Shale gas exploration and production is covered by the existing UK regime for all oil and gas exploration and development activities. DECC manages the licensing process in the UK as part of its landward licensing rounds.1 There are currently 334 landward licences in the UK, but only a handful that contemplates drilling for shale gas. The last Licensing Round (the 13th Onshore) was in 2008 with the award of 55 new licences covering more than 7,000 km2.2 Following a recent Parliamentary publication3 an environmental assessment has been published for the 14th Onshore Round, on which DECC is considering comments with a view to publishing a response as soon as practicable. Following this, DECC will invite applications for the 14th Round.
In the UK, specific additional concerns raised by various groups relate to the following:
- Requirements for water in shale gas extraction could put pressure on water supplies at the local level;
- The UK is densely populated and consequently any wells associated with shale gas extraction will be relatively close to population centres. This would lead to additional challenges such as noise pollution, congestion from the increased traffic from construction works and additional land use demands; and
- Concerns over specific environmental effects of hydraulic fracking.
In the UK, Cuadrilla Resources Corporation (Cuadrilla) has drilled wells at Grange Hill and Preese Hall near Blackpool in Lancashire. Drilling began in March 2011 and on 21 September 2011 Cuadrilla announced that it had found 200 trillion cubic feet of gas at Fylde Coast which if recovered, could provide 5,600 jobs in the UK, with 1,700 of those in Lancashire.4
However, Cuadrilla was forced to halt drilling in May 2011 after the British Geological Survey (BGS) concluded that shale gas fracking had likely caused two small earthquakes off the Fylde coast near Blackpool. Following the publication of an independent report, Cuadrilla ‘unequivocally accepted the report’s findings’ that hydraulic fracking was the ‘likely cause’ of the earthquakes and has stated it is ready to put in place an early detection system proposed by the report5. However, seemingly coming to the defence of Cuadrilla, the head of Energy at the BGS stated at the recent Shale Gas Environmental Summit that ‘unequivocally…these tremors were too small to be detected by human beings and…the tremors were way too small to cause any damage.’6
Cuadrilla met with DECC on 13 October 20117 and presented its detailed geo-mechanical and seismicity study into its operations and how the risk of earthquakes can be minimized. DECC will evaluate the report in tandem with BGS before it will allow Cuadrilla to resume drilling.8 The Environment Agency also intends to monitor the radioactivity, chemical additives and other pollution indicators at the Preese Hall site in order to obtain baseline data for future reference.9
Protesters from Campaign Against Climate Change have now set up a protest camp (named ‘Camp Frack’) in Lancashire and are calling on Cuadrilla to stop shale gas drilling10 and protestors from the anti-fracking group ‘Frack Off’ stormed one of Cuadrilla’s rigs11.
Separately, further exploration has been proposed in South Wales at Llandow Industrial Estate near Cowbridge for potentially large reserves of gas However, Vale of Glamorgan Council voted unanimously on 20 October 2011 to deny an application by Eden Energy and Coastal Oil and Gas Limited to test drill at the site. It is expected that the decision will be appealed.12 The Council are awaiting guidance in relation to the responsibility for shale gas applications from the Welsh Government.13
Various legislative regimes apply to shale gas extraction, which include planning and environmental regulation, as well as a UK Petroleum Exploration and Development licence (PEDL) and specific drilling consents from DECC. The PEDL allows a company to pursue a range of oil and gas exploration activities (which include the exploration and development of unconventional onshore gas), subject to necessary drilling/development consents and planning permission. DECC also requires a permit for activities associated with surface works if these involve emissions to surface or groundwater. In an attempt to minimise the associated risks in the UK, DECC requires the operator to also hold an environmental permit under the Environmental Permitting Regulations 2010 (EPR 2010).
On 15 July 2011, the Government responded to the Energy and Climate Change Committee’s report on shale gas.14 The response rejected the need for any post-activity remediation funds to be set-up or for any changes to existing wastewater or health & safety regimes but envisages introducing specific Emissions Performance Standards over time.
