House of Lords - The Economic Impact on UK Energy Policy of Shale Gas and Oil

The Economic Impact on UK Energy Policy of Shale Gas and Oil - Economic Affairs Committee Contents

Chapter 4: Shale gas in the UK

General

52. There is nothing new about producing hydrocarbons from the United Kingdom's extensive shale deposits, as the history of the 19th century Scottish shale oil industry shows. It petered out in the 1950s because it could no longer compete in the market. There was no commercial interest in shale gas or oil because there was no technology to exploit it effectively. The picture was transformed by the shale gas revolution in the US and its spectacular success in producing abundant, cheap shale gas and oil by horizontal drilling and hydraulic fracturing. The US experience rekindled interest in the economic potential of shale in the UK.

Differences between the US and the UK

53. Shale gas development in the UK is likely in some ways to be similar to the US experience: for example concerns on environmental impact. There are also many differences of geography, experience, supply chain, regulation and public attitudes between the two countries.

Resource

54. Professor MacKay, Chief Scientific Adviser, DECC, told us "you can fit the entire United Kingdom in the Marcellus shale area in the USA alone."[88] Professor Richard Davies told us however, "the [UK] shale is … much thicker than US shales, so perhaps we will see that some of the UK wells produce more gas than the ones in the United States."[89]

55. In June 2013, the US Energy Information Administration (EIA) estimated the US's technically recoverable shale gas resources as 665 trillion cubic feet (tcf).[90] It also quoted an alternative estimate by Advanced Resources International (ARI), an energy consultancy, of 1,161 tcf.[91] (The EIA explain that technically recoverable resources represent the volumes which could be produced with current technology, irrespective of prices or production costs).

56. There is only one current figure for the UK's shale resource, the British Geological Survey's (BGS) central estimate of 1300tcf gas in the ground in the Bowland shale basin.[92] Forthcoming studies may add to it. There are not yet estimates of how much might be technically recoverable. Although the UK's shale resource may be smaller than in the US, it is nevertheless likely to be substantial, especially if thicker shale deposits in the UK produce more gas from a given area.

Population density

57. Mr Wright told us that in the US, fracking was accepted even in densely populated areas: "fracturing in densely populated urban areas and remote wilderness areas was not problematic". He recalled "fracturing over a dozen wells in Beverly Hills and nearby Los Angeles."[93] In the narrow confines of the UK, there is more public concern and resistance. Mr Atherton said that in the UK, "It is the local issues that are holding it up and the fear that the companies have."[94] We consider public acceptability of fracking in the UK more fully from paragraph 77 below.

Experience

58. The UK is a major offshore oil and gas producer in the North Sea. Wytch Farm in Dorset is Western Europe's largest onshore oilfield and has produced successfully for decades in an area of outstanding natural beauty without arousing controversy. The US nevertheless has far more experience of onshore oil and gas exploration and production. According to Bloomberg "the vast majority of high-horsepower rigs and pressure pumping systems needed to frack are in North America."[95] Professor Muller said, "The UK and China has this enormous advantage that that you can now build on our … 15 years of horizontal drilling, multi-stage fracking in the US."[96] Mr Andrew Austin, CEO of IGas Energy, did not see any barrier to the successful development of the necessary supply chain, "if we can give them the confidence from early results we will get the supply chain to follow."[97]

Regulation

59. The regulatory framework in the US and the UK is radically different. Professor Muller told us that in the US, "there are no national regulations on fracking. There are state regulations".[98] In the UK, by contrast, there is national regulation by several Government departments and agencies as well as local authority planning controls. We heard evidence that the UK's regulation is more rigorous than that of the US. But, Wytch Farm apart, the UK's system has not been tested by widespread onshore exploration and production. In the UK the EU dimension to regulation could cause more uncertainty and complication. We examine the UK's regulatory framework in Chapter 8 below.

