In February, King & Spalding was invited to participate in an access rights workshop run by UK oil and gas regulator, the Department for Energy & Climate Change ("DECC"). The purpose of the workshop was to invite stakeholders, including petroleum companies, academics, industry advisers and public interest groups to discuss with DECC the existing legal framework for securing subsurface access rights for oil and gas exploitation and to debate the need for policy or legislative changes in the context of supporting exploitation of the UK's shale plays, as well as promoting development of other onshore unconventional energy resources, such as geothermal. The UK government supports shale gas development for the significant economic and energy security benefits it perceives development will bring to the UK. However, there remains significant public opposition to fracking in the UK, making DECC and UK shale operators all too aware of the challenges to be faced in securing the necessary access rights required to frack, both at the surface and at depth.
In the UK, the ownership of all oil and gas reserves is vested in the Crown by the Petroleum Act 1998 (the "Act"). The Act entitles the UK government to issue licences to third parties to "search for and bore for and get petroleum". But, whilst a petroleum licence may cover a wide area defined by geographic coordinates, it does not grant the licensee any rights of access to the land within those coordinates. Access rights must be secured independently by the licensee from each landowner over, or under, whose land it wishes to carry out petroleum exploration or development activities. Failure to obtain the necessary subsurface access rights amounts to an actionable trespass.
In the case of conventional oil and gas exploitation, where perhaps just one landowner is affected, the parties can usually reach a mutually acceptable agreement on access without difficulty. Once an operator has negotiated surface access rights, usually by way of a lease or a licence on commercial terms, to set up a rig and its associated infrastructure on the land, it can proceed to drill one or more vertical wells without further permission (although any necessary rig site planning permissions and drilling permits must still be obtained from the local authority and DECC). Where shale gas exploitation is concerned, however, surface access rights are just the first step. The lateral wells associated with fracking mean that a horizontal well could extend far beyond the limits of ownership of the surface landowner from whom access rights for the well pad have been obtained. In the UK, it is a long-standing principle of land law that ownership of land extends vertically from the surface boundary up into the sky and down to the centre of the earth. This means that subsurface access rights must be secured from every landowner under whose land a lateral well extends, whatever the depth and irrespective of the impact that well of resulting fracture has on the land at the surface.
The UK Supreme Court's judgment in Bocardo SA v. Star Energy UK Onshore Ltd confirmed the requirement for operators to secure access rights to all land encroached upon by petroleum operations, irrespective of the depth or impact of the encroachment. In Bocardo, the encroachment of an oil pipeline into the subsurface of land to which the operator had no access rights was held to be trespass. The case also confirmed that the appropriate measure of damages where there was no physical damage caused by the trespass was "fair and reasonable compensation between the landowner as a willing grantor and the operator as a willing grantee for the right to access the subsurface of the land in a way that would disturb or detract from the landowners use of the land". Bocardo SA had claimed for a share in profits deriving from the oil pipeline under its land. Bocardo SA was awarded £1,000 by the court, being the amount that Star Energy indicated it would have been prepared to pay for access before the trespass occurred.
Identifying and securing access rights from each landowner affected by a shale well is a challenge for shale gas operators for a variety of reasons:
Predicting the length a horizontal well will need to extend to before drilling commences can be difficult. Even more uncertain is predicting the length of a fracture created in the fracking process, making it difficult to identify with certainty the surface landowners who will be affected;
Directional changes may be required due to geological reasons, taking the horizontal well in a direction not anticipated at the outset, creating additional costs in compensating landowners who in fact will not be affected, and delaying operations until landowners affected by the new direction of the well can be identified and access secured;
The UK is very densely populated and each petroleum licence area may cover land comprising thousands of individual households and landowners;
35% of UK land is remains unregistered with the UK Land Registry making identifying owners of some land complex and time consuming;
Once relevant landowners have been identified, individual negotiations must be undertaken with each, to agree upon access and any appropriate compensation. This step can be lengthy and the costs are unpredictable, with scope for dissenters to hold operators to ransom over a strip of land dissecting the direction of a proposed lateral well. Operators are even concerned that anti-frack groups may actively seek to acquire land in these areas to be held as "ransom strips".
Even if an operator can identify with some certainty the landowners who will be affected by a proposed shale well, what happens if those landowners refuse to cooperate or demand unreasonably high compensation in return for access?
Under the existing legislative framework for petroleum access rights, where an operator is unable to obtain access rights by negotiation with a landowner, the Mines (Working Facilities and Support) Act 1966 (the "1966 Act") allows a licence holder to apply to the court for "ancillary rights" that are necessary for the exploration for, or production of, petroleum. This is a statutory right of operators to apply to the UK court to order the landowner to grant access to the land required. To satisfy the court that such an order is appropriate, the operator must demonstrate that: (i) the need to acquire access is in the national interest; and (ii) it is not reasonably practicable to obtain access by private arrangement because (among other things) the person with the rights unreasonably refuses to grant access or demands terms which, having regard to the circumstances, are unreasonable. Whilst the development of the UK's petroleum resources would, in line with government policy, likely be considered to be in the national interest, thereby enabling operators to employ the rights granted under the 1966 Act as a viable alternative where bilateral negotiations fail, securing access via this compulsory acquisition process through the UK courts is inevitably a lengthy, costly and uncertain route to access most operators would seek to avoid.
DECC recognises the access challenges facing operators and, conscious of the need to promote a constructive environment for UK shale investment, is considering its options for policy change to facilitate the access rights process and reduce risk for investors, whilst managing the perceptions and expectations of the public. DECC asked for industry and interest group opinion on four possible options:
Do nothing – Access rights for unconventional oil and gas activities would be secured under the existing legislative framework.
Refine the existing procedure by either:
a. fixing or capping compensation payments for individual negotiations; or
b. providing for group negotiation or notification.
Legislate for automatic access rights – Grant automatic access rights below a specified depth through new legislation drafted specifically for unconventional oil and gas exploitation incorporating a defined landowner notification and compensation payment procedure.
Something else… What other methods of dealing with the access rights issue do the shale industry and interest groups think are viable alternatives?
At the workshop King & Spalding attended, there seemed to be consensus amongst industry representatives that legislating for automatic access with a defined compensation calculation mechanism was the most favourable option. However, public interest groups might view this approach as disempowering landowners of their fundamental rights and DECC itself admitted that legislating change could take a long time, leaving operators struggling with the existing regime in the interim.
Another important point arising from the discussions was the need to educate the public that whatever framework for subsurface access for unconventional oil and gas is finally established, the compensation landowners will be entitled to where no physical damage or disturbance is caused to the accessed land will be a nominal amount. Attempts to use the court process to extract large sums in compensation for access will fail. In Bocardo, the court determined that had there not been evidence establishing what Star Energy would have been willing to pay to avoid the lawyers' fees and costs in pursuing compulsory access via the 1966 Act (being £1,000), the appropriate compensation payable to Bocardo SA would have been established by the mechanism set out in the 1966 Act, and would have amounted to £82.50. This amount is analogous to existing pipelines legislation providing for compulsory acquisition of subsurface access rights for the laying of pipelines, where compensation is typically £50 per landowner.
It is clear that the industry's view is to seek a refinement of the existing access rights process or for the government to legislate specifically for access rights for unconventional oil and gas to give it the certainty it needs to properly evaluate the economics of a well in a particular licence area before progressing too far along with the development. DECC needs to consider how it might achieve this whilst balancing the interests of all stakeholders. We will report on the outcome of DECC's review on subsurface access rights when it becomes available.