Matthew Townsend and Claudia Watkins of Allen & Overy look at developments and possible regulatory changes in the shale gas industry.
"In the UK at least, we appear to be moving in the right direction. We are expecting new government guidance at any time on how the planning and permitting processes will operate more efficiently for shale-related applications."
Only a year ago, the prospects for shale gas projects in Europe did not seem particularly encouraging. Hydraulic fracturing had been halted in the UK after two small seismic tremors in the north of England in April and May 2011 and the government was reviewing the extent to which additional safety measures needed to be imposed. Elsewhere in Europe, governments and regulators were also hesitating over the potential environmental and health and safety impacts of fracking, with several member states choosing to impose moratoria on drilling. Meanwhile, the shale boom in the US continued unabated, with the current production of over 200 billion cubic metres predicted to double by 2040.
However, at a national level at least, the mood in the UK has significantly changed. Driven by concerns over energy prices and security of supply, the government has thrown its weight behind shale. A series of recent policy announcements marks a significant shift in policy. This is being welcomed by developers and investors in the sector but whether it will be enough to accelerate the exploration and development phases so the UK could move to full production in the near term remains uncertain.
The UK’s new dash for gas
The UK has, in recent history, been self-sufficient in natural gas due to North Sea production (it was a net exporter until 2004). Gas currently comprises approximately 45 per cent of the UK’s energy mix and is critical to its power supply. However, the ongoing decline in domestic production means that the UK now relies on imports to meet the gap (in 2011 importing more than it produced for the first time since 1967). Most of the UK’s gas imports are sourced from Norway and Qatar, accounting for approximately 40 per cent each of imports over the past couple of years, with most of the balance from continental Europe. Meanwhile, the anticipated closure of coal-fired power stations (due to environmental requirements) and the longer-than-expected development of new nuclear capacity, have led many to conclude that a new domestic source of energy must be found. These concerns were reflected in the Government’s Gas Generation Strategy announced in December 2012. The Strategy was supportive of a future role for shale (and conventional) gas provided the environmental impacts could be adequately managed.
The government has since established the Office of Unconventional Gas and Oil under the supervision of the Department of Energy & Climate Change (DECC). Its role will be to regulate fracking activities associated with shale gas developments and assist developers in coordinating the various interested government departments and local regulators in relation to permit applications. Operators seeking to frack must first obtain a licence from DECC and, in addition, conduct a prior review of the information available on seismic risks in the area, submit a “frack plan” to DECC demonstrating how any seismic risks are to be addressed, carry out seismic monitoring before, during and after fracking activities and implement a “traffic light system” to identify any unusual seismic activity.
In addition to requirements around fracking, developers must also ensure that a number of other consents are in place before full exploration. These consents are numerous and include a Petroleum Exploration and Development Licence (or PEDL) under the Petroleum Act 1998, multiple planning permissions (and associated environmental impact assessments) and environmental permits for radioactive and mining waste (under the Environmental Permitting Regulations) to name but a few.
It has been a difficult challenge for the early developers of shale to navigate their way through this regulatory jungle. Some argue this is made worse by the fact that there is no EU-wide permitting regime for shale (although many would not wish to see yet further regulation in this area, at least in the short term). Each member state has developed its own system (albeit largely based on European environmental law), which has given rise to material differences in approach between countries.
Given shale’s recent development across Europe, in determining which permits are required and the process for obtaining them, regulators have to some extent (and perhaps understandably) been learning by doing. The fear of judicial review by environmental pressure groups looms large with the result that local decision making can be slow and overly cautious. In the UK at least, there is a real sense that the positive signals from national government are not being reflected locally where it remains a long and costly process to even secure permissions to drill exploratory wells.
For the industry to succeed this needs to change and the local permitting requirements clarified and streamlined. This need not have any adverse effect on the environmental veracity of screening permit applications or the strength of controls imposed once permits are granted.
In the UK at least, we appear to be moving in the right direction. We are expecting new government guidance at any time on how the planning and permitting processes will operate more efficiently for shale related applications. The Environment Agency will also be publishing guidance for consultation on the permits required for shale and streamlined application process. It is also looking to develop standard environmental permits for shale (dealing with radioactive substances and mining waste). This is designed to help meet the ambitious new targets of issuing permits within a standard 13-week period by September 2013, with the period dropping to just one to two weeks by February 2014. The latter can only be done if there is an initial public consultation on the standard permit conditions rather than on each single application.
The government is also consulting on a more favourable tax regime for shale activities. Under the proposals, the effective tax rate on the portion of production income subject to a supplementary charge would be reduced from the existing 62 per cent to 30 per cent.
Developments elsewhere in Europe
Across the rest of Europe, it remains a mixed picture. Some countries have embraced the opportunities presented by shale. Poland, for example, has been a particularly avid supporter, having issued approximately 110 shale gas exploration concessions to more than 30 companies, including Chevron, ConocoPhillips and Poland’s PGNiG, over areas that cover more than a third of the country. However, following an initial rush, progress has been slower than expected. Despite initial estimates from the US Energy Information Administration of over 5 trillion cubic metres of shale gas reserves in Poland, more recent reports in 2012 conducted by the Polish Geological Institute and US Geological Service slashed that figure by a factor of ten. Despite these uncertainties, the view remains that the more realistic estimate of recoverable reserves is still sufficient to play a critical role in meeting the country’s domestic energy demand.
Ukraine announced in early 2013 its potential US$10 billion shale exploration and production deal with Shell, heralding the largest investment in unconventional gas in Europe to date. According to the US Energy Information Administration, Ukraine has the third-largest shale gas reserves in Europe, at approximately 1.2 trillion cubic metres. Significantly, the development of shale gas reserves could be ground-breaking in loosening the country’s energy dependence on Russia, which has twice cut off winter gas supplies to Ukraine since 2006.
Other European countries, such as Sweden, have also shown some interest in developing a shale gas industry. However, Europe’s reaction to shale remains markedly more conservative than in the US. While high gas prices and a heavy reliance on Russian gas have intensified the desire to exploit shale, hesitation by EU policy makers and the cautious approach adopted by domestic gas industries reflect concerns about the environmental risks of fracking. Fierce debate has circulated in particular around the risks involving the contamination of groundwater, the possibility of seismic tremors, and gas leakages. Environmentally motivated moratoria have been imposed in countries such as France and Bulgaria.
Regulatory change in Europe
The European Commission recently reported on its public consultation into unconventional energy projects, concluding that it will need to develop suitable legislative proposals to enable a more harmonised and safe development of these projects. The European Council, however, remains divided on the issue with a number of member states resistant to intervention in domestic energy markets. However, Climate Action Commissioner Connie Hedegaard has stated that “using it [shale] as a transitional technology between oil and something else could be a good choice. Climate-wise, it is not a subject of major concern. However, considering the environmental impact, the Commission believes we should have some common approach to regulating that in Europe, also in order to guide investors”.
It remains uncertain whether we will see new legislation proposed by the Commission during 2014. What is clear, however, is the Commission’s view that action needs to be taken.
A bright future for shale?
In Europe at least, it remains early days for shale and we are some way off seeing full production. In certain countries, however, there is recognition by governments that shale has an important role to play and there are positive signs for the industry. The challenge will be converting this shift in policy into a step change in the number of permits granted and wells drilled and, eventually, the volume of gas extracted produced.