Ownership of petroleum rights and permissions to drill

60. In the US landowners own subsurface mineral rights. Operators therefore have to negotiate permission from the landowner to drill for and extract petroleum. Mr Peter Hughes of Peter Hughes Energy Advisory told us "Individuals and landowners are incentivised not to stand in the way of this because they own mineral rights. A lot of people in the US have made an awful lot of money by virtue of owning land under which there was considerable shale gas."[99] Mr Wright said "it helps enormously that [US] landowners own those royalty rights".[100] None of our witnesses cited recalcitrance on the part of US landowners as an obstacle to exploitation of shale gas and oil. The speed and scale of the industry's development in the US suggests that any opposition by landowners has been limited.

61. In the UK, the owner of the surface of land is also the owner of the strata beneath it, including any minerals present unless common law or statute has vested ownership of these in someone else.[101] Parliament, however, granted ownership of all subterranean petroleum to the Crown in 1934.[102] Operators are therefore required to obtain a licence from the Government to search for and produce gas and oil.[103] The Supreme Court recently held in Star Energy v Bocardo that an operator would be committing a trespass unless he had also received permission from the landowner to drill underneath his land.[104] Rt Hon Owen Paterson MP, Secretary of State for the Environment, told us "Coal seams run under land owned by a whole range of landowners … I do not see why we cannot, with a bit of wit and good will, come to a similar arrangement for shale."[105]

62. We would expect that an operator in the UK would normally secure a landowner's permission to drill under his land in return for a payment, as in the US. If a landowner in the UK refuses permission to drill underneath his land, operators can acquire rights compulsorily using a rarely used procedure[106] in the Mines (Working Facilities and Support) Act 1966. This requires the operator to apply to the responsible Minister for a referral to the High Court which will assess the claim and if granted, determine compensation for the landowner. The Supreme Court in Star Energy v Bocardo determined that such compensation would be nominal as drilling deep beneath land would not be regarded "as an interference with any actual existing right or as involving any loss of amenity value or at any rate not such an interference as required more than essentially nominal compensation."[107] The landowner in Star Energy v Bocardo was awarded £1000.

63. In October 2013, Greenpeace launched a campaign to encourage landowners close to possible drilling sites to state explicitly that they would not allow hydraulic fracturing under their land.[108] They called this a "legal block": without permission, "fracking companies would be acting unlawfully if they were to drill under your home."[109] Operators could, however, use the procedure described above compulsorily to obtain rights (with nominal compensation), though after delay and costs incurred while permissions were sought from the High Court.

64. In April 2014 it was reported that the Government might put forward in the Queen's Speech changes to the law of trespass to allow operators to exploit gas reserves under privately-owned land even if the owners object.[110] We recommend that the Government should amend relevant legislation to ensure that subsurface drilling for oil and gas can go ahead without undue delay or cost. This change should ensure that the fact that UK landowners do not own petroleum rights makes little difference to the speed of shale gas and oil development; in practice, it may even make subsurface drilling under third party land easier in the UK than it is in the US.

The UK's shale resource

65. Terms used include:

· resource, or total resource, or gas-in-place (GIP) refer to the volume of gas trapped in shale rock; the British Geological Survey uses this measure;

· technically recoverable resources are the estimated volume of gas that can be extracted; US agencies use this measure;

· reserves are the part of the resource deemed to be commercially ( or economically) recoverable; this is the measure of most interest to industry.

66. DECC has commissioned studies by the British Geological Survey (BGS) of shale deposits in "prospective" areas (those thought most likely to contain shale gas and oil resources). Studies by the BGS of the Bowland-Hodder shale, roughly the area between Nottingham and Scarborough in the east and Wrexham and Lancaster in the west, were published in 2010 and in July 2013.[111] The BGS's central estimate is of 1300tcf gas in place. Professor Mike Stephenson told us:

"there are parts of Britain where there is no point in [carrying out a survey] because there is simply no shale. There are other areas where it is worth a look: the Weald … is being done at the moment … The intention is to look at the central lowlands of Scotland after that … it is sensible to concentrate in the areas that have the most potential."[112]

The Scottish Government last year launched a consultation document on planning policy.[113] It has convened an Independent Expert Scientific Panel on unconventional oil and gas to provide a base for further policy development.[114] Figure 9 shows the principal shale-bearing areas of the UK being assessed by the BGS. As this report went to print, it was expected that BGS and DECC would soon publish a report on the shale gas and oil resource in the Weald basin.

