In 2011, hydraulic fracturing received considerable media attention in the United Kingdom after the epicentres of two earthquakes of magnitude 2.3 and 1.5 were recorded close to Cuadrilla’s shale gas exploratory operations in North West England. It hit the headlines again this Summer when up to 1,000 evironmental protesters caused Cuadrilla to temporarily suspend its recently opened exploratory drilling site in Balcombe, West Sussex.
This article seeks to explain what shale gas is and why hydraulic fracturing is required to extract it with reference to the developing industry in the United States and in Europe. A brief evaluation of the controversies surrounding the shale gas industry will be given before we identify the regulatory framework which has been set up to address the potential damages. While a number of obstacles mean that shale gas production in Europe is unlikely to ever reach the scale of the US, governments and energy companies are unlikely to halt their continued exploration for the gas.
What is shale gas?
Shale is a fine-grained sedimentary rock with very low permeability that formed from deposits of mud, silt, clay and organic matter millions of years ago. Shale gas, mainly consisting of methane, is a natural gas that is trapped within shale rock formations thousands of feet beneath the surface of the earth. It is a type of “unconventional” energy source along with others such as coal bed methane, tight sandstones, and methane hydrates. In contrast to conventional deposits, it has much lower concentrations of hydrocarbons per rock, its reservoirs are spread out over a much larger area and it requires a specialist method, hydraulic fracturing, to extract the gas.
What is hydraulic fracturing?
Hydraulic fracturing, colloquially known as “fracking”, is a process used to increase the permeability of the shale in order for the gas to be extracted. It involves pumping large quantities of water, sand and chemicals into the rock at extremely high pressures to create fractures in the formation. The sand acts as a proppant by keeping the fractures open after the fluids have returned to the surface, enabling the gas to flow from the rock into the wellbore. It has been used in conventional hydrocarbon extraction in over 1.2 million wells since 1947, principally in the US and Canada, and for over 30 years in Europe (European Parliament, Committee on the Environment, Public Health and Food Safety, (25 September 2012), ‘Report on the environmental impacts of shale gas and shale oil extraction activities (2011/2308(INI))’).
However, over the last decade, the combination of fracking and enhanced horizontal drilling techniques has made shale gas economically viable and unlocked vast new resources. Whereas previously, vertical drilling could only access a limited surface area of shale, horizontal drilling exposes more gas deposits and allows multiple wells from one drilling pad (Discover Magazine, (8 January 2011), ‘Fracking Nation’). Consequently, since 2002-2003, rock that was previously considered to be of little value suddenly held the promise of changing long-held assumptions about natural gas as an energy carrier (European Commission, Joint Research Centre, (September 2012), ‘Unconventional Gas: Potential Energy Market Impacts in the European Union’).
Shale gas in the US
In the US, the ability to commercially extract shale gas from huge reservoirs has resulted in rapid growth to the industry and turned the country into the “Saudi Arabia of natural gas” (Daniel Steinway and Thomas Jackson, (2012), International Energy Law Review, ‘Hydraulic fracturing and the shale gas boom’). It has helped the US move from being a net importer of gas to virtual self-sufficiency (Department for Energy and Climate Change, (December 2012), ‘Gas Generation Strategy’). According to the US Energy Information Administration (EIA), the production of shale gas is set to almost triple from 5 trillion cubic feet (tcf) in 2010 to 13.6 tcf in 2035 (United States Energy Information Administration, (2012), ‘Annual Energy Outlook 2012’). In his 2012 State of the Union speech President Obama noted that the US supply of gas is set to last 100 years and will produce more than 600,000 jobs by the end of the decade. The massive increase in shale gas production in the US has therefore led to speculation that the shale gas revolution could spread worldwide and transform global energy markets.
Shale gas in Europe
Geographically, shale gas resources are thought to be evenly distributed across all continents, with the EIA estimating the total volume of technically recoverable shale gas worldwide to be 6,622 tcf. In Europe, France and Poland are two of the most promising shale gas countries with an estimated 180 tcf and 187 tcf of technically recoverable resources respectively. Other countries such as Norway, Ukraine and Sweden may also possess large resources (The Royal Society and the Royal Academy of Engineering, (June 2012), ‘Shale gas extraction in the UK: A review of hydraulic fracturing’). In the UK, a report by the British Geological Survey released on 27 June 2013 estimated shale gas reserves in the Bowland Basin in the North of England to be 1,300 tcf, much higher than any previous estimate. In addition, it is thought that other areas of the UK, such as the Weald Basin in southern England, have potentially large shale gas reserves.
