Notes From The Field - An English Law Perspective On The Oil & Gas Market
As energy costs in the US drop on the back of shale oil and gas discoveries, the rest of the world is gripped with envy. Other countries have also started dreaming of cheap power and energy security through shale. The UK Government wants a piece of the action and is desperately trying to make itself the poster boy for European shale gas.
There are only two government figures for the UK's shale resource: the British Geological Survey's (“BGS”) central estimate of 1300tcf shale gas in place in the Bowland shale basin, and its recent estimate of between 2.20 and 8.57 billion barrels of shale oil in place in the Weald Basin. These are not, however, estimates of how much shale resource is technically recoverable. Only exploratory drilling will reveal the extent of the recoverable reserves and to date, little or no exploratory drilling and appraisal activity has been undertaken in the UK.
Since the Government gave permission for hydraulic fracturing to resume in December 2012, the Environment Agency (“EA”) has not received a single permit application to undertake hydraulic fracturing. Cuadrilla Resources, the owner of the only shale exploratory well in the UK, has only drilled three wells in the Bowland shale and partially fractured one since 2008. In the US, more than one hundred wells were needed before the industry was satisfied that shale gas was viable. So why is progress of the shale industry in the UK so painfully slow?
Public opinion is divided. On the one hand, in light of concerns about water contamination, earthquakes and disruption to rural communities, there are calls for a more robust and rigorous regulatory regime. On the other hand, there seems to be a general consensus within the industry that the regulatory regime is unnecessarily complex with significant levels of duplication of responsibility. The UK Government has made its primary intention clear. The House of Lords Economic Affairs Committee Chair Lord MacGregor said that the Government's commitment to go “all out for shale” had to be backed by a simplified and easier-to-understand regulatory regime.
What is this regulatory regime they talk of?
The UK's regulatory framework for onshore exploration and production applies to conventional as well as unconventional resources. There is no separate regime for shale gas and oil, except that additional rules apply to hydraulic fracturing.
In a move to clarify the regime, the Government established the Office of Unconventional Gas and Oil in December 2012 to work closely with regulators and the industry to ensure that the applicable regulatory regime is as clear and simple as possible, whilst safeguarding public safety and protecting the environment. Additionally in December 2013, the Department of Energy and Climate Change (“DECC”) published a “Regulatory Roadmap” to help developers understand the regulatory process for onshore oil and gas exploration and appraisal in the UK. The regulations require the fulfillment of a number of steps before a shale gas project can take place and are outlined below.
The first step in the process is the procurement of a licence to conduct exploration and production. The Petroleum Act of 1998 vests all rights and ownership to hydrocarbon resources in the Crown and these rights are administered by DECC on behalf of the Crown. Companies must obtain from DECC a Petroleum Exploration and Development Licence (“PEDL”) before they can undertake an onshore oil and gas exploration or production, including in relation to shale gas and oil. The PEDL will give the relevant company exclusive rights to explore for, and develop, the hydrocarbon resources in a defined area for a defined period of time.
Access to Land
While the Crown owns the rights to the hydrocarbons, land ownership legally entitles the owner to rights at the surface and down to the centre of the earth. Any developer wishing to carry out operations at the surface or underground must obtain the landowner’s permission to do so. The Supreme Court in Bocardo SA v Star Energy( UKSC 35) held that if a developer does not acquire the landowner’s permission to pass through its land or has not obtained a court order granting such rights, the developer will have committed a trespass if it proceeds with any activity under the land even if there is no damage to the landowner’s property.
At present, the developer has to negotiate terms with each landowner – there is no standard agreement or regulation as to terms that can be agreed. If a deal cannot be agreed, the developer can make an application for the case to be referred to the courts via the Secretary of State. The need to individually negotiate and agree terms with landlords has proven to be a major barrier to shale gas developments.
On 23 May 2014, DECC published for consultation proposed new rules regarding rights to access land. The proposal contains three elements:
- An automatic right of access to undertake horizontal drilling, provided such works take place at least 300 metres below the surface of land. This depth is taken as that below which a landowner is very unlikely to have any use for the land. The developer would still need to obtain all surface access rights and permissions (environmental, planning, health and safety, etc.) in order to commence drilling.
- A one-off payment, either to individual landowners or a community body, of £20,000 for each horizontal well that extends by more than 200 metres laterally. Where lateral drilling vertically coincide, payment will be made only once. This is a move away from the ability of landowners to demand an amount of payment they consider appropriate and is in sharp contrast to the approach taken in the US. In the US, notwithstanding the fact that the individual owner of the land is unlikely to ever make use of its rights, the owner is entitled to receive value for them in the form of lease payments and a royalty from production (the minimum percentage for which is usually protected by statute).
- A public notification system, under which the developer would give notice to the affected community of matters such as the relevant area of underground land, and details of the payment that will be made in return for the access.
The consultation closes on 15 August 2014. The Queen's Speech on 4 June 2014 confirmed that a new Infrastructure Bill will be introduced which will include provisions designed to address the access issue.
