In early 2014, David Cameron boldly announced that the government supported the exploitation of onshore oil and gas through hydraulic fracturing (fracking) and that the UK should fully embrace exploration, stating: "I want us to get on board this change that is doing so much good and bringing so much benefit to North America"1. Since then, the government has announced further tentative steps towards its ambition to realise shale gas exploration such that it is now one of the governments 'Top 40' priority UK infrastructure projects under the most recent iteration of the National Infrastructure Plan (NIP).
Latest studies have indicated that supplies of natural gas which are economically recoverable from shale in the United States can accommodate the country's domestic demand for natural gas (at current levels of consumption) for more than a hundred years. This is an economic and strategic boon home and abroad, and at least in the near term, a potentially important stepping-stone toward lower-carbon, greener energy. However, as things stand in the UK currently, unconventional oil and gas exploration is hampered by a powerful anti-fracking movement and a cumbersome planning and environmental permit process.
The government is seeking to address both of these hurdles by a combination of rhetoric and (at least the beginnings of) relaxation of restrictions. It has also introduced the most competitive tax regime in Europe for shale gas and in the Queen's Speech, the government announced plans to allow developers to drill under homes without the owner's permission. Nevertheless, it remains the case that any developer wishing to exploit (what is estimated to be) 1,300 trillion cubic feet of shale gas lying underneath British soil still has a challenge ahead. On 8 May 2014, the House Of
Lords Economic Affairs Committee released a report stating that development of shale gas resources should be an "urgent national priority", blaming the "dauntingly complex" regulatory framework for the snail's pace of exploration.
What fracking will mean if given the green light
Work is carried out in three distinct phases: exploration, appraisal and production. The exploration phase can last anything from two to six months and involves drilling wells to identify whether oil or gas can be produced profitably. All UK shale gas development is currently in this phase.
The appraisal phase is next, and typically lasts from six months to two years. It requires testing of the deposits to establish the strength of the resource and its potential productive life. Finally, the production stage can begin, when developers can begin profiting from their efforts. This phase is expected to last a minimum of 20 years. However, preparing the apparatus and finding a suitable drilling site is only half the battle. Before the government will grant the developer a drill consent, numerous other consents and permissions must first be obtained.
Rights to drill from landowners
Firstly, landowners must agree to drilling underneath their property. Fracking for shale gas is performed in both vertical and horizontal wells, and horizontal wells can be over a mile long. Therefore, a single fracking operation may require rights to drill under multiple landholdings. As the law currently stands, drilling without landowner consent will amount to trespass and opens extraction companies to the risk of landowners obtaining injunctions to halt the drilling process. Unlike in the United States, landowners have little incentive to cooperate with developers as underground oil and gas belongs to the Crown.
Reports in the press have suggested that opponents of fracking could obstruct drilling by buying up strips of land, known as "ransom strips" in a fracking area, giving them the right to mount legal challenges to drilling. Licensed developers have the right to seek compulsory purchase of land required for drilling: however, to date no such order has ever been implemented. Such proceedings are likely to be drawn out: the developer must show that the need to acquire the right is in the national interest, and that the landowner has been unreasonable in refusing to grant the right by private arrangement. It is unlikely that landowners who have refused access to developers will go down without a fight.
The government is seeking to clarify the position for developers post Queen's speech following a public consultation. Ministers want to establish that energy companies have the right to run shale gas pipelines under private land, without breaking trespass laws. This is likely to be accompanied by a right to compensation for local communities.
Petroleum exploration development licences
Secondly, the developer will require a petroleum exploration development licence (PEDL). There are currently 176 PEDLs for onshore oil and gas in the UK and the Department of Energy and Climate Change is planning to conduct a new round of licensing in 2014. These licences confer on the developer an exclusive right to search, bore for and extract hydrocarbons in the licence area. However, this licence alone is not enough to start drilling.
Planning permission and Environmental Impact Assessments
Planning permission is also required from the Minerals Planning Authority (which is usually the County Council). When applying for planning permission, the developer must complete an ownership certificate which provides details about the ownership of the application site and confirms that appropriate notices have been served on landowners. The government has recently signalled its intention to simplify this process by allowing developers to apply for planning permission without notifying the owners of land where only underground operations will take place. This should be welcome news to developers and shows recognition by government of the impracticalities of identifying interests in land over large areas in the early stages of seeking the various consents needed. As yet, planning permission has only been granted for exploratory wells at a small number of sites, with no site being close to opening.
The Minerals Planning Authority must also decide whether an Environmental Impact Assessment (EIA) is required, on a case-by-case basis. It is unlikely that an EIA will be required for exploratory drilling operations which do not involve hydraulic fracturing.
Environmental and health & safety go ahead
Fourthly, permits from the Environment Agency will be issued to ensure fracking is not harmful to the surrounding environment. This will be a step heavily scrutinised by environmental campaigners, who advocate that the techniques used in fracking could cause small earth tremors, water contamination and environmental damage. However, the government claims that if there is any risk to the environment, the authority will find this risk unacceptable and not permit activity.
No developer has managed to reach this stage in the process as of yet: the House of Lords Economic Affairs Committee's report pointed out that the Environment Agency has not received or approved any applications for the necessary permits since the moratorium on hydraulic fracturing was lifted in 2012.
Finally, the Health and Safety Executive must be notified of the well design and operation plan. If satisfied, a well consent will be granted.
Only when all of these consents have been obtained will the government grant a drill consent to the developer.
The future for UK fracking – the good and the bad
It's not all negative news for UK onshore energy operators. As above, in the government's bid to go "all out for shale," the most competitive tax regime in Europe for shale gas has been introduced; saving companies an extra 24p in tax for every GBP 1 they spend on the project. The new tax breaks are structured so that when a developer starts making taxable profits from selling gas, it will be taxed at 30 per cent rather than the usual 62 per cent. In fact, new developers will now have an effective tax rate lower than the US.
The government is also allowing councils to keep all of the business rates raised from fracking sites, a deal which is expected to generate millions of pounds for local authorities. It is claimed this could be worth up to GBP 1.7 million a year for a typical site, funded directly from central government. This has been vilified by critics, with Greenpeace accusing ministers of trying to "bribe councils."
Whatever your stance, fracking continues to be a topic for debate, sparking lobbying and protests from campaigners. However, the government has firmly marked its position; the production of onshore oil and gas is 'full steam ahead'. There is no doubt that post Queen's Speech and in the lead up to the Autumn Statement (December 2014), fracking will be a key industry topic. Based upon the government's statements so far this year however, industry leaders will certainly be monitoring these announcements to see if they signal the end to rhetoric and political positioning and instead, the start of developer application approvals and progress.
Footnote
1 BBC: "Cameron urges fracking opponents to 'get on board', 13 January 2014.
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