The Impact of Shale Gas on Energy Markets - Energy and Climate Change Contents


4  Developing shale gas in the UK

30.  In addition to below-ground factors (see chapter 3) there are also a number of above-ground factors which will be critical to determining how much shale gas can be recovered.

Public perception

31.  Public acceptance of the shale gas industry will be key to ensuring its success in the UK. To date, there has been public concern over, and local opposition to, shale gas developments. Mr Taylor of the Institute of Directors, for example, suggested that, "community concerns around shale gas are probably the No. 1 issue that needs addressing."[84] The Socité Générale highlighted that the shale gas industry needs a "social licence" to operate.[85] This is something Cuadrilla, which started drilling in Lancashire in 2010, has already had to address. Cuadrilla was responsible for triggering a small earth tremor in 2011 which caused concern.[86] A small number of opinion polls have shown that the UK public is more in favour of certain renewable energy technologies than shale gas.[87]We concluded in our previous report that:

"We conclude that hydraulic fracturing itself does not pose a direct risk to water aquifers, provided that the well-casing is intact before this commences. Rather, any risks that do arise are related to the integrity of the well, and are no different to issues encountered when exploring for hydrocarbons in conventional geological formations." [88]

32.  Part of the problem, according to Professor Anderson of the Tyndall Centre, is that there is a lot of uncertainty about how the industry will develop and what this will mean for the communities which live in close proximity to it.[89] Professor Anderson suggested that there was a need to be "absolutely candid and direct" with the public about what the shale gas industry is likely to entail.[90] He suggested that the public might not believe industry descriptions of what shale gas might mean for the community because the industry has a vested interested in promoting it.[91] DECC has established an Office of Unconventional Gas and Oil, which the Minister told us would play a role in, "dispelling some of the myths [...] in countering misassumptions and misinformation.".[92] If the Office is perceived to be acting as both regulator and promoter of the industry (see Regulation section below), however, it is unlikely to be trusted.

Community engagement

33.  One way the shale gas industry is trying to minimise some of these potential issues is through effective community engagement. Witnesses representing companies with interests in different energy technologies highlighted their experience of, the benefits of community engagement. Mr Spence of EDF Energy, for example, explained the importance of early consultation, getting the facts out about what the proposals are, what the impacts are and what it might mean for the community. He also suggested that a developer should be willing to listen, make changes and respond to concerns. [93] Mr Parsons of National Grid said that they were proactive in engaging with communities and special interest groups to try to take their views on board all the way through the life cycle of a project.[94] The Minister told the Committee that he expected businesses to play a full role in community engagement.[95] Lessons from Hinkley C nuclear power station, which some of the Committee visited and which are outlined in our report, Building New Nuclear: the challenges ahead, suggested, however, that business engagement with the community was sometimes lacking and needed to be improved.[96]

34.  One key to community acceptance will be a robust factual response by government to scare stories. The other key to ensuring public acceptance of the shale gas industry is community engagement. Engagement should be early and businesses need to be able to demonstrate that they are both listening and responding to community concerns. The Government should consider whether it would be appropriate for the new Office of Unconventional Gas and Oil to provide advice and support to local communities living near potential shale gas developments, taking into account the need to address perceptions that the Office may be too closely linked to industry.

Community benefit

35.  In addition to community engagement there was strong agreement that communities affected by development should receive some tangible benefits.[97] An analogy was drawn between shale gas and onshore wind where community benefits schemes have been explored as a way of reducing local opposition.[98] Dis-benefits relating to shale gas could include; visual and noise intrusion, impact of lorries travelling to and from shale gas sites. In the US, it is generally the case that mineral rights belong to the landowner. The company then pays the landowner a royalty for the shale gas they extract. Mr Yeager of BHP Billiton told us that landowners are, "our partners and they have a share in the profits.".[99] These contracts between landowner and shale gas company also contain provisions on how the company will leave the land once operations have ceased.[100] There is, therefore, a big incentive for the landowner to allow shale gas operations on their land.