Exploration and production of oil and gas in the U.S., including shale gas, are regulated under a complex set of federal, State, and local laws that address every aspect of exploration and operation. All of the laws, regulations and permits that apply to conventional oil and gas exploration and production activities also apply to shale gas development. The U.S. Environmental Protection Agency (EPA) administers most of the federal laws, although development on federally-owned land is managed primarily by the Bureau of Land Management (part of the Department of the Interior) and the U.S. Forest Service (part of the Department of Agriculture)15.
86% of the total 750 tcf of technically recoverable U.S. shale gas resources are located in the Northeast, Gulf Coast and the Southwest regions, which account for 63 percent, 13 percent, and 10 percent of the total, respectively. In the three regions, the largest shale gas plays are the Marcellus (410.3 tcf, 55 percent of the total), Haynesville (74.7 tcf, 10 percent of the total), and Barnett (43.4 tcf, 6 percent of the total) plays.16
It was announced on 26 October 2011 that in an £5bn deal, British energy company BG Group have agreed to buy liquefied natural gas produced from shale from U.S. energy firm Chienere Energy Partners. This 20 year deal is the first of its kind in the U.S. and will see 3.5 million tonnes of gas per year being supplied to Asian and European markets. Currently, the price of gas in the USA is half that of gas in the UK and a quarter of that in Asia making it an attractive exporter.17
A study by PwC reported that 46% of the U.S. oil and gas M&As in the third quarter of 2011 were related to shale gas. This equates to $22.6bn.18
Whilst the Obama administration has been generally viewed as supporting developments in shale gas production, New York and New Jersey authorities have temporarily frozen hydraulic fracturing activity in response to public unease.19 The main concerns have centred around the potential environmental and health impacts particularly in relation to contamination of drinking water and air pollution, community disruption and the need for further research and safeguards.20 However, preliminary findings of a study the University of Texas Energy Institute found no link between hydraulic fracking and groundwater contamination.21
The EPA held hearings on 27 September 2011 into proposed new rules that would force energy companies to better monitor and reduce emissions of methane and other air pollutants. Industry officials urged the EPA to proceed cautiously with its regulatory proposal, and a spokesman from the American Petroleum Institute raised the concern that a moratorium may be placed on developing U.S. oil and natural gas resources.22 The EPA is also undertaking a Hydraulic Fracturing Study as a result of environmental concerns raised by the use of this process.
The EPA is also considering permitting restrictions on diesel fuels use in hydraulic fracturing under Safe Drinking Water Act (SDWA) Underground Injection Control (UIC) Class II.23 Similarly, the Department of the Interior has recently indicated that fracturing fluids on federal lands ought to be disclosed.24
On 11 August 2011, the U.S. Shale Gas Subcommittee of the Secretary of Energy Advisory Board released its 90-day report. The report made several recommendations including the need for continued development and research, implementation of State regulations aimed at best practice techniques and increased flow of information to the public.25 In particular, it emphasised the need for input from organisations such as the State Review of Oil and Natural Gas Environmental Regulation (STRONGER) which peer reviews a State’s regulatory programs. However, these recommendations are yet to be taken up at State level.
At the other end of the spectrum, France became the first country to ban the controversial technique of hydraulic fracturing, amid concerns about environmental pollution26.
Initially, strong protests targeted three permits planning the exploration of shale gas. The permits “Villeneuve de Berg” and “Nant” were granted on 1 March 2010 to Schuepbach Energy, a U.S. company, and the permit of “Montélimar” was granted to Total, together covering a territory of 9 672km², including Ardèche, Drôme, Vaucluse, Gard, Hérault, Aveyron and Lozère ranging in duration from 3 to 5 years. Additional permits were granted and there are 16 permits in total planning to use the hydraulic fracturing.
