19th June, 2013: 22:05 GMT

UK fracking to get green light

London, 17 April 2012

Commodities Now - DECC today publishes an independent expert report recommending measures to mitigate the risks of seismic tremors from hydraulic fracturing - and is inviting public comment on its recommendations. An effective monitoring system and a "traffic light" control regime are among measures recommended by the report, which has reviewed a series of studies commissioned by Cuadrilla, and confirms that minor earthquakes detected in the area of the company’s Preese Hall operations near Blackpool in April and May last year were caused by fracking.

Under a proposed "traffic light" control system, a "red light" would be triggered by any tremor measuring 0.5 local magnitude or higher, meaning fracking should stop and safety procedures such as allowing water to flow back to the surface should be carried out.

DECC’s Chief Scientific Advisor David MacKay said: “If shale gas is to be part of the UK’s energy mix we need to have a good understanding of its potential environmental impacts and what can be done to mitigate those impacts.

“This comprehensive independent expert review of Cuadrilla’s evidence suggests a set of robust measures to make sure future seismic risks are minimised - not just at this location but at any other potential sites across the UK.”

The invitation for comment runs for six weeks from today. All comments received will be considered and taken into account before any decision is taken on further fracking for shale gas.

The report recommends the following measures to mitigate the risk of any damaging seismic activity from future shale gas operations in the Bowland Basin:

That the hydraulic fracturing procedure should include a smaller pre-injection and monitoring stage.
That an effective monitoring system to provide near real-time locations and magnitudes of any seismic events should be part of any future hydraulic fracturing operations.
That future fracking operations for shale gas should be subject to a “traffic light” control regime, similar to that recommended by Cuadrilla’s consultants. A red light at activity levels of magnitude of 0.5 or above means fracking should be stopped and remedial action taken (this is lower than the magnitude 1.7 proposed by Cuadrilla’s report). Unusual seismic activity, even at lower levels, should be carefully assessed before operations proceed.
For any future operations elsewhere in the UK the review recommends suitable actions to assess the seismic risk before any operations take place.

The Shale Gale is now rolling out across the globe

Advanced drilling techniques have enabled the probing for vast amounts of shale oil and gas. This newfound energy wealth has transformed the US industry and is considered by many as a means to fuel much of the country’s electric generation for decades to come, and reversing the US’s oil dependence.

The shale revolution has fundamentally altered the outlook for both oil and gas availability and prices. Starting in the US, interest in shale extraction is spreading fast. Heralded as a “game-changer” by supporters and “environmentally pernicious” by critics, this controversial energy source is increasingly on the agenda globally.

The ‘transformative’ impact that shale extraction has had on US energy markets is well documented. This shale success story has led to heightened speculation over the potential for it to transform energy markets in other regions – for both oil and gas. The spotlight is now on Europe and China where exploration is underway. And capital is flooding in.

“However, a number of issues indicate that the experience in the US may not be replicated in Europe,” according to a recent report from Ernst & Young (E&Y). Furthermore, the rapid growth in shale oil and gas production has resulted in a corresponding increase in concerns about public health and the environment. Accordingly, opinion on the environmental impact of shale developments and their role in the future energy supply mix has become increasingly polarized.

China’s oil giants are perhaps the most interested in learning more about the drilling and hydraulic fracturing techniques that have unlocked this US bounty. For example, Platts recently reported that US and Chinese experts have completed the first joint evaluation of a shale gas basin in China’s Liaohe basin in northeastern Liaoning province as part of a shale gas cooperation pact between both countries. PetroChina and China’s National Energy Administration are working with the US Geological Survey on the study, with the Liaohe basin considered the third most prolific in China, with estimates of reserves at 15 billion barrels of oil.

The most powerful endorsement of US shale potential is the international nature of the sponsors. Notable ventures include France’s Total linking with Chesapeake, BG Group with Exco Resources, Sinopec with Devon Energy, and India’s Reliance with Atlas Energy and Pioneer resources. “These international players are seeking more than just a share of US gas; they are seeking to identify best practices that can be scaled globally,” according to Bora Bariman, Associate Director, Oil and Gas with LLyoyds Bank.

