Shale Gas Toolkit. Managing Environmental Issues Part 5

Shale Gas Toolkit Managing Environmental Issues Part 5

Part 5: Managing Environmental Issues Despite the recent focus on shale gas exploration in the UK and elsewhere in Europe, there is currently no unified regulatory regime that specifically covers exploration, development and exploitation of shale gas. As yet, although there has been no commercial production of shale gas and just a few pilot production tests in the UK, significant concerns have been raised by campaign groups, protestors and others about the potential public health and environmental impacts of fracking for shale gas. At a time when the Government is supporting the drive for shale gas and many oil and gas companies are looking to participate in this industry in the UK, it is important for participants in this market to ensure that public opinion relating to the environmental integrity of extraction of unconventional hydrocarbons is considered carefully and concerns addressed wherever possible. Management of key environmental concerns is essential for the sector s development. A range of issues will need to be considered including contamination of surface and groundwaters, potential stress on water supplies, soil quality and fugitive emissions. Whilst some of these can be mitigated by careful selection, a full understanding of the fragmented regulatory regime covering these issues is necessary to appropriately address the issues. Members of the oil and gas industry who are investing in shale gas and bidding for the 14th Licensing Round in the UK are currently having discussions with Government about changing the Environmental Impact Assessment (EIA) framework so that EIAs are not necessary for each well that is drilled during shale gas exploration, development and production. Industry is driving the agenda to streamline this process in the UK, in the same way as standard rules permits were introduced for waste management, to reduce the cost of regulatory compliance. At the time of writing, further changes have been proposed to the Infrastructure Bill that would, if enacted into legislation, mean that there would be more detailed assessments and checks of the environmental issues to be addressed as part of the consenting regime for hydraulic fracturing consents. The suggested conditions cover areas such as environmental impacts (see below), arrangements for independent inspections of the well integrity, monitoring of methane levels in groundwater prior to fracturing and of methane emissions to air, provisions relating to groundwater and environmental protection areas, review of the impact of components of hydraulic fracturing fluid and potential restoration conditions in relation to development. 1 Part 5 of the Toolkit provides an overview of the key environmental legislation relevant to the exploration, development and exploitation of shale gas. We have set out the types of environmental permits that could be necessary (depending on site and project-specific factors) and the implications of the Registration,Evaluation and Authorisation of Chemicals (REACH), water usage and wastewater disposal for the shale gas industry. www.pinsentmasons.com/shale

Shale Gas Toolkit Shale Gas Toolkit: Part 5 Overview of Fracking Process Shale gas extraction generally leads to a larger environmental footprint compared to conventional gas development. This is due to the fact that it requires a more intensive well stimulation technique, it mainly takes place on-shore and will cover much wider areas. In addition, as productivity of shale gas wells is generally lower than conventional wells, more wells will need to be drilled. In the current state of technological development, shale gas extraction requires the combined use of high volume hydraulic fracturing and directional (especially horizontal) drilling. Hydraulic fracturing or fracking is a process by which fracturing fluid a mixture consisting typically of water, sand and chemical additives (generally between 0.5% and 2% of the total fracturing fluid) is injected under high pressure to break the rock, open and enlarge fractures to enable the hydrocarbons to flow into the well. So far, experience in Europe has been focussed on low volume hydraulic fracturing in some conventional and tight gas reservoirs, mostly in vertical wells, constituting only a small part of past EU oil and gas operations. Drawing on the North American experience where the high volume fracturing has been broadly used, operators are now testing this practice further in the EU. However, at the time of writing Part 5 of this Toolkit, there has been no commercial production of shale gas and just a few pilot production tests in the UK. Managing Legal Risks In addition to understanding the environmental concerns that might arise on projects, appropriate risk management should also involve: Risk management of environmental issues through appropriate drafting on acquisition of sites for shale gas activities, or in relation to access arrangements Guidance for companies on EIA procedures and processes (which are covered in Part 3 of our Toolkit and below) Legal review of appointment documents for environmental consultants to consider the suitability of liability management and in particular limitations, to shale gas related work Consideration of legal issues associated with water management plans and water re-use proposals, particularly in view of the plethora of water legislation Liaison with regulatory authorities in relation to environmental issues, particularly in relation to waste or waste water management Advice on potential and threatened nuisance claims by neighbours relating to environmental issues, or threatened prosecution by the relevant environment agency (i.e. Environment Agency, Natural Resources Wales or the Scottish Environmental Protection Agency (SEPA)) if future incidents occur. Cuadrilla s recent experience shows that the interface between the various types of consents required is also of great importance when developing project strategy. A favourable outcome by the environmental regulators may not necessarily yield the same result from planning authorities, and visa versa. The Legal Regime As we have already mentioned, there is currently no unified regulatory regime that specifically covers exploration, development and exploitation of shale gas in the EU, partly as the existing legislation was not designed with shale gas in mind. Participants in the shale gas industry in the UK will need to give careful consideration to a number of areas of environmental laws that we believe must be approached with an eye for detail and underpinned by robust consenting, mitigation and management strategies (as noted above). Both general and specific pieces of EU and UK environmental legislation apply to shale gas activities from planning until cessation. The key laws and regulations that are relevant from an environmental perspective cover Strategic Environmental Assessment (SEA), Environmental Impact Assessment (EIA) and planning, underground risk assessment, well integrity, integrated and consistent requirements in terms of baseline and operational monitoring, capture of methane emissions and disclosure of fracturing fluid composition on a well by well basis. 2