FIGURE 9

The UK's Principal Shale-Bearing Areas

Source: DECC, February 2014

This map shows the three areas where the BGS has undertaken studies on behalf of DECC to estimate the shale gas resource:
·  Bowland-Hodder—completed, report published July 2013
·  Weald Basin—publication expected shortly
·  Midland Valley of Scotland—in progress

67. The UK may also have substantial resources of shale gas offshore. Mr Richard Sarsfield-Hall of Poyry told us that "there is a great potential offshore that has not really been investigated."[115] Mr Figueira said that "the costs of offshore shale development are of an order of magnitude significantly above those onshore. That has generally been the reason why we have not pursued that as a priority."[116] It was however reported in February 2014 that DECC had awarded licences for exploration in the Irish Sea to Nebula Resources. Dr Chris Cornelius of Nebula was reported as believing that a considerable quantity of gas was in place: "Is any of that exploitable? That's the billion dollar question and we won't know that for many years."[117]

68. There may also be some scope to exploit offshore shale gas by horizontal drilling from the shore. Professor Alan Riley of City University said "we may be able to do inshore drilling from the shore outwards quite significantly."[118]

Resource estimates

69. Professor Riley said "we just do not know the scale of the resource base."[119] Mr John Williams of Poyry said "Until there is more evidence … the jury is out."[120] BGS estimates for the Weald and central Scotland, not yet known, are likely to add to the 1300tcf estimated for Bowland, as might offshore gas resources. The Weald may also have natural gas liquids or shale oil. Ms Toni Harvey (DECC) told us that "The experience from America is that every shale play is different and that it varies dramatically from basin to basin".[121] The Weald was "likely to be mostly [shale oil] liquids."[122] Meanwhile initial studies of UK rocks by geologists at Imperial College have produced encouraging results. According to a report in the New Scientist, "A study of 200 samples from shale rock formations throughout England suggest that they contain as much oil and gas per cubic metre as rocks under the North Sea once did."[123] Project leader Alastair Fraser from Imperial College is quoted as saying, "The onshore shales are rich enough in organic material and have the right petrology for hydraulic fracturing."[124]

Economically recoverable reserves

70. With estimates of the UK's shale gas resource still incomplete, and little or no exploratory drilling and appraisal yet undertaken, there are no well-grounded assessments of economically recoverable reserves of shale gas. Most guesses seem to take as their starting point the central BGS resource estimate of 1300tcf in the Bowland basin and extrapolate drawing on experience in the US. A widely held assumption is that about 10%, or 130tcf, or more, of the Bowland resource might be economically recoverable, equivalent to between 40 and 50 years of UK gas consumption. Mr Philip Lambert of Lambert Energy Advisory said "[if] you take 10% recovery, that is 130tcf … so we are talking about something … that could be as big as the North Sea."[125] Mr Wright was more upbeat: "My guess would be 10% to 20%, but it could be much higher."[126] Estimates from the North Sea and other oil and gas provinces have typically grown once production is underway. If 130tcf were economically recoverable, there would be a substantial impact on the UK's energy mix.

