Shale Gas Insights into the UK market

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UK Shale Gas – breaking new ground

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Executive summary

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A sustainable, long term investment

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Valuable community engagement

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Political support not rhetoric

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Streamlining regulation

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Licensing to encourage investment

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‘Nationally significant’ status

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Buffer zones

10 International investment 11 The impact of protest 12 About Pinsent Masons Energy and Natural Resources team 13 Appendix 16 Key Contacts

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Pinsent Masons | Shale Gas: Insights into the UK market

UK Shale Gas – breaking new ground Foreword The role shale gas could play in the UK’s energy mix has been hotly debated in parliament, the media and in our local communities. While protests and environmental concerns have made headline news, the true impact of shale gas is yet to be realised. Pinsent Masons, a leading adviser to the oil and gas sector, invited industry participants to shed light on the key regulatory issues affecting the scale of UK shale gas and share their views on its place in our future energy supply. The perspectives reflected in this report illustrate the need for an ongoing, measured debate about the role shale gas should have in the UK as well as the need for genuine community engagement throughout the life cycle of a project.

Paul Rice Partner Head of client relationships for Energy and Natural Resources at Pinsent Masons

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Executive summary In October and December 2013 Pinsent Masons invited the most prominent organisations with involvement in UK shale gas to attend summits in London and Edinburgh to discuss some of the most pressing issues affecting the ‘shale revolution’. As part of the events, 100 delegates participated in face-to-face interviews to gauge their views.1 The results of that exercise are revealing, and represent the views of a cross-section of stakeholders. Respondents included: government bodies such as the All-Party Parliamentary Group for Oil & Gas and professionals in related fields such as planning, environment and wider oil and gas specialists. The headline findings were as follows: • The vast majority of respondents feel that it will take at least a decade for shale gas to become a significant contributor to the UK’s energy resources • 55% of delegates cited local opposition and ‘nimbyism’ as the biggest challenge and barrier to the shale gas becoming a valuable domestic resource • 60% of respondents supported proposals for a single planning and licensing regime responsible for planning, environment and health and safety permits – indicating that there are some reservations that the current regime is fit for purpose • 52% of survey respondents credit the Conservative party with devising the clearest policies to promote exploration and production of shale gas in the UK. 31% of delegates are unclear about which party provides the most coherent policy on shale gas, while a number of respondents indicated that Labour ‘has not been vocal on the subject of shale gas’ • 45% of respondents felt that protests in Balcombe, West Sussex, did not have any significant impact on the business case for investment in UK shale. The following report provides more detail and analysis from energy experts across the Pinsent Masons business.

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A copy of which can be found in the Appendix.

Pinsent Masons | Shale Gas: Insights into the UK market

A sustainable, long term investment 2% 5% 16% 13%

Within the next 5 years Within the next 10 years Within the next 20 years Not at all

64%

Don’t know

Respondents were asked when they believed shale gas would become a valuable energy resource in the UK. While all but 5% of delegates felt that the resource will become a part of the domestic energy mix, only 16% believe this is achievable within the next five years. 64% are confident that fracking will be a successful extraction method within a decade and 13% in the next 20 years. “We are at the beginning of a shale gas revolution. But we must recognise that significant investment of time and money is required to ensure success. The indigenous UK technological supply chain presents a genuine opportunity for us to emulate the success experienced with unconventional gas in the US where it has been truly transformational for the supply chain and consumers. Injecting funds into our supply chain is essential if we want to experience the type of boom seen across the Atlantic. We have the opportunity to provide this funding and focus on what infrastructure and technology we need to ensure shale gas features highly in the UK’s future energy supply. Now at the early stages of exploration, it’s imperative that we invest in the future and look ahead to a time when shale gas will be a significant element of our energy mix.” Bob Ruddiman is the Head of Pinsent Masons’ Energy and Natural Resources sector

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Valuable community engagement Other Lack of knowhow/skills Lack of investment Lack of scale Lack of political backing Localism 0

