Shale Gas Toolkit. An introduction to Shale Gas Part 1 June 2013

Transcription

1 Shale Gas Toolkit An introduction to Shale Gas Part 1 June 2013

2 Part 1: An introduction to Shale Gas Shale Gas could contribute significantly to our energy security and reduce imports of gas as we move to a low carbon economy. It could substitute for imports which are increasing as North Sea gas is decreasing Ed Davey, Energy Change and Climate Secretary, on 13 December 2012 announcing that the moratorium on hydraulic fracturing in the UK had been lifted. This was reaffirmed in the March 2013 budget when the Chancellor gave attractive financial incentives to both fracking companies and local communities stating his commitment to make it happen. This is the first in a Pinsent Masons series of briefings and toolkits on Shale gas in the UK and Europe, exploring the legal Framework for successful exploitation. What is Shale Gas? Shale gas is a natural gas (composed predominantly of methane) which is trapped in shale formations located at significant depths below ground. Shale gas is located either within the rock pores, on the surface of the rock or within natural fractures of the rock (i.e. the gaps between the shale rock). Shale reservoirs are low-permeability, meaning that shale gas flows through the rock less easily than in conventional gas reservoirs containing sandstone or limestone. The low permeability of the shale reservoirs means that the shale gas often cannot be easily extracted, meaning that some form of specialised extraction process or stimulation is required. As a result, shale gas is classed as an unconventional gas. Recent estimates indicate that the UK has trillion cubic feet (tcf) of economically recoverable onshore shale gas reserves and consultancy firm Pöyry reported that shale gas could supply 21% of UK gas demand by 2030, reducing expected gas prices by 2-4%. The Shale Gas extraction process In order to assess the size of a potential reservoir and then to extract shale gas, a developer will drill one or more wells vertically down into the shale reservoir (sometimes referred to as a shale play ). The developer may, once the well is drilled vertically, opt to drill the well horizontally along the shale play, allowing greater exposure and increasing the potential for recovery of shale gas

3 Shale Gas Toolkit An introduction to Shale Gas: Part 1 While increasing the potential recovery of shale gas, horizontal wells do, however, cost around three times more than that of a standard vertical well. In a small number of cases, the natural fractures within the shale reservoir will be sufficient to allow the shale gas to be released through the well without the need for any further extraction process. In most cases though, in addition to the drilling of both vertical and horizontal wells, a specialised extraction process known as hydraulic fracturing or fracking is used. This involves pumping fracking fluid into the shale reservoir at a pre-determined rate and pressure. The components of fracking fluid will be unique for each and every shale reservoir, however this will usually consist almost entirely of water and sand (the sand is used to prop the fractures open) and a very small concentration of specialised chemicals. As a result, large volumes of water are required to carry out this process and so a sustainable supply must be identified. This process creates and maintains fractures in the shale reservoir which allows the shale gas to be released up the well. The main stages of the process While the recent media attention has focused mainly on the fracking, the overall process of shale gas exploration takes a number of years and involves many years of planning, commissioning, operating and thereafter decommissioning. 1. Identification The developer identifies, through a number of desktop surveys and geological analysis, areas believed to be suitable for shale gas exploration. Assuming the analysis indicates that there is potential for shale gas exploration, the developer will also try to secure the relevant exploration and exploitation rights (detailed further below) at this stage. 2. Exploration The developer, upon securing its exploration licence, identifies locations within the project area that contain the highest potential for shale gas. Initial work may include further geological studies, analysis of seismic data and drilling of exploration wells to analyse samples. 3. Appraisal The developer drills a number of wells to test the commercial viability of gas production at the identified sites. This allows the developer to better understand the properties of the shale gas produced. It also provides an opportunity to test different well designs and that the gas produced during this appraisal stage is capable of being used for small-scale commercial generation of electricity. 4. Initial Development The developer drills the first few production wells and the construction of the necessary infrastructure to gather gas to be sold into the market. This phase provides early sales revenue and a greater understanding of production trends as well as the best way to tailor the well design to fit the circumstances of the specific project. 5. Full Development and Production This stage involves detailed planning and engineering design, the drilling of production wells across all prospective areas of a licence and putting in place appropriate-sized production facilities and infrastructure to cater for large volumes of produced gas. Projects in this phase can last for over 20 years, providing a stable source of gas supply either feeding into an off-taker s pipeline, power generating facilities or into liquefied natural gas (LNG) processing infrastructure. 6. Abandonment Once a well has been drilled and has finished its useful life, it must be abandoned. This process involves safely sealing the well (known as plugging ) and rehabilitating the surrounding area in accordance with licence terms and planning permission conditions. The abandonment stage can vary depending on the number of sites within the licence area. 2

