Shale Gas Update 2015

The nascent shale gas industry in the UK took a blow this week, on 29 June 2015, when Lancashire County Council decided to reject a planning application made by Cuadrilla for its Preston New Road site. Against the recommendation of planning officers to approve the application, the Council decided, with a majority (9 to 3 with 2 abstentions), to refuse planning consent.

The Council’s legal advice indicated that an appeal on its decision to refuse the planning application is likely to be overturned. Understandably, Cuadrilla will be concerned about the outcome of any appeal, however campaigners and advocates agree that it is by no means fatal for the shale gas industry developing in the UK. If Cuadrilla do proceed to appeal, it will be very interesting to see how an impartial tribunal judges the planning submissions made for a sample exploration well, as an independent decision could move away from the gulf that seems to still exist between national energy policy and local sentiment.

To date, the UK government has taken significant steps to improve the landscape in which operators are able to develop shale resources when given approval to proceed. As a recap on the current progress made, please find an update on the political and legislative framework below. However, due to the recent decision, it appears as though the time is approaching where the UK government may intervene further to promote exploration, regardless of local planning restrictions and views.

CMS will be monitoring developments closely and we will provide updates on the Law-Now platform as the debate continues.

Shale Gas Development to Grow

With a Conservative majority win in the United Kingdom General Election, and David Cameron heading back to Number 10 for another 5 years, there is no doubt that the scene is set for promotion of shale gas exploration in the UK at the national level of government. The Prime Minister has previously called hydraulic fracturing (‘fracking’) “good for our country”, while former Energy minister Michael Fallon described shale gas in 2013 as “an exciting new energy resource”. In the lead-up to the election, fracking proved an important issue, with the Conservative manifesto supporting the development of a regulated fracking industry, and also in ensuring community benefits, as well as promoting tax cuts they had introduced to help promote the industry: “We will secure your energy supplies: We will continue to support the safe development of shale gas, and ensure that local communities share the proceeds through generous community benefit packages.” The new Secretary of State for Energy and Climate Change, Amber Rudd, has continued the Conservative government’s apparent support for shale gas by stating recently that it hopes “we'll be able to deliver shale, as we've always wanted to do, in a safe but beneficial way.” She has also stated that the Conservatives hope to “kick-start a shale gas revolution.”

Licences

Shale gas exploration in the UK, as well as in other countries in Europe, is projected to grow following a new round of Onshore Licensing in 2014, with licences to be awarded in 2015. Recent estimates by the British Geological Survey show that shale gas deposits are much greater than previously estimated: according to a 2013 survey, there may be 1,300 trillion cubic feet of shale gas in the north of England. A recent UK government report said the Bowland Shale reserve could be analogous to the Barnett Shale in Texas (purported to contain the largest reserves of onshore gas in the United States), with a potential gas yield of nearly 5 trillion cubic feet of gas, and an estimated minimum of over 2 trillion cubic feet. Moreover, a 2011 study demonstrated the Barnett Shale to be responsible for 119,000 jobs in Texas providing additional incentives to develop the industry in the UK for the increases in employment opportunities in the sector, especially as North Sea reserves begin to decline.

Keen to tap into the wealth of natural gas in the UK, several major oil and gas companies, including Total, GDF Suez, Centrica, Ineos, and Cuadrilla, are investing hundreds of millions of pounds in the natural gas sector. In 2014, major petrochemicals company Ineos revealed their $1 billion (£640 million) investment for shale gas exploration in drilling wells across the north of England and Scotland. Ineos chairman Jim Ratcliffe explained "I believe shale gas could revolutionise UK manufacturing and I know Ineos has the resources to make it happen, the skills to extract the gas safely and the vision to realise that everyone must share in the rewards". In March 2015, Ineos invested nearly £200 million in a shale gas exploration deal with IGas Energy, allowing the companies to drill and frack several wells in the Northwest. Ineos has also pledged £138 million in funding for shale gas exploration in the Bowland Shale Formation.

Infrastructure Act 2015

On 12 February 2015, the Infrastructure Act 2015 (which provides energy firms underground access and additional safeguards against trespass claims) received Royal Assent. UK trespass law was reinforced in 2010 in the case of Bocardo SA v Star Energy which stated that although property rights do not apply to the value of resources such as oil and gas, landowners still need to grant their consent, or not withhold their consent, for drilling to take place. The Infrastructure Act 2015 is one of the UK government’s measures to boost shale gas development and incorporates several measures to facilitate industry access including; laying out a new underground access regime that prevents property owners from claiming drilling below 300 meters without consent be qualified as a trespass. Prior to the Infrastructure Act 2015, which came into force in April of this year, firms seeking to drill wells for either exploration or extraction of shale gas needed to gain either consent from all property owners affected by the drilling development, or else obtain ancillary rights through the Petroleum Act 1998. While licences from DECC and other consents, including planning permissions from relevant local authorities, are still required, the new allowances in the Infrastructure Act 2015 serve as a robust safeguard to protect firms from delay and disruption by non-consenting adjacent landowners.

Business Retention Rates

Under the previous business rate retention scheme, local authorities retained 50% of the taxation rates; however, in 2014, the Prime Minister announced that the business rates retention to fund local services would increase to 100%. In a January 2015 report, the Department for Communities and Local Authorities confirmed that the entirety of business rates taxation for shale oil and gas activities shall be retained by local authorities, with the type of authority determining the percentage of shares. The UK government report stated that shale oil and gas “has the potential to add to the UK’s energy supply, help improve energy security, create jobs and meet carbon targets”, thus improving the local economic benefits of shale gas development. The report explains that decisions to increase the rates income on shale oil and gas sites will ensure that local authority decisions will be “taken with the highest standard of propriety based upon planning grounds, and not some ulterior motive”, and that local communities benefit, and where necessary, be compensated for any costs associated with resource development.

UK Public Opinion

According to a recent poll of over two thousand British adults, 42% of the general public currently support fracking, while 35% oppose it. In response to the UK government’s most recent consultation paper on shale oil and gas, respondents voiced concerns about the safety of resource development. However, the report stated that the UK government feels that the concerns are “misplaced”, as a robust regulatory framework is currently in effect, and will ensure “on-site safety, prevent water contamination, mitigate seismic activity and minimise air emissions”. While the various legislative changes will facilitate oil and gas firms access to resources and enhance local communities’ benefits, expert regulators will thoroughly examine firms’ requests and will not permit any unsafe development operations.

Scotland

In Scotland, new controls on the industry are due to be debated and agreed by the Scottish parliament. Although a 2012 UK government report concluded that fracking is safe if adequately monitored, the Scottish government has announced a moratorium on unconventional oil and gas projects until a full public consultation on the impacts to the environment and public health is undertaken. However, with the current push to extract shale gas in the north of England, and the economic and political support of the Conservative- government, fracking in Scotland may not be that far away.

The European Perspective

A key question for shale gas development beyond the UK is whether the EU can and should speak with one voice about shale gas. In general, as stated in the Treaty on the Functioning of the European Union, Member States can determine the level of oil and gas exploitation of their own natural resources as long as common EU environmental concerns are taken into account.

In 2012, Directorate General of Energy announced that there was no need for immediate change to EU energy policy or legislation in respect of shale oil and gas exploration and extraction. However, studies have shown potential inadequacies in the ways that risks are addressed by EU legislation in relation to environmental issues and human health; uncertainties in the application of EU legislation; potential for risks to be insufficiently addressed by EU legislation, as well as uncertainties regarding implementation at national level.

In order for shale gas extraction activities to develop in the European Union, there has to be more serious debate and openness about all the issues involved. However, with pressure for energy security and independence, combined with the burgeoning shale gas revolution in the United States as a model, shale gas development will continue to expand in some parts for the EU, like the UK and Poland, which others like France and Germany, have taken a less positive stance.