In March 2011, the French government prolonged the moratorium on shale gas drilling until June. This followed protests opposing drilling near the town of Villeneuve-de-Berg in southern France, with over 20,000 people voicing their opposition. Drilling near the town had been planned for the end of 2011.27
A new law No 2011-835 dated 13 July 2011 has banned the exploration and production of hydrocarbons by hydraulic fracturing and cancelled all the permits which were planning to use this technique. This law also provides a penalty of Euro 75,000 and one year imprisonment to any person using fracking without informing the relevant authority.
On 11 October 2011, France’s National Assembly rejected proposed legislation aimed at prohibiting the development of shale gas and oil. The subsequent legislation was seen as superfluous to the law adopted on 13 July 2011. 28 This bill subsequently led to the repeal (confirmed on 13 October) of three licences granted for shale gas exploration to Total SA and Schuepbach Energy.29 However, the 61 remaining licences are still under scrutiny.
A French government website providing further information on shale gas is available here (in French only).
Outside the U.S., Poland is one of the first countries where companies are seriously attempting to develop shale gas, not least influenced by the desire to lessen dependence on imported gas from Russia. Poland has recoverable shale gas resources of 187 tcf, equivalent to more than 300 years of the country’s annual natural gas consumption, according to previous reports by the U.S. Department of Energy reported previously.30
ExxonMobil has six licences to explore for shale gas in Poland. In the Lublin Basin, Exxon is operating in partnership with French oil major Total, which holds a 49% stake in the licences. In the Podlasie Basin, Exxon has partnered with Hutton Energy. Exxon was due to start work on its second shale gas well in Poland in September 2011 near the eastern town of Siennica.31
On 24 October 2011 Orlen Upstream began its first exploratory drilling in Syczyn, Wierzbica concession. The project is located 30 kms north of the Exxon Mobil Krasnystaw site.32 The drilling rig is then to be moved 50 kms north west to Berejow, on the Lubartow concession. This is the first phase of a step in $150 million investment plan to drill six shale gas test wells through to 2013.33
Given the economic fears surrounding the Nord Stream pipeline (taking gas directly from Russia to Germany and thus bypassing Poland), political will favours this new form of gas extraction and in the lead up to Poland’s general elections on 9 October this year, the ruling (and successfully re-elected majority) party, announced its plans to use the proceeds of shale gas to set up a pension fund.34
Poland was previously thought of as a proponent of a common European approach to shale gas and does not have any separate legislation at present governing shale gas, taxation and royalties. However, the largest opposition party and potential coalition partner, Law and Justice, has recently drafted reforming legislation which will allow for open tenders and a return to unsuccessful companies of 200% of their incurred costs. The draft bill also envisages tax reforms and greater flexibility in determining payment schedules.35 Similarly, on 4 October 2011, the Polish Permanent representation to the EU presented a study on shale gas which described possible EU regulation of the industry as ‘unfeasible’. 36
Shale gas production in Canada is primarily from the Cordova and Horn River Basin projects in northeast British Columbia, where the total resource is estimated to be almost 700 tcf.