Made in The USA

‘Unconventional’ production in the US has increased at a rapid pace. According to the US Energy Information Administration (EIA), the annual average growth rate in shale gas production was 48% between 2006–2010. This has resulted in the US becoming largely self-sufficient in natural gas. According to the EIA’s Annual Energy Outlook 2011, shale gas production is expected to continue increasing strongly. The reference case predicts an almost fourfold increase in shale gas production from 2009 to 2035. By then, shale gas production in the US is forecast to total 342 billion cubic meters.

Shale gas will probably account for 49% of total US dry gas production in 2035 the US Energy Department estimates. Today the US uses 65 bcf of gas per day (25-30% of which comes from shale). It supports around 600,000 jobs. And at current prices, US gas is the equivalent to oil prices of around $15/bbl.

US Gas Production Outlook

The ‘shale gale’ sweeping North America has more than doubled the size of the discovered natural gas resource – enough to satisfy more than 100 years of consumption at current rates. But over-optimism is being tempered. For example, the Energy Department recently cut its estimate for natural gas reserves in the Marcellus shale formation by a whopping 66%, citing improved data on drilling and production.

Crude oil produced from tight sands and oil shales has also been instrumental in reversing the long decline of US crude output.

The US imported nearly 9 million barrels of oil a day in 2011 – the lowest since 1999. Imports as a share of consumption fell to 45% – the lowest since 1995 (and down from a peak of over 60% in 2005). Tight oil formations are helping to drive increases in both production and reserves.

Optimists are already forecasting huge increases by 2015 taking US oil production to 8 million bpd. Output from the Bakken area in North Dakota alone could reach 900,000 according to industry consultants Bentek.

Today, all over the US, oil majors and cash-rich independents are combing the countryside for more oil and gas. Indeed, as gas prices have fallen due to North America’s gas glut [with prices expected to hover around $2 – 3/MMBtu for the next 2 years] traditional gas shales are being looked at again as possible oil producers. For example, the famous Barnett shale in Texas is slowly emerging as an oil producer. Falling gas prices are already threatening gas producers and several are now scaling back on production. Drilling activity is being redirected away from gas-rich deposits towards liquid-rich oil and wet gas plays, as energy firms and frackers respond to prices.

With gas prices rock-bottom and expected to remain in the $2 – 6/MMBtu till around 2020 by many estimates, producers are cutting costs by improving technology and processes.

Not so long ago, analysts estimated the production cost of gas from fracked wells at around $6-7 MMBtu from the best run facilities. “The implication was that gas from shale was the marginal source of supply and would set the long-term equilibrium price in the market at $7 or more,” according to Reuters commodity analyst John Kemp. But they underestimated the industry’s ability to adapt. “Frac factories” – to use Henry Ford’s assembly line approach, drilling up to 40 well bores from a single pad, and conducting operations to drill, perforate, complete and frack wells simultaneously – and other operating efficiencies are transforming the economics of supply. “Drilling is probably not economic at $2 but might no longer need $6 to achieve satisfactory returns,” says Kemp. Thus, the upside to prices may be capped lower than previously thought. “Moreover, drilling for (profitable) oil and liquids will produce increasing amounts of associated natural gas and ensure gas supplies continue rising even if prices remain in the doldrums,” says Kemp.

Shale in Europe

The US shale experience has put the spotlight on Europe where exploration is underway in a number of countries. Europe currently imports about 60% of its gas according to the IEA. This is estimated to grow to 83% by 2030, due to increasing demand, stronger environmental laws, and declining production from established fields.

A report by the EIA puts the volume of technically recoverable shale gas in Europe at 17.5 trillion cubic metres (compared with 24.5 trillion in the US). A study by the European Centre for Energy and Resource Security (Eucers) suggests that unconventional gas resources might be able to cover European gas demand for at least another 60 years [adding that the region’s high population density could pose problems]. The world’s largest oil companies are reportedly busy securing land across Europe with a view to exploiting the region’s shale gas reserves. Shale development is lauded as improving Europe’s energy independence, generating new revenues for landowners and governments, creating jobs, and stimulating economic growth.

Key advances in extraction technology and low gas prices have not gone unnoticed in Europe. Poland is among those countries most keen to tap new energy sources and break the country’s reliance on coal – and gas imports from Russia. Others are also keen to push ahead with shale exploration, with test drilling underway in several EU Member States; including the UK, Germany and Poland. Cuadrilla Resources bored its first shale gas well in the UK last year, ExxonMobil recently finished drilling its sixth well in north-west Germany, and Chevron is active with its first well in Poland.

Others are less enthusiastic. The Bulgarian National Assembly recently voted to impose an indefinite ban on shale exploration and extraction using hydraulic fracturing or other similar technology. Indeed, a hard-hitting editorial in the Trud newspaper accused pro-Russian Bulgarian supporters of fomenting protests against shale gas operations in the country. [Yes, politics is never far from the surface in relation to energy matters, especially in Europe]. Last year, France voted to outlaw hydraulic fracturing. Even South Africa is sceptical, even though the estimated resource base would have the energy equivalent of 400 years of South African fuel consumption of around 500,000 bbl/d, according to supporters.

In the UK, although the government seems to acknowledge that shale gas could play an important part in the energy mix, it is not driving it forward with any sense of commitment or urgency, according to Elizabeth Shepherd, Head of Environment and expert in shale gas at international law firm Eversheds.

Ofgem’s report into the impact of unconventional gas on Europe, completed last June, was only published last month, leading to criticism that it is out of date. It acknowledges that there is potential within Europe for unconventional gas to become a major source of supply, but it comments on factors such as environmental constraints and/or environmental compliance costs without taking developments since June into account.

“From a legislative point of view, there should be nothing holding back at least the exploration of shale gas,” says Shepherd. “In fact, the procedures for authorising shale gas activities are no different from the procedures for conventional hydrocarbons,” she adds. Importantly, the UK government’s energy plans could cost billions of pounds if the price of gas falls significantly because energy policy is based on the assumption that future gas prices will be high. The emergence of shale gas – and the predicted boom – suggests that gas prices may actually fall in the future.

“Overall the government approach is broadly favourable to shale gas, but there are political tensions within the coalition, trying to reconcile the drive for renewables with the potential for a cheap, job creating, economy transforming energy source which shale gas presents,” says Shepherd.

Cuadrilla Resources estimates the total gas in place in the Upper Bowland Shale of the Pennine Basin near Blackpool, Lancashire at 5.7 tcm. The recoverable resource will, of course, potentially be much lower, By way of reference, the UK consumed 0.09 tcm of natural gas in 2010. The British Geological Survey (BGS) estimates the UK shale gas reserve potential at 150bcm.

Regulating Shale

The major obstacles to shale development in Europe (particularly gas) remain a combination of regulatory and environmental concerns. Many in the industry have been quick to label shale gas the ‘green’ alternative to coal and a vital tool in Europe’s fight against climate change.

However, doubts relate to the negative side-effects of hydraulic fracturing. The toxicity of fracking chemicals and how they are disposed of and with the large volumes of water needed are just two examples.

A European Union-commissioned study recently concluded there is no need for new legislation to regulate shale gas exploration in the EU, suggesting a cautious approach to an issue that has divided EU Members. “Overall, we can conclude that the current legislation, especially in the field of environmental protection, already covers most aspects linked to shale gas activities,” the study said. It added, however, that “some adjustments to legislation should be further considered in order to improve its appropriateness and practicability with a view of regulating shale gas activities.”

The report, praised by advocates and criticized by environmentalists, came as the nascent shale gas industry picks up momentum. “While all environmentalists agree on the need to move away from coal, I don’t think you will find much enthusiasm for shale gas,” says Jesse Scott of NGO EG3.

The EU could still move to restrict shale gas development. Energy Commissioner Guenther Oettinger said the report “confirms that there is no immediate need for changing our EU legislation. ... We take environmental concerns seriously and will continue to monitor the development of shale gas extraction in the EU.”

“We are pleased that after careful review the EU believes the existing regulatory framework for oil and gas exploration and production provides enough safeguards to ensure that natural gas from shale can be produced responsibly in its member countries,” announced John Claussen, Country Manager for Chevron’s operations in Poland.

But environmentalists believe the EU’s conclusion was premature and rued that shale gas would divert attention from important renewable energy investment.

The IEA’s World Energy Outlook 2001 says that the growth of hydraulic fracturing “is challenging the adequacy of existing regulatory regimes.” As such, it plans to publish a report this year advising its members countries on best practice for regulating the industry.

