Key discussion points

• Energy crisis and new “dash for gas” set to ignite UK shale market
• Moratorium on exploration lifted
• New industry guidance issued, UK and EU shale-specific legislation under consideration
• Now is the time to “engage” and lobby for the regulation you want

Introduction

On 13 December 2012, the UK moratorium on hydraulic fracturing (“fracking”) of shale gas was lifted. On 5 December 2012 the government published its Gas Generation Strategy paper. The two events are, we would suggest, closely connected.

On 19 February 2013 Alistair Buchanan, current head of Ofgem, the UK electricity regulator, articulated a stark vision of a Britain plunged into darkness, shorter working weeks and manufacturing shut downs as early as winter 2014 if urgent steps are not taken to address the country’s looming energy gap. As environmental regulations drive the shut-down of old fossil-fired plants, and a silver bullet of new nuclear remains mired in delay and arguments about the necessary level of subsidy; electricity generation capacity margins sit at their lowest levels since privatisation of the industry a generation ago. The misery of power cuts brought down at least two governments in the 1970s. The next general election in the UK is fixed for May 2015. If Mr Buchanan’s predictions are right and the weather is unkind, that could take place against a backdrop of one of the most miserable winters in recent memory.

The government recognises that it needs to move fast to address this issue and new gas-fired generation is the solution that is quickest, cheapest and most easy to finance. If shale gas – the subject of its own section in the Gas Generation Strategy – can play a part in the much criticised but, frankly, essential "dash for gas" by reducing the UK’s dependence on expensive and uncertain imports of gas, so much the better from the government’s perspective.

In short, the stars are very much in alignment for the UK shale industry at this point in time. As a result, there has been great speculation on the effect that shale gas might have on the UK energy market and whether this can replicate the dramatic impact felt in the United States. In 2000, shale gas in the United States accounted for only 1% of the country’s gas supplies. By 2010, this percentage had increased to 20% of the country’s supplies, and U.S. shale gas supplies are predicted to reach 46% by 2035.

The estimates for UK reserves are more conservative (and planning controls, "nimbyism," population density and a variety of other factors make the rate and extent of development we have seen in the United States more problematic here) but there is certainly still a huge market for shale gas exploration in the UK. Cuadrilla Resources is the owner of the only current exploration well in the UK, but with the lifting of the moratorium this seems set to change, and new applications are already being received for new drilling operations (although Cuadrilla has currently halted its operations for detailed environmental assessment).

Regulatory background

Against this backdrop, the extent to which new regulations need to be developed by UK and/or European legislative bodies to regulate the exploration and production of shale gas is under renewed consideration. Currently, there is essentially no shale-specific legislation at the overarching EU or UK level, but there is a substantial body of relevant existing oil and gas, environmental and health & safety, planning and other legislation that provides most of the necessary legal framework.

The view of the UK government in lifting the moratorium on fracking was that the UK’s existing regulatory framework should be sufficient, for the most part (and whatever the motivation for the government taking that position (see above) we would broadly agree with that assessment at least as regards this current exploration phase for the shale sector):

“So far as the UK is concerned…the industry has a good record, and…there are already in place robust regulatory controls on all oil and gas activities… I believe the existing regulatory framework already provides the means to ensure that the industry does apply good practice throughout its operations; and that it will do so consistently. But we are taking further steps to reinforce the regime.” Ed Davey, DECC, 13 December 2012.

The UK has an extensive legal framework which will be relevant to fracking, which requires various permissions to be obtained and requirements to be complied with.

Under existing laws operators will (subject to certain thresholds in the case of environmental matters) have to acquire at least the following:

• A petroleum exploration and development licence, granted by the DECC
• Planning permission for surface operations, granted by the Local Minerals Planning Authority
• Permits from the Environment Agency allowing injection of fracking fluids and proppant, water abstraction and management of flow-back fluid and waste gases
• Permissions or agreements with relevant landowners.

Several more specific existing regulations have clear application to shale gas wells, including the Offshore Installations and Wells (Design and Construction) Regulations 1996, the Borehole Sites and Operations Regulations 1995, the Provision and Use of Work Equipment Regulations 1998, the Town and Country Planning Act 1990, Environmental Protection Act 1990, and Environmental Permitting (England & Wales) Regulations 2010.

However, the quid pro quo of the lifting of the moratorium was the government’s call for the development of more industry-specific guidance and a consideration of what additional regulations may be needed to accommodate an expanding shale industry and restore public confidence in it. The development of new legislation and guidance always presents a risk to industry (a topic to which we return below) but industry also needs to accept and understand the fact that the government needs to be seen to be addressing public concerns (however misplaced and media-driven those might be) and it is in the sector’s interests that it should do so.

As part of this "spring-cleaning" exercise, a leading industry body, the UK Onshore Operators Group (“UKOOG”), has produced a set of guidelines for the exploration of shale gas wells.

The UKOOG guidelines are intended to supplement the existing framework and apply to the unique aspects of shale gas wells and high-volume fracturing operations.

The guidelines

UKOOG is an industry body representing the UK onshore oil and gas industry. The guidelines were put together by a high-level working group including operating and service companies, with input from the DECC, the Health and Safety Executive, the Environment Agency, and the Scottish Environment Protection Agency.

This is the first issue of the guidelines, focusing on the exploration and appraisal phase. Later guidelines may follow on the production and storage phases.

