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.
Markets
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.
Conclusion
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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