4 What rights or permits are required? There is no one regulation or regulatory body which governs shale gas exploration or any one licence which is required. Instead, the individual activities required during shale gas exploration are subject to various practical and regulatory requirements. We have detailed some of the material rights required below: Petroleum Exploration and Development Licence (PEDL) under the Petroleum Act 1998 Any developer looking to extract shale gas would be required to obtain a PEDL from the Department for Energy and Climate Change (DECC). PEDLs authorise the developers to search for, bore for and get hydrocarbons (including shale gas) over a large area of ground. PEDLs are valid for a period of time designed to mirror the typical cycle of a field: exploration, appraisal and production. Developers must be aware that the PEDL will expire at the end of each term unless there has been sufficient progress from the licensee to warrant moving to the next stage. DECC issues PEDLs in competitive offerings (licence rounds), which generally take place every year therefore the window of opportunity to apply is limited. There is an out-of-round process, however this is only justified in exceptional circumstances for example where broad competition is not feasible even in licensing rounds. The award of a PEDL is discretionary and developers wishing to successfully compete for a PEDL must be able to demonstrate appropriate and acceptable financial, technical and environmental capabilities to exploit the licensed area fully and responsibly. Property Rights The PEDL will cover a large area and, usually prior to the exploration stage, the developer will narrow this area down to smaller sites suitable for appraisal, exploration and subsequent development. In relation to those sites, the developer will need to either purchase the relevant site from the landowner or secure alternative property rights (such as a lease or licence) from the landowner to take access over all or part of the site. In many cases, the minerals beneath the property may be in separate ownership, in which case the developer will also either require the consent of the minerals owner or to purchase or take a lease of the minerals beneath the property. Coal Authority Rights under Coal Industry Act 1994 Coal reserves in the UK are managed by the Coal Authority and so any activity which intersects, disturbs or enters the Coal Authority s coal interests will require the consent of the Coal Authority. Where the developer is drilling down into the shale reservoir and it is likely that the developer will be passing through the coal seams, a licence from the Coal Authority will be required. In some instances, a third party operator may be working the coal seams and will have already been granted rights from the Coal Authority in which case the shale gas developer will need to enter into a separate interface agreement with the third party developer and the Coal Authority to ensure that the rights of each party can co-exist. Planning Permission under the Town and Country Planning Act 1990 and Town and Country Planning (Scotland) Act 1997 There are a number of different stages in the exploration of shale gas, many of which constitute development (such as exploratory digging, the construction of a well and hydraulic fracturing itself) and therefore require planning permission. Any permission would need to be obtained from the local planning authority in respect of each relevant stage. In England and Wales, permission from the minerals planning authority will be required in relation to any drilling activities. The Environment Agency (Scotland) will be statutory consultees in relation to any planning application and so environmental matters (such as use of or impact on ground water) will be considered as part of any planning application in relation to any of the different stages. Additionally, many stages of the shale gas process will require a detailed environmental impact assessment to be carried out where the relevant stage meets certain criteria and/or may have significant environmental effects

