Overview

"Unconventional" onshore oil and gas extraction is likely to play a greater role in the UK energy economy, as changing production economics, advances in oilfield technology and energy security pressures trigger a range of Government announcements intended to create a clear investment pathway for shale gas and oil.

Estimated shale gas reserves could meet UK gas needs for 50-70 years, assuming a 10-15 per cent recovery rate. Shale production is highlighted as inconsistent with the binding Climate Change Act 2008 carbon reduction budgets, committing to halving UK emissions during the period 2023-2027 (and achieving an overall reduction of 80 per cent by 2050) relative to 1990 levels. The Government confirmed the dominant role for gas in electricity generation to at least 2020 in its 2012 Gas Generation Strategy. It also lifted a short-term moratorium on exploitation through hydraulic fracturing techniques – "fracking" – in December last year and announced a proposed package of regulatory reforms, new guidance and incentives. These measures were announced on 19 July 2013 and we highlight the key points below.

Tax Breaks

The Chancellor had already foreshadowed a more favourable tax regime for shale both at the Conservative Party conference in 2012 and in his Budget speech in 2013. 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 per cent to 30 per cent, by relieving the 32 per cent "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 Treasury consultation on the fiscal regime for shale invites responses on policy and technical issues (including how to define unconventional hydrocarbons) as well as possible industry structures and the likely impact of the measures. The consultation closes on 13 September 2013: let us know before then if you have any comments you would like us to incorporate into our response.

PEDL to the Metal

Onshore oil and gas exploration, assessment and production can only take place with a licence under the Petroleum Act 1998, issued by the Department of Energy and Climate Change (DECC). The next round for onshore Petroleum Exploration and Development Licences (PEDLs) in early 2014 will cover onshore oil and gas exploration and production (including shale gas), virgin coal-bed methane exploration and production and natural gas storage in hydrocarbon reservoirs. The 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.

The Government has also now appointed AMEC to prepare a revised Strategic Environmental Assessment report in line with EC law for public consultation before the round begins.

New Planning Practice Guidance

Planning permissions are required for all stages of the fracking process. The Government has decided not to bring shale planning consents into either the National Strategic Infrastructure regime or the recently-created Major Commercial Projects fast track. Planning applications for exploration, assessment and production stages will remain with local Mineral Planning Authorities.

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 are likely to target the planning process to prevent shale development, particularly in sensitive locations. The range of effects associated with fracking, particularly at production stage (including water abstraction, engineering operations, transport, visual, ecological and economic impacts), will require careful treatment to avoid legal challenges to the planning process.

The new Planning Practice Guidance for onshore oil and gas (the Guidance) is therefore intended to enable the small number of minerals authorities that will deal with fracking applications to do so without reopening issues that have been, or will be, dealt with by other regimes. The Environment Agency, the Health and Safety Executive, DECC and in some cases the Coal Authority all act as filters in the consenting process for onshore unconventionals. EC Directives on water, environmental assessment and waste all apply. The Guidance therefore aims to help regulators and applicants limit the scope of the planning exercise by giving due recognition for the sophistication and effectiveness of the existing regulatory regime for onshore oil and gas in the UK. The Guidance also helpfulIy:

  • addresses public concerns, by explaining how hydrocarbon extraction, including shale gas and coal-bed methane, works in practice and is regulated;
  • sets a benchmark for pre-application assistance from authorities (and the information they should properly seek to validate and determine planning applications);
  • seeks to clarify the role for Environmental Impact Assessment during initial planning stages;
  • encourages minerals planning authorities to set clear local policies for the location and assessment of hydrocarbon extraction within the Petroleum Licence Areas; and
  • sets a high bar – exceptional circumstances – for authorities seeking financial guarantees to cover restoration and aftercare costs.

The Guidance sits underneath the existing National Planning Policy Framework and alongside the Technical Guidance Note on Flooding and Minerals. Surprisingly little guidance is given on the technical issues required to complete planning applications. Developers will need to exercise care in defining development site boundaries, undertaking EIA and satisfying the strong emphasis on significant pre-application consultation and public engagement.

Environmental Permitting

The existing environmental and safety regimes currently provide the framework for onshore exploration in the UK. Operators will need environmental permits for the management of the flowback fluid and waste gases. The key permitted activities for shale projects are those relating to groundwater, radioactive substances, and mining waste. As shale projects will require a large quantity of water they may also be subject to the water abstraction regime and the Water Resources Act.

The Environment Agency is due to publish technical guidance (which will be subject to consultation) setting out the regulator's requirements for operators. The Environment Agency has announced that it will be streamlining the applications for mining waste and radioactive substances permits and speeding up the permit issue process with the aim of issuing permits for onshore oil and gas exploration activities within one to two weeks with standard rules from early next year.

Developers will also need to carefully manage the disclosure of proprietary and commercially sensitive information to public authorities because of requirements under the Environmental Information regime. The Environment Agency's guidance note on the regulation of exploratory shale gas operations indicates that information on chemicals used in fracking fluid will normally be made available to the public but that it "may not disclose the relative quantities in the mixture, as this is commercially confidential". Environmental permits and permit applications are held on the public record and there may be issues in particular around the disclosure of the chemical composition of fracking fluids which may also be subject to requirements under REACH.

Comment

Onshore UK shale gas exploration is likely to accelerate over the next five years. The consenting process presents significant technical and legal challenges, but there is now a clearer pathway and incentives for shale exploitation. Rather than undermining carbon reduction commitments, shale gas could provide a secure standby power source required to complement the extension of renewable capacity. The significance of shale production, if it occurs at scale, will be the emphasis it places on bringing forward carbon capture and storage projects, since without it gas cannot remain a large part of the UK energy mix beyond 2030.