Shale Gas

Memorandum submitted by IGas Energy (SG 07)

Executive Summary

· IGas Energy believes that shale gas could make a valuable contribution to the UK energy mix, assuming it can be shown to be commercial ly viable in the UK. The full extent of shale gas resources in the UK is currently unknown;

· Together with Coal Bed Methane (CBM), shale gas could have clear positive implications for UK energy security. The potential supply of hitherto untapped unconventional sources of gas (both CBM and shale) mean that the UK could be significantly more self-sufficient in terms of gas supply for longer than previously expected;

· Compared to other countries, the UK has the advantage of a clearer framework for the licensing and permitting of drilling for unconventional gas, both at the surface and sub-surface. Operators have a number of clear and well-understood obligations within a consistent and predictable regulatory framework. This requires operators to communicate their intentions early, to identify all HSE hazards and explain how these will be managed, and to obtain pre-approval for all significant activities;

· IGas Energy believes that the UK’s system of regulation governing unconventional gas exploration and extraction is more rigorous and effective than in many other countries; in particular because of the separation of responsibilities between the licensing authorities and the HSE, which occurred post Piper Alpha. There is also an added element of transparent control provided by the planning process;

· Shale gas (as distinct from CBM, which can be extracted without hydraulic fracturing) can only be extracted using complicated and extensive hydraulic fracturing techniques which use a mix of chemicals and which carry a degree of environmental risk. However, these risks are required to be identified and mitigated to the satisfaction of the Health and Safety Executive and, where appropriate, various Environmental agencies;

· Onshore unconventional gas supplies offer potential carbon savings relative to gas sourced offshore or from overseas.  This is due to closer proximity to customers and distribution networks and a less carbon intensive extraction process. In particular, shipping gas over distance consumes significant energy and thereby has an environmental impact of its own; Russian gas, even on conservative estimates, has a carbon footprint which is 30% greater than domestically produced gas.

1.
IGas Company Profile

1.1. IGas Energy (IGas) was set up in its current form in 2003 to produce and market domestic sourced gas from unconventional reservoirs, particularly coal bed methane (CBM). IGas is now producing gas from its pilot production site at Doe Green in Warrington and selling electricity through its on-site generation. This is a UK, and potentially European, first in terms of unconventional gas.

Coal Bed Methane

1.2. IGas is the largest independent CBM producer in the UK. Extraction of CBM involves drilling into virgin coal seams and removing the gas trapped therein. Like other forms of natural gas, this gas is used to provide both industrial and domestic power. IGas has ownership interests of between 20 and 100 per cent in eleven Petroleum Exploration Development Licences (PEDLs) in the UK, wholly owns two methane drainage licences and has a 75 per cent interest in three offshore blocks under one Seaward Petroleum Production Licence. These licences cover a gross area of approximately 1,756 km² across Cheshire, Yorkshire, Staffordshire and the North Wales coast. The mid-case estimate for gas initially in place (GIIP) in these holdings is 3,823 billion standard cubic feet of gas (bcf) (source: Equipoise Solutions Ltd), excluding any shale potential. Based on the contingent recoverable resource estimates prepared by DeGolyer and McNaughton, IGas has enough gas to supply electricity to over 7 per cent of UK households for 15 years.

1.3. IGas Energy remains on track to establish the UK’s first CBM commercial production site in 2011.

Shale Gas

1.4. Whilst IGas is currently focusing on developing its CBM resources, the company has identified a significant potential shale resource within its acreage which is estimated (on an unrisked basis) to comprise up to 1.9 trillion cubic feet of gas initially in place. IGas intends to conduct further work to better understand the potential of this shale resource.

1.5. That said, IGas is currently concentrating on extracting its CBM resource. E xtraction of CBM is less complicated, less impactf ul on the local environment, more targeted and, currently, more commercially viable than shale extraction. It is therefore IGas’ priority at this point in time.

2. What are the prospects for shale gas in the UK, and what are the risks of rapid depletion of shale gas resources?

2.1. IGas Energy believes that shale gas could make a valuable contribution to the UK energy mix, assuming it can be shown to be commercially viable in the UK. DECC has identified the Upper Bowland Shale of the Pennine Basin, the Kimmeridge Clay of the Weald Basin and the Lias of the Weald Basin as offering the best shale gas potential onshore in the UK [1] . IGas Energy’s shale acreage lies within its Point of Ayr license in the Cheshire Basin and consists of Holywell Shale (Upper Bowland Shale equivalent). This acreage extends over 1,195km ² , has an average thickness of 250m and has a high potential to be hydrocarbon bearing. These findings have led IGas Energy to retain independent consultants to evaluate the potential of these shales.

2.2. In 2010, Equipoise Solutions Ltd (acting on behalf of IGas Energy) undertook an independent review of the shale gas potential of Holywell shale within the Point of Ayr license. This is spread across the North West of England (predominantly Cheshire) and North Wales (off the coast to the north of Rhyl and Prestatyn). Estimates of GIIP aggregated over all of these interests indicate a low net total of 31 bcf shale gas, a middle net total of 412 bcf shale gas and a high net total of 1,945 bcf shale gas. These values assume that the Holywell shale is normally pressured. There is a possibility that part of the Holywell shale is actually over-pressured (although the company currently has no evidence of this). This would mean much higher gas content and higher initial production rates in those areas.

2.3. IGas intends to conduct a focussed programme of activity which will enable the Company to understand better the shale potential that is both contained within its acreage and complementary to its primary objective of commercial CBM delivery. The shale related activity would include 1) data acquisition (core/log data etc.); 2) core analysis (geochemistry/geomechanical); and 3) sponsorship of an M.Sc at a major UK University to further study the Holywell shale. The feasibility of further development of the shale potential in IGas’ acreage will depend on the outcome of these studies and experience elsewhere within the UK and Europe.

3. What are the implications of large discoveries of shale gas around the world for UK energy and climate change policy

3.1. It is broadly acknowledged that the discovery and subsequent extraction of unconventional gas in the United States played a major role in significantly reducing that country’s imports of liquefied natural gas and increasing its security of supply. Whilst we do not know the full extent of shale gas resources in the UK, it is likely that there is sufficient quantity to make a significant and substantive contribution to the UK energy mix. Uncovering such a sizeable untapped domestic resource could have clear positive implications for UK energy security.

3.2. Within the broader context of UK energy and climate change policy, the UK’s commitment to long-term development of renewable energy resources will demand new, low-carbon, flexible gas-fired power plants to compensate for the intermittency of wind generation. The potential supply of hitherto untapped unconventional sources of gas (including shale gas) mean that the UK could be more self-sufficient in terms of its gas supply for longer than previously expected. Given that the Government’s proposals for Electricity Market Reform are already geared towards meeting the UK’s EU emissions targets and managing the transition to renewable energy sources, there is arguably little impact on UK energy policy beyond the assurance and reduced cost of domestic energy security. Given that domestically sourced gas is generally cheaper than gas sourced overseas, it is reasonable to assume a positive impact in terms of the cost of energy to the consumer, which may have an impact on the necessity or otherwise of fuel poverty measures.

3.3. In order to encourage the investigation of the potential of this resource, there is a need to ensure a robust licensing and regulatory system that protects the public while maximising the rate of extraction. We believe that the system as it stands provides both sufficient oversight and sufficient incentive for the potential of the UK shale resource to be properly assessed in a safe and responsible manner.

3.4. Compared to other countries, the UK has the advantage of a clearer framework for the licensing and permitting of drilling for unconventional gas, both at the surface and sub-surface. DECC awards licences based on work programmes and competency to search for hydrocarbons. Well programmes are independently reviewed by HSE-approved third party well examiners and the HSE approves well programmes in line with their own health, safety and environmental requirements. For onshore wells, various approvals are required from a number of agencies specific to the chosen site. These include (but are not restricted to) local authorities, the Environment Agency, various conservation agencies, utility bodies, Network Rail and the Highways Agency. Operators have a number of clear and well-understood obligations within a consistent and predictable regulatory framework that assists both operators and interested parties to communicate their intentions and concerns in a constructive manner.

4. What are the risks and hazards associated with drilling for shale gas?

4.1. Shale gas (as distinct from CBM, which can be extracted without hydraulic fracturing) can only be extracted using complicated and extensive hydraulic fracturing techniques which use a mix of chemicals and which carry a degree of environmental risk. However, these risks are required to be identified and mitigated to the satisfaction of the independent HSE and, where appropriate, various environmental agencies.

4.2. Unlike other forms of gas extraction, the main safety issue associated with unconventional gas is not the risk of explosion – it is the protection of aquifers in proximity to the area of operation.  Where an aquifer lies in close proximity to a well, the relevant sections of the well would be encased in steel and cement in order to reinforce its integrity and to protect the aquifer completely.  As it is, shale in the UK typically lies significantly deeper than nearby aquifers, so any contamination risk in this respect is substantially reduced.

4.3. Whilst there have been claims of contamination of drinking water in the United States in recent months, these have been comprehensively rebutted by US natural gas producers. [2] In fact, there has never been a documented instance of water contamination caused by hydraulic fracturing. In 2010, the US Environmental Protection Agency announced that it was undertaking a new study [3] into the potential impact of hydraulic fracturing on drinking water, human health and the environment. It is due to report in 2012.

4.4. Safety and protection of the local environment remain the primary concerns of any responsible operator. In all drilling operations in the UK, operators are required to demonstrate their suitability to operate and their ability and commitment to give due regard to the safety of workers, communities and the local environment. Community relations in particular are a vital component of onshore activity, including in relation to the environment. IGas is committed to working broadly and closely with members of the public and community leaders in all of its areas of operation. Indeed, the well-developed nature of the planning process in the UK means that such relations are absolutely essential to operate effectively.

4.5. IGas Energy believes that the system of regulation governing unconventional gas exploration and extraction in the UK is more rigorous and effective than in many other countries. The UK system of regulation benefits greatly from its origins in the North Sea and the considerable experience of the UK authorities (particularly the independent HSE) in other industries. The onshore industry has also inherited the culture of safety that has pervaded the UK offshore oil and gas industry since the Piper Alpha disaster and the Cullen Report, whilst the separation of responsibilities between the licensing authorities and the HSE allows for more effective oversight than in other jurisdictions. There is an added element of transparent control provided by the planning process.

5. How does the carbon footprint of shale gas compare to other fossil fuels?

5.1. Onshore unconventional gas supplies, such as shale gas and coal based methane (CBM), offer potential carbon savings relative to gas sourced offshore or from overseas.  This is due to closer proximity of supplies to customers and distribution networks and a less carbon intensive extraction process. There will also be a subsequent carbon saving with respect to domestic gas as large volumes will not have to be transported through the transmission systems of Russia and Europe.  Shipping gas over distance consumes significant energy and thereby has an environmental impact of its own; Russian gas, even on conservative estimates, has a carbon footprint which is 30% greater than domestically produced gas.

5.2. Compared to other forms of unconventional gas, shale drilling is deeper and more complex than CBM and therefore imposes a heavier carbon footprint. CBM has the potential added benefit of future CCS application.

January 2011