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Survey respondents were asked what they think will be the greatest barrier to shale gas becoming a significant contributor to the UK’s energy resource. 55% chose ‘localism’, emphasising the power and impact local opposition and ‘nimbyism’ can have on the development of innovative energy technologies. While community benefits provide a financial incentive to those living near fracking sites, engaging with residents and encouraging concerns to be voiced and addressed at early stages of development are critical to a successful shale gas industry. 10% of delegates highlighted lack of political backing as the single most significant barrier to the development of shale gas. 3% of respondents pinpointed lack of scale, while 2% selected lack of knowhow and skills as the biggest stumbling block. 27% of survey respondents outlined a number of other barriers including ‘negative public perception’, ‘social activism’, ‘stringent regulatory requirements’, ‘incoherent climate change policy’, ‘environmental concerns’ and a ‘a lack of understanding about unconventional oil and gas.’ “The shale gas industry should do everything it possibly can to keep the economic benefit in local communities. It is right that communities ask ‘what are the environmental concerns?’ and ‘what’s in it for me?’ We should be communicating with local people and giving them an opportunity to voice concerns. The sector has made real progress of late...This will go a long way to educate the public and stop the hyped up, circular debate we have seen so far.” Dan Byles is the chair of the All-Party Parliamentary Group for Onshore Oil and Gas

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Pinsent Masons | Shale Gas: Insights into the UK market

Political support not rhetoric 45 40 35 30 25 20 15 10 5 0

Yes

No

Don’t know

Not applicable

The Government perspective on shale gas has been contradictory. While generous tax breaks and commitments made by Government to streamline the licensing regime were announced in July, the fate of the burgeoning energy resource has been blighted by a lengthy planning application process. This summer Government rejected proposals to label shale gas projects ‘nationally significant’ providing a fast-tracked planning process. Despite the contradictory messages from lawmakers, 40% of survey respondents are confident that the Coalition Government’s policy on shale gas is coherent enough to foster investment. Others are not so positive – with 42% not satisfied with current shale gas policy.

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52% of survey respondents credit the Conservative party with devising the clearest policies to promote exploration and production of shale gas in the UK while just 2% and 4% pinpointed Labour and Liberal Democrats respectively. 31% of delegates are unclear about which party provides the clearest policy on shale with a number of respondents claiming that Labour ‘has not been vocal on the subject of shale’. 7% felt other parties such as UK Independence Party (UKIP) and Scottish National Party have demonstrated the clearest shale gas policies.

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Streamlining regulation 22%

30%

Yes No Don’t know 48%

The UK regulatory environment is regarded as one of the most robust in the world. Maintaining a stringent system which satisfies environmental and planning laws whilst promoting a burgeoning industry in the UK is a tough balance to strike. Under environmental laws alone nine separate applications must be made by developers illustrating the need for coherent regulation and collaboration between and among industry and various statutory bodies in the UK. With this in mind, we asked delegates about their views on the consenting regime for shale gas exploration. 48% of respondents felt that current regulations are not fit for purpose while just 22% are satisfied with the consenting process. “Almost every aspect of shale gas development, from the initial exploratory drilling right through to the decommissioning of a shale well, is already covered by existing legislation. This has the effect of making shale gas development one of the most regulated activities in the energy sector. With strong, but fair, legislation, shale gas developers can proceed under the scrutiny that a nervous public demands. This will give comfort that, before any shale gas development can proceed, all of the relevant public concerns will have been considered when deciding whether or not to permit shale gas development and sufficient controls will be in place to ensure any such development is properly managed. The balance has to be struck, though, between strong legislation and legislation which impedes development and discourages investment in the sector.” Jennifer Ballantyne is an Energy and Planning Partner at Pinsent Masons

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Pinsent Masons | Shale Gas: Insights into the UK market

Licensing to encourage investment 70 60 50 40 30 20 10 0 Yes

No

Don’t know

Not Applicable

Planning permission is just one approval essential for onshore drilling. In addition, developers must apply for up to nine separate permits from DECC, the Environment Agency as well as Health & Safety Executive approvals. At such an early stage of its development in the UK, it is yet to be determined the contribution that shale gas will make to the domestic energy resource. A report by the British Geological Survey estimates the Bowland Shale Bason alone contains about 1,300tn cubic feet of gas. While initial estimates are positive, ministers have warned that the amount recoverable could be much lower. Lengthy, costly and complex licensing at the pivotal exploration stage is not conducive to attracting widespread investment. We asked respondents if they would be more likely to be involved in shale gas should lawmakers establish one over arching regime covering planning, minerals and health and safety. 60% supported this proposition signalling an appetite in the sector for a more efficient and ‘fit for purpose’ regulatory framework, while 19% felt this proposal would not have a beneficial impact.

