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

9  Annex 1: note of informal meeting with BHP Billiton

Attraction of shale gas

Shale gas is the largest and most significant phenomenon in the oil and gas sector in recent history. There is a huge abundance of shale gas and it will have a worldwide impact. We now have twice the oil and gas reserves we thought we had. It is a 'game changer' and as a result dependable low cost fuel is available where it wasn't before. It's going to reverse production declines in oil and gas. The US is heading toward self-sufficiency and could be producing over 10 million barrels of oil equivalent a day in the next 5 years.

Regulatory regime

The regulatory regime in the US is stringent but reasonable and reliable. It is similar to the regulatory regime in the UK's North Sea which has a high level of confidence. There is a "let's get it done" approach. The regulations outline specific standards for drilling and reporting requirements. These are backed up by spot checks. Air emissions are also regulated in a tightly permitted way. Most companies in the US appreciate that this tough regime is in place but once we are satisfactorily within the constraints of the regulations we are free to proceed. The regulatory regime allows you to proceed with developing your assets.

The regulatory regime has the same basic requirements across all states. The Federal government has primary oversight responsibility for air emissions and chemical usage. Their intent is to create transparency which allows informed stakeholders' acceptance.

Relationship between company and landowner

In the US, the landowner generally owns all the minerals under their land. In order to access the shale gas we lease the land from the landowner. We pay the landowner a royalty for the shale gas we extract. Royalties can be the biggest deduction from revenue and can range from 10-25 percent - reflecting the quality of the mineral rights.

The lease agreement also usually contains provisions on how we will use and leave the land during and after operations. We aim to have minimal impact on the land and agree to restore the land to its original state once operations have finished. The footprint of shale gas is, therefore, very small.

Fiscal regime

With regards to the fiscal regime in the US, there is no cap on revenue unlike some countries. If gas prices double, we get the benefit along with the royalty owner. If they half, we bear the investment risk. The biggest deduction to our profit goes to the landowner (see above). There is a small State related tax (between 2-5 per cent of revenue). There is also a federal corporation tax (between 30-35 per cent).

There has never been an additional tax incentive other than what has been described above. There has been no real tax incentives related to shale gas directly. The only role of the Federal government has been to develop a regulatory framework and let the industry invest and conduct its own research. The amount of research going into shale gas is phenomenal. There is "space age" amounts of research going into shale gas in the US every day.

Technical developments

Hydraulic fracturing technology has existed for a long time. Over this period we have seen incremental improvements in the technology. 20 years ago we were able to slant the drill. Now we can drill horizontally in any direction. The development of horizontal drilling and being able to place it with increasing accuracy and precision has enabled us to take advantage of shale gas. In fact, it has seen a quantum leap regarding the economic viability of the shale gas industry. For example, we used to have to move a rig to another location, which can take several days. Today, on multi well pads, we can move a rig in a matter of hours and begin directional drilling from the same site.

The learning and development of shale gas exploration and extraction experienced in the US will accelerate the development of shale gas industries in other countries. Exploration, however, still takes time because all wells are a little different. The first well is likely to be poor, the second a little better and the hundredth brilliant. This could be part of what we have seen with ExxonMobil in Poland - lots of drilling is needed to build an accurate picture.


The price of gas has fallen in America as a result of the shale gas revolution. We do assess and adjust to ensure our investment decisions are appropriate. However, because gas has displaced coal in the US and there has been up take of the petrochemical industry we are confident that demand for gas will increase over time.

Moreover, most shale gas operations also produce liquids. A lot of our wells produce equal amounts of gas and liquid. For example, we are producing 1000 barrels of oil a day off of just two wells. There is a substantial amount of liquids production. These liquids are more valuable and so allows associated shale gas production to stay economic. Oil is produced in exactly the same way as gas. Most of the shale production, however, was not in the US 5-7 years ago.