Environmental Permits The Environmental Permit is likely to be the key environmental consent required for each individual stage (or phase) of shale gas development in England and Wales. An Environmental Permit could be required if fracking activities are deemed by regulatory authorities to include: A groundwater activity, such as discharge of fracking fluid into wells A mining waste activity, for example, storage of flowback fluid An installation under the Industrial Emissions Directive An activity requiring a Radioactive Substances Act consent (which is likely to be the case wherever oil and gas is produced). Additional consents may be required from the Environment Agency if shale gas development results in: An activity requiring a Groundwater investigation consent An activity requiring a water abstraction licence typically, abstraction of more than 20m 3 per day An activity requiring a flood defence consent if the development takes place near river or sea flood defences A coal authority consent under the Coal Industry Act 1994 may also be necessary if the operation will intersect coal seams or coal mine workings. The Environment Agency strongly advises that operators and developers discuss the requirements of all relevant permissions with the Agency at the pre-application stage and twin-track the planning and environmental consent applications. In Scotland, the above activities will require similar consents from SEPA. Environmental Permit: Cuadrilla Case Study On 16 January 2015, the Environment Agency granted an environmental permit to Cuadrilla Bowland Limited for the exploration stage of their shale gas operations in Lancashire. The permit provides the required consent for various exploration activities including: Injection of fracking fluid into wells via injection boreholes Extraction of flowback fluid (up to 3000m 3 ) Flaring of limited amounts of waste gas Storage of extracted flowback fluid. Conscious of the heightened public concern in relation to the environmental impacts of shale gas development, the Environment Agency completed a rigorous seven month assessment of Cuadrilla s application. The normal four week consultation period was extended to eight weeks and the Environment Agency requested several pieces of additional information from Cuadrilla. Notably, these requests related to the composition of friction reducer, Cuadrilla s waste management plan and proposed measures for the limitation of noise from flaring. Shale gas developers should be mindful of the extended timescales for obtaining environmental permits and the approach to public consultation should be given particular consideration. It is, however, hoped that with improved knowledge of the specific characteristics of shale gas development and industry standards, turnaround times for granting these permits will decrease. Environmental Impact Assessment (EIA) As set out in more detail in Part 3 of our Toolkit, the answer to the question of whether any given phase of a shale gas project will require an EIA will depend on the nature, size and location of the operations and whether they will have a significant effect on the environment. Amendments were tabled to the Infrastructure Bill in August 2014 that would have meant that EIAs would have been required for all shale gas activity at all sites. However, those amendments were not officially moved forward. Part 5 of this toolkit has been published after MPs voted against an amendment to the Infrastructure Bill that would have resulted in an outright ban on shale gas activity in England and Wales. However, MPs did vote on stronger checks and thirteen conditions that would be relevant to shale gas development in England and Wales which will now be scrutinised further as part of the Bill process. The amendments tabled to the Bill would mean, if enacted, that no hydraulic fracturing could take place unless an EIA of a development had been carried out, a consideration of cumulative impacts by Mineral Planning Authorities (MPAs) and community benefits provided. Also, no fracking would take place in groundwater areas, source protection zones and protected areas as noted above. 3

