The US shale gas revolution has seen several EU Member States chase after the “American Shale Gas Dream,” particularly given that shale gas in the US is up to five times cheaper than conventional European gas. The sheer rate of expansion of the shale gas market and its already visible impact on the US economy has shaken up the energy sector. According to an editorial report from The Wall Street Journal, gas from shale beds now accounts for more than 25 percent of the US natural gas market, up from just one percent in 2000. Added to this are the hundreds of thousands of jobs this burgeoning industry is said to have created, both directly and indirectly. Shale enthusiasts have also stated that shale gas may have secured US energy needs for the next 100 years.
Despite these attractive assumptions, the topic of shale gas has divided EU Member States into two camps. Critics from countries like France and Bulgaria dismiss it as coming at too high an environmental cost, pointing out that the hydraulic fracturing technology married with horizontal drilling and advanced sensing techniques (or, simply, "fracking") could have unpredictable consequences. On the other hand, supporters such as Poland, Spain, Hungary, Romania and the UK view it as a solution to energy dependency that could lift us out of an impending energy crisis. However, it seems that even countries with ardent government support may not be able to sustain this nascent industry.
United Kingdom
In January 2014, Total became the first oil and gas "major" to invest in UK shale. Total, advised by a team from Dentons' London office, acquired a 40 percent interest in two licenses in the Gainsborough Trough area of the East Midlands, which cover an area of 240 km2 Island Gas Ltd—a partner in the joint venture company set up for this project—will be the operator of the initial exploration program, with Total taking over operatorship as the project moves towards development.
Onshore oil and gas in the UK, at least in its “unconventional” forms, has so far generally been the preserve of a group of small, specialist companies. This is due to the limited resources to fund test drilling programs for shale and the extensive preparatory work in terms of regulatory clearances and surveys that needs to be completed before drilling can begin. Total’s move shows that there is now enough interest and confidence in the UK shale scene to justify the involvement of companies with sufficient resources to take the more promising prospects to the next stage.
Onshore oil and gas exploration, assessment and production in the UK can only take place with a license under the Petroleum Act 1998, issued by the Department of Energy and Climate Change (DECC). The next round for onshore Petroleum Exploration and Development Licenses (PEDLs) in 2014 will cover, among others, onshore oil and gas exploration and production (including shale gas). The UK Government announced last December that new PEDLs will be subject to greater regulation than before, including enhanced seismic risk analysis / monitoring and a “traffic light” system for controlling operations.
Work commissioned by DECC and published in July 2013 indicates that it will be quite a while before UK shale has an appreciable impact on UK energy prices, and that the impact is likely to be modest. However, the prospect of a UK shale industry also represents in its own right the prospect of economic growth. Estimates of the number of jobs that could be created by UK shale developments vary considerably, but they could be in the tens of thousands. The prospect of additional tax receipts from onshore unconventional gas projects boosting the public finances is also attractive to the UK Treasury as revenue from offshore oil and gas developments dwindles.
As part of its effort to boost investment in shale production, the Treasury detailed proposed “pad allowances” on 19 July 2013, the effect of which would be to reduce the tax rate on a portion of fracking production income from 62 percent to 30 percent, by relieving the 32 percent “supplementary charge.”
Shale gas would benefit from first-year allowances for capital expenditure and an extended Ring Fence Expenditure Supplement (reflecting the longer payback for shale gas projects).
The Finance Bill 2014 will include provisions legislating for this. On 13 January 2014, the Prime Minister also announced that local authorities would be able to keep 100 percent of the business rates from shale developments.
Although an established technology, with onshore shale gas production in the UK going back more than 20 years, fracking is controversial in the UK. Public interest groups and local objectors have targeted the process with anti-shale protests to prevent shale development, particularly in sensitive locations. However, some compelling figures lead to the prediction that "unconventional" onshore oil and gas extraction is likely to play a greater role in the UK energy economy. Estimates of shale gas reserves suggest that it could meet UK gas needs for 50-70 years, assuming a 10-15 percent recovery rate. With this in mind, the UK Government sought to allay these concerns by proposing financial rewards for "host communities". Thus, it has welcomed the Community Engagement Charter launched by the UK Onshore Operator Group (UKOOG) in June 2013. UKOOG proposed that host areas should receive £100,000 per well site at the exploration / appraisal stage and 1 percent of revenues at the production stage, allocated approximately 2/3 to the local community and 1/3 at the county level.
While the search for UK shale gas continues, we have already seen the impact that the US shale revolution has had in the UK. By depressing domestic demand for coal in the US, shale has helped to keep some of the UK’s remaining coal-fired power stations supplied with cheap coal and to boost their share of the UK's electricity supply. Also, towards the end of 2013, Ineos announced that its Grangemouth plant, which had apparently come close to being permanently shut down a few weeks earlier, would start to import ethane derived from US shale gas in 2016.