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‘Nationally significant’ status 70 60 50 40 30 20 10 0 Yes

No

Don’t know

Not Applicable

We asked respondents for their views on Government officials rejecting proposals for shale gas to be regulated by the Nationally Significant Infrastructure Project (NSIP) regime. 59% agreed that the Coalition should reconsider its policy of not allowing shale applications to be given NSIP status, demonstrating a belief that there is a need for a more appropriate planning regime.2 “The tangled web of consents that a project requires is complex. While Government has made steps to support shale gas economically through tax incentives, more guidance is needed for the licensing process. Appropriate planning, environmental and health and safety regulations are vital to provide confidence in this new industry and are therefore a key part of confidence building between promoters and communities. But a balance needs to be struck between regulatory process and efficiency of process. It is clear that Government see shale as a potential answer to a number of the country’s energy, employment and economical issues. Whilst a single consenting regime has its attractions, it is difficult to see how the current NSIP regime could apply to the identification, exploratory and appraisal stages given how early these stages are in the fracking process. Accordingly, a mixture of further guidance from Government on how the current processes should be applied together with a potential streamlining of the consenting process for initial development, full development and production would provide the industry and investors with the certainty that is required.” Richard Griffiths is an Energy and Planning Partner at Pinsent Masons

Data gathered from delegates at London-based conference.

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Pinsent Masons | Shale Gas: Insights into the UK market

Buffer zones 20% Yes 55% 25%

No Don’t know

Earlier this year Scotland’s Climate Change Minister called for ‘buffer zones’ for fracking sites and nearby settlements to be included in the upcoming Planning Policy Framework. While specific parameters are yet to be divulged, news reports at the time credited local community concern about fracking as the key driver for establishing areas that would be ‘off limits’ to developers. We asked delegates if they think the introduction of buffer zones would hinder the pace of development of shale gas in Scotland. 55% of respondents believe that progress would be slowed while 25% are confident it would not impact how the industry develops.3 “Scotland has a long history in energy and natural resources which already incorporates unconventional oil and gas production. Benefiting from a wealth of technological know-how and skills in the conventional oil and gas industry it is likely that Scotland will play a vital part in the development of the UK’s shale gas industry. The buffer zone proposal could delay the pace of progress. But it is also necessary to ensure that there is a site specific assessment. No doubt communities and industry alike will be keen to see if this proposal is implemented and if so, how broad the buffer zones will be.” Jennifer Ballantyne is an Energy and Planning Partner at Pinsent Masons

Data gathered from delegates at Edinburgh-based conference.

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International investment 60 50 40 30 20 10 0 Yes

No

Maybe

Don’t know

As Scotland fast approaches the 2014 referendum on independence we asked delegates about the potential impact on a developing domestic shale gas industry. 55% of respondents felt confident that Scottish independence would not impact the industry’s ability to attract overseas investment while just 15% believed it would hinder investment opportunities.4 “The increased community benefits announced by Mr Cameron demonstrate the UK Government’s commitment to shale gas but as it stands they will have little or no impact in Scotland. The proposals announced in January only apply to England and it will be interesting to see whether the Scottish Government follows this positive lead with a similar incentive for local authorities north of the border. So far there are no signs that they will however industry – particularly potential investors and developers – would doubtless welcome more clarity as to what level of support they can expect.” David Ross is an energy and planning specialist at Pinsent Masons

Data gathered from delegates at Edinburgh-based conference.

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Pinsent Masons | Shale Gas: Insights into the UK market

The impact of protest 3%

7% Yes 45%

No Made no difference

45%

Don’t know

The protests at Cuadrilla’s site in Balcombe propelled shale gas exploration into the media spotlight. Anti-fracking groups descending on the West Sussex village to campaign against the controversial extraction method could have been damaging for the industry in the UK. Despite widespread publicity of the lengthy protests, opinion of its impact on shale gas in the UK is split – 45% of respondents feel that events in Sussex damaged the business case for investment in the UK while 45% disagree and 7% believe it made no difference.

