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UK shale gas might be ready for take-off this year

This year may very well see the unconventionals sector begin to deliver on its rich promise

The conclusions of the European Council meeting on 22 March surprised many by focusing on the need to lower energy prices and boost European competitiveness, emphasising the role of onshore unconventional oil and gas development as part of that cost-effective strategy.

This would be achieved through a number of mechanisms including “systematic recourse to onshore and offshore indigenous sources of energy…while respecting Member States’ choices of energy mix”.

Council president, Herman van Rompuy, nonetheless downplayed the potential contribution of shale in Europe, stating there was no anticipated European energy “game changer”, comments echoed by Commission president, José Manuel Barroso, who said that Europe had no “silver bullet” to its strategic energy challenges.

Strong advocates at the council meeting in pushing unconventional oil and gas to the top of the European agenda were the UK, Poland and Romania, with UK Prime Minister, David Cameron, noting that Europe could not afford to be left behind the rest of the world in developing its unconventional gas resources.

Cameron’s position follows a stream of recent initiatives and announcements in the UK regarding shale, and the formulation of a clear government strategy to promote shale gas exploration and development as quickly as possible.

Fracking ban

Last December, the 18-month ban on hydraulic fracturing (fracking) in the UK, introduced - after evidence of seismic-induced activity triggered by a Cuadrilla Resources fracking operation in Lancashire - was lifted by the government following a review on fracking conducted by the Royal Academy of Engineering and the Royal Society, and a Department of Energy and Climate Change (DECC) consultation involving independent experts. This was followed in April by conclusions from the Energy Institute at Durham University that fracking was less likely to trigger seismic events than other human activities, such as mining.

The March 2013 budget underlined the UK government’s more focused approach to shale development with three measures intended to move the debate forward. Importantly, proposals will be made to ensure that local communities benefit from shale operations within their area; technical planning guidance for the exploration phase of a shale development will be published by July 2013; and a gas field (tax) allowance will be included in the 2014 Finance Bill to incentivise investment in shale exploration.

These budget measures were broadly welcomed by the industry and the investor community. The UK Onshore Operators Group (UKOOG), the representative body for the UK onshore oil and gas industry, said that the “budget will help the industry take the next steps in assessing [the shale] resource”, whilst the “proposed taxation measure will be a catalyst for increasing UK drilling activity”.

Central to the UK government’s more joined-up shale gas policy is the Office of Unconventional Gas and Oil (OUGO), established in December 2012 within DECC. Led by Duarte Figuera, formerly head of offshore renewables at DECC, OUGO will be responsible for the promotion of “safe, responsible and environmentally sound recovery of the UK’s unconventional reserves of gas and oil”, and will spearhead the production of proposals for community benefit as outlined in the budget.

OUGO aims to work closely with the Treasury to ensure that developments in the taxation system and the regulatory and licensing regimes in support of unconventional oil and gas in the UK can function coherently.

Speaking in March, Secretary of State for Energy and Climate Change, Ed Davey, acknowledged that while “shale is not the silver bullet those seeking cheap energy wish for”, maximising the recovery of indigenous hydrocarbon resources can drive growth and economic activity. He added that, over time, shale has the potential to contribute significantly to the UK’s energy security.

These themes were developed further in the Energy and Climate Change Select Committee’s April 2013 report, The Impact of Shale Gas on Energy Markets, which considered a wide range of issues, including the geological prospects for shale gas in the UK, the above-ground factors which may influence the viability of UK shale gas operations, potential impacts on energy markets, and pricing and climate change mitigation.

The report makes a reasoned case for quickening the pace of exploration, together with government action on community benefit and in the areas of regulation, tax and environment, including climate change and carbon capture and storage. It reflects a clear frustration with the length of the UK shale gas moratorium, indicating that this has been detrimental not just to the speed of development, but also to public perception of the industry.

Adopting a less cautious approach to a number of these same issues, the Institute of Directors’ (IoD) report, Getting Shale Gas Working, published in May (and sponsored by Cuadrilla Resources), makes a strong economic case for proceeding without delay to explore for and develop the UK’s shale resource. The IoD estimates that the industry could generate £3.7bn ($5.5bn) in annual investment and support more than 70,000 jobs. 

However, the report does not downplay some commonly identified barriers to the development of shale gas in the UK, including regulatory, social and environmental issues, and takes a consistent line to such concerns raised by industry and more recently by the Energy and Climate Change Select Committee. It highlights, in the manner proposed in the March budget and elaborated in the select committee’s report, the need to develop a suitable structure to incentivise and compensate local authorities and communities.

Clearly, momentum is building in the UK for shale gas exploration, underpinned by what promises to be a relatively quick and coordinated governmental review of regulatory and legislative measures to meet the specific needs of shale gas exploration.  This is complemented by industry efforts, such as the release in February 2013 of UKOOG’s onshore shale gas well guidelines. Developed by operating and services companies, together with DECC, the Health and Safety Executive and the Environment Agency, the guidelines promote good industry practice for onshore shale gas exploration and appraisal operations, and include recommendations such as the public disclosure of fracking fluids, to  encourage increased community awareness and support.

With all these varied initiatives in play, 2013 may prove to be a tipping point for the start of meaningful UK shale gas exploration. Looking ahead, the British Geological Survey is expected to issue its DECC-sponsored report on the UK’s shale gas resource in the summer, an update on its 2010 report, which, it is anticipated, will show significantly increased potentially recoverable shale gas reserves, albeit with certain qualifications, and an understanding that substantial exploration activity must take place before meaningful reserves data can be produced.

Also to come is the UK’s 14th onshore licensing round, originally anticipated for summer, there is now speculation that the timeframe will be extended to allow for the implementation of measures outlined in this year’s budget.

Hamish McArdle, energy partner at Baker Botts LLP hamish.mcardle@bakerbotts.com

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