While these estimates do not mean these quantities can be extracted for use, the June 2013 BGS report provides the industry and regulators with an indication of how to best plan future exploratory drilling in order to determine how much of the shale gas would be able to be commercially recoverable. This is expected to be substantially lower than the total amount of gas reserves in place as a result of technical and commercial limitations on the level of extraction.
Shale gas, however, is not without controversy. Many have raised serious concerns over the dangers of fracking and its impact on the environment, water resources and climate change targets. These issues have even resulted in a ban on fracking in parts of the US and other countries. For example, in 2012, Pennsylvania and New York State stopped the process pending further research into environmental impacts. Fracking has also ceased elsewhere, including Quebec, Canada (March 2011), France (July 2011), South Africa (August 2011) and Bulgaria (January 2012) (The Royal Society and the Royal Academy of Engineering, (June 2012), ‘Shale gas extraction in the UK: A review of hydraulic fracturing’). It is therefore worth considering why steps have been taken to halt exploration and to explore these concerns in more detail.
Reasons for the controversy
There are two types of seismicity associated with fracking. On the one hand, there are micro-seismic events which are a routine feature of fracking and are purposely induced for the propagation of fracture networks. On the other, there are larger seismic events that are an unintended consequence of fracking in a pre-stressed fault (The Royal Society and the Royal Academy of Engineering, (June 2012), ‘Shale gas extraction in the UK: A review of hydraulic fracturing’). This can happen when fracking fluid is injected to a nearby but previously unidentified pre-stressed fault and reduces the effective stress to the point where the fault slips and releases its stored energy (The Royal Society and the Royal Academy of Engineering, (June 2012), ‘Shale gas extraction in the UK: A review of hydraulic fracturing’).
The second type of seismicity was induced by fracking treatments at Cuadrilla’s base of operations in Preese Halll in April and May 2011. As a result, Cuadrilla’s UK shale gas operations were suspended. There is therefore widespread fear that the renewed use of fracking could trigger more earthquakes and cause unnecessary risk to life and property.
However, the risk should be put into perspective. There is a consensus that the maximum magnitude of an earthquake induced by fracking is no greater than 3M. Importantly, this means that the threat to property and life is extremely unlikely. This is a view supported by the British Geological Survey who concluded that the risks are minimal and there was no reason why Cuadrilla should not proceed with their shale gas exploration activities as long as they conduct rigorous seismic assessments and utilise a traffic light monitoring system at the time fracking takes place (The Royal Society and the Royal Academy of Engineering, (June 2012), ‘Shale gas extraction in the UK: A review of hydraulic fracturing’). Taking the findings and recommendations into account, on 13 December 2012, the UK government officially gave Cuadrilla the green light to continue with their operations.
There are concerns that fracking could lead to the contamination of water resources. The fear is that fracking will cause the upward migration of methane gas into aquifers or the cement casing around the well hole will fail and release huge quantities of fracking fluid into the water supply.
While there have been instances of methane in water due to unsatisfactory construction of the wells and of chemical contamination of water by leaks and spills from surface facilities (Department for Energy and Climate Change, (December 2012), ‘Gas Generation Strategy’), it should be noted that risks can be minimised by best practice. It should also be emphasised that fracking generally takes place at depths of around two kilometres, far below the water table, and there have been no confirmed instances of contamination directly attributable to fracking. A comprehensive study on the potential effects of fracking on water resources was commissioned by the US Environmental Protection Agency (EPA) in 2011 and a preliminary report is expected shortly with the final report due in 2014.
There are also concerns that increased shale gas production will have a negative impact on climate change. Critics point out that the methane emissions from the production process, if not properly controlled, can result in significant additions to greenhouse gases (Department for Energy and Climate Change, (December 2012), ‘Gas Generation Strategy’). The level of fugitive emissions are critically important as methane, the main constituent of natural gas, contributes to climate change at a level 25 times greater than carbon dioxide over a 100-year timeframe (and over shorter timeframes methane’s impact is greater still) (Friends of the Earth).
On the other hand, it is generally accepted that CO2 emissions from shale gas, even on a worst-case scenario, are significantly lower than for coal (Department for Energy and Climate Change, (December 2012), ‘Gas Generation Strategy’). Advocates of shale gas therefore point to the benefits of switching from coal to gas for climate change. For example, in the US, CO2 emissions have fallen by some 450 million tonnes in the past five years, which is more than any other country (The Economist, (2 June 2012), ‘Fracking Great: The promised gas revolution can do the environment more good than harm’).