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About Pinsent Masons Energy and Natural Resources team The energy and natural resources sector of the 21st century presents unique challenges and opportunities. Few other industry sectors have as significant a global impact. From inventing new ways of harnessing energy to finding cleaner ways of using existing energy sources. Energy companies across the world are embracing change and challenging the way they do business against a backdrop of geopolitical change and unprecedented natural events. In a sector which is sensitive to political and macroeconomic events, it can be difficult to maintain the pace of change that is required. Our focus is on offering pragmatic advice that makes a real difference – by providing solutions, not just identifying problems. We help our clients to steer a clear path through the regulatory, legal and procurement minefields that stand between them and the development of their business. Our energy and infrastructure, banking, corporate, M&A, property, planning and environment, health and safety, construction, and tax lawyers all have a wealth of experience within the sector and regularly draw upon the complementary and specialist skills each other offer within this field. Our Energy and Natural Resources team has been actively involved in the renewable/alternative energy industry for decades. Our finance, energy, environment, property, planning and construction lawyers have extensive experience of advising developers, stakeholders and funders on oil and gas matters. Working across varied jurisdictions including the North Sea, the Caspian, Eastern Europe, Africa, Asia and the Middle East, our key expertise include acting for major international contractors, owners, NCOs and oil companies.

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Pinsent Masons | Shale Gas: Insight into the UK market

Appendix Shale Gas & Fracking Questionnaire London Event 1. Do you believe that shale gas will become a significant contributor to the UK’s energy resources in future? Within the next 5 years Within the next 10 years Within the next 20 years Not at all 2. What do you think will be the greatest barrier to shale gas becoming a significant contributor to the UK energy mix? Localism Lack of political backing Lack of scale Lack of investment Lack of knowhow/skills Other – please state… 3. Do you think the Coalition Government’s policy on shale gas is coherent enough to foster investment? Yes No Don’t know 4. Which political party do you think has the clearest policies to promote shale gas exploration in the UK? Conservative Labour Liberal Democrats Other – please state Don’t know 5. Do you think the current regime for obtaining planning permission for shale gas exploration is ‘fit for purpose’? Yes No Don’t know

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6. Would you be more likely to be involved in shale gas activity if the government streamlined the licensing process for shale by establishing one overarching regime covering planning, minerals and health and safety? Yes No Don’t know 7. Specifically, do you think that the government should reconsider its current policy of not requiring or even allowing applications for shale gas exploration to be considered under the fast track Planning Act 2008 regime that applies to ‘nationally significant infrastructure projects’? Yes No Don’t know 8. In your opinion, have events in Balcombe this summer damaged the business case for investment in UK shale gas? Yes No Made no difference What organisation do you work for?

Would you be happy for your organisation’s name to be mentioned in our final report, and if so, would you like to receive a copy of the findings?

Edinburgh Event – additional survey questions 7. Do you think the Scottish Government proposals to set ‘buffer zones’ between fracking sites and settlements will hinder the pace of development of shale gas in Scotland? Yes No Don’t know 8. Do you think that the domestic shale gas industry could attract more international investment if Scotland becomes independent from the UK? Yes No Maybe Don’t know

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Notes

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Key Contacts To find out more about how we can help you, visit www.pinsentmasons.com or contact [email protected] Bob Ruddiman Head of Energy & Natural Resources T: +44 (0)122 437 7925 M: +44 (0)7767 316970 E: [email protected]

Paul Rice Partner Head of Client Relationships for Energy and Natural Resources T: +44 (0)20 7490 6282 M: +44 (0)7798 617709 E: [email protected]

Jennifer Ballantyne Energy & Planning Partner T: +44 (0)141 567 8655 M: +44 (0)7801 851199 E: [email protected]

Richard Griffiths Energy & Planning Partner T: +44 (0)20 7490 6981 M: +44 (0)7770 303734 E: [email protected]

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