Environmental Risk Assessment
DECC requires the compilation of an environmental risk assessment (“ERA”) for all proposed shale gas operations where hydraulic fracturing is planned. This involves carrying out an overview assessment of environmental risks (including risks to human health) covering the full cycle of the proposed operations (including well abandonment) with the participation of stakeholders (including local communities). DECC is consulting with other regulators to develop agreed guidance for developers on the preparation of suitable ERAs.
Any developer seeking to drill and subsequently test for and possibly extract shale gas has to apply for planning permission from the relevant local Mineral Planning Authorities (“MPAs”). The primary purpose of UK planning law is to ensure that the development is environmentally acceptable. Key issues that the MPA will be concerned about are site location, traffic volumes, noise, groundwater, induced seismicity and waste.
The MPA will carry out an initial screening exercise to determine whether the proposal for extraction requires an environmental impact assessment (“EIA”). If the development is likely to have significant environmental impact, the developer will be required to complete an EIA. It is therefore highly likely that an EIA will be required for exploratory drilling operations which involve hydraulic fracturing.
The MPA is also responsible for ensuring proper restoration and aftercare of the site when operations terminate. As part of the application process, a plan for restoration of the planned development site must also be submitted to the MPA. If planning permission is granted, the MPA will monitor and inspect operations to ensure that they comply with any conditions imposed.
The MPA advertises planning applications that it receives and has the authority to make representations on individual proposals. Before the MPA takes a decision, it is required to consider the advice provided by other agencies, such as the EA, and also to extensively consult with statutory consultees and NGOs.
Concurrently with the planning permission process, the developer must serve notification on the EA of its intention to drill accompanied by a detailed statement setting out information on well drilling, well casing, storage of substances including fuel and chemicals and a proposed plan for dealing with waste.
The developer will also require environmental permits where there is:
- groundwater activity, unless the EA is satisfied that there is no risk of inputs to groundwater;
- mining waste activity, which is likely to apply in all circumstances;
- industrial emissions activity, when the developer intends to flare more than 10 tonnes of gas per day;
- radioactive substances activity, which is likely to apply in all circumstances; and
- water discharge activity, if surface water runoff becomes polluted.
The technical documentation supporting the applications for the planning permission and environmental permits are often the same, and best practice recommendation is for “parallel tracking” of environmental permits and planning applications.
Under the Coal Industry Act 1994, any well likely to enter or pass through a coal seam, for any purpose, will require the agreement of the Coal Authority. Such agreements lay down stringent requirements for the entering of coal seams and the subsequent provision for the supply of information. This includes accurate plans and sections of all wells drilled and full well logs.
Health and Safety
In the UK, all offshore and onshore wells must be designed and constructed in accordance with government regulations. Inspectors from the Health and Safety Executive (“HSE”) and an independent well examiner (who is appointed by the developer) are required to check to ensure that the developer is following the regulations.
Prior to the start of drilling, the developer is required to notify the HSE of the well design and operation plans. The regulations also require a developer to provide the HSE with regular reports of any activities on the well. HSE well specialists and the independent well examiner will undertake regular assessments of well integrity.
Drilling Consent from DECC
The PEDL does not give consent for drilling or any other operations. Developers are required to separately seek final consent from DECC to drill once all permissions and permits from other bodies discussed above have been granted.
For shale wells where an ERA is required, DECC is charged with reviewing the ERA. If hydraulic fracturing is intended, DECC will require that a fracturing plan to address the risk of induced seismicity is submitted and will review this plan before these operations are permitted. Finally, DECC will check that the EA and the HSE have no objections to the proposed operations before consent is given.
Notwithstanding the various attempts to simplify the regulatory regime alongside the introduction of the Office of Unconventional Gas and Oil, there continue to be some nagging issues in respect of duplication of responsibilities. For example, the developer’s plans are approved by DECC (to mitigate the risk of induced seismicity), the EA (for air emissions, to mitigate the risk to public health) and the HSE (which monitors well integrity). Another example of duplication is the developer being required to discuss plans to mitigate the risk of groundwater contamination with DECC (during the ERA), the local MPA (again during the ERA), the EA (during the application for a groundwater permit) and the HSE (during its review of the well design).
There have been calls for a single body to regulate onshore development of shale gas and oil but any such reorganisation would only cause more delays in the industry. Instead, the House of Lords Economic Affairs Committee has recommended a more coordinated and responsive approach within the existing framework, with a lead regulator identified by the Government. Duplication of information requests and the consequent delays and costs might also be avoided if the Office of Unconventional Gas and Oil provides a single point for data input for developers.
Continuous calls for the UK Government to simplify regulations and speed up the process for awarding permits do not address the concerns of local communities who remain unconvinced by what they consider a risky technology. In respect of the regulatory regime however, the Government has made tremendous progress by simplifying regulation (where possible) in a way that fosters the UK’s emerging shale gas industry while protecting the public. Developers now have the responsibility to seize these opportunities and step up the search for shale.