36.  In the UK, mineral rights belong to the Crown. Transferring mineral rights for shale gas from the Crown to the landowner, even for a short time would be according to the Minister an, "extremely radical change."[101] He added that, "it would not be reasonable to see the community as the landowner. We have to take a rather more permissive view of benefit".[102] Mr Crotty of INEOS Olefins & Polymers Europe suggested that as a result the industry in the UK needed to go the "extra mile."[103] This included going beyond what would be required by way of compensation under the planning system.[104] Mr Taylor of the Institute of Directors said:

"One other aspect that would be useful is being able to provide tangible benefits to communities that have shale-gas wells in their neighbourhood, whether that is through lower gas bills or some other mechanism, such as local amenities—some way that communities can get compensated for the disturbance from the development.".[105]

The Minister suggested that DECC was looking at the association between infrastructure investment and community benefit and that, "it would be inconsistent if we did not do so in respect of shale gas.".[106] The Chancellor, Rt Hon George Osbourne, confirmed in the budget his intention to, "develop proposals by summer 2013 to ensure that local communities will benefit from shale gas projects in their area".

37.  Communities who are affected by shale gas development should expect to receive, and share in, some of the benefits of the development. We support the Government's intention to ensure that local communities will benefit from shale gas projects in their area. We recommend that the Government explores ways of sharing substantial material benefits with local communities. In the same vein as the recommendation in our Building New Nuclear report, one option the Government could consider is extending the scope of its proposal to allow local authorities hosting renewable energy projects to retain business rates to include shale gas developments. A mechanism for sharing substantial material benefits with local communities should be ready to be offered to communities in time to encourage them to take a positive view of the prospect of commercial shale gas operations beginning in their locality.

Regulation

38.  The UK is still in the very early stages of developing a shale gas industry. With only a few wells drilled so far, the exploration phase has barely even begun. Nevertheless, earth tremors at Cuadrilla's site in Lancashire, combined with suggestions of environmental damage including waste water contamination from the US and concern over the types of chemicals used in fracking has fuelled concern around the possible environmental impacts of the industry. In addition to our conclusions on the construction of wells, in our previous shale gas report we concluded that some of these concerns including, for example, the amount of water used in fracking operations were warranted and needed to be managed carefully. On balance, however, we concluded that an effective regulatory regime could be established and that a moratorium on shale gas exploration was not justified.[107] Since then the 2012 Royal Society report, Shale Gas Extraction in the UK, said:

"The health, safety and environmental risks associated with hydraulic fracturing (often termed 'fracking') as a means to extract shale gas can be managed effectively in the UK as long as operational best practices are implemented and enforced through regulation.". [108]

Ensuring effective regulation of the shale gas industry as it develops - which will prevent environmental damage and minimise disruption to local communities - is critical to ensuring public confidence in the industry. We welcome the recent publication of the UK Onshore Operators Group, UK Onshore Shale Gas Well Guidelines[109], which we believe provides some evidence that the industry is seeking to keep its house in order.

39.  In the US, the regulatory regime varies between States making it difficult to generalise. Regulations which apply across all States are concerned with air emissions and chemical usage. Mr Yeager of BHP Billiton suggested that their intent was to create a level of transparency which led to 'public acceptance'.[110] ExxonMobil also highlighted how the industry in the US had responded to public concerns over the chemical additives to fracturing fluids by voluntarily submitting data to the www.fracfocus.org national online registry.[111] Mr Yeager told us, however, that even though there was a tough regime in place which was similar to that applying to the UK's North Sea operations and which has a high level of confidence, "once we are satisfactorily within the constraints of the regulations we are free to proceed" and that this approach "allows you to proceed with developing your assets." The regulatory regime is therefore stringent but reasonable and has been described as having a "let's get it done" approach. [112]

