In This Issue:
Shale Gas Development in the UK, Regulatory Update
Shale Gas Development in the UK, Regulatory Update
Underground Drilling Access
One of the key legislative developments outlined in the Queen's speech on 4 June 2014 was the Infrastructure Bill (the "Bill"). According to the Queen's Speech, the Bill will make important changes to the regulatory structure affecting exploration and development for both conventional and unconventional resources. These proposed changes are designed to incentivise companies to invest in shale gas exploration in the UK. In particular, the Bill will address the underground access regime for horizontal drilling.
The Government's consultation on its proposals to clarify and streamline the underground access regime for horizontal drilling and incentivise companies to invest in shale gas exploration in the UK (the "Proposals") closed on 15 August 2014. The feedback from this consultation is currently being analysed with a full response to be published by the Government in autumn 2014. Such feedback will determine the changes to the underground access regime to be included in the Bill. The Bill does not presently contain any provisions to effect such changes.
On 26 August 2014, the opposition party tabled a series of amendments to the Bill. These amendments can be viewed here. They provide for:
the inclusion of water companies as statutory consultees in the planning process;
an environmental impact assessment to be carried out as part of the planning process;
the disclosure to the public of the composition/constituent elements of any hydraulic fluid employed in each well and the quantity of such fluid; and
the implementation of baseline monitoring to measure the levels of methane in the water over a 12 month period.
Such amendments, aimed to strengthen the regulation of hydraulic fracturing, are a likely response to the public's unease towards shale gas drilling and recent findings (for maps and data click here) by the British Geological Survey and the Environment Agency that about half of the major aquifers in the UK have potentially prospective shale lying beneath them. These findings exacerbated fears that aquifers could be contaminated by methane or other gases escaping from hydraulic fracturing activities. However, it remains to be seen whether these amendments will be included in the final version of the Bill.
For further information please contact
Rachel Barlow Associate +44 20 7919 1364 rachel.barlow @bakermckenzie.com
Olympe Bory Associate +44 20 7919 1979 olympe.bory @bakermckenzie.com
Ben Farnell Of Counsel +44 20 7919 1503 ben.farnell @bakermckenzie.com
Michael Herington Partner +44 20 7919 1972 michael.herington @bakermckenzie.com
Patrick O'Gara Senior Associate +44 20 7919 1633 patrick.o'gara @bakermckenzie.com
Graham J. Stuart Partner +44 20 7919 1977 graham.stuart @bakermckenzie.com
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Current regime and its impact on shale gas development
The law, as it presently stands, has arguably played a role in hindering large scale shale gas exploration in the UK. Under the Petroleum Act 1998, mineral rights for land are owned by the Crown. Depending on the specific drilling activity taking place, permits and licences must be granted by the Department of Energy and Climate Change ("DECC"), the Environment Agency as well as other regulatory bodies. Licensees are also required to obtain permission (i.e. access rights) from the relevant landowner before carrying out any drilling activity, vertical or horizontal, on and/or under their land. Drilling without such a consent amounts to trespass (Star Energy Weald Basin Ltd v Bocardo SA  UKSC 35).
Landowner's consent must be obtained prior to undertaking any drilling operations. If a licensee fails to obtain such consent, the licensee can refer to the Secretary of State and is taken through a lengthy court procedure to obtain access rights (approximately two years). Access rights must be negotiated with landowners in the event of any drilling activity taking place underneath their land, even if the drill site is not located on their land.
The current regime is problematic in the context of shale gas developments. Horizontal wells often cover long distances (between 2,000 to 4,000 meters), such wells are therefore likely to cross more than one property. As licensees are required to negotiate access rights with every landowner living above underground drilling, this means that a single landowner has the power to significantly delay or block a project even though there is no drilling on the surface of its land and therefore no interference with its enjoyment.
Overview of the Proposals
The Proposals set out a three-pronged approach to reform the underground access regime and boost shale gas development:
amendments to underground access regime - statutory underground access rights are to be granted to companies extracting oil or gas at least 300 meters below the surface. These rights would be modelled on the underground access rights granted for coal bed methane and underground coal gasification pursuant to the Coal Industry Act 1994. This would remove potential trespass issues and prevent landowners from delaying and preventing fracking by refusing to grant access. Companies looking to develop operations would still need to obtain all necessary permissions (e.g. permits, planning etc.) before commencing operations;
introduction of a coherent compensatory system - a compensatory regime is to be introduced alongside the underground access regime. Such compensatory regime would consist of a voluntary payment system allowing a community body to receive payment in return for the right of access. The shale gas industry indicated willingness to pay a £20,000 one-off payment for each unique lateral well of more than 200 metres. The Proposals contemplate the introduction of a reserve power for the Government to enforce payment through regulations if the industry voluntary scheme is not honoured; and
establishment of a public notification system - a public notification system for the community is to be established, under which the operator would outline matters such as the relevant area of underground land and the payment to be made for access.