The potential for successful shale projects exists in many parts of the world and even major oil companies’ resources are finite. The UK authorities, at all levels, will need to continue to perform well on shale in order to ensure that the UK receives its fair share of investment in shale projects. There will be more transactions like Total’s acquisition of a stake in an existing shale play, but oil companies face a different regulatory environment from the one they are used to if they have been involved in UK offshore projects. They are moving from a world in which DECC regulates almost all aspects of their work under the licensing regime to one in which they have to manage relationships carefully with a range of stakeholders and deal with a number of different authorities, some of which will be very sensitive to local views. It is, however, likely to be some time before any shale project enters the production phase and a number of years before any appreciable amount of shale gas is produced in the UK.
Romania
The Romanian Government is keen to pursue shale gas projects in a bid to address the concerns of energy- intensive industry, such as aluminum, steel and chemical producers, which are perpetually up in arms over high electricity and gas prices. They allege that high energy prices bar them from competing effectively in the market, and as a result these key industry participants have on a number of occasions threatened to relocate outside Romania, triggering massive job losses in the local economy.
To date, four oil concession agreements have been executed in Romania for exploration, development and production: one in Barlad, in eastern Romania, and three in Dobrogea, in the south-east. All of them were granted to a local subsidiary of US oil and gas giant Chevron. Exploration started in October 2013 and was suspended shortly afterwards due to opposition from the local community. Chevron began the exploration process again in February 2014 and was recently granted a second environmental permit to install additional exploration equipment in the concession areas.
Nevertheless, opposition to shale gas remains active: green NGOs have scheduled regular protest meetings, and they have so far been successful in garnering local community support. In some situations tensions escalated to the point where the Government was obliged to increase the riot police presence and restrict the NGOs’ access in shale gas exploration areas, to prevent sabotage of Chevron's drilling equipment.
Experts agree that one of the main reasons for this “Not In My Back Yard” approach relates to the fact that local communities receive virtually no direct benefit from shale gas production occurring in those communities.
In common with the legal regime in other EU Member States, under Romanian law mineral resources belong to the national public domain and not to private landowners or local communities.
As well as the strain this issue has caused in relations between the Government and its people, it has led to open administrative conflicts between central authorities and local public authorities. In some instances the latter challenged the central agencies’ grant of exploration licenses and other permits in court, claiming that shale gas resources do not belong to the State, but in fact belong to the local authorities, arguing that the government should not be allowed to exploit these resources.
This chain of events has led to experts calling for reform of the current Romanian oil and gas legislation, setting up local community funds that would receive part of the royalties paid by the production license holders and distribute the proceeds for the benefit of the local communities. The Government has indicated its readiness to amend the legal framework in the medium term once it has confirmed, through investigative drilling, the existence of viable shale gas deposits.
The current Romanian Petroleum Law is first in line for reform. Although it regulates exploration, development and production activities, it does not make any explicit distinction between conventional and unconventional resources. As noted by the National Agency for Mineral Resources in one of its reports, the specific legislation needed to address the exploration and production of unconventional natural resources (and shale gas in particular) is quite limited, mirroring the relatively restricted exploration activities at present.
Poland
Much like everywhere else, Poland’s shale industry is still in its infancy.
A full assessment of the scale of Poland's reserves requires more test drilling. However, Poland is believed to have one of the largest shale gas reserves in Europe, with reserves of risked, technically recoverable shale gas estimated at 146 Tcf in four assessed basins. Shale gas potential is being explored by exploration and production companies under 72 unconventional gas exploration concessions. Up until 4 August 2014, 65 exploration drills (including 12 horizontal drills and 27 cases of hydraulic fracturing) have been completed. There is one exploration drill in progress, with another three due to be started shortly. Industry insiders view this relatively low level of activity as a consequence of the unclear legislation governing this sector and the uncertainty of the proposed legislation on the subject.
Initially, the hydrocarbons legislation proposed by the Polish Government involved the mandatory participation of a government-owned entity (National Fossil Fuels Operator) with a minority equity stake in shale gas development projects. However, this gave rise to serious concerns in the industry over the shape of future hydrocarbon regulations.
According to industry representatives, these changes, if implemented, could significantly reduce industry investment in shale gas exploration at a time of disillusionment with early well results. In an effort to address these concerns, the Government decided to modify its approach towards shale gas development significantly, by redrafting the proposed hydrocarbons legislation to introduce an incentive scheme for investment in the shale gas industry. The Hydrocarbons Law was signed by the President on 1 August 2014 and awaits publication in the Journal of Laws. The Hydrocarbons Law will come into force on 1 January 2015.
The Hydrocarbons Law also proposes a number of regulations aimed at simplifying the procedure for granting new concessions, reducing the administrative burden, therefore accelerating shale gas exploration and production in Poland. The Hydrocarbons Law proposes one concession only—comprising the exploration and production stage— instead of the separate concessions possible under current law. Any rights acquired under concessions currently in force will be preserved. Companies performing geophysical surveys to examine geological structures will merely be required to notify the competent authority. It will be possible to produce shale gas and explore the rest of the licensed area under the same concession.