Fort Nelson in British Columbia is an area that is experiencing a “boom” in shale gas exploration, which is expected to last for the next two decades as British Columbia’s shale gas industry continues to expand.37
Environmentalists are campaigning for a moratorium on fracking in Canada until the environmental risks have been clarified.38 The industry, including the Canadian Association of Petroleum Producers, has welcomed the scientific reviews ordered by Environment Minister Peter Kent. While the federal government has said it plans to monitor development of shale gas projects, it has no current plans to regulate these.39
More recently, legal action has been threatened by the chief of St. Mary's First Nation against the New Brunswick government for failing to consult with First Nations people (as required by constitutional law) regarding natural gas exploration and are demanding that all relevant licenses be revoked.40
Despite stating that shale gas extraction is mainly an area for provincial and territorial jurisdiction, in September the federal Conservative government announced that it is launching two separate reviews on the environmental impacts and the science and use of hydraulic fracturing in Canada and hinted that it may become more actively involved in monitoring, if not specifically regulating, the processes.41
The U.S. Energy Information Administration estimates that Germany could have 8.2 tcf of recoverable shale gas reserves, compared to just 6 tcf of conventional natural gas.42 However, and announcement by the head of department, Lower Saxony State Authority for Mining, Energy and Geology at the recent Shale Gas Environmental Summit that Germany had in fact been fracking since 1955 and that ExxonMobil had been involved in shale gas exploration in Germany since 2008 without incident, came as a surprise to many. Similarly, he illustrated that other than the Netherlands, Germany produced more onshore natural gas than any other country in Europe.43
In January 2011, ExxonMobil announced that it will spend up to $100 million on exploring shale gas in North Rhine-Westphalia region of Germany over the next five years.44 It has already drilled at least three test wells into shale gas rocks in Lower Saxony.45
Other companies that have secured exploration permits in Germany include BASF's oil and gas arm Wintershall, Gaz de France, BNK Petroleum, BEB (a subsidiary of Royal Dutch Shell), and Canada’s Realm Energy, a company specializing purely in shale gas exploration.
However, shale gas exploration plans in Germany have faced opposition.46 Frequent protests from anti-shale gas groups, such as Schoenes Luenne, have caught the attention of the German Environment Minister, Norbert Röttgen, who has ordered a review into the environmental impact of shale gas production in Germany.47 On 22 November 2011 a committee comprising representatives of Germany's Green Parties and Social Democrats heard expert evidence on the safety and potential impacts of the technology on mines and water supply48 but findings are not expected until early 2012.
In June 2011, it was announced that the Chinese government had offered four shale gas blocks in southern China to underline its determination to move forward with developing unconventional gas resources.49 The offers, China’s first for shale gas and in which blocks will be won at auction, will not be open to foreign bids at this stage.
The U.S. Energy Information Agency estimates that China has larger shale gas reserves than the U.S. China does not currently produce commercial shale gas because most oil companies focus more on producing conventional natural gas, which is cheaper to produce than shale gas.
China will hold a second tender offer for shale gas blocks this year and could extend the invitation to more Chinese companies, including Sinochem and ZhenHua Oil.50 Executives at CNPC – China's biggest energy company – have said they aim to produce 500m cubic metres of shale gas by 2015.51
Despite the potentially lucrative returns given the estimated reserves in China, progress in the area of shale gas has been criticised. For example, recently gas price reform was put on the back burner whilst the government attempted to address inflation. However, certain rebates were introduced to narrow the gap between the prices paid by gas importers and the sale price on the domestic market.52 No legislative reforms or significant development appears to have been made as of yet and currently licences for exploration are limited to domestic companies. It was announced in early October this year that a second round of auctions would be commenced but it is unclear how easily foreign parties could be brought on board.53
Ukraine is taking marked steps in the development of the exploration and production of shale gas. According to preliminary studies by Eurogas, Ukraine potentially has similar shale gas bearing formations to the U.S.54 The U.S. Energy Information Administration believes Ukraine holds as much as 40 tcf of recoverable shale gas. It is envisaged that by 2017 domestic natural and shale gas production will be increased to 28 bcm (current level 20 bcm) and 10 bcm of LNG will be imported, and by 2020 Ukraine will be producing 4-5 bcm of shale gas per year.55
The Ukraine, in contrast to other jurisdictions, is opening its national shale gas development to the global supermajors.
On 29 June 2011 TNK-BP, BP’s Russian arm, signed a memorandum of understanding with the Ukrainian Government which led to the announcement that TNK-BP plans to invest $1.8 billion over seven years to develop shale gas in Ukraine.56
On 1 September 2011 it was announced that Royal Dutch Shell will be drilling in the Ukraine for shale gas, as the Eastern European country tries to reduce its dependence on Russian energy.57 Ukraine's prime minister, Mykola Azarov, said of the agreement: “The time will come when Ukraine will meet all of its own gas needs.”58
On 30 September 2011 ExxonMobil signed a co-operation deal with Naftogaz Ukrainy, the Ukrainian national oil company covering “fundamental principles of co-operation within mutually identified areas.”
