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UK fracking: the pursuit of safety

Further changes to the Infrastructure Bill have now addressed the potential problems for the UK unconventionals industry introduced by a Labour amendment two weeks ago, but the approach of Scottish and possibly Welsh Ministers is less encouraging for would-be shale developers.

Infrastructure Bill

At the last substantive debate on the Infrastructure Bill in the Commons, an amendment was inserted providing that “any hydraulic fracturing can not take place” unless 13 conditions are fulfilled.  As we pointed out in an earlier post, the drafting of this “safeguarding” provision (which can be seen here at amendment no.21) left considerable scope for doubt as to when some of these conditions would be satisfied.  Such uncertainty inevitably assists those who want to delay or obstruct fracking operations.

The House of Lords has now replaced the Commons’ amendment with some much better drafted provisions (see amendment 21B here) that provide a clear and practicable route to satisfying each of the safeguarding requirements proposed by the Commons.  Although the Labour spokesman, Lord Tunnicliffe, raised a number of points of detail which he suggested had been lost in translation from the Commons’ amendment to the Government’s version (see column 1079 of the Hansard report), it seems possible that there will be no further changes when the Bill returns to the Commons for the next stage of the so-called ping-pong process.

In the meantime, here are ten points to note about the new clauses:

1      The new clauses insert two new sections (4A and 4B) into the Petroleum Act 1998, under which oil and gas exploration, production and development licences are granted.

2      The standard conditions of licences for onshore development (the model clauses) provide that the licensee may not commence drilling of any well or borehole without the Secretary of State’s consent.  In future, any such “well consent” must contain a condition prohibiting fracking at a depth of less than 1000 metres and a condition requiring the licensee to have the Secretary of State’s consent for any fracking at a depth of 1000 metres or more.

3      Under new section 4A, the Secretary of State may only issue a “hydraulic fracturing consent” if he is satisfied that 12 conditions are met.  These conditions reflect the Commons’ 13 pre-conditions for permitting fracking, but they are expressed more clearly and 11 of them are accompanied by a description of the documents whose existence will be sufficient for the Secretary of State to be satisfied that the relevant condition is met – although the legislation explicitly states that he may also consider them to be satisfied without reference to such documents.

4      The 12th condition is “that a scheme is in place to provide financial or other benefit for the local area” – slightly wider than the equivalent Commons drafting.  The Commons’ 13th condition was about not fracking at less than 1000 metres: this is subsumed into the well consent itself, rather than being a condition for issuing the hydraulic fracturing consent.

5      The new conditions avoid imposing the Commons’ requirement to notify “residents in the area on an individual basis”, substituting a requirement for the local planning authority to confirm that the applicant has self-certified its compliance with publicity requirements under the planning regime.  Baroness Verma, speaking for the Government, pointed out that it would be difficult for the Secretary of State to be satisfied that all residents had been individually notified.

6      The picture is not yet quite complete.  Draft regulations are to be laid before Parliament, by 31 July 2015, to clarify the burning issue of exactly which “protected groundwater source areas” and “other protected areas” will be off-limits to fracking.  Unless the current Government (or its successor) means to beat that deadline by a wide margin, it may be Autumn before these important details have been clarified and we know whether Greenpeace’s analysis of the extent of the protected areas is unduly optimistic from an anti-fracking point of view.

7      Government has made a lot of statements and published guidance about the inter-relationship of the various different consenting regimes that apply to fracking, but new section 4A for the first time “joins the dots” between the different regimes in legislation.  So, for example, the condition on environmental impact assessment is linked to a notice from the local authority; the requirements about methane monitoring are linked to conditions in the environmental permit; and the requirement on well integrity is linked to an HSE certificate.

8      The decision to permit fracking in each case rests with the Secretary of State, but if everything is working as it should, he will issue the consent on the basis of work that is already required to be done under the existing planning and other regulatory regimes. Presumably for that reason, applications for hydraulic fracturing consents are not required to be published or consulted on.

9      A hydraulic fracturing consent may be issued subject to conditions.  Failure to comply with the conditions of a hydraulic fracturing consent, or with the prohibition on fracking at less than 1000m, could lead to revocation of the underlying licence.

