Legal Briefing

Shale gas: the 
energy saviour?

The In-House Lawyer Logo

Projects, energy and natural resources | 01 December 2012

Shale gas is a naturally occurring gas, consisting mainly of methane, that is found in thin layers of sedimentary rock known as shale. It is termed ‘unconventional’ natural gas because it is found in shale, which is less permeable than rock in which natural gas has historically been found and, as such, additional procedures are required to extract the gas. The procedure by which shale gas is extracted is called hydraulic fracturing or ‘fracking’ and involves the injection of a fluid mixture of water, sand or ceramic beads and chemicals into shale rock at high pressure to create fractures through which shale gas is forced into the well bore for collection. Some of the largest deposits are estimated to hold as much as 500 million cubic metres of gas reserves.


Advances in technology have made 
fracking for shale gas more economically attractive. As such we have seen an increase in interest in the UK from shale gas operators looking to profit from extraction and, tentatively, the government, which is eager to investigate any avenues available to bolster dwindling North Sea gas supplies and reduce the UK’s reliance on imported gas. However, environmental groups have raised concerns about the fracking procedure, particularly in relation to risks of groundwater pollution and that fracking could cause seismic activity.

Although shale gas exploration in the UK is in its infancy, a 2010 British geological survey commissioned by the Department of Energy and Climate Change (DECC) estimated, by analogy with shale gas reserves in a defined area in the US, that 150 billion cubic metres of shale gas could be recoverable from shale in the UK, the equivalent of almost two years of the UK’s gas requirement. With such potential, is shale gas the UK’s energy saviour, or is it an expensive and potentially polluting distraction from conventional energy resources?

THE POLITICAL AND ECONOMIC 
CASE FOR SHALE GAS

Despite the apparent potential for shale gas in the UK, opinion is divided and the government appears to be torn between the benefits and the environmental risks. Proponents of fracking point towards what they consider are the clear benefits of a valuable addition to the UK’s energy mix and preventing the UK becoming excessively dependant on imported gas. It is hard to dispute that what is a new industry in the UK would benefit the wider economy; the Institute of Directors has suggested that a shale gas industry in the UK could create 35,000 jobs and that the UK could meet 10% of its gas requirement for the next 103 years if the industry is a fraction as successful as the shale gas industry in the US.

The government indicated its tentative support for shale gas extraction in October 2012 with an announcement by the chancellor of the exchequer that the UK shale gas industry will benefit from preferential tax treatment analogous to that offered for North Sea exploration in the form of field allowances. Qualified support has also come in the form of an endorsement, subject to clear regulatory control, by the head of the Environment Agency, Lord Smith of Finsbury. While fracking is currently permitted under 
UK law, it is hoped that the government 
will soon give further indication of its support or otherwise to shale gas extraction (see below).

Turning to Europe, the European Commission’s Joint Research Centre (JRC) has recently published a report on shale gas that is also supportive of the economic case for shale gas extraction. ‘Unconventional Gas: Potential Energy Market Impacts in the European Union’ investigates the economic arguments surrounding shale gas extraction and concludes that:

‘… unconventional gas may meet more than 40% of the increased global demand for gas by the year 2035’.

The report also cites statistics from the US where shale gas reportedly accounted for 28% of domestic production in 2010. Such is the success of the US shale gas industry that previous projections on import requirements have been revised down and plans for an increase in export capability have been tabled. However, certain commentators suggest that the success of the US shale gas experience cannot be emulated in the UK and Europe as the shale gas will be more expensive to produce and there remains concern among opponents of the adequacy of the regulatory regime that covers shale gas extraction both in Europe and the UK.