5 Shale Gas Toolkit An introduction to Shale Gas: Part 1 Environmental and Health and Safety Consents As detailed above, there is no one consent required for shale gas exploration and instead it is each individual part of the process which is governed by different legislation this is no more evident than in respect of the environmental consents which are required in relation to shale gas exploration. We have set out below some of the material environmental consents required: 1. Environmental Permit (England and Wales only) A bespoke Environmental Permit (i.e. not one which will fit within any of the standard environmental permits) will be required from the Environment Agency in accordance with the Environmental Permitting Regulations This will deal with a number of the environmental risks contained in the shale gas exploration process, including the following: discharges to surface or groundwater; gasification processes; temporary storage and subsequent treatment and disposal of naturally occurring radioactive materials; and waste treatment and storage. 2. Water Abstraction Licence (England and Wales only) Where developers wish to source water from groundwater/surface waters a water abstraction licence will also be required from the Environment Agency in accordance with the Water Resources Act Applications will be made available on the public register and on the Environment Agency s website for comment. Comments from consultees will be taken into account when determining the application. 3. PPC Permit (Scotland only) A PPC Permit from the Scottish Environment Protection Agency (SEPA) under the Pollution Prevention and Control (Scotland) Regulations 2012 will be required for the following activities: refining of gas; gasification or other heat treatments; combustion; and disposal of solid or liquid wastes. While the initial exploration for shale gas does not fall into one of these categories, however to allow the processing of any gas on the site a PPC Permit must be in place. 4. CAR Licence (Scotland only) A CAR licence will be required from SEPA under the Water Environment (Controlled Activities) (Scotland) Regulations 2011 for the following controlled activities: constructing a borehole greater than 200 metres; injecting fracking fluid; abstracting water for injection purposes; abstracting the flowback water; and management of abstracted fluids. Where applying for a relevant CAR Licence, the developer will be required to submit relevant information to SEPA, including a risk assessment, details of the borehole construction and details of the chemical additives in the fracking fluids. 5. NORM Consent The flowback water occurring from the exploration of shale gas may contain naturally occurring radioactive materials (NORM). Where not already dealt with under the Environmental Permit, the developer is required to demonstrate to the Environment Agency or SEPA in accordance with the Radioactive Substances Act 1993 (RSA93) that the radioactive levels fall below certain thresholds, failing which the developer will require consent to be issued under RSA HSE Consent There is a duty under the Borehole Sites and Operations Regulations 1995 on the operators of petroleum borehole sites to ensure that no operations which would make a significant alteration to the well or involve an accidental release of fluids from the well are carried out unless they have notified the Health & Safety Executive (HSE) at least 21 days in advance. The HSE will serve an improvement notice requiring modifications to the plan if they are not satisfied with the well design and changes must be made before drilling can commence. Failure to do this could result in delays for drilling activities. 7. Fracking Consent The consent of DECC will be required in accordance with the Petroleum (Production) (Landward Areas) Regulations 1995 prior to any fracking activities. In this respect, the developer will require to submit to DECC a Fracking Plan. DECC have advised that the Fracking Plan should be comprehensive and progressive. 4

