UK: Recent Developments In The UK Shale Gas Industry

UK government lifts moratorium on hydraulic fracturing

On December 13, 2012, the UK Department of Energy and Climate Change (DECC) announced that the current moratorium on hydraulic fracturing in the UK was lifted, subject to the introduction of new regulatory controls designed to mitigate the risk of seismic activity from hydraulic fracturing operations. The Secretary of State for Energy and Climate Change (the Secretary) noted that, given the relative infancy of the shale industry in the UK, the controls are not to be considered exhaustive or definitive, but rather as "precautionary measures for our present state of knowledge". The Secretary also noted that initial operations under these new controls will be subject to careful scrutiny (to ensure the effectiveness and efficacy of the controls) and that the controls will be reviewed as experience develops to ensure that they are proportionate to the risks involved with hydraulic fracturing. The Secretary stated that there is "the potential for a very exciting shale gas industry in the UK", a view strongly supported by the Prime Minister and Chancellor of the Exchequer.

DECC has also commissioned a report to be prepared by the British Geological Survey which will estimate the level of the UK's shale gas resources. Initial reports have suggested it will conclude that the Bowland basin (in the North East of England) has gas reserves of approximately 300 trillion cubic feet — roughly 17 times more than the known remaining reserves of the North Sea — although how much of this will be economically viable to produce remains to be seen. The report is due to be published in early 2013.

The announcement is the latest in a series of encouraging statements by the UK authorities on the practice of hydraulic fracturing. In April 2012, DECC published an independent report on seismic activity induced by hydraulic fracturing techniques in the Bowland basin. While the report recommended the implementation of mitigation measures and operational guidelines to reduce the risk of seismic tremors from hydraulic fracturing techniques, it concluded that there was "no reason why the risk of induced seismicity should prevent future hydraulic fracture operations in the area." A joint report by the Royal Academy of Engineering and the Royal Society published in June 2012 (the Royal Society Report) also concluded that, where operational best practices are implemented and enforced through regulation, the health, safety and environmental risks associated with hydraulic fracturing could be managed. The December 13 announcement follows a careful review of, and government response to, the Royal Society Report.

New Gas Generation Strategy and its proposed impact on the UK shale gas industry

The December 13 announcement follows a report that was published by DECC on December 5, 2012 and presented to Parliament entitled "Gas Generation Strategy" addressing the importance of gas as a feedstock for a low carbon economy and examining the current and future role of shale gas development within the UK. Among other things, the proposals set forth in the Gas Generation Strategy include (i) encouraging the construction of up to 26 GW of new gas-fired power stations by 2030 to replace existing and ageing plants, (ii) subsidizing efforts in the research and development of technology promoting carbon capture and storage, and (iii) focusing on the development of shale gas reserves in the UK.

In particular, the Gas Generation Strategy lists some the steps to be taken by DECC towards developing shale gas in the UK. These include the following:

  • Office of Unconventional Gas and Oil. DECC will set up an Office of Unconventional Gas and Oil, which will work with the UK Department for Environment, Food and Rural Affairs (Defra) and other governmental departments to provide a single point of contact for investors and ensure what is hoped will be a simplified and efficient regulatory process.
  • Policies and Guidance. DECC will look into improving its development policy and guidance to ensure that existing onshore licensing arrangements, which have complemented exploration activities to date, also complement long-term shale gas production.
  • Appropriate Approaches. Given that shale gas development requires an extended pattern of drilling to facilitate horizontal wells, which can also affect the periods of capital investment required, DECC will open a dialogue with interested license holders to identify whether any changes to the existing licensing regime are required for future shale gas development.
  • New Licensing. DECC will consult on further onshore licensing of shale gas exploration, including the environmental implications of further licensing for shale operations and a public consultation on the environmental impact of shale operations.

