Shale Gas in the UK: One year on…

by Reed Smith
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[authors: Lynne Freeman, Christopher Parrott]

Introduction

Following changes in personnel in the UK Government, opportunities may be on the horizon in the budding UK shale gas industry. Last year, we reported on the challenges in achieving large scale shale gas production in the UK, summarising them as:

  • The impact of Governmental decisions on energy policy;
  • Obtaining planning and other permissions to access the land and develop the shale reserves;
  • Overcoming environmental and safety concerns;
  • The influence of lobbyists and environmental pressure groups; and
  • Access to funding for exploration.

One year on, we consider the progress in respect of these challenges, to see what has changed and what remains to be done before the impact of shale gas on the UK’s energy needs can be determined.

The impact of Governmental decisions on energy policy

The UK coalition Government reshuffle in September 2012 has given greater hope for a forthcoming expansion of the UK’s shale gas activities, following comments made by the new Minister of State for Energy (John Hayes) and Secretary of State for Environment, Food and Rural Affairs (Owen Paterson).

Paterson praised Britain’s shale gas reserves as "one unexpected and potentially huge windfall". The significance of this is that Paterson is responsible for the Environment Agency, a body which is involved in not only the planning process, but also the authorisation of any discharge so as to protect the environment.

The new Secretary of State for Energy and Climate Change, Ed Davey, takes a different stance on shale gas. Davey favours using renewables and nuclear rather than shale gas and has cast doubt on the carbon impact of proposed new gas plants and the price volatility of internationally traded gas. However, other Government representatives, including Chancellor of the Exchequer George Osborne, are more supportive.

Osborne has recently announced a generous new tax regime for shale gas, "so that Britain is not left behind as gas prices tumble on the other side of the Atlantic". Osborne is a known supporter of increasing the role of natural gas in the UK’s plans for energy and the economy. The new proposed tax regime is rumoured to include a proposal that the shale gas industry would be excluded from the existing North Sea fiscal regime, where marginal tax rates are between 62% and 81%.

The UK Government is expected to give the green light for more hydraulic fracturing ("fracing" or "fracking") operations in the UK to access shale reserves, and to reveal full details of the Government’s new "gas strategy" and tax regime, within weeks.

Any change in policy is likely to be shaped by the effect that investment in shale gas exploration could have on the economy. Some suggest gas exploration and production operations could create 42,000 new jobs over the next ten year period.

Overcoming environmental and safety concerns

Last year saw a moratorium placed over the production operations of Cuadrilla Resources in Lancashire, after fracing operations were feared to be linked to seismic tremors felt in the area. However, several reports published recently have produced encouraging findings regarding the limited extent to which fracing causes tremors. The British Geological Survey found that although fracing is known to have caused tiny tremors, these tremors would normally be undetectable to humans. This is backed up by further research which indicates that fracing to "intentionally create permeability rarely creates unwanted induced seismicity large enough to be detected on the surface – even with very sensitive sensors – let alone be a hazard or an annoyance"1.

A further concern about fracing is the possible increased emissions. Research indicates, however, that the UK can continue its shale gas developments without increasing carbon emissions2.

Environmental concerns were the principle cause of protests against fracing last year and remain so. Recent developments may give adequate encouragement to companies to move forward with construction, investment and project development of the shale gas energy source within the UK.

The influence of lobbyists and environmental pressure groups

Protesting has continued from environmental pressure groups over fracing, with concerns raised as to the environmental implications of shale gas extraction, but many think these concerns are misplaced3.

Access to funding for exploration

The financial implications of shale gas exploration have been highlighted by Ed Davey, who said that "whilst exploiting natural gas from shale deposits may secure more sources of energy, it will not be cheap".

This is backed up by reports which indicate that whilst shale reserves "may be very large [up to 40 trillion cubic feet, higher than previous estimates of 20 trillion cubic feet], the production rate per well is likely to be low"4. It seems likely that although shale gas has the potential to make a useful contribution to UK energy needs, it is unlikely to offset decreased North Sea supply.

The Government is expected to issue a new estimate of shale gas resources in the Bowland formation before the end of the year, followed by a more comprehensive prediction for the whole country in 2013.
It is rumoured that the Government is exploring the prospects of extracting shale gas offshore, due to the purported greater reserves of offshore shale gas. Investors will require certainty that risks inherent in offshore operations (such as those experienced in the offshore wind industry) will be offset by the prospect of higher rewards.

Whilst the cost of extraction may mean that energy price reductions are not as great as had been hoped for, the sheer estimated size of shale gas formations in the UK means that investment could still be highly profitable. The over-supply in the US is leading some companies, such as Schlumberger, to look to reduce dependence on the North American shale gas market with a refocus on the UK.

Obtaining planning and other permissions to access the land and develop the shale reserves

The UK has a strict regulatory framework governing onshore shale gas exploration which can currently take six to nine months, although there are aims to reduce this time period considerably; Paterson aims to reduce the time taken for drilling applications to a much reduced time period of two weeks.

Although the moratorium on fracing remains, the Minister of State for Energy, John Hayes, has announced that companies are expected to be permitted to resume shale gas exploration and production operations towards the end of this year, as supported by the new Government gas strategy. More applications are currently being submitted for new drilling operations.

Conclusion

Although there have been many positive developments over the past year, not everyone believes that the UK can replicate the success of the US shale gas market. The International Energy Agency has claimed that Europe is seeing a "golden age for coal" thanks to cheap US exports, and that "in Europe, no golden age of gas will come. Europe is an exception to the [gas] revolution"5.

On the whole the outlook for shale gas production in the UK is positive, following the Government reshuffle and the results of environmental studies into exploration and development activities last year. Whilst the question of the reduction of energy supply prices is one that appears to be still up in the air, the rising excitement amongst investors and recent discoveries beyond Lancashire mark the potential for growth in the UK shale gas market.


1. http://esd.lbl.gov/research/projects/induced_seismicity/primer.html   

2. http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=23&refer=About us/PwringEnergyDeb  

3. See for example http://www.oilonline.com/default.aspid=259&nid=38867&name=Energy+leaders+discuss+shale+gas+myths+at+Gastech

4. http://www.ft.com/cms/s/0/287378ee-0708-11e2-92ef-00144feabdc0.html#axzz2BYOlDQK3

5. http://uk.reuters.com/article/2012/10/05/uk-europe-coal-iea-idUKBRE8940U620121005

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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