Shale Gas Toolkit Shale Gas Toolkit: Part 5 Current market thinking from environmental consultants involved in the 14th Licensing Round is that it is unlikely in the short to medium term for a MPA (or in Scotland, a local authority) to approve of fracking development without an EIA. It is anticipated that this will continue to be the case until better information is collected that demonstrates significant effects are unlikely to be triggered by fracking activity. In practice, a screening opinion can be obtained from a MPA on whether or not an EIA is required. Operators should however be aware that there could be non-legal reasons that trigger an EIA, such as the desire for an operator to be open about the potential environmental impacts of a proposed project. In addition, if market practice is for operators to obtain an EIA for each well to be fracked, other operators are likely to be guided by this when they make their applications for new activities. Given the lack of track record of UK examples for hydraulic fracturing, it is considered current best practice to undertake an EIA on any proposed well development involving hydraulic fracturing even where it may be debated whether an EIA is required or not. The current market practice in relation to EIAs is likely to lead to huge costs for operators that win bids for PEDLs in the 14th Licensing Round in the UK, due to the level of detail and volume of information required for an EIA under the current legislative framework. We understand that a rough estimate of the costs per EIA per well for operators is 150,000 200,000. Registration, Evaluation and Authorisation of Chemicals (REACH) Regulations In addition to each site being scrutinised by the Environment Agencies (the Environment Agency, Natural Resources Wales and SEPA) and the Health and Safety Executive, the Agency will require details of the substances that constitute the fracking fluid and will only grant an environmental permit if they are satisfied that there are no risks to the environment, particularly to groundwater. The REACH Regulations govern the chemicals that can be used in fracking fluid and registration under REACH may be required in the EU for substances to be used in fracking fluid. Our experience from working with manufacturing companies is that there are significant costs associated with such registrations and companies facing potential registration of chemicals have in many instances looked carefully to see if they can use alternative chemicals that have been registered by others. In addition, companies may be tempted to adopt business models used in the US, but need to be aware that some chemicals used for fracking by US companies are banned in the EU. We understand that the disclosure of chemicals that will used in fracking fluid is a matter of significant concern to operators involved in this market, as the constituents of fracking fluid used by different operators has been a closely guarded secret in the US. Careful guidance will no doubt be needed by participants in the shale gas industry on environmental confidentiality issues, particularly in relation to fracking fluid. Water usage and disposal of waste water Concerns have been expressed about the quantities of water used in fracking and the disposal of waste water that results from the process. The water used may of course be obtained from licensed suppliers, but if directly abstracted by the operators, will require a Water Abstraction Licence from the Environment Agency or Natural Resources Wales in England and Wales. Licences will only be given where the relevant Agency is satisfied that a sustainable supply is obtainable. 4

Equally, disposal of waste water is subject to scrutiny by the Environment Agency in England and Natural Resources Wales in Wales and will require a permit. The waste water from operations in Lancashire has been found to contain low levels of radioactivity. A case-specific radiological assessment is required in support of any application for a permit for the disposal of radioactive waste. The Environment Agency and Natural Resources Wales will critically review any such assessment and will only issue a permit if satisfied. In Scotland the carrying out of various activities including abstraction and disposal that are likely to have a significant adverse effect on the water environment require a water use licence from the SEPA. With the regulators focus on waste management, there could be potential opportunities for waste water management contractors in the sector who are able to develop innovative storage, treatment and transporting techniques. Noise, Traffic, Impacts on Health A major concern for regulatory authorities is the potential impact of normal operations in terms of noise, traffic and impacts on health. This will be dealt with under the planning regime and by the Health and Safety Executive in the UK. All proposals for oil and gas exploration require planning permission from the relevant MPA and issues associated with this are picked up in Part 3 of our Toolkit on planning. Impact on 14th Licencing Round In preparation for the 14th Licensing Round in the UK, during which bids were submitted by the end of October 2014 for Petroleum Exploration and Development Licences (PEDLs), the companies considering participation in the emerging UK shale gas market worked very closely with geologists, hydrogeologists and others to understand the site-specific characteristics which indicate whether shale gas is located in the licensing areas covered by the Round. Likely environmental issues in each location were also important factors in determining the viability of the sites. Recent Developments Commission Recommendation Industry best practice is being shaped by a European Commission Recommendation on the minimum principles for the exploration and production of hydrocarbons (such as shale gas) using high-volume hydraulic fracturing (Commission Recommendation (2014/70/EU), OJ L 39/72. 08.02.2014 8 February 2014). Notably, this is a voluntary mechanism at present. The Recommendation provides guidance on the minimum principles which Member States and shale gas developers should be following to address and manage the key environmental concerns associated with the exploration, development and exploitation of shale gas and drilling of wells and fracking that form part of that process. These include encouraging developers to undertake various site specific environmental assessments, baseline reporting, ensuring that wells are appropriately designed and that release of gases in to the atmosphere is limited. Member States are to ensure that companies apply Best Available Techniques (BAT) to manage environmental risks appropriately. This is a requirement of many environmental permits. Compliance with BAT has led to considerable costs for industrial operators in other sectors, for example in the chemicals industry, so operators should be very careful to feed into the Commission process for drafting BAT documents. The Environmental Industries Commission is currently seeking input from industry stakeholders on BAT for onshore oil and gas exploration, with the findings expected at the end of March 2015. Status of the Recommendation The Recommendation is non-binding, but will be followed 18 months after publication by a review by the Commission of the extent to which it has been effective in implementing the principles set out in the Recommendation. As the Recommendation was published on 8 February 2014, the Review should have taken place by the end of July 2015. Failure by Member States to implement the various elements of the Recommendation could lead to legislative changes down the line. 5

