salmond, Scotland’s first minister and leader of the ‘yes’ campaign, was also keen to stress Scottish renewable potential. Yet Scotland’s resource sector also includes both existing and prospective coal mine and unconventional gas projects, such as coalbed methane (CBM) and underground coal gasification (UCG).

Scottish coal

Scotland has been moving away from coal in recent years – closing the coal-fired power plant at Cockenzie in 2013 – yet the fuel still makes up around 25% of the country’s energy mix. The remainder of electricity in Scotland is generated by Nuclear (34%), renewables (30%) and gas (8%).

The Longannet coal-fired power plant, which can generate enough electricity for 2 million homes, plays a vital role in meeting Scottish energy demands. The importance of the plant was underlined by Scottish energy minister, Fergus Ewing, who said the plant (the third largest coal-fired power plant in Europe) could continue operating until at least 2025.

A reminder of coal’s continuing role in Scotland and the UK is further illustrated by Hargreaves Surface Mining, which recently hired its 500^th worker in Scotland, a year after two operators went out of business. Hargreaves manages seven coal sites in Scotland.

Indeed, according to the Herald Scotland, Hargreaves has vowed to continue its coal operations in Scotland, although it has hinted that it may close coal operations in England.

There has also been a mooted revival of the coal industry in Cumbria and the Borders, as New Age Exploration continues apace with its Lochinvar metallurgical coal project, which has a total resource of 111 million t.

Unconventional resources offer potential

Like coal, unconventional resources also offer significant potential – for both Scotland and the UK. A recent independent report released by the Scottish Government confirmed that there is a potential wealth of unconventional resources available for development – including UCG, CBM and shale gas. Dart Energy also backed planning roles on unconventional gas extraction, published in two documents from the Scottish government, which recognised the role of CBM in the diversification of the nation’s energy mix.

A report by Ricardo-AEA, meanwhile, confirmed that Scotland holds a significant portion of the UK’s 2900 billion m³ of recoverable CBM. The report pointed to Dart Energy’s Lethan Moss project as being a useful case study to ascertain site preparation, completion, production and abandonment practices likely to occur if the UK CBM industry develops. Dr Mark Broomfield pointed to the Ricardo-AEA study as he suggested Scotland could capitalise on its CBM reserves if it were to enter into the global CBM market.

Algy Cluff, of Cluff Natural Resources, has further said he is keen to develop an UCG project in the north sea. He argued that the “huge” reserves of UCG off the Scottish coast could provide a new source of gas for power plants and industry and offer an alternative to shale gas, since unlike shale it would not “make enemies” of “Friends of the Earth and the entire British middle class”.

Fife-based company, Thornton New Energy Ltd – a subsidiary of British company BCG Energy Ltd – has also formed a multi-million pound joint venture with Australian company Riverside Energy Ltd. The joint venture will involve the exploration and development of coal resources under the Firth of Forth in Scotland. Thornton claim that the UCG project could provide Scotland with “100 years of energy”.

Referendum uncertainty

In the run up to the independence referendum, many resource companies were understandably wary in their approach to developing operations in Scotland. With the outcome of the independence referendum too close to call (on the eve of the vote, most polls put the yes/no campaigns on 50 points each), companies chose to hold off investing in potential projects until after the result of the referendum became known.

Dart Energy, for example, is one of a number of prospective CBM players looking to develop operations at sites in Scotland. However, the company held off making a final decision on progressing certain projects until after the referendum – and is further awaiting the outcome of a public enquiry into one of its CBM proposals. A spokesman for UK Onshore Oil Operators Group, said that the outcome of the Dart Energy public inquiry will likely play a crucial role in luring investors, who will only be attracted to Scottish resources if they believe planning permission is likely.

Questions remain in regards to Dart’s public enquiry, the result of which is yet to be announced. There is also uncertainty in regards to how far the Westminster government will push the promised “devo max” proposals for a Scotland evidently discontent with the current status quo. As yet, what these devolutionary proposals – among them increased fiscal authority for Scotland – might mean for resource plays and prospective projects (for coal and unconventional resources alike) – is still unclear.

Uncertainty among potential investors in Scotland’s resources is not good news. According to The Journal, Dennis Clark, chairman of Newcastle-based fabricators OGN Group, believes fears among investors in the run up to the referendum led to delays in hundreds of millions of pounds of potential contracts for the oil, gas and unconventional industries.

Industry fears regulation and taxes

It is fair to say the majority of private resource companies are not fond of regulation or regulatory bodies. For evidence of this look no further than across the Atlantic to the US, where the Environmental Protection Agency comes under frequent vehement attacks from the coal industry. UK regulatory bodies may suffer similar fates. For example, the recently-created UK Oil and Gas Authority – set to be headquartered in Aberdeen – has been criticised for having an unclear role in regards to UCG and CBM. A spokesman for the Department of Energy and Climate Change said the authorities role would “extend onshore” but only that its role in regards to shale, CBM and UCG would be “considered in more detail”. Such lack of clarity does not go down well with prospective industry investors, who rely on clear facts before financially backing resource plays.

Further fears abound among industry investors in regards to potentially increased taxes.

In pointing out the similarities between Norway and Scotland – geographically close, similar populations, both countries with access to significant oil resources, etc – the idea has been promoted that Scotland, with new fiscal authority granted by further devolution, could adopt the Scandinavian model of social spending, funded by the North Sea oil. Yet, as Alison Steed points out in the Financial Times Advisor column, “detractors claim that the oil industry is contracting, so this would not be possible without significantly raising taxes.”

The prospect of raising taxes – or increasing industry regulation – for resource companies may prove popular among voters, but would be deeply unpopular among resource companies, which often cite taxation and what they see as already strict regulation as reasons of postponed or cancelled investment. Keeping resource companies on side is undoubtedly key in keeping the lights on.

Other analysts have also pointed to fears among energy and resource industry investors that a Scotland with greater devolved powers could raise taxes. For example, Matthew Ingham, GlobalData’s lead upstream analyst for the North Sea and Western Europe, argued: “Scotland will have to act swiftly to quell international companies’ fears and maintain industry confidence, especially if it wishes to sustain the record-breaking development expenditures of 2013.”

Alternative roles for coal

In a somewhat more alternative role for coal and other resources in Scotland, Mitch Feierstein, chief executive of the Glacier Environmental Fund, argues that Scotland should revert to a modernised version of the old gold standard, although gold alone would be too narrow a base. Instead, the currency could be linked to a basket of commodities: such as gold, iron, platinum, oil, alternative gas resources and coal.

Feierstein has not elucidated how such a theory would work in practice, yet he does emphasise that he sees the involvement of coal and unconventional gas as integral to the future of Scotland.

What potential

Scotland undoubtedly boasts resource-rich potential – from oil to coal and unconventional gas. How these resources are used, however, will be key. Numerous theories and claims are made in regard to what could be done with this potential, yet at the time of writing that is all it is: potential. The rewards of managing the resources effectively could be great, yet there are inherent dangers associated with potential mismanagement that could spell disaster. Reports and evidence show that there is the potential for both the coal and unconventional gas sectors to grow – perhaps taking up the role of a renewable sector diminished by lower subsidies – yet these industries could be threatened by cautious investors unwilling to navigate unclear regulations and tax clauses. Scotland’s resources must be managed effectively by those in both Holyrood and Westminster: the effect of not doing so would be felt not only in Scotland, but in the rest of the UK as well. 

Written by Sam Dodson

Read the article online at: https://www.worldcoal.com/special-reports/02102014/regional-insight%E2%80%93scottish-coal-ucg-and-cbm-sr8/