To frack, or not to frack?

The UK awaits the development of world-class shale gas resources with significant uncertainty. Despite the passing of the Infrastructure Act in February, considerable ambiguity remains over exploratory deep hydraulic fracturing of shale gas resources, particularly in the Bowland Shale of Northern England. With lower oil prices, an imminent election and significant opposition, some doubt if shale gas will ultimately become part of the UK energy mix.

Tony Smith, Technical Director – Gas, at SLR Consulting, sets out why 2015 is a critical year for UK Shale Gas.

Although there has been no hydraulically-fractured onshore shale gas well in the UK since 2011, when Cuadrilla was associated with the much-publicised minor induced earth tremors in Lancashire, 2015 is shaping up to be crucially important for the fledgling UK shale gas industry.

We are at the start of the UK shale gas journey; we have yet to see the first onshore horizontally-fractured shale well and, as a result, there has been no flow testing to prove the industry is viable. Nevertheless, considerable political and commercial capital has already been invested in the sector’s success.

Interest has been underpinned by the British Geological Survey assessment of Bowland Shale gas resource with a mid-case estimate of 1329 trillion cubic feet (tcf) of gas in place.   Of course only a small fraction of this gas will be producible due to geological, technical and environmental issues (and ultimately termed as ‘reserves’), but the resource scale represents a world-class opportunity for an increasingly import-dependent UK market.

Bearing in mind that the UK consumes just less than 3 tcf of gas per year, it is clear that even if only five per cent of the resource can be produced, this would equate to 66tcf, or 22 years’ supply. Of course shale gas would be part of a gas supply portfolio, including ‘conventional’ production and imports though pipeline and Liquefied Natural Gas (LNG), so the shale gas industry could be with us for several generations.

Developing a world-class resource

Objections to developing onshore shale gas range from water pollution concerns to potential impact on global warming. What is patently clear is that shale gas planning requires thorough and careful environmental and community management reflecting and mitigating environmental risks to water, soil, air and ecology as well as community impacts,  other environmental and infrastructure issues such as traffic, noise, vibration and seismic events.

In order to manage these risks, the UK has a complex and multi-agency regulatory process involving the Environment Agency, The Health and Safety Executive, the local Minerals Planning Authority (MPA), Department of Energy and Climate Control (DECC) and possibly the Coal Authority. UK operators must complete thorough Environmental Risk Assessments (ERA) and Environmental Impact Assessments (EIA) in order to gain consent for ‘high volume hydraulic fracturing’, and perhaps, more importantly, need to develop and maintain an effective community engagement process in order to gain and retain the most difficult ‘licence’; the Social Licence to Operate (SLTO).   The industry association, UKOOG, has committed a £100K payment to Community Benefit Fund for each shale gas wellpad site with a further 1% of production related revenue when the wellpad starts commercial production.  Ineos subsequently stated an overall 6% production related payment split broadly at 4% to the landowner and 2% to the community benefit fund although the detail of what is, and is not included in this higher community offer remains to be seen.

As we approach the General Election on May 7th, we should note that both Government and the main opposition party have stated their support in principle for shale gas development. It is difficult to argue against the economic case for developing shale gas as part of a primary energy portfolio including renewables and nuclear. Gas is required in the UK energy mix for several decades to come, the issue is not ‘if’ gas; it’s ‘which?’ gas.

The UK can ostensibly consume imported gas from Qatar, Norway or elsewhere (receiving zero direct tax revenue) or it can develop indigenous UK supplies (and receive marginal Corporation and Supplementary tax).  However, the prelude to the passing of the Infrastructure Act in February highlighted significant disparity of views which were caught up in an (unsuccessful) Commons vote, introduced by Environmental Audit Committee, for a moratorium on shale gas in England.  Following devolution of some powers to Holyrood, Scotland has subsequently stated that it has imposed such a Moratorium indefinitely with a similar position likely in Wales over the coming months. Therefore, England may hold the key to unlocking the shale gas door in the first instance.

Caught up in a hectic week in both Houses of Parliament in February, the end result was that the Infrastructure Act contained pretty well all of the ‘11 Labour Amendments’.   However, several key clauses and definitions remain incomplete and as such require clarification and definition in secondary legislation, to be completed by the new government by the end of July 2015.  These include the definition of groundwater source protection zones; so called SPZ’s; whether secondary legislation prohibits shale gas developments on all defined categories of SPZs or just the most critical SPZ1 remains to be seen. Similarly, whereas the 2015 Infrastructure Act prohibits shale gas developments within National Parks (and indeed other protected areas), it is not yet clear if horizontal wells may be drilled from outside to inside such prohibited areas.
Other issues addressed within the Infrastructure Act include;

  • The prohibition of hydraulic fracturing at less than 1000 metres from the surface.
  • The need for baseline monitoring for methane in groundwater a minimum of 12 months prior to hydraulic fracturing.
  • Independent inspection to determine the integrity of wells.
  • EA approval for all chemicals used in the fracture fluid.

The Act also describes the definition of ‘High Volume Hydraulic Fracturing’ where more than 1,000 cubic metres of fluid is used at each fracture stage or more than 10,000 cubic metres of fluid in total. And, last but not least − the ‘trespass’ issue is now resolved in law. ‘Deep-level land’ more than 300 metres deep may be horizontally drilled; however, the industry association UKOOG has suggested a payment of £20,000 per horizontal well to surface land owners.

Announcing the 14th Round

Unlike the USA, where land ownership generally confers ownership of below ground resources, UK oil and gas is owned by the state with operators requiring a licence to produce hydrocarbons.

Onshore licencing is nothing new in the UK and DECC is currently assessing bids for the 14thonshore oil and gas licensing round which closed in October 2014. DECC is understood to have received 95 applications for 295 blocks and many believe that DECC is ‘ready’ to announce the winners of the licensing round. However, two key uncertainties may delay  award; (a) secondary legislation (outlined above) and (b) changes to the oil and gas fiscal regime (the Chancellor announced a reduction in  supplementary tax to 20% in the recent March budget) from the current level of 30%). Add to this the possible voting consequences, in some key and marginal constituencies containing shale gas resources, of awarding the Petroleum and Exploration and Development Licences (PEDL) so close to the election, and it is easy to understand that a delay in licence award until after the election may be the outcome.