10    Once the new sections are in force, the requirement to apply for and obtain a hydraulic fracturing consent before beginning to frack will apply whenever a licensee seeks a new well consent, regardless of when the licence under which the consent is sought was granted.

The provisions about hydraulic fracturing consents link to another change made to the text of the Bill as it left the Commons.  This relates to reporting by the Committee on Climate Change on the impact that greenhouse gas emissions from the use and extraction of gas from onshore sources may have on the UK’s ability to meet its Climate Change Act emissions reduction targets.  When such reports are produced (on 1 April 2016 and every 5 years thereafter), the Secretary of State will be obliged either to legislate to terminate the right of use of deep level land for petroleum and deep geothermal exploitation or to produce a report explaining why he has not done so.  But if the right of use is terminated, it will only be removed in respect of projects that have not already made use of that right.

Scotland and Wales

While for the Coalition Government in Westminster, a safety-first approach to fracking may be achievable simply by means of some deft legislative drafting, the politics in Edinburgh and Cardiff are different.  Both Scottish and Welsh Ministers have recently taken a less positive stance on fracking.

The negative noises from Ministers in the devolved governments come in the context of debates about further devolution of energy-related powers and against the background of the awkward split between the oil and gas licensing regime (currently administered by the Secretary of State for all of Great Britain, but a potential candidate for further devolution, particularly in Scotland)  and the planning regime (where Welsh and Scottish Ministers are, or can be, the ultimate decision-makers).  Any unconventional development will need both a Petroleum Act licence and planning permission.

On 28 January 2015, Fergus Ewing, the Scottish Energy Minister, announced that the Scottish Government’s “cautious, evidence-based approach” to fracking and its desire to hear “the voices of the communities…likely to be most affected…in a formal and structured way” meant that “it would be inappropriate to allow any planning consents in the meantime” and he announced ” a moratorium on the granting of planning consents to unconventional oil and gas developments…until such time as the work I have referred to has been completed”.  Scottish Ministers have also directed the Scottish Environment Protection Agency not to issue any “controlled activity regulation licences” during the moratorium (see page 17 of the report here for the full debate).

On 4 February 2015, there was a vote in the National Assembly for Wales in favour of both the devolution of energy consents and a fracking moratorium.  Discussion of fracking, ranging as far afield as New York and New South Wales, dominated the debate: the party lines on the subject in Cardiff are not the same as those in Westminster.

It seems that Welsh and Scottish Governments have made the political calculation that it is best to let England lead the way in building the UK evidence base on fracking.

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UK fracking: the pursuit of safety

UK Parliament votes against moratorium on fracking – but there may be a catch

Perhaps unsurprisingly, yesterday afternoon’s House of Commons debate on the Infrastructure Bill did not result in the introduction of the explicit moratorium on further attempts to develop a UK shale gas industry that had been proposed by a number of MPs opposed to fracking.  However, two significant changes have been made to the Bill’s provisions on shale gas exploitation in the UK.

Pre-match build-up

The debate was at the Bill’s “Report” stage in the Commons: this is the first opportunity that the full House, rather than the Committee which has done most of the line-by-line scrutiny work, has to vote on changes to a Bill.  (It is also the last such opportunity, unless the House of Lords subsequently disagrees with changes made by the Commons.)  A large number of amendments had been tabled, mostly seeking either to restrict fracking in some way or requiring further investigation of and reporting on its impacts on climate change, for example as a result of fugitive emissions of methane from fracking sites.  Whilst both the Government and the official Labour Party lines are that fracking should be allowed subject to proper safeguards, there are differences of view as to how far existing legislation and institutions provide sufficient protection for the environment.  And there are a number of MPs of all parties who disapprove of fracking in any circumstances.

This strain of opposition to fracking in principle was demonstrated when the House of Commons Environmental Audit Committee (EAC), which has been considering fracking, chose to publish its report on the morning of the debate.  The report puts the case against developing a UK shale industry on the grounds that it would inevitably be inconsistent with the UK’s climate change emissions reductions targets to do so.  The EAC argue that the Government is wrong if it argues that shale gas is good because it will displace coal as a fuel for electricity generation and so reduce emissions.  They believe that a flourishing shale industry would be bound to breach the UK’s carbon budgets, set under the Climate Change Act 2008.  Essentially, they see the UK’s apparent shale reserves as a prime example of “unburnable carbon“.  The Committee also express concern about the uncertainty surrounding some other impacts of fracking, e.g. on water, and cite “a lack of public acceptance” for the technology.  They conclude that “a moratorium on the extraction of unconventional gas through fracking” is required to “allow the uncertainty surrounding environmental risks to be resolved”.

By a further happy coincidence, The Guardian simultaneously published a leaked letter from George Osborne to Cabinet colleagues on fracking.  The letter demonstrates in some detail the extent of the efforts being made by central Government to ensure that it does everything that it can properly do to facilitate consent for fracking through processes that it does not entirely control (because planning and other consents are administered by local government or the Environment Agency).

Finally, in the days between the end of the Committee sessions and the debate, there was a slow drip-feed of anti-fracking amendments being published and trailed in the media – and Vivienne Westwood and others turned up to protest outside Parliament on the day.

The main event

In the end, as often happens, the debate itself was something of an anti-climax.  The Government used its control of the House to confine the debate to less than two hours, which was followed by votes on a more or less representative sample of the amendments.  Some of the debate generated (in participants’ own words) more heat than light.  Attention was paid to the fate of a report by Defra on the impact of shale gas on the rural economy, which has so far been published only in redacted form.  Some suspect that the Government is suppressing unwelcome analysis.  Ministers have done little to dispel this by saying that the report should not have been produced, is not analytically robust and would not help the debate.  A fair amount of time was also devoted to the question of whether or not MPs had received a copy of a letter from a Minister following up on an earlier debate.

But there was also a considerable amount of substantive discussion.  For example, the arguments from the EAC report were rehearsed, and rebutted by a number of speakers, who pointed out the continuing importance of gas to our heating, as well as electricity generation needs, and that the life-cycle carbon emissions of LNG (on which we are likely to depend in the long-term if we do not find new sources of indigenous gas) have been found to be higher than those associated with shale gas.

The question of further devolution of powers to Scotland was also raised: if legislative competence for the licensing of onshore oil and gas exploration and extraction is to be devolved to the Scottish Parliament, as the Government has proposed following the recommendations of the Smith Commission, should the Government not wait before awarding further licences in Scotland?  Unsurprisingly, Ministers were not persuaded by this view.  After all, they are not proposing to devolve the actual granting of licences to the Scottish Government.

If you don’t want to know the result, look away now…

In the end, only two substantive amendments have been introduced into the Bill in relation to shale gas as a result of yesterday’s debate.

  • A Government amendment requiring the Secretary of State to request the Committee on Climate Change (CCC) to provide advice on the impact which “combustion of, and fugitive emissions from, petroleum got through onshore activity” is likely to have on the Secretary of State’s ability to meet the Climate Change Act duties to reduce greenhouse gas emissions by 80% by 2050 and to meet each of the carbon budgets set under the Act in the meantime.  Future Governments will be obliged to report on the conclusions they have reached after considering the advice of the CCC – a sort of “comply or explain” mechanism.
  • As was expected, the Government allowed a Labour front bench amendment to pass.  The intention of the new clause it introduced is said to be: “to ensure that shale gas exploration and extraction can only proceed with appropriate regulation and comprehensive monitoring and to ensure that any activity is consistent with climate change obligations and local environmental considerations”.  Politically, accepting the new clause was clearly the expedient course.  From a legal point of view, it may cause more problems than it solves.

The new clause lists 13 things that must happen before “any hydraulic fracturing activity” can take place in Great Britain.  The list is a mixture.  Some of the pre-conditions it sets reflect existing legislation – for example requirements to carry out an environmental impact assessment; for planning authorities to consider the cumulative impact of fracking proposals in a given area; and to seek Environment Agency approval of fracking fluids.  Others include monitoring of the site for 12 months before fracking begins; “site-by-site measurement, monitoring and public disclosure of existing and future fugitive emissions”; independent inspection of well integrity; avoidance of groundwater source protection zones; a statutory requirement for the kind of community benefit schemes the industry has already promised; bans on fracking in “protected areas” (undefined), or at depths of less than 1,000 metres; and notification of residents in the area “on an individual basis”.

The House of Lords will now have an opportunity to consider the amendments made by the Commons.  Unless some changes are made to clarify the less tidy parts of the new clause’s drafting, uncertainties over what it requires may lead to a moratorium on GB fracking by the back door if and when the new clause comes into effect.

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UK Parliament votes against moratorium on fracking – but there may be a catch

Clearing the way for UK shale (and deep geothermal) exploitation: Infrastructure Bill Update (1)

A new stage in the UK Government’s campaign to remove potential obstacles in the way of shale gas developments was reached last week following a debate in the House of Lords.  Clauses on access to “deep-level land” for petroleum extraction and deep geothermal energy projects are now part of the Infrastructure Bill currently before Parliament.

Since English law recognises no lower vertical limit to landowners’ rights, the new clauses should prevent landowners from seeking to obstruct projects on the grounds that e.g. the drilling of lateral wells 1km underneath their property would be a trespass against them, or alternatively demanding an exorbitant price for agreeing to such use of “their” land.

The new clauses begin: “A person has the right to use deep-level land in any way for the purposes of exploiting petroleum or deep geothermal energy”.  Land here means “onshore” land, and “deep-level” means at least 300 metres below the surface.  In Scotland, the right so far only applies to geothermal electricity generation projects.

The right of use would include all phases of a shale gas or geothermal project: exploration, development, production and decommissioning.  The clauses refer explicitly to “drilling, boring, fracturing or otherwise altering deep-level land” and “passing any substance through, or putting any substance into, deep-level land or infrastructure installed in deep-level land”.  They also allow developers – as a matter of private law – “to leave deep-level land in a different condition from the condition it was in before an exercise of the right of use (including by leaving any infrastructure or substance in the land)”.

Although existing legislation provided scope for developers to override landowners’ objections to the use of their land to extract petroleum by statutory means, the Government concluded that the procedures involved were too burdensome.  The new clauses were introduced following a consultation which ran from May to August 2014 and was discussed in an earlier post on this Blog.  The consultation met with an overwhelmingly negative response, but largely from respondents opposed to fracking per se on a range of environmental grounds.

The new statutory right of exploitation removes a potentially time-consuming and expensive obstacle to development.  Those opposed to individual developments that involve the use of “deep-level” land will now have to rely on public law licensing, planning and environmental processes, rather than the exercise or enforcement of their private law rights, if they wish to try to stop projects going ahead.

The Bill does not otherwise change the position in relation to rights and liabilities as between developers and landowners.  If developers cause damage or harm during their operations, they are likely to be liable for remediation costs and to pay civil damages to any third parties adversely affected.  Landowners could also potentially incur liability for environmental damage caused by developers using the new right in certain circumstances such as the insolvency of a developer.  This position is likely to continue to focus commercial and other strategies, including possibly the imposition of some form of security for decommissioning / remediation costs as a condition of planning permission.

For more shale-related posts, including commentary on the 14th Onshore Licensing Round, see Dentons’ UK Planning Law Blog.

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Clearing the way for UK shale (and deep geothermal) exploitation: Infrastructure Bill Update (1)

Why won’t UK shale be subject to the renewable energy community stake requirement?

As noted in our recent post on Shared Ownership, the UK Department for Energy and Climate Change (DECC) has published its Community Energy Strategy (Strategy) which anticipates that by 2015, it will be normal for new renewable energy developments to offer project stakes to local communities (and which could be enforced by an enabling power in the draft Infrastructure Bill 2014). At a recent renewable energy industry event, it was asked why shale developers are not similarly targeted by the Strategy to offer stakes to local communities?

Analogy to a new tax

In short, because it would likely be argued to be unfair. Shale developers have already paid and committed to fulfil minimum work obligations onshore under a petroleum, exploration and development licence, in order to have the right to explore for and later extract hydrocarbons from the sub-surface (and off the Crown). Any later requirement to give a royalty or equity interest to a local community, could be regarded as being analogous perhaps to an unexpected new tax. In addition, having to obtain DECC consent or adding say a community interest company (CIC) vehicle to a hydrocarbon licence, could be administratively cumbersome.

Misalignment of local opposition

That said, renewable developers may argue that buying or leasing surface land rights for renewable energy generation, and later having to give a stake to a local community, is little different philosophically. However, the current Strategy proposal is perhaps designed to address the apparent misalignment between national poll results (which are reported to suggest a majority are in favour of renewable energy); and local communities (who often resist wind and solar developments in their own localities). Such opposition is often then said to be reflected in local authority planning application refusals, which in turn reduces renewable energy development and impacts national carbon targets.

