George Osborne's hope for a shale gas revolution in the UK has been dealt a serious blow after a leading authority on the energy industry predicted that it would not be commercially viable to extract the gas.
The consultancy, Wood Mackenzie, also cast doubt on suggestions that the UK contained vast reservoirs of shale gas, with the analyst Niall Rowantree arguing that "it is not possible to accurately predict the ultimate recoverable volume of shale gas in the UK and therefore any estimates of the ultimate impact on UK gas supply are premature".
Wood Mackenzie estimates that in order to develop UK shale reserves, potential operators would need a gas price of $9.68 per million British thermal units (mbtu) for the project to make economic sense. This is considerably more than this year's average UK spot price of $8.69 per mbtu and the $8 per mbtu that Bloomberg forecasts it will hover around between 2015 and 2020.
Jamie Spiers, a researcher at Imperial College, said: "These figures suggest that the cost of extracting UK shale gas reserves will exceed the price. This is a big issue that hasn't been addressed very much."
Tony Bosworth, senior energy campaigner at Friends of the Earth, added: "This is further evidence that shale gas production isn't going to push our energy prices down."
Yvonne Telford, another Wood Mackenzie analyst, said: "We think it is unlikely that shale gas from the UK alone will have a material impact on the UK's gas price dynamics to 2025."
Shale gas is produced using the controversial practice of fracking, or hydraulic fracturing, which releases the hydrocarbons by blasting a mixture of sand, water and chemicals into the rock at high speed.
The Government imposed a moratorium on the practice 18 months ago after the UK's first fracking site was found to have caused two minor earthquakes in the Blackpool area. It was lifted this month after the Government ruled that fracking should be allowed to continue under strict supervision, and shale gas now lies at the heart of the Chancellor's dash-for-gas energy strategy. Any commercial shale gas production is not expected until at least 2015.
Mr Osborne is hoping that Britain can replicate the shale gas revolution in the US, where fracking has knocked about three-quarters off the price in the past four years, taking it to about $3.30 per mbtu.
"A commercially viable UK shale gas development will only be possible if the subsurface is as good as the very best shale plays in North America," said the Wood Mackenzie report, adding: "The commercially viability of the UK's shale resources is yet to be proven."
Shale gas production is expected to be more expensive and problematic in the UK than in the US because it is more densely populated, the shale has a higher clay content, and planning permission is likely to be difficult to secure – in part because in the US the household owns the mineral rights which in Britain belong to the Government.
The Chancellor and David Cameron have championed the prospects for shale gas, arguing that fracking could drive down prices and create thousands of jobs. Their enthusiasm stems in large part from an estimate by Cuadrilla Resources, the UK's most established fracking operator, that its exploration licence for the shale hotspot around Blackpool contained 200 trillion cubic feet of gas – the equivalent to 70 years of UK consumption. However, experts point out that even if the 200 trillion figure is correct, no more than a small fraction of it could be commercially extracted. "Until many, many more wells are drilled, fracture stimulated and flow tested, it is not possible to accurately predict the ultimate recoverable volume of shale gas in the UK," Mr Rowantree said.