The Polish Government has also proposed a dedicated hydrocarbons tax system in separate draft legislation which is currently making its way through Parliament. The State’s share of the revenue will come in the form of two new taxes: cash flow tax and royalty tax – not to exceed 40 percent of the gross income of production. Shale gas production will be tax-free until 2020, with the amount of tax on hydrocarbons dependent on profitability.
Ukraine
Ukraine is in crisis, with a new President and a transitional Government pending anticipated elections in the Fall. Nevertheless, a critical focus of the new Government (and the previous regime as well) is increasing energy independence.
To that end, over the last couple of years Ukraine has implemented major reforms in its legislation on production sharing agreements specifically to promote shale gas development. Three very public tenders for shale gas development projects took place between 2010 and 2012 in Western and Eastern Ukraine, which were awarded to Shell, Exxon and Chevron. Due to the current crisis with Russia, Exxon has suspended its operations, whereas Shell and Chevron have temporarily halted some of their activities. Regional administrations protested against the potential environmental risks of shale gas exploration, but were eventually placated by changes in legislation that allowed a portion of gas revenues to revert to the relevant local administrations rather than fully to the national government.
Turkey
Inspired by the US shale gas boom, Turkey has begun considering the potential of shale gas to meet its ever- increasing energy demands and to reduce its dependency on imported natural gas. Whether this expectation is realistic or not depends on the findings of the surveys regarding recoverable shale gas resources in Turkey, which are currently at a very early stage.
In June 2013, the US Energy Information Administration released a report which estimates that Dadas Shale (Southeastern Anatolian Basin) and Hamitabat Shale (Thrace Basin) in Turkey contain 163 Tcf of risked shale gas in place with 24 Tcf as the risked, technically recoverable resource.
The Turkish Petroleum Corporation (TPAO) conducted early-stage shale gas exploration and drilling activities in cooperation with Shell and Transatlantic Petroleum. According to the media, other companies that are engaged in early-stage exploration activities include ExxonMobil, Anatolia Energy and Valeura Energy.
Exploration and production of shale gas is regulated under the Petroleum Law (Law No. 6491published in the Official Gazette No. 28647) (the Law) and its accompanying secondary legislation. Although the Law does not have provisions specifically envisaged for shale gas, its definition of “petroleum” is broad enough to include shale gas.
The Law, which entered into force on 11June 2010, is aimed at liberalizing the petroleum market and incentivizing further investment. The duration of exploration concessions was increased to five years for onshore concessions (with a possible two-year extension) and eight years for territorial waters concessions (with a possible three-year extension). The duration of operation concessions was also increased to 20 years with the potential to extend twice for 10 years. Most of the preferential rights of TPAO existing under the previous Petroleum Law of 1954 were abolished, although TPAO still retains its preferential right for operation.
The Law introduced a clearer and more straightforward method for the calculation of royalties to be paid to the State by the concessionaires.
It also provides exemptions from customs duties, levies and stamp tax for equipment imported and supplied locally and facilitates repatriation of capital. It sets forth a general obligation to provide security in the amount of two percent of the total investment amount (one percent for territorial waters) for exploration concession applicants. The Law states that, for unconventional resources (including shale gas), the Ministry of Energy and Natural Resources has the discretion to reduce or completely waive the security payments requirement. Considering that the Council of Ministers resolved to support shale gas exploration studies in its Decree on Approval of Medium Term Program (2014-2016) (Decree No. 2013/5444, published in the Official Gazette No. 28789), the Ministry of Energy and Natural Resources is likely to exercise its discretion regarding security requirements in relation to concessions on shale gas. Despite the improved state of Turkish legislation surrounding the shale gas industry, the need to develop and improve Turkey’s legal and technical infrastructure means that shale gas production will not begin before 2020.
Looking ahead
The media’s fracking furore has died down, but the impact of the American boom in the shale gas industry has already had an appreciable effect on the European oil and gas landscape. Despite protests from local interest groups, early exploration is well under way in many countries, and the legislative framework is slowly but surely developing. There is still some opposition in certain jurisdictions: France currently has a moratorium on fracking, promised by President Francois Hollande to last at least until the end of his presidential term. In the long run, however, shale gas has the somewhat heady potential of securing energy independence for many countries (including the possibility of Europe freeing itself from its dependency on Russian gas), as well as bolstering the oil and gas industry with the creation of new jobs, and subsequently the economy at large.
Two recent developments may afford a glimpse into the way the shale gas landscape is being moulded in Europe.
First, in October 2013, the European Parliament amended the directive regulating environmental impact assessments (EIA) (Directive 2011/29/EU) to ensure that hydraulic fracking is subject to EIAs, preventing conflicts of interest between investors and EIA providers and entitling local communities to challenge exploration and production permits. Second, and more recently, Cuadrilla is submitting planning applications to begin operations in Lancashire, UK, which could start as early as 2015.