The Gas Generation Strategy's main focus is to reduce the uncertainty around gas generation for investors with fiscal certainty in relation to the development of shale gas resources being a central theme (see below). In particular, the Gas Generation Strategy emphasizes that, if shale exploration is successful, early production could be seen as early as the second half of this decade, although any substantial contribution to the UK's gas supply is unlikely to occur until well into the next decade. The Gas Generation Strategy also notes that, while it is hoped that the UK shale industry will expand and play a part in the UK's energy mix, it is unlikely to expand at the rate which the US shale industry has done, where the relatively recent shale gas boom has resulted in sharp reductions in gas prices. This is due to a number of reasons including the greater population density in the UK and associated opposition from environmental groups, the different treatment of mineral rights and ownership of subterranean gas reserves in the UK as compared with the US, as well as certain other socio-economic, commercial and regulatory hurdles that will need to be addressed (see "European Unconventional Gas Outlook — A Tough Nut to Frack?").

Proposed tax regime for shale gas operations

On December 5, 2012, the Chancellor of the Exchequer reconfirmed an announcement made in October 2012 that the government will engage with the oil and gas industry to develop a targeted tax regime for shale operations with the aim of developing a focused tax regime to incentivize investment and stimulate production in the shale industry. It is expected that there will be a further update in the next UK Budget (on 20 March 2013) with a formal consultation to follow thereafter, a process in which Vinson & Elkins is to be involved.

Proposed European Union legislation

Whatever approaches, rules, policies or standards are adopted by the UK government, they will be affected by the positions adopted by the EU with respect to the shale industry. The EU is expected to introduce legislation regulating the shale gas industry and implementing minimum safety standards following growing concern over hydraulic fracturing activities, especially in the UK, Poland and France. On November 21, 2012, the European Parliament voted in favor of the European Commission exploring what new legislative changes were necessary to more effectively regulate the shale industry. The European Parliament has also rejected a call for a ban on new hydraulic fracturing activities, stating that EU member states have the right to explore and develop their reserves as they see fit, subject to satisfying the required regulatory measures. The European Commission is expected to deliver a framework on managing the risks of shale operations and addressing shortcomings in existing EU regulation during 2013.

Conclusions

It seems clear now that the UK government intends to support hydraulic fracturing in the UK and to encourage energy companies within the shale gas sector in order to secure an affordable long term gas supply and to balance the risks associated with the UK's energy trilemma (see A "Trilemma" For Investors In UK Energy Infrastructure — Law 360). It remains to be seen whether such encouragement will have an effect on EU policymakers and act as a catalyst for other European countries to reconsider their own policies with respect to the shale industry.

Please click http://www.decc.gov.uk/en/content/cms/news/wms_shale/wms_shale.aspx for a copy of the Written Ministerial Statement by Edward Davey (the UK Secretary of State for Energy and Climate Change) dated December 13, 2012.

Please click http://og.decc.gov.uk/assets/og/ep/onshore/7269-government-response-sg-report-.pdf for a copy of the government response to the Royal Academy of Engineers and Royal Society report on "Shale Gas Extraction in the UK: a review of hydraulic fracturing" dated December 10, 2012.

Please click http://og.decc.gov.uk/assets/og/ep/onshore/7268-sg-qa.pdf for a synopsis of the main questions raised in response to the DECC consultation on mitigation of seismic risks from hydraulic fracturing for shale gas (with government responses) dated December 10, 2012.

Please click http://og.decc.gov.uk/assets/og/ep/onshore/5075-preese-hall-shale-gas-fracturing-review.pdf for a copy of the DECC independent report on seismic activity induced by hydraulic fracturing techniques in the Bowland basin published in April 2012 entitled "Preese Hall Shale Gas Fracturing: Review and Recommendations for Induced Seismic Mitigation" by Dr. Christopher A. Green, Professor Peter Styles and Dr. Brian J. Baptie.

Please click http://www.raeng.org.uk/news/publications/list/reports/Shale_Gas.pdf  for a copy of the joint report by the Royal Academy of Engineering and the Royal Society published in June 2012.

Please click http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/oil-gas/7165-gas-generation-strategy.pdf for a copy of the Gas Generation Strategy dated December 5, 2012.

Please click http://www.hm-treasury.gov.uk/press_92_12.htm for further information on the targeted tax regime for the shale gas industry from HM Treasury website.

Originally published in V&E Shale Insights — Tracking Fracking E-communication, December 13, 2012

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