Further investment

There will be further investments in shale gas. People are going to be drilling for shale gas for at least the next 50 years. Our great-grandchildren will be drilling for shale gas. This is indicated by the major oil and gas companies interest in shale gas. ExxonMobil is looking at every major shale play. Shell is following suit. The reason is the hydrocarbons are there and prospects for extracting them are constantly improving. Every year the industry is a little better, producing a little more and is becoming a little more efficient. Yes, not only BHP Billiton but the entire industry will be pushing forward.

Social impacts

The social piece is a huge component and constitutes a large part of the US onshore shale gas business. The powerful benefits of the shale gas industry cannot override confidence and citizen acceptance and we work very hard to make sure that our operations are safe.

Geology is just the start. When we lease the land in the United States from landowners who also own the minerals (see above), they are our partners and they have a share in the profits. They want us there as a result. Most of the areas we work in are sparsely populated. In some cases there are "more cows that people". Despite this the impacts of shale development on people living in the area is the biggest thing that we deal with.

In terms of ground water, there has been no substantiated damage. There have been claims. But there is concrete and steel to protect the ground water and all of it is subject to regulation. If there are problems it will be because of the same techniques used to extract conventional oil and gas, not because of hydraulic fracturing.

People have concerns about seismic activity. What happens is that there are stresses in the rock and they try to move. This is normal seismic activity but if we put lubricants across the existing faults that helps it to move. We have learnt that when this occurs we are able to understand where the fault is and we move away from the area. It is the disposal of produced waste water deep into permitted disposal wells that is the main issue in the US, not the fracturing. Moving away from fault areas and removing the lubricant takes this problem away. We are now putting sensors on these wells and so we are able to monitor the activity and get forewarning. It's real and therefore an important social concern and something we worry about a lot but as such we are learning to manage around it.

The most serious problem is injury in the work place. The shale gas industry is less mature than the conventional gas industry. The number of people which work in the sector is an order of magnitude larger. As a result we have more vehicle incidents than anything else. The rigs have 65 different pieces of equipment and the only way to construct them and disassemble them is with people. The large volume of moving parts and a larger proportion of less experienced workers means that as an industry, shale gas development can be less safe than, for example, the conventional offshore oil and gas industry. Unfortunately, sometimes people are hurt and sometimes killed. This situation is unacceptable, and the very best companies like us are making huge inroads daily to making it safer. We recognize this is part of our social obligations and today our company is already performing far above the industry average. So quickly we are gaining confidence that it will get as good as it is offshore.

Despite some of these negative aspects, it is important to remember that everyone in the US is benefiting from the shale gas revolution. In the US, we have met our Kyoto targets, despite never signing the agreement; due to coal consumption being replaced by natural gas. We have created a million highly skilled jobs with a long career ahead of them. We also hire people and support local communities.

In Europe, the social environment is different. In the US, our 45 rigs can go wherever they want and there is no one lying in front of the rig. In Europe it is different. They will have to prove to the average citizen and governments that there is an abundance and that the processes which allow it to be extracted are safe.

Game changer in EU?

In the US we are discovering new things about shale gas continually. The Haynesville Bossier, for example, was not known about 5 years ago. Today, however, one shale play (Bakken) produces more oil than 3 OPEC countries combined. Knowledge about how much oil & gas is in the ground is becoming better understood and is continually changing on a monthly basis. This is because you have to actually drill in order to understand not only how much oil & gas is in the ground but how much is possible to get out. Shale plays require drilling, delineating and then testing their production capability in order to understand how much there is.

The US map of shale basins has developed over time as drilling has taken place and they have been able to develop an increasingly accurate picture of how much shale oil & gas there is. In Europe, however, because so little drilling has taken place it is still unknown how much shale gas there is. Caudrilla's project, for example, is an early view of the American experience. It will take years and years to develop it. American shale plays have thousands of wells and have been delineated over time. All of this would have to happen in the UK and EU.


Progress is made in the US shale gas industry every day. We are living it every day and we can do it right. There is, however, an enormous responsibility on the government to make sure that the framework is right and can be relied upon for long term investments. We spend a lot of time every day working on the various issues around shale. If the proper framework is there we can do it safely and do it well. Social, technical and economic parts of the industry have and will continue to move forward.

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© Parliamentary copyright 2013
Prepared 26 April 2013