71. Only exploratory drilling can tell what the recoverable reserves really are. The Minister for Energy said "we know that there is a lot more of it down there than we thought, but we do not know whether it can be extracted to the same volume and at the same cost as it has been extracted in the States. That is why we need to get on and encourage the industry to drill."[127]

72. Once a drilling programme has taken place, operators would need to carry out detailed appraisal to test costs. Mr Atherton said

"Where we need to get to … is the position where we know it is commercial. If we can bring [shale gas] to market at about $8 per MMBtu, it is a very commercially viable industry. If it is going to take $15 to bring it to market, then it is not viable until the world gas price goes to $20. So let us find out whether we can bring it to market at $8 or $15."[128]

73. On the available evidence, there may well be potential for economic development of shale gas in the UK. Estimates of the UK's total onshore shale gas resource are however still incomplete and it is impossible to tell how much of the resource can be economically recovered until exploratory wells are drilled and appraised. It is vital that we get on with it.

Timescale

74. Permits and planning permission must be granted before exploration or production can take place. Mr Atherton said "they have to drill 20 to 30 wells just to know what the producibility of the Bowland and other UK shale formations are. On the current timetable that is likely to take a very long time; we are into 2020/2025."[129] He added: "From an engineering and finance perspective, that can be done within three years very straightforwardly. What is stopping it is due process and political will".[130] Mr Fallon said "the next stage … is the drilling of … some 20 to 40 exploratory wells over the next couple of years … we have been doing everything we can to encourage it."[131] Mr Figueira said the industry "would certainly expect production to start before the end of the decade, but to be at scale in the early 2020s."[132] The evidence we heard suggests that large-scale production of onshore shale gas in the UK is unlikely before the next decade unless effective and immediate action is taken to bring forward exploration and appraisal.

The snail's pace of exploration

75. Ministers are keen for exploration to go ahead. The Chancellor of the Exchequer told us "we want to see exploratory drilling, and my hope is that commercial drilling will follow."[133] The Minister for Energy said "I shall certainly do everything I can to step up the pace of exploration."[134] But the pace is still slow. Mr Francis Egan, CEO of Cuadrilla, said "We do need to start. From 2008 to probably the end of this year, we will have drilled a grand total of three wells in the Bowland shale and partially fractured one. I would not call that an accelerated exploration programme."[135] Dr Tony Grayling of the Environment Agency told us that "since the Government gave permission for hydraulic fracturing in principle to resume [in December 2012], we … have not yet received any permit applications to undertake hydraulic fracturing."[136] The delays seem mainly due to uncertainties over regulatory requirements, which we examine more fully in Chapter 8.

76. Despite Ministerial encouragement and eagerness on the part of the industry to get on with exploratory drilling, progress on the ground has been at a snail's pace while industry and officials come to grips with a dauntingly complex regulatory regime for onshore shale gas and oil.

Public acceptability

77. We deal with public concerns about the possible environmental impact of hydraulic fracking in Chapter 7.

78. Onshore shale gas cannot be developed in the UK without public acceptance. At the national level, the available evidence, which is slender, seems to suggest that public attitudes are not clear-cut. The DECC's latest attitudes survey, published in January 2014, found 27% of respondents in favour of shale gas extraction, 21% against and 48% neither supporting nor opposing.[137] A survey by the University of Nottingham, also in January 2014, found 26.7% in favour (39.5% in July 2013).[138] Taken together, they seem to suggest that most people nationally have yet to take a firm view on shale development.

79. Public acceptance at local level is essential if shale is to be exploited. Mr Wright said that "very key to [shale gas] development, is getting communities on your side."[139] But there is some local hostility to onshore drilling in areas affected. Ms Tina Rothery of Residents' Action on Fylde Fracking (RAFF) said "we do not want this in anyone's backyard."[140] Opponents of Cuadrilla's activities in Balcombe are deeply hostile to local drilling.[141] Mr Austin of iGas said "the barriers … right now … are getting local acceptance where we are trying to drill … it is the inability to manage that that would rule out any particular area."[142]

80. The industry recognises it has ground to make up and needs to engage local opinion. It announced in June 2013 that each operator would create a "community benefit mechanism" based on a one percent share of revenue from each production well.[143] In January 2014 the UK Onshore Operators' Group (UKOOG) announced a pilot scheme at selected shale gas exploration sites. Once planning consent is granted and exploratory drilling operations begin, each pilot exploration site will have £100,000 made available for the benefit of the local community.[144] The Government supports these industry initiatives. The Minister for Energy wrote in the Sun on Sunday that they could "amount to £10 million for an average-sized "pad" development."[145]