Reduced justification for compensation

By comparison, opposition to shale developments, is perhaps expected to be less driven by local planning or land-use opposition, as opposed to broader ideological and environmental concerns, which may not be as effectively addressed with active community participation – few well-heads will have the “wow factor” of a windmill. In addition, once DECC’s current consultation on granting horizontal drilling access rights (to ease shale and geothermal developments) runs its course (see our recent post Compulsory access rights “in the national interest”), then developers will possibly have less need for community alignment on specifically land-use environmental concerns. Indeed, the relative thickness of exploitable UK shale resources means that relatively few well-pad sites on the surface could be used to access large areas of sub-surface resource horizontally, causing little environmental impact (truck movements apart). This may reduce any justification for giving local communities a substantive share of the profits.

Conclusion: proactivity in hindsight

It is also important to note that the nascent shale industry, to the extent represented by the recently invigorated UK Onshore Operator’s Group (UKOOG), has perhaps already drawn some of the sting of potential community engagement regulation, by pro-actively suggesting well-pad and production payments (albeit modest in amount) for local communities. Whilst the renewables industry is more mature, numerous and with diverse interests, it may be noted that a sophisticated regulator is rarely motivated to act, except where market failure is perceived. Therefore, if the shale industry were to fail to implement the recommendations volunteered by the UKOOG, DECC may be tempted to re-assess the absence of unconventional developments from the Strategy and Infrastructure Bill’s proposals for community participation. In hindsight, now that DECC has seen a need to prompt the renewable energy industry into volunteering community participation, it appears less likely that community payments divorced from equity stakes or project profitability alone, will meet the regulator’s perception of community needs.

For further analysis on the potential application of UK and other international examples for tailoring legislation, farm-in and joint operating agreements in developing unconventional basins, please see our Shale Guide, recently presented and discussed over two days in Washington DC at a World Bank and OGEL symposium, aggregating the learning of representatives covering 18 countries.

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Why won’t UK shale be subject to the renewable energy community stake requirement?

UK shale legislation – what could (and should) change from 4 June?

Land access under the Infrastructure Bill

According to reports by the BBC and the Financial Times, Whitehall sources have indicated that the Government plans to propose a new Infrastructure Bill in the Queen’s Speech on 4 June 2014. The Bill may provide for automatic access rights for certain shale developments below a minimum depth, and establish a landowner notification and compensation procedure (with a compensation cap).  Although the focus is expected to be on the facilitation of installation of export pipelines under private land, the legislation may also be relevant to horizontal drilling, well completion and stimulation techniques.

Discussions on horizontal drilling rights in the UK are, however, now well rehearsed. Drilling under private land without the owner’s consent is a trespass; compulsory access rights and compensation mechanisms already exist; but they are untested in the shale context, they involve potentially lengthy procedures, and their application could be subject to judicial review.  In the US, directional drilling techniques have been used (e.g. under Dallas Fort Worth Airport) to avoid unleased land and “set-back” restrictions.  Although the UK already has a long-established conventional onshore industry, such directional drilling techniques are not yet cited as a potential solution (and would not prevent the need to obtain a neighbour’s land access consent).

The land access issue is nevertheless often cited in the UK as a significant reason why, so far, early shale investments and recent consolidation amongst developers have not yet translated into drilling permit applications.  All appreciate that, unless test drilling commences in the UK, and the commercial viability of shale production is proven relatively quickly, further funding may not be forthcoming.  No wonder the Government is keen to be seen removing perceived blocks to development.

Whilst trespass is important, it is perhaps interesting that less focus has revolved so far around related land issues, such as residual and decommissioning liabilities, insolvency, remediation and security concerns. Therefore, if any Infrastructure Bill only tackles the issue of providing greater certainty to developers in relation to land access, there may remain some way to go in encouraging more wholesale shale developments by those who would welcome a further regulatory comfort blanket to overlay the existing, largely comprehensive framework of regulation.

UK onshore licensing round

Perhaps an equally pertinent topic for the time being is what may come to pass in the next UK onshore licensing round.