THE REGULATORY REGIME 
FOR FRACKING OPERATIONS

The techniques involved in extracting shale gas on a commercial scale are controversial. Despite the recent focus on shale gas extraction, there is currently no regulatory regime that specifically covers the drilling of shale gas wells or fracking and the consenting requirements are similar to those for conventional gas extraction. These typically include a requirement for:

  1. Planning permission, and, as part of the planning process, the Local Planning Authority will inevitably require an Environmental Impact Assessment (EIA).
  2. An exclusive licence issued by DECC through a competitive process under the Petroleum Act 1998, similar to that for offshore gas exploration and extraction.
  3. Environmental permits will often be required under the Environmental Permitting (England and Wales) Regulations 2010 for fracking fluid injection where such fluid contains pollutants and is to be injected into rock formations containing groundwater and for waste water discharge. The Environment Agency (EA) will require details of the substances that constitute the fracking fluid and will only grant an environmental permit if satisfied that there are no risks to the environment, particularly to groundwater. An environmental permit may also be required where there is a risk that natural substances could pollute groundwater as a result of the fracking process.
  4. A notification to the EA that the operation could affect water conservation under the Water Resources Act 1991.
  5. A water abstraction licence under the Water Resources Act 1991 (such licences are difficult to obtain in practice).
  6. Coal Authority consent under the Coal Industry Act 1994 if the operation will intersect coal seams or coal mine workings.
  7. Approval by the Health and Safety Executive (HSE) of the design of the proposed well and ongoing supervision by the HSE.

In addition to these specific requirements, there are certain other regulatory regimes that could apply in the event of a potential or actual pollution incident with which shale gas operators should become familiar. The positive obligations in the Environmental Damage (Prevention and Remediation) Regulations 2009 will require operators to notify and mitigate (and subsequently, if applicable, remediate) any threat of environmental damage caused by their operations. Depending on the contents of fracking fluid, hazardous waste regulations may also apply.

The contaminated land regime and the common law principle established in Rylands v Fletcher (1868) could also become relevant in the event of a pollution incident. Further, the Borehole Sites and Operations Regulations 1995 require operators of borehole sites, which will include shale gas boreholes, to provide the HSE with advanced notice of significant alterations to wells or any risk of accidental release of fracking fluid or shale gas.

ISSUES WITH FRACKING

Opponents of shale gas extraction and fracking, including Friends of the Earth and Greenpeace, argue that the above regulatory regime is insufficient for fracking to be carried out safely, pointing towards three key environmental risks of the fracking process:

  1. substantial requirement for water;
  2. potential pollution of groundwater 
and/or drinking water from sediments and/or fracking fluid solutions; and
  3.  seismic activity.

The substantial water requirement cannot be disputed with around 8,000 to 16,000 cubic metres of water required per borehole. This represents a significant burden on water supplies and in areas where water is scarce it is unlikely that abstraction licenses would be granted. As the contents of fracking fluid must be disclosed to the EA as part of environmental permitting process, this element is clearly regulated, although opponents call for tighter regulation. The risk of groundwater contamination from naturally occurring sediments dislodged during the fracking process is also a risk that the EA will assess in considering applications for environmental permits.

With regard to the seismic risks, DECC commissioned a report into the recent seismic activity in the vicinity of the Preese Hall fracking facility near Blackpool that was carried out by three independent experts in hydraulic fracture and seismology. The report, ‘Preese Hall Shale Gas Fracturing Review & Recommendations for Induced Seismic Mitigation’ (the Preese Hall Report) was published by DECC on 17 April 2012 and agrees with the conclusions of a previous report on the same subject by Cuadrilla Resources Ltd, the operator of the Preese Hall facility; that the minor seismic activity near the Preese Hall facility was induced by the fracking process. However, the report continues to suggest that, provided preventative measures are taken, there is no reason why the Preese Hall facility should not recommence operation.

In the US, where the shale gas industry is well developed, there have been numerous cases brought against shale gas operators for environmental and property damage and personal injury arising from the above issues. The US has also seen federal enforcement of regulatory requirements and actions to force federal/state governments to enforce regulations that are not currently being applied. However, there have been suggestions that the issues in the US have only occurred due to poor regulation and monitoring of the fracking procedure.