81. The Local Government Association (LGA), welcoming the Prime Minister's announcement of a shale-related rates concession to local authorities (paragraph 91 below), called for more detail on how "the community benefits package will be strengthened to fairly remunerate those who will be most affected."[146] It added: "Given the significant tax breaks proposed to drive forward the development of shale gas and the impact drilling will have on local communities, these areas should not be short-changed by fracking schemes. One per cent of gross revenues distributed locally is not good enough".[147] The LGA also called for the community benefits of fracking to "be enshrined in law."[148]

82. Mr Wright told us that if he were a developer (he has no plans) he "would probably offer 2% of gross revenues to the surface owners of the land because they would immediately become my partners".[149] The Secretary of State for the Environment said

"I think that the potential of 1% of revenues could be an absolutely enormous sum that compares favourably with the regime pertaining in other countries … I admire the [Local Government Association's] bargaining technique … [1%] will potentially be welcomed in quite remote rural areas where there are not many great wealth creation opportunities … once it gets started, it will be very widely welcomed."[150]

83. The Minister for Energy also welcomed the industry's offer of community benefit schemes:

"£100,000 for a fractured well will go some way towards compensating the very immediate local residents from some of the disruption involved over the period of the actual fracturing before the gas starts to flow. One per cent of the revenues per well-site could amount to … between £5 and £10 million … a formidable sum of money which could be used for the benefit not simply of local residents but of the slightly wider community around the well-head."[151]

The Minister was "not so sure that these two parts of the offer should go to any of the councils involved."[152] He hoped

"local residents … could opt for a reduction in their bills … it may be that they would want the £100,000 devoted to a particular facility. So far as the £10million is concerned … I would rather see it go either to some community or to a local charitable foundation that is working in the area and not see it sucked into the local government finance system."[153]

84. Ministers did not express support for the LGA's proposal to enshrine community benefit schemes in legislation. The Secretary of State for the Environment spoke instead of "a legally binding commercial transaction."[154]

85. Areas where fracking takes place will benefit through investment and the creation of jobs. Those adversely affected by development may be compensated under existing planning legislation and through community benefit schemes but local councils should be reimbursed for the full cost of infrastructure repairs that may prove necessary such as damage to roads.

86. We welcome the industry's introduction of community benefit schemes for localities where drilling for shale gas is to take place. We also welcome the Government's support for the industry's schemes, which should be given the chance to prove themselves. We consider that the industry, as well as the Government, will also need to present the case for shale development more effectively to local communities, including clarity of plans and meticulous compliance with regulation as well as local economic benefits.

87. Local incentives, however substantial and well-targeted, will not avail if public concerns about perceived dangers to health and environment from fracking (addressed in Chapter 7) are not assuaged. Witnesses recognised that these concerns need to be taken seriously and that government and industry should make every effort to offer reassurance. Mr Egan said "the protests [at Balcombe] were not against what was actually happening; they were about what people were concerned might happen."[155] Mr Wright said "The public has every right to know what we are doing, why it works and how it works."[156] Mr Hughes said "The issue of course … is reassurance … The biggest challenge we face at the moment as an industry is reassuring the people and winning hearts and minds."[157]

88. Some opponents are not open to reassurance that well-regulated fracking should pose low environmental risks. Asked if anything could be done to satisfy his concerns, Mr Roberts of Residents Against Fylde Fracking (RAFF) replied, "I do not believe so, no … we are backing the wrong horse here."[158] He thought that "This is entirely the wrong industry to be backing. We need now to be backing the renewable sector."[159] Mr Molho of WWF-UK told us that "Our organisations [WWF, Greenpeace and Friends of the Earth] are opposed to the development of shale gas in the UK, mainly on grounds relating to climate change".[160] Mr Egan said that "decarbonisation … is at the root of a lot of the NGO position."[161] We discuss shale gas and climate change in Chapter 6.

89. Other opponents seem more concerned about local disturbance in the form of increased traffic and visually intrusive installations. We heard evidence that this disturbance would usually be temporary while drilling and related works took place. Mr Wright told us that "There definitely would be a noticeable impact. Drilling rigs are 200 feet tall".[162] But once production is under way, as Sir David King, Special Representative for Climate Change, Foreign and Commonwealth Office, told us, "When the fracking is done, what is left in the ground is something like a metre and a half high … the actual visual impairment arising from these wells is pretty minimal."[163] Mr Wright said that "you do not see wells that are producing."[164]

90. At the national level, there is little hard evidence of public opinion on shale gas development and what there is shows mixed results. There is some strident local opposition to fracking. There is a chicken-and-egg aspect to public acceptability: the most convincing argument for onshore shale gas development in the UK would be a successful working example.

Government action

91. The Government are publicly committed to developing shale gas in the UK. The Prime Minister said in January "We're going all out for shale."[165] He also announced that local councils would be able to keep 100% of business rates from shale gas, instead of 50%.[166] The Chancellor of the Exchequer told us "I am a huge supporter of shale gas".[167] In his 2013 Autumn Statement he announced a new fiscal regime for the onshore oil and gas sector.[168] He had earlier said he wanted to make the new tax regime "the most generous for shale in the world".[169]

92. The new tax regime and rates concessions to local authorities will doubtless be welcome to the industry. But it is probably not a key factor since investment decisions are likely to turn on expected costs and volumes. Nor has tax been the main obstacle to development of onshore shale gas in the UK. Viscount (Matt) Ridley said "a tax break is less important than the planning system in holding this back."[170] Other witnesses agreed.

93. Industry witnesses argued that the Government should do more to encourage public acceptance of shale gas exploration. Mr Lambert said "It should not be really left just to the companies. It is almost a national issue, trying to find out what we have got."[171] Mr Atherton said that "Cuadrilla is a small company … They are not equipped to take on the legions of environmental protesters. The state has to step in at some point and say "No, this is definitely in the public interest, and we are going to do it."[172] Mr Tom Crotty of INEOS agreed: "there is an enhanced role for Government in getting the imperative explained in the public domain."[173]

94. The Chancellor of the Exchequer assured us that "there is a determined effort at the top of the Government to sell the benefits of this not just to the nation but to the local communities involved."[174] But the Government are less assertive in countering the perceived environmental risks of fracking which have stalled progress on exploration for shale gas. The Secretary of State for the Environment told us that "opponents … have done a good job in alarming the public. We have to counter that, but it cannot just be done by the Government."[175] The Minister for Energy said "Ministers are not always believed when they go out and say that things are absolutely safe."[176] If, however, Ministers are unwilling to say that the technology is safe, the public will understandably suspect that this is because it is not safe.

95. We welcome the Prime Minister's and Chancellor's commitment to development of shale gas in the UK. We also welcome Government support for the industry's community benefit schemes and the tax and rates measures the Government have announced to encourage development. But industry's investment decisions will turn mainly on estimated costs and production volumes. These cannot be assessed without exploratory drilling and appraisal, which are being delayed by regulatory constraints and vocal opposition from some groups. The Government must be much more forceful in their public advocacy of the economic benefits of well-regulated shale development. They must also explicitly address the safety issues.

88 Q 209. Back

89 Q 127. Back

90 US Energy Information Administration (2013) 'Technically recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States', 10 June. Back

91 Ibid. Back

92 Andrews, I.J. (2013) The Carboniferous Bowland Shale gas study: geology and resource estimation, British Geological Survey for Department of Energy and Climate Change, London, UK. Back

93 Chris Wright. Back

94 Q 206. Back

95 Bloomberg. Back

96 Q 47. Back

97 Q 89. Back

98 Q 47. Back

99 Q 204. Back