Whilst the issue of new licences in a new 14th onshore licensing round is not a foregone conclusion, the precursory strategic environmental assessment (which was subject to a Department of Energy and Climate Change (DECC) consultation that closed on 28 March 2014) stated that the option of awarding no licences in the 14th round is: “incompatible with the main objectives” of the Government, and is therefore perhaps unlikely.  Therefore, the issue of what the licence terms will look like is an interesting point of speculation.

The Government may be keen to avoid a two tier system which differentiates between conventional and unconventional developments if possible, particularly given the different approaches already applying to conventional developments onshore versus offshore (e.g. in relation to decommissioning treatment), and given the Wood Report’s recent call for greater integration.  That said, there is a contrary argument that some difference of approach is required, given the substantial depth of shale resources in the UK (being up to ten times thicker than in the US) and given that such thickness may justify multiple horizontal wells being drilled from a single well-pad.  This would suggest that provision should be more formally made to allow multiple developments (conventional or unconventional) to proceed under the same land footprint, at differing depths or horizons, in order to maximise recovery from the resource over a given land area.

It is perhaps also worth considering some example terms from the latest (2008) 13th UK onshore Petroleum Exploration and Development Licence (PEDL), and associated model clauses set out in legislation (Model Clauses), in order to highlight areas which would perhaps suit amendment in the unconventional context:

  • Mandatory relinquishment of 50% of the licence area at the end of the initial term of six years is clearly sub-optimal for shale developers, who need certainty over an area throughout a drilling campaign (although relinquishment may be avoided on a bespoke basis where the regulator considers it necessary to recover petroleum, under Model Clause 4(5)).
  • The second term in a PEDL is currently five years, with a distinct 20-year production period thereafter.  Similarly, this separation does not lend itself well to a pilot / appraisal phase (which is likely to include some production).  Re‑alignment along the lines of a dual appraisal phase, followed by a commercial production phase, may be more suitable.
  • The typical work commitment for the initial term (e.g. drilling one, typically vertical, well and conducting seismic work) could do with tailoring to the unconventional situation, perhaps to include ongoing development obligations after initial appraisal.  Indeed viable seismic may be precluded by landscape issues.  One approach from the US, which may be adapted in shaping work commitments (and indeed relinquishment-related issues), is allowing a large block to be held, so long as the operator maintains a “continuous drilling programme”, meaning that a new well must be started within, say, 180 days of completion of the prior well.  A failure to meet the drilling deadline typically results in the loss of all acreage outside the acreage attributable to the existing wells.  Many private agreements in the US (wishing to encourage drilling and hence maximise economic recovery) incorporate similar arrangements into their commercial lease arrangements.
  • Use of terms like “Oil Field” (which means strata forming part of a single geological petroleum structure, according to Model Clause 23(1), which deals with unitisation), in the context of requirements to unitise, conduct petroleum measurement and elsewhere, could have unintended consequences when applied to the unconventional context.
  • Whilst Model Clause 27 treats data required to be provided by a licensee to DECC as confidential, 27(d) allows the relevant Minister, the relevant local council and others, to publish: “any of the specified data of a geological, scientific or technical kind” after as little as four years.  Clearly this may be of concern to operators and other owners of sensitive intellectual property who are keen to keep such data confidential.  There may be arguments to suggest that the nature of data necessary to commercially “unlock” a shale, for example, should in fact be treated as proprietary and therefore be subject to greater confidentiality restrictions.
  • Perhaps the most stark example of a licence term which may require amendment in the unconventional context, however, is Model Clause 19(1)(d) under the heading “Avoidance of harmful methods of working“, which requires licensees to: “prevent the entrance of water through Wells to Petroleum-bearing strata except for the purposes of secondary recovery…“. Few would argue that water injection for hydraulic fracturing amounts only to secondary recovery, and therefore an amendment to remove any ambiguity would appear prudent.

Whilst regulators may be happy to take a liberal interpretation of existing licence terms when applied to licensees and operators, those decisions may be subject to greater scrutiny by those opposed to shale developments, potentially opening the door to judicial scrutiny.  It remains to be seen whether the Queen’s Speech on 4 June (or the 14th licence round) will put some minds to rest.

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UK shale legislation – what could (and should) change from 4 June?