THE REGULATORY FUTURE 
FOR SHALE GAS IN THE UK

As it stands in the UK shale gas operators are constrained only by the regulatory requirements outlined above and DECC has made clear that it does not consider that there should be a moratorium on shale gas. This is a view shared by the Energy and Climate Change Select Committee, which has suggested, following its inquiry into shale gas, that the fracking process poses limited risk to aquifers as long as well casings remain intact and that the wider risks are similar to those encountered in the exploration for and extraction of ‘conventional’ gas.

The Preese Hall Report made recommendations to DECC for wider application in the mitigation of fracking induced seismic activity in the future regulatory regime for shale gas extraction in the UK. Those recommendations are:

  1. the fracking procedure should commence with less intrusive 
pre-injection before fully intrusive fracking;
  2. live monitoring systems should be in place for fracking facilities to identify any seismic activity as it occurs;
  3. a control regime should be set up using a ‘traffic light’ analysis; seismic activity of 0.5 magnitude or greater would result in a red light response, immediate cessation of fracking and any necessary remediation. Seismic activity of lower than 0.5 magnitude would be carefully monitored and fracking operation suspended pending further investigation; and
  4. an assessment should be made on seismic risk on a site-by-site basis before fracking operations are permitted.

DECC is currently considering comments by interested parties before making any decisions about permitting the Preese Hall facility to recommence operation and any further regulatory controls that might be introduced for shale gas fracking. At the time of writing a DECC announcement on the subject is awaited.

DECC will likely also take into account the recommendations in a joint report published by the Royal Academy of Engineering and the Royal Society in deciding on the regulatory future for shale gas. The report has wider application than the Preese Hall Report but similarly supports shale gas fracking subject to closer monitoring, despite indicating that it considers the current regulatory regime sufficiently robust if it is stringently enforced. It considers that environmental risks (including seismic and water risks) can be properly managed in the UK, that fracture propagation is unlikely to cause contamination and that well integrity is the highest priority. It cites the importance of robust monitoring, and calls for mandatory EIAs.

THE EUROPEAN PERSPECTIVE

Fracking is also getting considerable interest in the rest of Europe, where 
opinion is divided, with countries including Poland and Ukraine apparently eager to exploit the potential of shale gas extraction while the likes of France, Switzerland and certain states in the US have banned fracking and shale gas extraction pending more definitive evidence on the safety of the process.

In an attempt to achieve a European consensus, the European Parliament’s Economic and Scientific Policy Department held a workshop with leading experts on 28 February 2012, which concluded that further research was required in this area. To that end the European Commission’s Joint Research Centre (JRC) was tasked with reviewing the economic case for promoting shale gas and also, separately, the adequacy of the current European regulatory system. The JRC’s report on 
the economic case is generally supportive of shale gas extraction but its report on 
the environmental issues associated with shale gas extraction to identify key uncertainties and assess the appropriateness of current environmental legislation is awaited.

As if to pre-empt the outcome of the JRC’s report, the European Commission has included in its 2013 work programme the development of a Europe-wide regulatory framework to enable efficient and environmentally sound extraction of shale gas, which indicates Brussels-based tentative support for shale gas extraction.

CONCLUSION

There is no doubt that we are living in increasingly uncertain times with regard to the UK’s energy requirements. The government reminds us frequently that we need a diverse energy mix and to ensure security of supply.

Shale gas extraction in the US has made an enormous difference to the energy market there, turning Liquified Natural Gas import terminals into export terminals and profoundly affecting the price of gas and the profile of the country’s energy security. The government is likely to want to emulate this success. However, it will be important to ensure that the UK’s regulatory regime is sufficiently robust to protect the environment from the potential adverse effects of fracking and to ensure that the fracking process is carried out as resource efficiently as possible. The latest reports referenced in this article suggest that more needs to be done to ensure that shale gas can be extracted safely and economically. It is clear that the risks associated with fracking, and any need for tighter monitoring and regulation, will need to be weighed against the potential benefits of extraction; contribution to the energy mix and energy security.