Supply to more than meet demand

It was recently reported that iGas studies show that sites in the north-west of England contain much larger shale gas resources than previously anticipated. These studies indicate that north-west sites (areas in Lancashire and Cheshire) have a capacity of somewhere between 15-170 trillion cubic feet (tcf) of shale gas, up from the 9 tcf previously estimated by iGas. Reports in the press this week have added credence to these studies, with an announcement that The British Geological Survey, in a report prepared for the Government, has found that there could be 1,300 tcf of shale gas at a single site alone in the North of England. To give this some context, the entire gas reserves left in the UK North Sea are estimated to currently be as little as 7 tcf. If these potential shale gas resources can be utilised, reports suggest that this could meet Britain’s gas consumption for decades to come, narrowing the ever-alarming “energy gap”.
Studies have suggested that the most likely outcome of these discoveries is confirmation of a 102 tcf resource in an area covering some 300 square miles of Cheshire. This is a sharp contrast to the preliminary estimates of the British Geological Survey of Britain’s shale gas resources, which had previously estimated recoverable shale reserves to be at around 5.3 tcf. Although it is anticipated that confirmed resource figures may be lower than the top end of iGas’s estimate, in due course, the iGas studies which seem now to be solidly supported by the latest finding of the British Geological Survey, do raise the possibility that the UK energy market may be able to utilise the nation’s shale gas resources to boost the UK’s energy independence and position the UK to benefit from its own “on-the-doorstep” available resources.

“Home-grown” potential

Britain’s current gas use comes in at around 3 tcf per year. On this basis, even if the lower end of iGas’s findings is used as a starting point, the identified resources could account for in excess of 5 years’ worth of Britain’s gas consumption. The UK currently relies on some 1.5 tcf of imported gas per year, which represents about 50% of the UK’s consumption. If iGas’s findings are substantiated, (as appears to be the implication in light of the British Geological Survey report) and can lead to a fully available (and extractable) resource, the UK may no longer need to expend sums obtaining any imported gas for energy use.

The iGas study and the British Geological Survey report demonstrate that there is some clear discrepancy between the previously estimated resources, including iGas’s own estimates for its own licences held in the north-west, with potential shale gas quantities outstripping those previously anticipated. Cuadrilla has also, when carrying out its own studies in 2011, estimated its resources to be around some 200 tcf. Combined, these significant findings represent a substantial shale capacity here in the UK, which is, as yet, being untapped. Interest in the UK’s shale capacity is certainly mounting, with recent reports suggesting that significant energy players, such as Centrica and Total, are gearing up to invest in shale opportunities in the UK. Indeed, Centrica has already signalled its intent by purchasing a 25% stake in the Bowland exploration licence from Cuadrilla for £40m. This suggests that the market is sitting up and taking notice of what could be a potentially extremely valuable opportunity for key investment in the UK energy market.

The market appears to be quietly optimistic about the UK’s potential. Notwithstanding the current reports, the only way to confirm the viability of, and in turn exploit, the UK’s shale gas resources is to drill wells and begin fracking. However, in the current political climate, this is easier said than done, especially on a large scale, although the industry remains hopeful that the Government, along with the industry, can reassure communities of the potential benefits of exploiting the UK’s shale gas reserves. This stance appears to be further strengthened by the market’s anticipation that the Government is likely to announce plans for tax incentives to encourage investment in shale gas, coupled with anticipated streamlining of the process to award drilling permits. Indeed, in his Spending Review this week, Chancellor George Osborne said that the Government would “make the tax and planning changes which will put Britain at the forefront of exploiting shale gas.”

Things do appear to be moving in the right direction, as demonstrated by the strong economic case presented by the Institute of Directors for proceeding without delay to exploring for and developing the UK’s shale resource, as set out in the report “Getting Shale Gas Working” published on 22 May 2013. The market’s focus on shale gas is further evidenced by the April 2013 Energy and Climate Change Committee report on the impact of shale gas on energy markets and the establishment of the Office for Unconventional Gas and Oil, as well as the draft guidelines published by the UK Onshore Operators Group (which we have discussed in a previous alert).

What’s in it for the consumer?

The global energy market has witnessed the revolutionising of the US energy industry as a result of the exploitation of shale gas and there is growing excitement as to whether the same can be achieved here in the UK. There are some concerns amongst market analysts that the shale geology of the UK is more complex than that in the US and there are other constraints (such as planning laws) and so costs of exploration and production may be a lot higher than they have been in the US.

However, the recent reports, if nothing else, confirm that there is certainly large-scale shale gas potential in the UK. If these resources can be utilised this could revolutionise the UK’s energy production and could have far-reaching effects for the UK’s energy market. The UK’s gas import costs could plummet and consumers could, in the long-term, see a cap on gas bills. Added to this, communities could also benefit from the extraction process itself, as it is estimated that the labour market will be significantly boosted in shale-rich areas. In addition, the government has outlined plans for the shale industry to share revenues with communities located near the wells, by providing £100,000 worth of benefits as well as 1% of the revenue generated from each well.

Boom or gloom?

The industry will continue to proceed with caution as, of the shale resources discovered, it remains unclear how much of this will actually be recoverable. As we have commented on in a previous alert, numerous challenges still need to be overcome. However, there is some inevitable excitement within the industry that useable resources will allow the UK to lessen its dependency on the use of imported gas and could even, in time, become a potential exporter.

iGas is scheduled to commence a drilling programme later this year, to enable it to further crystallise its estimates, and Cuadrilla is also due to begin drilling its first exploration well in Balcombe, West Sussex later this year. These explorations should hopefully give a more accurate picture of the resource available.

Whilst it is anticipated that actual recoverability of the identified resources will further lower current estimates, the potential recoveries remain material. The market will no doubt now be eagerly anticipating more concrete results, but in the meantime, it appears that, in light of Government promises to give tax breaks to the shale industry and the lifting of fracking restrictions in December 2012, the UK market is gearing itself up to benefit from these exciting shale gas discoveries.
Green groups, who have on the whole have received the news of the UK’s shale potential with negativity, have responded to latest reports with scepticism. The industry appears to be gearing up for a UK shale gas “boom” and the support that the British Geological Survey report adds to these studies, suggests that we may not simply be witnessing industry hype. The full picture cannot be known until fracking begins…

Client Alert 2013-181