However, while shale gas may be a cleaner energy source than coal, the reduction in CO2 would not be sufficient on its own to meet long-term emissions targets (Ernst & Young, (2011), ‘Shale gas in Europe: revolution or evolution?’). The UK, for example, is legally bound to reduce greenhouse gases by 80% by 2050 compared to 1990 levels and a substantial proliferation of shale gas production would add to the pressure of meeting this target. Furthermore, it is likely that encouraging investment and incentives for the shale gas industry would result in less investment in lower carbon, but more expensive, sources of renewable energy (Ernst & Young, (2011), ‘Shale gas in Europe: revolution or evolution?’ ).
Shale gas activities involve a number of distinct aspects and, as such, the overall legal framework an operator has to consider before, during and after exploration and extraction is complex. For example, in addition to the requirement to comply with mining and hydrocarbon legislation, there are laws governing property, worker’s safety, public liability, pressure equipment, the use of chemical substances and environmental legislation (Philippe and Partners report for European Commission, (8 November 2011), ‘Final Report on Unconventional Gas in Europe’). With this in mind, the Chancellor of the Exchequer announced the Government is setting up an Office for Unconventional Gas in order to provide a single point of contact for investors and streamline the regulatory process (Winter statement, December 2012).
Nevertheless regulation of shale gas exploration and production is likely to be scrutinised in greater detail as the industry develops and commercial extraction takes place on a much larger scale. This is particularly the case given the controversy surrounding fracking and concerns over the environment. While it is beyond the scope of this article to provide a detailed analysis of the adequacy of the existing regulatory framework, it is worth briefly outlining the bodies responsible for regulating the industry in the UK.
The Petroleum Act 1998 gives the Crown rights and ownership over all petroleum resources in the UK. This is in contrast to the US where the landowner rather than the State owns the petroleum. Companies wishing to explore and extract shale gas therefore need to obtain a Petroleum Exploration and Development Licence (PEDL) issued by the Department for Energy and Climate Change (DECC). These licences grant companies the exclusive right to ‘search and bore for and get’ petroleum resources, including shale gas (British Geological Society, (October 2011), ‘Mineral Planning Factsheet: Alternative fossil fuels’). Already 97 Petroleum Exploration and Development Licences (PEDL) have been awarded for shale gas exploration in the UK with the results of the 14th Round of Onshore Licensing expected shortly (The Royal Society and the Royal Academy of Engineering, (June 2012) ‘Shale gas extraction in the UK: A review of hydraulic fracturing’). However, the bidding process is often lengthy, expensive and bureaucratic.
Although a PEDL grants exclusivity to an operator in an area specified by the licence, it does not include any right of access to the land. Therefore another hurdle to overcome is negotiating access to land. The onus is on the operator to negotiate the necessary consent from the landowner to drill on or underneath their land. As a result, there is less incentive for landowners in the UK to grant access, as unlike in the US, they are not entitled to a share of the profits from the production of the shale gas. These land laws coupled with the onerous nature of obtaining a PEDL are therefore viewed as a potential barrier to the development of the shale gas industry in the UK.
In addition to the PEDL, all shale gas activities require planning permission from the minerals planning authority (usually the local Council). If the site of operations is more than one hectare, the operator is required to conduct an Environmental Impact Assessment (see the Schedules attached to Town and County Planning (Environmental Impact Assessment) England and Wales Regulations). For the operational phase, the Environment Agency, the Health and Safety Executive and the corresponding bodies in Scotland and Northern Ireland are the primary regulators (Department for Energy and Climate Change, (December 2012), ‘Gas Generation Strategy’). Unlike in the US, operators are also required to disclose the composition of the fracking fluid to the Environment Agency (the injection of fracturing fluids is also regulated under the Water Framework Directive and Environmental Permitting Regulations (EPR) and Water Resources Act 1991). There is also a large amount of disparate EU Directives in relation to water resources, environmental protection and health and safety that should be considered.
While shale gas extraction in Europe is many years away from US levels of production, governments and energy companies will continue to explore and prepare for extraction if discoveries allow. The high profile nature of controversies in relation to seismic activity, water resources and climate change will inevitably mean greater scrutiny in shale gas activities, particularly fracking. Energy companies therefore need to be mindful of complying with the plethora of regulatory regimes and maintain robust standards and structures. In any event, it is likely that expanding shale gas activities will lead to more disputes and potential litigation as in the US. As a result, the insurance market should keep up to date with developments in best practice in order to differentiate premiums between those companies who comply with the highest standards and those that fall short.
For further information please contact Toby Osborne.
Other articles in this edition include: