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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?

Weald Basin oil – is it shale oil or oil shale? and why it matters

The UK Department of Energy and Climate Change (DECC) has published a study by the British Geological Survey of the Jurassic shales of the Weald Basin in southern England (Report). Unlike shale gas findings of a similar report published in 2013 for the Bowland-Hodder in northern England, the Weald Basin is said to contain oil:

“There is unlikely to be any shale gas potential, but there could be shale oil resources in the range of 2.2-8.5 billion barrels of oil (290-1100 million tonnes) in the ground, reflecting uncertainty until further drilling is done.”

A third study is also now said to be underway, and will apparently be completed in the summer of 2014. It will cover the Midland Valley of Scotland. Estimates will be made for both the oil and the gas “in-place” resources of the carboniferous strata of central Scotland.

Shale oil versus oil shale

The existence of shale oil (as opposed to gas) in the Weald Basin may come as less of a surprise given the existing conventional oil developments in the area (most notably the Wytch Farm oil field developed by BP). Nevertheless, extraction methods needed for shale oil (being oil produced from a shale reservoir), versus oil shale (being sedimentary rock from which Kerogen-based crude may be produced by heating), will be of interest to many. As the Report states:

“… oil shale is immature and can either be mined at or near the surface or retorted in situ at depth.”

It is understood that “retorting” involves heating oil shale in a process which causes oil and gas vapours to condense into a synthetic crude (and producing a solid coke-like residue). A heating source (generally gas or coal-fired) is needed for production. It is perhaps for this reason that the Report states that:

“Such oil shale extraction techniques make it very unlikely that it might be exploited at depth in the Weald Basin.”

Whilst this may suggest a surface or near-surface mining operation is necessary for extracting oil shale, if this is commercially and otherwise unviable, then it may be hoped that shale oil, is more abundant than currently estimated. The Report notes that:

“None of the Jurassic shales analysed …. has an ‘oil saturation index’ … of greater than 50 … [although] … it may be that some horizons within the Mid and Upper Lias, lower Oxford Clay and Kimmeridge Clay exceed the 100 required for the oil to be ‘producible’.”

In summary, unlike shale gas, where free and adsorbed gas may be extractable, with oil, only the free oil component is effectively producible. As such, the Weald Basin may only become economically attractive for unconventional oil production, if oil is found to be producible in commercial quantities as shale oil.

The Report’s findings are not therefore, perhaps likely to see the UK’s unconventional development focus shift from gas to oil just yet. Furthermore, given that most of the identified shale oil potential lies within existing licence areas, there may be limited opportunities for new entrants (unless existing licences are transferred or relinquished). It will of course be interesting to see the findings from the upcoming Scottish resource report, particularly given the significance to the Scottish independence debate. It is also interesting to note that in DECC’s publication “Underground Drilling Access” (published on the same day as the Report), that such Scottish resources are referred to as the “Oil-Shale Group” of central Scotland, which perhaps implies that the impending Scottish resource report may not flag significant quantities of hoped-for shale oil (as opposed to oil shale).

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Weald Basin oil – is it shale oil or oil shale? and why it matters

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?