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The Proposals have been welcomed by the United Kingdom Onshore Operations Group. However, in August 2014, the Scottish Government indicated that it would formally oppose the Proposals, citing that "the people of Scotland can determine the approach in Scotland". Such a stance does not come as a surprise in light of the recent debate around Scottish independence and the upcoming referendum on 18 September.
New Onshore Oil and Gas Licence Terms and 14th Onshore Licensing Round
The Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations 2014 took effect on 17 July 2014. The regulations contain the model clauses ("Model Clauses") applicable to any licences granted from 17 July 2014, and, in particular to licences granted pursuant to the 14th licensing round for onshore oil and gas exploration ("14th Onshore Licensing Round") launched on 28 July 2014. The 14th Onshore Licensing Round opens about half of the UK for exploration and aims to spur shale gas exploration.
New Model Clauses
The Model Clauses are the first ones to be specifically adapted to unconventional oil and gas activities. They include a number of changes to the previous model clauses, some of which are particularly relevant for shale gas:
although the model clauses still require a 50% surrender of acreage at the end of the Initial Term, this is now subject to the right to apply for the creation of Retention Areas (for further exploration) and Development Areas (for extraction activities). This provision reflects significant concerns that the 50% surrender requirement would be inappropriate given the dispersed nature of shale resources;
DECC has an additional express right to reject a development program if it does not ensure the "maximum economic recovery" of petroleum. This may prove controversial in relation to shale gas, where the maximum economic recovery is often uncertain;
reports submitted by a licensee to DECC on shale strata geology, operations and hydraulic fracturing will have a reduced confidentiality period of 6 months. This is a dramatic reduction from the 4 year confidentiality period which previously applied to all information supplied pursuant to a licence (and continues to apply in respect of other information provided). This provision is undoubtedly designed to facilitate market entry by more players; and
the creation of a new type of onshore licence, a "landward exploration licence", which gives a non-exclusive right to non-intrusive exploration principally by way of seismic surveys. A similar type of licence already exists for offshore licensing, and this new type of onshore licence is intended to fill a gap in the types of onshore licence on offer.
Although the Model Clauses provide some flexibility in response to the specific characteristics of shale gas exploration and development, they also tighten controls on proposed activities, timescales and reporting. For example, they contain increased information requirements for development plans and mechanisms to ensure the licensee is held to the development plan timescale. Such measures are aimed to accelerate shale gas development.
The Regulations and Model Clauses can be accessed here.
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14th Onshore Licensing Round and environmentally sensitive areas
The US EIA June 2013 Report estimates the UK's technically recoverable shale gas reserves to be 26 tcf and technically recoverable shale oil around 0.7 billion barrels. As stated above, the 14th Onshore Licensing Round opens about half of the UK to conventional and unconventional hydrocarbon exploration, including up to 20,000 km2 of land in Scotland.
Applications in the 14th Onshore Licensing Round are to be made via the portal-based LARRY facility. The licence provides the first step to begin exploration but does not authorise the licence holders to drill. To proceed with drilling operations licence holders will require planning permission, permits from the Environment Agency and sign-off from the Health and Safety Executive.
Environmentally sensitive sites are not excluded from the 14th Onshore Licensing Round. However, guidance published on 28 July 2014 by the Department for Communities and Local Government provides that where unconventional hydrocarbon activities are proposed in or adjacent to any National Park, the Broads, any Areas of Outstanding Natural Beauty or a World Heritage Site, planning permission should be refused if the application represents "major developments", except in "exceptional circumstances" and where it can be demonstrated that the application is in the public interest.
The assessment that will be carried out for applications related to environmentally sensitive sites is set out in paragraph 116 of the National Planning Policy Framework (available here), and includes an assessment of:
the needs for the development, including in terms of any national considerations, and the impact of permitting it, or refusing it, upon the local economy;
the cost of, and scope for, developing elsewhere outside the designated area, or meeting the need for it in some other way; and
any detrimental effect on the environment, the landscape and recreational opportunities, and the extent to which that could be moderated.
There are separate assessment criteria for World Heritage Sites under paragraph 133 of the National Planning Policy Framework.
However, it is not clear what constitutes a "major development" or "exceptional circumstances". Shale gas companies are expected to seek clarification on this point, although the Government is likely to favour a wide policy discretion in the lead up to the UK general election in May 2015.
It remains to be seen how much industry appetite there will be for the 14th Onshore Licensing Round. This is especially the case as industry hopes were dashed in July 2014 when a planning application by Celtique Energie (made pursuant to a licence granted under the 13th licensing round) to explore for shale oil and gas near Wisborough Green, West Sussex, was rejected by the County Council. The Council said that Celtique did not demonstrate the site represented the best option when compared with other sites, the proposed operations would have an adverse impact on the area, and referred to site-specific considerations including unsafe highway access. Although the Council's reasoning was to some extent specific to the site in question, the rejection may dampen enthusiasm for the 14th Onshore Licensing Round.