40.  Cuadrilla, a shale gas company which has direct experience with the current regulatory regime in the UK, has stated its belief that the regulation is "effective and everything is covered."[113] Mr Egan of Cuadrilla told us that "the UK is widely recognised in the oil and gas industry as having the strongest regulatory system."[114] Cuadrilla believed, however, that there was room for improvement. Mr Egan was keen to emphasise that he was not looking for "radical change" but that there was some overlap between regulatory agencies such as the Environment Agency and the Health and Safety Executive (HSE) especially in terms of environmental impact assessments which could be streamlined.[115] Others were less confident believing that it was too early to conclude whether the regulation was "going to be up to it."[116] Professor Anderson of the Tyndall Centre said that it will be a, "learning by doing approach to ensure the regulation is appropriate."[117]

41.  According to the Government the new Office for Unconventional Gas and Oil will work with Defra and other Government Departments, join up responsibilities across Government, provide a single point of contact for investors and ensure a simplified and streamlined regulatory process. [118] However, the Minister reassured us that the normal planning rules would continue to apply and the new Office would not supersede the legal responsibilities of the Environment Agency or the HSE.[119] The Minister explained that the Office would play a coordinating role, giving coherence to the Government's strategy and providing consistency in its approach to the subject of shale gas. It would also bring together safety and security measures and would engage with industry to ensure that these were achieved.[120]

42.  Some environmental organisations were concerned that this new Office would act as both a regulator and promoter of the shale gas industry. Professor Anderson felt it was "the fox looking after the chickens" and that "few people would suggest that is wise."[121] Responding to these criticisms the Minister stated that he was confident there would be no conflict of interest and was unapologetic about the Office engaging with the industry arguing that it was an important factor in ensuring effective regulation.[122] Mr Egan of Cuadrilla, however, suggest that it was something which "needs to be managed carefully. Promotion and regulation [...] are two different things."[123] The Chancellor confirmed in the Budget that the Government will, "provide detail of the objectives, remit and responsibilities of the Office of Unconventional Gas and Oil."

43.  We welcome the Government's attempts to minimise the regulatory burden on companies by streamlining processes and avoiding duplication where possible. However, robust regulation of the sector in order to protect the environment and ensure the health and safety of workers is absolutely essential in itself as well as to ensure that the shale gas industry is to be accepted by the general public. We recommend that the Government maintains the highest standards of protection in environment and health and safety procedures. When the Government provides detail of the objectives, remit and responsibilities of the Office of Unconventional Gas and Oil should include clear lines of accountability to a single Minister responsible for the Office. The Government must also demonstrate how it intends to avoid any potential conflict of interest arising from the different roles of the Office.

Tax

44.  Taxation is a key factor in determining whether a shale gas industry will develop. Professor Bradshaw of the UK Energy Research Centre (UKERC) suggested, for example, that the fiscal regime determines whether industry will be willing to make the investment in exploration, as well as commercial scale extraction.[124] In the US, the tax regime is according to Mr Tiley of Shell, "generally friendly to the industry".[125] However, it is difficult to make generalisations because tax is split between the Federal Government and individual States. In the past the US Federal Government offered tax credits that applied to certain unconventional fuels including for a time natural gas produced from, among other things, "... Devonian[126] shale, coal seams, or a tight formation..." which were designed to incentivise the development of these resources.[127] However, it is not clear whether they played any significant part in the development of the shale gas industry. They were in any case abandoned in 2008. [128] The shale gas industry in the US now generates a significant amount of public revenue. In 2011, a report from IHS Global Insight highlighted that in 2010 shale gas production contributed about $19 billion in federal, state and local government tax and federal royalty revenues. By 2035, these receipts were estimated to more than triple to just over $57 billion.[129]

45.  It is currently unclear how shale gas will be taxed in the UK. Professor Stevens of Chatham House told us that, "shale gas is excluded from the normal petroleum regulations. It is in a world of its own, and until the fiscal system and the regulations begin to catch up, it is not clear to me what the fiscal system for shale gas would be."[130] DECC stated that, "the Treasury has made no recent estimate of potential tax revenues from shale gas."[131] The Government has, however, indicated that the tax regime for shale gas should be designed to encourage the development of the industry.[132] The 2012 Autumn Statement and the Gas Generation Strategy confirmed that a new tax regime was currently being developed in consultation with industry. DECC has said that it will "support new ways of tapping our indigenous resources" by engaging with, "companies to develop a targeted tax regime for any future shale gas industry."[133] The Chancellor confirmed in the Budget that he intended to:

"introduce a new shale gas field allowance and extend the ring-fence expenditure supplement from six to ten years for shale gas projects to promote investment in this industry at an early stage of its development."

