Shale Gas in the UK: developments in April, May & June 2014

09 June 2014

The state of the UK national conversation about shale has reached a rather curious impasse. Politicians and industry pay a great deal of lip service to the industry’s importance and to judge by the media coverage one could be forgiven for thinking that the UK is, to use the Prime Minister’s words, ‘going all out for shale.’ A consensus of sorts is forming around the notion that shale gas could be hugely significant, if not transformative, for the UK economy, yet very little is currently happening where really it counts: under the ground.

Three publications in April and May 2014, together with the Queen’s Speech on 4 June 2014, go some way to identifying not only the scale of UK’s economic opportunity but also how realising those opportunities might be accelerated.

The first report, Getting Ready for UK Shale Gas: Supply chain and skills requirements and opportunities, was commissioned by the United Kingdom Onshore Operators Group (‘UKOOG’), was funded in part by the Department of Business Innovation & Skills and written by Ernst & Young. It was published on 24 April 2014.

The study provides one of the most detailed views to date of what a native UK shale industry could entail in terms of investment, jobs and new markets. The numbers are impressive. In the period 2016–2032 it suggests that:

  • there would be a need for specialised equipment and skills for hydraulic fracturing totalling £17bn
  • there would be a waste, storage and transportation requirement worth £4.1bn
  • there would be a £2.3bn requirement for steel
  • there could be a new rig manufacturing requirement worth £1.6bn
  • new markets would be created for UK businesses
  • 64,500 new jobs could be created.

In all the report suggests that participants exploiting UK shale gas would need to spend a total in the region of £33bn, comprising £20.5bn for hydraulic fracturing services, £8.2bn for drilling & completion services and £4.1bn for waste management, storage & transportation.

There are, however, some caveats to these estimates. Most pertinently, no-one yet really knows how much shale gas is in place in the UK or how much of it is technically recoverable: this report assumes the validity of the 2013 British Geological Survey gas-in-place estimate of 1300 tcf in the Bowland Shale Basin and the ‘high case’ shale pad yield scenario in the Institute of Directors 2013 report Getting Shale Working.

But even if those estimates are valid, in order fully to exploit the resulting shale opportunities the study notes that UK must act reasonably quickly in three crucial areas. First, it must invest in the training the UK workforce: there aren’t enough people in the UK with the right skills in petroleum engineering and geosciences. Secondly, it must help UK businesses (for example, steel and cement providers) understand better what they can build and sell to the shale industry. Thirdly, it must help UK businesses understand better how they can obtain shares in the markets that will be created for drilling rig manufacture and waste disposal. In relation to each such gap the report identifies steps that government, industry and the financial sector could take.

The health of the UK economy was also in the mind of the House of Lords Economics Affairs Committee in its 8 May 2014 publication The Economic Impact on UK Energy Policy of Shale Gas and Oil. This is one of the more thoughtful and rigorous reports prepared by an arm of government on the subject of shale in recent years. In preparing it the Committee heard from 62 witnesses, comprising a range of interests from government, academia, industry and environmental campaigners.

The report sets out an overview of the UK’s energy market; how shale gas has revolutionised the US economy and the knock-on effects on the world energy market; what is known about the extent of the UK’s shale reserves and the potential economic impact in the UK; how action on shale might affect achievement of the UK’s climate change objectives; the environmental impact of shale gas in the UK; and the UK’s regulatory system for shale gas exploration and exploitation.

In the course of its 103-page report the Committee made the following observations:

  • The UK energy market is being shaped profoundly by (i) the decline of North Sea oil and gas, leaving it more dependent upon imports; (ii) a long-term shift in UK energy consumption to electricity and gas; (iii) the UK government’s commitment to long-term reductions in carbon emissions;
  • Inconsistent UK energy policy over a number of years means that there is a growing risk of power cuts as the margin of electricity generating capacity over peak demand shifts;
  • Witnesses advised the Committee that geopolitical events such as the situation in the Ukraine in early 2014 could leave the UK exposed: although the UK is not directly dependent on Russian supplies, in an integrated market it would not be immune from shortages or price increases across the European Union;
  • Although the US shale revolution has already had extensive effects the full impact on world energy markets has not yet materialised: if developed at scale internationally shale gas and oil could alter the balance of the whole international energy market and undermine the dominant role of Middle Eastern and Russian energy exporters;
  • The regulatory frameworks in the US and UK, respectively, are radically different. The UK regime operates at a national level; the regime in the US operates instead at State level.
  • Moreover, in the US landowners also own subsurface mineral rights; in the UK the relevant rights (to petroleum) are instead owned by the Crown, although the landowner retains rights of access to his land and to the more general strata beneath it. The Committee heard that the effect in the US was that ‘individuals and landowners are incentivised not to stand in the way of [shale exploitation] because they own mineral rights’ and found that the speed and scale of US shale development suggests that landowner opposition had been limited.
  • In the UK, by contrast, an operator must obtain permissions both from the relevant landowner and government. As the law currently stands landowners can obstruct shale gas development by relying upon the law of trespass. In such cases there are certain compulsory remedies open to operators, but not without incurring delays and costs. It recommends that the Government amend the relevant law of trespass.
  • A key reason for the delay the development of a UK shale industry is the presence of a ‘dauntingly complex’ regulatory regime.
  • Despite ‘strident’ local opposition in places, there is little hard evidence of public opinion about shale gas development. The Committee recommends that the government be much more forceful in its support and public advocacy of shale.
  • In relation to the possible economic effects of a UK shale industry, the Committee thought it unlikely that the UK would enjoy energy price cuts on the same scale as those seen in the United States. The UK could, however, create a new, viable and internationally competitive industry attracting investment and creating jobs & skills.
  • In relation to climate change matters, the Committee thought that shale gas development was compatible with the UK’s climate change objectives: although shale is a fossil fuel it is cleaner than coal, which it is more likely to displace than renewables.
  • Although much of the ‘strident’ public opposition to shale gas development has been based on environmental grounds, the Committee found that the weight of expert scientific opinion was that methane migration to pollute the water supply is ‘difficult to conceive.’ With strict regulatory oversight and monitoring in place it considered the risk of methane contamination of aquifers to be very low. Likewise, the risks of induced seismicity were also considered to be very low.

The Committee therefore emerged very positive about the potential for the UK in developing its own shale industry. It reserved most of its ire for the government, which it said should be doing much more to facilitate the development of the UK’s shale industry by simplifying the regulatory environment and playing a greater role in reassuring the public about the ‘exaggerated’ environmental dangers of a local shale industry.

As it happens we did not have to wait long for the government to act upon one of the matters raised in the Committee’s report, reform of the law of trespass. The Department of Energy & Climate Change published its paper Underground Drilling Access: Consultation on Proposal for Underground Access for the Extraction of Gas, Oil or Geothermal Energy on 23 May 2014, setting out proposals to simplify the process shale and geothermal operators must follow in order to obtain permission to drill.

A little background will be helpful. In the UK it is a basic legal principle that the owner of the surface of land is the owner of the strata beneath it, including the minerals that are to be found there, unless there has been an alienation of them to someone else by a conveyance, at common law or by statute. So if a shale operator wishes to carry out underground operations – which, by its nature, may require going underneath the land of many landowners – then as the law currently stands it must obtain each landowner’s permission to do so. Failure to obtain that permission may result in the operator committing a trespass in relation to that (subsurface) land. This state of the law was affirmed by the UK’s Supreme Court in July 2010 in Bocardo SA v Star Energy UK Onshore Ltd (Secretary of State for Energy and Climate Change intervening) [2011] A.C. 380.

Perhaps alarmed by proposals by anti-fracking groups to buy up ‘ransom strips’ of land, with the attendant threat of an action in trespass, to prevent, or at least hinder, operator development of the UK’s shale resources, the Department has proposed a change in law. By analogy with the arrangements under s51 of the Coal Industry Act 1994 it proposes a ‘right of underground access’ to companies extracting petroleum or geothermal energy in land at least 300 meters below the surface. The purpose of this change appears only to be to remove the threat of an ‘underground’ trespass action: all other relevant permissions would still be needed (for example, those relating to environmental and planning matters).

The Department proposes two other aspects to its solution to the trespass problem. The first is that shale or geothermal operators should participate in a ‘voluntary’ payment system in which industry makes a payment to the local community (as opposed to each landowner). The Department observes that the shale and geothermal industries have proposed a one-off payment of £20,000 for each unique lateral (horizontal) well that extends by more than 200 meters laterally. It is worth noting that compliance with the ‘voluntary’ scheme would be encouraged by the Department’s assumption of a reserve power to enforce payments via regulation.

The final element of the Department’s proposed solution is a public notification system, under which each operating company would explain relevant matters relating to proposed works to the local community – and under which the operators would detail the payment that would be made in return for access. This would not form part of a process by which a landowner or a community could object to the relevant project: such objections would form part of the usual planning or environmental regulatory processes.

The Department’s proposals are now out for consultation. Interested parties have until 15 August 2014 to respond. The Department’s proposed reform of the law of trespass was mentioned in the Queen’s Speech, setting the agenda for the final session of the current UK Parliament. The reform has been incorporated into a new Infrastructure Bill. Initial reaction to the new Bill suggests that the responses to the Department’s proposals will be made along partisan lines: the shale industry will likely regard the reform to the law of trespass as highly desirable and the ‘voluntary’ proposed £20,000 community payment as the best deal available; whereas anti-fracking groups will likely see the trespass reform as the removal of a key legal weapon in their armoury.

View our Shale Gas in the UK page for more information >