6 Recent Developments The most high profile shale gas development to date in the UK has been the Cuadrilla exploration site in Preesall, Lancashire. As a result of minor earthquakes which were recorded during fracking operations at this site, a moratorium on all fracking activity in the UK was introduced. We have included as an annex to this toolkit a case study detailing the history of this site. Despite the moratorium on fracking activities in the UK being lifted in December 2012, seismicity will remain an issue to which considerable attention will be given and has the potential to be a stumbling block to proposed or commenced operations. Operators will be required to: review available information on faults in the area to minimise the risk of activating any fault by fracking; and monitor background seismicity before fracking operations commence to provide a baseline against which activity during and after the operations can be compared. Real time seismic monitoring will continue during operations which will be subject to a traffic light system so that operations can be paused or halted in the event of abnormal seismic activity. The red-light is currently set at magnitude 0.5 which is far below a perceptible surface event. New Government Office Additionally, the UK Government announced in its Autumn Statement that an Office of Unconventional Gas and Oil will be set up with a view to streamlining the regulation of shale gas exploration. In Europe though, the picture for shale gas exploration is not as positive. There are currently moratoriums on shale gas exploration in France, the Netherlands, Czech Republic and Bulgaria. In Germany, while the government has not introduced a moratorium, the North Rhine-Westphalia, the country s most promising region for shale gas, suspended fracking last September. Our Experience While the exploration of shale gas is only at the early development stage in the UK, the Pinsent Masons Oil & Gas team is long established and has deep gas sector knowledge gained through in-house experience, wide client exposure and regular participation in global industry events and activities. Our diverse range of clients from oil and gas majors to independents on the exploration and production side has allowed us to advise on many different perspectives over many years, including advising recently companies who are operating in both coal bed methane and shale gas exploration in the UK. Multi Disciplined Expertise Our team draws upon the specialist skills and disciplines across the firm allowing us to provide services in all aspects of the gas industry including banking and finance, capital markets, licence/regulatory, joint ventures, competition, procurement, HSE, employment, pensions, sanctions, tax, disputes, real estate, environmental, restructuring and anti-bribery and corruption. Of particular relevance to shale gas exploration, Pinsent Masons advises internationally on all aspects of planning and environmental law and the associated consenting processes; steering a course through the political, as well as the legal, aspects. We offer local market knowledge across the UK and Europe, from a team that is used to working together on a national and international basis which therefore offers a consistency of approach and quality across the board. The team has a particular focus on the energy sector and substantial experience advising on complex energy developments and associated infrastructure, both onshore and offshore. We know and understand the business of energy generators and their supply chains and we possess unrivalled technical knowledge and experience which we apply when inputting to the consenting process, whether it be advising on consents strategy, providing support during the application process or providing representation at appeals or inquiries resulting from the grant or refusal of consent/permission

7 Shale Gas Extraction Process Timeline The Shale Gas Extraction Process, from identification of a potential development area to the full commercial exploitation of that area, contains many stages and can last over 30 years. At each stage Developers must meet a number of regulatory requirements that are set out in the time line below. SEISMICITY: this issue has the potential to be a stumbling block to proposed or commenced operations and is something to which Developers must give considerable thought. Developers must assess the risk of activating faults in the proposed licence area and also monitor background seismicity before fracking operations commence. Real time seismic monitoring will also be necessary during operations and operations will need to be paused or halted where seismicity passes a certain level Abandonment Well plugged and surrounding area rehabilitated in accordance with prescribed standards Full Development & Production Drilling of production wells across licence area and construction of commercial production facilities and infrastructure for large volumes of shale gas Initial Development First production wells constructed as well as necessary infrastructure to facilitate the sale of shale gas. Early sales revenue generated and project tailored to maximise production Appraisal Drilling of wells to assess commercial viability of gas production. Gas produced at this stage can be used for small-scale commercial electricity generation Exploration Once PEDL secured, Developer identifies locations within licence area with highest potential for shale gas and exploratory drilling undertaken. Identification Developer identifies suitable areas for shale gas exploration 1 3 Years 1 3 Years 1 2 Years 2 3 Years Over 20 Years Rehabilitation of area in accordance with PP conditions Well Abandonment in accordance with HSE standards Aftercare of the site in accordance with PP conditions PP from MPA for large scale commercial drilling of Production wells and further site upgrade i.e. construction of large scale production infrastructure Again, once PP granted the Developer must repeat the process of notifying the EA and HSE prior to drilling before being the green light by DECC. PEDL Extension for full commercial exploitation PP from MPA for drilling of initial Production wells and associated site upgrades. Again, once PP granted the Developer must repeat the process of notifying the EA and HSE prior to drilling before DECC give the ultimate green light to commence operations PEDL Extension PP from LPA for drilling of Appraisal wells and associated upgrades i.e. drilling platforms Once PP granted the Developer must repeat the process of notifying the EA and HSE of drilling before being the green light by DECC Additionally HSE Consent would be necessary where the Developer wished to significantly alter existing wells PP from MPA (LPA in Scotland) for change of land use and the drilling of EXPLORATORY wells and associated works EIA dependent upon the scale of the operations EPs dealing with environmental risks WAL needed where water for fracking operations sourced from groundwater/surface water CA CONSENT to drill through coal seems where necessary Well Examination Scheme implemented to confirm Well designed and constructed in accordance with industry Notify EA of intention to drill Notify HSE of well design and operations 21 days prior to drilling HSE Consent where significant alteration of well needed Fracking Plan to address the risk of seismicity submitted to DECC Fracking consent from DECC PEDL to search for, and extract shale gas. (PEDL mirrors stages therefore PEDL extensions will be necessary) Property Rights negotiate with Landowners to purchase or secure rights (lease or license) over land to facilitate the process. Acronyms PEDL Petroleum Exploration & Development Licence CA Coal Authority DECC Department for Environment & Climate Change EA Environment Agency EIA Environment Impact Assessment EP Environmental Permit HSE Health & Safety Executive LPA Local Panning Authority MPA Minerals Planning Authority PEDL Petroleum Exploration & Development Licence PP Planning Permission WAL Water Abstraction Licence 6

