Sovereign wealth funds are supposed to help resource-rich countries plan for the future and broaden their economies. Britain’s version of a SWF unveiled by finance minister George Osborne on Nov. 25 will do neither. It is also unlikely to meet its primary objective of swaying opponents of shale gas developments to think otherwise.
Osborne said the Shale Wealth Fund could be worth up to 1 billion pounds over time. According to the finance ministry, this would be funded by siphoning off 10 percent of the revenue it expects to rake in over the next 25 years from companies fracking in the UK.
The economics of this plan, which was first floated by Osborne in 2014, are fragile. Although the UK sits on potentially vast shale gas reserves, these resources would be expensive to extract. Ernst & Young estimates that 33 billion pounds would have to be invested to bring 4,000 wells into production across the country.
To recoup those chunky costs over a decade, and assuming it takes three years for gas to start flowing, companies would have to sell 31 billion cubic metres of natural gas per year at current UK wholesale prices, according to a Breakingviews calculation. That’s a little less than a third of what Qatar exports in the form of LNG. And even if this output were attainable, which is unlikely, the flood of gas would only add to a global glut already depressing market prices.
Companies trying to frack in the UK have met with stiff opposition within local communities affected by the industry. Osborne’s fund is intended to assuage their concerns but could need more cash if it has any chance of success. Over 25 years the fund will have just 40 million pounds annually available to spend across large areas of the UK’s north, where most of its shale gas is located. It is unlikely to be enough to convert opponents.
Britain had its chance to establish a viable sovereign wealth fund akin to its neighbour Norway from the profits of North Sea oil in the 1980s, but chose otherwise. Osborne’s version, if it eventually happens, is a poor alternative.