The debate about shale exploration is at its hottest in Central European (CE) states. Poland is a classic example. With an overwhelming amount of electricity generated by coal, the prospect of gas supply dependence and its ability to meet EU emission targets is palpable. A recently released Polish governmental study found that hydraulic fracturing on Poland’s first shale gas exploration well has had no effect on the environment so far. The news will be welcome to Poland’s government, which has sought to make shale gas exploration attractive to foreign investors in its bid to become the “second Norway” as the Polish Geological Institute describes it.

“Shale gas remains the only dependable alternate source for the CE states,” according to Alan Riley, Professor of Law at City University London. It will also lead to cheaper gas, boosting the competitiveness of industry. “The economic and energy security benefits could be profound,” says Riley.

He believes that to allay the concerns of governments and environmentalists, the US should support the establishment of a Shale Gas Trust, which would seek to provide advice on shale gas exploration and production best practices. “It would offer assistance in drafting national regulations and certifying universities to educate the officials who supply the administrative capacity necessary to run production. The Trust would also undertake and commission independent research. It would be jointly run by European oil and gas states, such as the UK and Norway, which have the relevant experience, and would include representatives from all CE states as well as industry and NGO participants.”

The costs of developing shale operations in Europe will certainly be higher than in the US. European geology is said to be less favourable with shale deposits tending to be deeper underground and harder to extract. Critically, the US has a long history of drilling for fossil fuel deposits which has spawned a hugely competitive and well-developed oil and drilling services industry.

Europe (outside of the UK and Norway) has nothing to compare. And sinking wells in Europe is significantly more expensive. Well costs range from $6.5 m to $14m, in comparison to $4m at the Marcellus Shale in Pennsylvania, according to Deutsche Bank. “At the peak in 2008, roughly 1,600 gas drilling rigs were in operation in the US, while fewer than 100 such rigs are in operation in Europe,” say Deutsche Bank.2 And according to Wood Mackenzie, only 100,000 horsepower (hp) of hydraulic fracturing equipment is available in Europe, compared with 8 million in the US.

Land & Mineral Rights

Perhaps the biggest problem for the development of the shale industry in Europe relates to land and mineral rights. In Europe these are not vested in the same people as the land rights. In America, mineral rights belong to the landowner. In Europe, they usually belong to the state (or local government). The Economist recently described it thus: “When American property owners see drills, they see dollar signs. European landowners just see big, ugly drills.”

“The rights to all oil and gas in the UK have belonged to the government since the Petroleum Production Act 1934. We note that this is the case in most countries around the world, to which the US is an exception.” say Deutsche.[In the US, both surface rights and mineral rights belong to the landowner].

This fact results in two important differences with regard to the development of shale deposits. In the US, up-front bonus payments and production royalties accrue directly to the landowner. And since the landowner stands to benefit directly, the licensing process can proceed more quickly. In Europe licensing rounds for exploration and production involve central and local government approval, lengthening development times and adding to costs. This point has not been lost on producers, including Cuadrilla which stressed the possible tax revenues of £120m to local councils and £5-6bn to the government, according to Reuters.

Conclusions

While drilling to explore for shale oil and gas continues in Europe, its extraction potential remains uncertain. Technology expertise is being transferred eastwards from the US and who knows the possible potential China has to offer as it rapidly ramps-up shale development.

Although European shale development could make a difference, it’s only a transitionary phenomenon at best for environmentalists. And it could also become a long and costly exercise for developers.

In Eastern Europe shale presents a tremendous opportunity in terms of energy security, improved industrial competitiveness, and emission reductions. “With support from both the United States and some of the EU Member States with oil and gas production experience, this opportunity will be realised,” says Riley.

Europeans care passionately about the environment which suggests that, at least for now, shale remains a North American phenomenon .. which will be quickly followed by developments in China.

“Whilst we think that EU shale gas deposits certainly have the potential to contribute meaningfully to indigenous production over the next 10-20 years, we do not expect the impact of shale gas production on EU gas prices to be anywhere near as great as has been the case with US shale gas production on Henry Hub prices,” insist Deutsche.

Shale development takes time, and that will certainly be the case in the EU. It is one thing finding likely sources of shale deposits and another ensuring that they are technically and economically viable for production (or are allowed to be produced at all) - especially in the costly and complex arena of European energy policy. As Shepherd suggests, the best we can hope for is; “continued exploration, along with industry engagement with the public to satisfy them regarding the technology around shale gas exploration, which is key to advancing the opportunity in the UK and elsewhere.”

Ends --

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