8 For further details and queries relating to Shale Gas or other matters, please contact: Bob Ruddiman Partner Energy and Natural Resources T: +44 (0) E: Paul Rice Partner Property, Planning & Environmental T: +44 (0) E: Shirley Allen Partner Projects T: +44 (0) E: Simon Colvin Legal Director Property, Planning & Environmental T: +44 (0) E: David Ross Associate Property, Commercial Property T: +44 (0) E:

9 Shale Gas Toolkit An introduction to Shale Gas: Part 1 Case Study: Cuadrilla Resourses Limited, Preesall Exploration Site, Kirkham, Preston, Lancashire 2008 Cuadrilla Resourses Limited (Cuadrilla) is awarded exploration licences in the 13th onshore licensing round for the Bowland Shale by the DECC. 31 July 2009 Cuadrilla submits planning application to Lancashire County Council for temporary change of use from agriculture to construction of drilling platform and related development at Preesall. 30 October 2009 Lancashire County Council grants planning permission to Cuadrilla for drilling of exploratory borehole subject to conditions on time limits, working programme, soils and overburden, hours of working, highway matters, control of noise, safeguarding of watercourses and drainage, restoration and aftercare. 16 November 2009 Development commences at Preesall. Condition 2 requires completion and restoration within 18 months, i.e. by 15 May March 2011 Fracking begins at Preesall. March 2011 to January 2013 Environment Agency (EA) carries out independent assessments and sampling and makes frequent site visits to Preesall. The EA makes a total of 16 visits to the site, seven of which are arranged last-minute to sample flowback fluids. 1 April 2011 First tremor detected following Cuadrilla s hydraulic fracturing operations measuring 2.3 on the Richter Scale. To determine whether this was due to hydraulic fracturing, Cuadrilla works with Keele University and the British Geological Survey (BGS) to set optimally placed seismometers to monitor ground movements around the active well sites as well as the surrounding area. 27 May 2011 During the fourth fracture treatment at Preesall, a second tremor measuring 1.5 is recorded. Following this and after discussions with DECC, Cuadrilla voluntarily pauses hydraulic fracturing operations while a report is commissioned to discover if there was a link between seismicity and fracturing. 13 June 2011 Cuadrilla applies to Lancashire County Council to vary condition 2 of its original planning permission in order to extend the period of time for restoration of the site to 31 December December 2012 DECC announces that exploratory fracking for shale gas can resume in the UK, subject to new controls to mitigate the risks of seismic activity. 23 January 2013 Lancashire County Council Planning Committee considers application to vary condition 2, noting that Cuadrilla proposes to plug and abandon the borehole without any further testing. 13 March 2013 Cuadrilla announces cessation of operations at one of its 3 operational sites - Anna s Road site in Westby, Lancashire to allow for the completion of a voluntary EIA (Cuadrilla has 10 exploration licences and is currently implementing 3 of these). The EIA study will take 12 months to complete to account for migratory birds over wintering in the area. Please note, this table was last updated in May 2013 This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. 8

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