46.  If the shale gas industry develops, the energy intensive sector believes the tax revenue could have "profound impacts for the UK economy" which "would include bolstering Government income through the collection of additional tax and mineral rights revenues.".[134] Cuadrilla similarly highlighted that shale gas will create, "substantial tax revenues for the Treasury".[135] Mr Egan of Cuadrilla suggested that any new tax regime should recognise, "both the potential of the industry but also the stage it is at." He suggested that the UK is on the verge of potentially developing a significant new shale gas industry and, "if allowed to grow up into a tax-paying adult, it will pay a lot of tax, but it is in its infancy and there is a concern that that infant could be strangled at birth.".[136]

47.  The Government should make an assessment of whether these tax breaks will continue to be required during commercialisation.


84   Q 109 [Mr Taylor] Back

85   Ev 81 Back

86   Ev 68 Back

87   Qq 173-174 Back

88   Energy and Climate Change Committee, Fifth Report of Session 2010-12, Shale Gas, HC 795, para 113 Back

89   Qq 177-179 Back

90   Q 175 Back

91   Q 176 Back

92   Q 329 Back

93   Q 234 [Mr Spence] Back

94   Q 234 [Mr Parsons] Back

95   Q 324 Back

96   Energy and Climate Change Committee, Sixth Report of Session 2012-13, Building New Nuclear: the challenges ahead, HC 117, para 71-82 Back

97   Q 109 [Mr Taylor]; Ev w49 Back

98   Q 110 [Mr Egan; Mr Taylor] Back

99   Annex 1: note of informal meeting with BHP Billiton Back

100   Annex 1: note of informal meeting with BHP Billiton Back

101   Q 327 Back

102   Q 331 Back

103   Q 235  Back

104   Q 234 [Mr Spence] Back

105   Q 109 [Mr Taylor] Back

106   Q 325 Back

107   Energy and Climate Change Committee, Fifth Report of Session 2010-12, Shale Gas, HC 795, para 17 Back

108   The Royal Society and The Royal Academy of Engineering, Shale gas extraction in the UK: a review of hydraulic fracturing, June 2012, www.royalsociety.org/ Back

109   United Kingdom Onshore Operators Group, UK Onshore Shale Gas Well Guidelines: Exploration and appraisal phase, February 2013, www.ukoog.org.uk Back

110   Annex 1: note of informal meeting with BHP Billiton Back

111   Ev w20 Back

112   Annex 1: note of informal meeting with BHP Billiton Back

113   Q 109 [Mr Egan] Back

114   Q 109 [Mr Egan] Back

115   Q 112  Back

116   Q 167 [Mr Bosworth] Back

117   Q 167 [Professor Anderson] Back

118   Department for Energy and Climate Change, Gas Generation Strategy, December 2012, p 57 Back

119   Q 283; Q 328 Back

120   Qq 280-281 Back

121   Q 196 [Professor Anderson] Back

122   Q2 281-282 Back

123   Q 114 Back

124   Q 69 [Professor Bradshaw] Back

125   Q 131 [Mr Tiley] Back

126   Devonian refers to rocks formed during the Devonian period of geologic time (approximately 350 million years ago). Back

127   Q 70; Ev w20; Congressional Research Service, Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures, 7 May 2010, www.crs.gov  Back

128   Congressional Research Service, Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures, 7 May 2010, www.crs.gov Back

129   Q132 [Mr Taylor]; Ev w20 Back

130   Q68 Back

131   Ev 72 Back

132   Q 285; Ev 72 Back

133   Annual Energy Statement, DECC, November 2012  Back

134   Ev w1 Back

135   Ev 68 Back

136   Q 127 Back


 
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Prepared 26 April 2013