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 timeline 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. Identification Developer identifies suitable areas for shale gas exploration. Exploration Once PEDL secured, Developer identifies locations within licence area with highest potential for shale gas and exploratory drilling undertaken. 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. 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. Full Development & Production Drilling of production wells across licence area and construction of commercial production facilities and infrastructure for large volumes of shale gas. Abandonment Well plugged and surrounding area rehabilitated in accordance with prescribed standards. 1 3 Years 1 3 Years 1 2 Years 2 3 Years Over 20 Years Site specific characterisation and assessment 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 NORM Naturally Occuring Radioactive Materials PEDL Petroleum Exploration & Development Licence PP Planning Permission PPA Planning performance Agreement REACH Registration, Evaluation, Authorisation and Restriction of Chemicals WAL Water Abstraction Licence EPs mitigation and conditions dealing with potential environmental concerns/ risks (including: surface and groundwater activities and discharges, industrial emissions, radioactive substances, fracking fluid, NORM, waste water and storage) Flood Defence Consent EIA depending upon nature, size and location of development proposals, consultation strategy to be adopted and likely significant environmental effects WAL needed where water for fracking operations sourced from groundwater/ surface water Site specific characterisation and assessment PP from MPA (LPA in Scotland) for drilling EXPLORATORY wells, change of use in land and any associated works 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. EPs mitigation and conditions dealing with site specific environmental concerns/risks WAL EIA depending upon nature, size and location of development proposals and consultation strategy to be adopted and likely significant environmental effects Site specific characterisation and assessment PEDL Extension PP from MPA for drilling of APPRAISAL wells and any associated works and upgrades (e.g. drilling platforms) Section 106 planning obligations linked to PP PPAs if appropriate 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. EPs mitigation and conditions dealing with site specific environmental concerns/risks WAL EIA Site specific characterisation and assessment PEDL Extension for full commercial exploitation PP from MPA for drilling of initial PRODUCTION wells as any associated works and site upgrades Possible Section 106 planning obligations linked to PP PPAs if appropriate 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. EPs mitigation and conditions dealing with site specific environmental concerns/risks WAL EIA Site specific characterisation and assessment PP from MPA for large scale commercial drilling of PRODUCTION wells and any associated works or site upgrades (i.e. construction of large scale production infrastructure) Possible Section 106 planning obligations linked to PP PPAs if appropriate 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. EPs mitigation and conditions dealing with site specific environmental concerns/risks Possible EIA connected to PP depending on the changes that have been made. PP from MPA (if further consent required for changes to the development strategy from that consented in PP for stage 5) Rehabilitation of area in accordance with PP conditions Well Abandonment in accordance with HSE standards Aftercare of the site in accordance with PP conditions.

Contacts For more information please contact: Georgie Messent Partner T: +44 (0)20 7418 8263 M: +44 (0)7870 598098 E: georgie.messent@pinsentmasons.com Bob Ruddiman Sector Head Energy & Natural Resources T: +44 (0)1224 377 925 M: +44 (0)7767 316970 E: bob.ruddiman@pinsentmasons.com Paul Rice Partner and Head of Client Relationships Energy and Natural Resources T: +44 (0)20 7490 6282 M: +44 (0)7798 617709 E: paul.rice@pinsentmasons.com Eluned Watson Associate T: +44 (0)20 7490 9332 M: +44 (0)7919 395880 E: eluned.watson@pinsentmasons.com Emma Reid Solicitor T: +44 (0)141 567 8693 E: emma.reid@pinsentmasons.com Claire Swienton Solicitor T: +44 (0)20 7418 8289 M: +44 (0)7468 710896 E: claire.swienton@pinsentmasons.com 7 This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.

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