Despite the input of various authorities, the guidelines are not binding legal obligations but are intended to represent best practice in the industry. UKOOG notes that the guidelines "are not intended to prevent any organisation from adopting an alternative approach to managing well integrity, fracturing operations or environmental management."

The guidelines represent the industry’s response to the concerns and controversies which have been apparent since shale gas was first discovered in Lancashire back in September 2011, about the impact that the fracking process might have on the environment. Ken Cronin, the chief executive of UKOOG, noted while launching the guidelines that: "It is important that the industry works with all stakeholders to show it can access shale in an environmentally sensitive but also economic way."

Some of the key features of the guidelines are as follows:

• It is acknowledged that UK knowledge will evolve as experience is gained from drilling the first wells and that currently the industry is in a "pilot" stage in the UK as the first wells are drilled
• The most interesting feature is perhaps the emphasis on disclosure and transparency. The guidelines stress that operators should:
  • Engage with local communities and stakeholders, going beyond just the usual consultation procedures as part of obtaining planning permission
  • Explain “openly and honestly” their drilling, fracturing design and operational practices so that the public can gain a clear understanding of the challenges, risks and benefits of the development
  • Disclose operational data on water use, volumes of waste water, water disposal methods, additives in fracturing fluid, shale gas volumes including any emissions, fracture design and containment, and any induced seismicity
  • Comply with all statutory reporting (for example as part of the planning process) but should also have available for disclosure a detailed description of the well fracturing design and a detailed post-fracture job report
  • Disclose on the UKOOG website the chemical additives of fracturing fluids on a well-by-well basis.
• The guidelines review and emphasise the relevance of existing regulations and industry guidelines including the Well Integrity Guidelines issued in July 2012 (which apply to “typical” wells and “standard” operations)
• Operators are recommended to develop a Hydraulic Fracturing Programme, based on the risk assessment, which sets out the control and mitigation measures for fracture containment and for any potential induced seismicity
• Regarding seismicity, the guidelines emphasise mitigation of induced seismicity including carrying out site-specific surveys and pre-fracturing injection tests
• Baseline surveys of groundwater and any shallow aquifers should be undertaken by operators, both prior to and following construction, via independent third parties. All results should be disclosed and reported to the British Geological Survey
• The guidelines emphasise the importance of minimising, and if possible, eliminating, environmental and health risks.

What next?

Reacting to the publication of the guidelines, UK Energy Minister John Hayes commented that: "Shale gas is an exciting opportunity and could contribute significantly to our energy security. It is important that any development is safe and the public must be reassured that it is safe. I welcome these guidelines, which complement our robust regulatory system to ensure all operations are carried out to the highest possible standards and the environment is fully protected."

Although the guidelines are not legally binding, if operators opt to disregard any of the recommendations, in particular those concerning transparency and disclosure, they will at the least risk potentially damaging attention from sophisticated environmental and other anti-shale lobbyists and unwelcome media attention.

It seems likely that the guidelines will be followed by shale-specific regulations. Coinciding with the release of the ban on fracking, the Office for Unconventional Gas and Oil was created by DECC to coordinate UK shale gas strategy and dispel misassumptions that may have been made about the risks of fracking. This body will implement extensive new regulatory controls to review the seismic risk and the existence of faults before any new exploratory fracking activities are carried out. DECC confirmed in December that new regulations would require tighter controls on new applications to address the concern of seismic tremors. This includes a "traffic light" system meaning that any tremor measuring 0.5 or more on the Richter scale would trigger an automatic halt to drilling operations (a very low bar). Formal regulations would, unlike the UKOOG guidelines, have a binding effect.

In terms of the wider context, a similar process is going on at EU level. Many member states are experiencing similar issues as they work out how to deal with the regulatory and environmental challenges posed by fracking. In France, fracking continues to be banned.

Meanwhile, the European Parliament has called for a thorough review and analysis of the existing EU regulatory framework and how this applies to fracking. This is a development that the industry should monitor very closely. Admittedly, the Parliament is the most radical of the three legislative organs of the EU, but some of its suggestions give cause for concern. Despite the superficial attraction of a common or level regulatory playing field across Europe, past experience suggests that it is questionable whether pan-European framework legislation would be in anyone’s interests. The Parliament also calls for consideration of EU legislation requiring provision of financial guarantees/insurance, measures to ensure that EU-based companies “operate globally according to the highest standards” and even that there should be legislation to reverse the burden of proof against operators for civil liability purposes. These are the sort of suggestions that rightly strike fear into the hearts of lawyers and industry participants alike.

Conclusion

The guidelines build on the existing regulatory framework rather than effecting a knee-jerk “reinvention of the wheel” and this is to be welcomed. The emphasis on health and safety, control and the importance of communication with all relevant “stakeholders,” including the general public, and the desire to, tread carefully, to watch and learn and read accordingly also represent a sensible and pragmatic approach.

However, it cannot be taken for granted that further new UK – and particularly EU – legislation will be as well thought out. The key here is for industry to be engaged and lobbying now for the legislation it needs, not the legislation that bureaucrats think the industry needs. Trade bodies have an important role to play in this, but individual companies need to be engaged as well, both to supply trade bodies with the material they need but also to ensure that the diluted, consensus message delivered by those bodies suits the needs of the individual company. 90% of the room for manoeuvre as to the shape of future legislation exists before it is drafted.

This will be an interesting story to follow this year, in Europe and the UK, as more and more companies will no doubt seek to get involved in shale gas, the potential game-changer of the UK energy market.

Client Alert 2013-068