On 10 October 2011 the European Bank for Reconstruction and Development (EBRD) announced it would assist Ukraine in establishing production from shale gas. However, the EBRD stated that it does not fund exploration, only ‘proven reserves’, adding that ‘there are a lot of them in Ukraine’. 59
In addition to national developments, Ukraine is looking at the potential for cross-border exploitation of shale gas reserves. On 4 October 2011 the National News Agency of Ukraine reported that Ukrainian Energy Minister Yuri Boiko met in Kiev with Moldova’s Minster of Economy Valeri Lazar to discuss shale gas reserves straddling their shared border.
Under Ukrainian law, the development of shale deposits is no different from the exploration and/or production of conventional natural gas reserves and Ukrainian law does not provide a special regime for shale gas. Indeed, until 2011 there was no mention of shale gas in Ukrainian legislation. Only recently in July 2011 has shale gas been included into the list of minerals of national importance, thus, requiring a special permit to begin any activity in shale gas exploration/production.
Shale gas is much in the news in Israel, thanks to the discovery last year of a major offshore deposit estimated at around 16 tcf. The World Energy Council estimates Israel's shale deposits could ultimately yield as many as 250 billion barrels of oil, just ahead of Russia.
In July 2008, Israel Energy Initiative (IEI) was granted a research, development and demonstration licence at the southern Shfela Basin. The licence gives IEI the right to explore the area for oil, including the exclusive rights to perform survey drilling and experimental oil production. All of the wells drilled by IEI were approved by the respective district planning and building committees (Jerusalem and Southern districts). The survey drillings were also authorized by the drilling committee of the water authority, which operates under the Water Law and includes members from the Ministry of Environmental Protection, Ministry of Health, the National Park Authority, the geological institute.
By the end of 2011, IEI plans to start a small pilot project in Adullam to show how the conversion from kerogen to oil works on-site. That prospect has alarmed environmentalists, who argue that IEI risks contaminating Israel's main aquifer. Adam Teva V'Din, head of the Israel Union for Environmental Defense, has petitioned the High Court of Justice to halt the pilot, arguing the government wrongly granted IEI a permit under a 1952 petroleum law that does not apply to unconventional extraction methods.
Israel currently imports nearly all of its oil by tanker, mainly from Russia and the former Soviet republics. Those imports were abruptly cut off during the 2006 war with Hezbollah, which brought the country perilously close to running out of fuel. More recently, there has been talk in Egypt of raising the price on its natural-gas supplies to Israel and perhaps cutting it off entirely. Some measure of energy independence is a strategic imperative for Israel.
The Israel Petroleum Law was passed in 1952 and underwent substantial amendment in 1965. This Law governs the exploration and production of petroleum in Israel, including the continental shelf. Any grant or transfer of oil and gas rights is subject to the approval of the Petroleum Commissioner, who must consult with the Petroleum Committee. In addition, a set of regulations promulgated in 2006 imposed the first substantive requirements of applicants, both in terms of experience in oil and gas exploration and in financial strength. The development of shale deposits is no different from the exploration and/or production of conventional natural gas reserves and Israeli law does not provide a special regime for shale gas. However, licences granted under the Petroleum Law do not exempt the holder from any other laws, including planning laws and environmental laws.
It would seem that until more research is undertaken into the environmental consequences of hydrofracturing, it is unlikely that opposition to this method of gas extraction will subside. Conversely, certain countries with large reserves (e.g. Poland, the Ukraine and Israel) may be driven to promote shale gas production to decrease their reliance on imported gas. Although there are still considerable uncertainties, shale gas will undoubtedly prove to be a significant new force in the world energy scene, with far-reaching consequences and it will be up to the regulators and industry to ensure that the risks are assessed and managed, in order to maintain public confidence in the sector.