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Further details on the 14th Onshore Licensing Round, including details of offers made in each round, guidance on making applications, and a questions and answers list, are available here.
Political enthusiasm for UK Shale Gas
In order to encourage investment in shale gas and address concerns over the safety of shale gas exploitation, in June 2014, the Government launched a competition to invest up to £2,000,000 in the development of innovative technologies for the safe and responsible exploitation of the UK's shale gas resources. The funding aims to support innovative projects relating to environmental management, reservoir monitoring, and other 'open theme' technologies. The deadline for applications is noon on 24 September 2014, and the competition brief can be viewed here.
Fiscal regime and tax incentives
The Finance Act 2014, in which the UK government adopted new fiscal incentives for onshore shale gas exploration and production, came into force on 17 July 2014. The key fiscal incentives for onshore shale gas exploration are as follows:
"onshore allowance", reducing the head-line rate of UK tax on a proportion of shale gas profits from certain onshore sites in the UK to 30%, from the current level of 62% on UK oil and gas profits generally; and
extension of the ring fence expenditure supplement for all onshore unconventional hydrocarbon projects from six to ten accounting periods. This will enhance the value of certain unused UK tax allowances and losses, recognizing the longer payback period for shale gas projects.
These incentives are to support the development of onshore oil and gas projects, by driving investments in early stages when costs are likely to be higher and risks of unsuccessful exploration greater.
Environment, Heath & Safety
Environmental Awareness Statement & Environmental Risk Assessment
In December 2013, the Government published the UK Strategic Environmental Assessment for Further Onshore Oil and Gas Licensing ("UK SEA"), which concluded that the negative effects to environmentally sensitive areas could be appropriately mitigated or made acceptable through appropriate regulatory control.
A public consultation on the UK SEA, which closed on 28 March 2014 after receiving some 2400 responses from various stakeholders, recommended the exclusion of environmentally sensitive sites (and in particular, National Parks, Areas of Outstanding Natural Beauty and World Heritage Sites) from the licensing process. As discussed above, environmentally sensitive areas have not been excluded from the 14th Onshore Licensing Round. However, as a result of the UK SEA report and consultation process, applicants must submit an Environmental Awareness Statement ("EAS") to DECC along with their licence application. The EAS is an acknowledgment that the applicant understands the environmental sensitivities of the site and the relevant environment and planning legislation which must be complied with. The guidance (available here) also requires the EAS to give details of the applicant's previous compliance record, including any failure to comply with
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environmental legislation, and include the applicant's options for addressing potentially negative environmental effects. Where the application relates to a National Park, the Broads, any Areas of Outstanding Natural Beauty or a World Heritage Site, the relevant guidance (available here) requires that the EAS must be particularly comprehensive and detailed and that applicants must acknowledge the implications of the planning guidance (referred to above) on development in these areas (including the circumstances under which the application will be rejected).
In addition, DECC regards the preparation of an environmental risk assessment ("ERA") at an early stage of the project planning cycle as a necessary element of the 'good practice' requirement for shale gas operations under its licence terms. In April 2014, DECC published a working draft guidance on the preparation of an ERA, what it should contain, and the Government's reasonable expectations. According to the draft guidance, the ERA should provide a systematic and prioritised overview of environment (including health) risks arising from the proposed operations. It should be prepared as early as possible in the project planning cycle (before seeking planning permission) to inform discussions with regulators, communities and stakeholders. ERAs should also form the basis of more detailed Environmental Impact Assessment required for the planning application. The guidance, available here, is a working draft which DECC will continue to develop.
Health & Safety
A June 2014 review by Public Health England into the potential public health impacts of exposures to chemical and radioactive pollutants from shale gas extraction concluded that potential risks to public health in the vicinity of shale gas extraction will be low as long as the extraction process is properly conducted and regulated.
The principal risks identified relate to contamination of groundwater caused by either leakage through the vertical borehole or surface spills of hydraulic fracturing fluid. However, the report concluded that such risks can be minimised by good on-site management and appropriate regulation of all aspects of the process. The report, available here, includes recommendations for the monitoring and consideration of environmental and public health impacts, and a recommendation that the chemicals used in the hydraulic fracking fluid should be publicly disclosed.
Additional Guidance and thoughts
As energy demand in the UK continues to soar, the potential benefits of developing the UK’s shale gas resources cannot be overlooked. Ultimately, the success of the UK Government's reforms is likely to turn on the simplicity and ease of operation of the new system, the public perception of the controls in place to ensure safety in operation and the perceived adequacy of the compensation system. The rewards of the shale gas revolution in the US demonstrate the benefits at stake in encouraging the development of a substantial and active UK shale gas sector.
As part of the UK Government's plan to clarify the regulatory framework around shale gas exploration and production, in February 2014 DECC published a number of guidance documents on the following areas: climate change; local air quality; planning permission and communities; regulation and monitoring; safety from design to decommissioning; understanding earthquake risk; and water.
The guidance documents are available here.