Shale Gas Toolkit An introduction to Shale Gas Part 1

Part 1: An introduction to Shale Gas “Making the most of Britain’s home grown energy is crucial to keep job and business opportunities, widen tax revenues and reduce our reliance on foreign imports” – Michael Fallon, Business and Energy Minister commenting on British Geological Survey’s report on shale gas resource on 30 June 2014. This is part one in the 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 from the British Geological Society estimate that there is around 1,300 trilion cubic feet (tcf) of shale gas located in the Bowland Shale in the North West of England with a further 80 tcf of shale gas is located in the Midland Valley in Scotland. At a conservative recovery rate of 10%, this could supply the entire gas demand in the UK for 40-50 years. 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.

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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. 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 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, permit and planning permission conditions. The abandonment stage can vary depending on the number of sites within the licence area.

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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 areas of 100 km2 . 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 alternative year therefore the window of opportunity to apply is limited. The latest licensing round closed on 28 October 2014 and licences are expected to be awarded in early 2015. 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. The Infrastructure Bill, which is currently making its way through the parliamentary process contains provisions that will enable developers to benefit from a right of access at a depth of at least 300 metres below the surface onshore without the consent of the landowner, if enacted. 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 Minerals Planning Authority in England and Wales. In Scotland, permission would need to be obtained from the local planning authority. The relevant environment agency (Environment Agency, Natural Resources Wales and SEPA) will be statutory consultees in relation to any planning application and so environmental matters (such as use of or impact on groundwater) 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 activities meet certain criteria and/or may have significant environmental effects. See Part 3 of the Toolkit for more analysis on planning.

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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 (see Part 5 of the Toolkit for more detailed analysis on environmental consents and issues). We have set out below some of the material 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/Natural Resources Wales in accordance with the Environmental Permitting Regulations 2010. 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 or Natural Resources Wales in accordance with the Water Resources Act 1991. Applications will be made available on the public register and on the relevant 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. REACH (Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals) REACH is the EU chemicals regime which aims to ensure that chemicals are used in a way which minimises unacceptable risks to human health and the wider environment. Substances used in fracking fluid may need to be registered depending on the composition of chemical fluid’s and the exact process used. 6. NORM Consent The flowback water that results 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, Natural Resources Wales or SEPA (in accordance with the Environmental Permitting Regulations 2010 in England and Wales and the Radioactive Substances Act 1993 (RSA93) in Scotland) that the radioactive levels fall below certain thresholds. 7. H  SE 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. 8. 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 must submit a Fracking Plan to DECC and disclose details of any fracking fluids to be used in the extraction process. DECC have advised that the Fracking Plan should be comprehensive and progressive.

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Recent Developments Shale gas development in the UK is likely to receive a boost following the opening of the 14th Onshore Licensing Round in Autumn 2014 with the licences expected to be awarded early in 2015. The last licences were awarded in 2008 and so it is likely that this licencing round will generate further interest and investment in shale gas development in the UK – companies such as Centrica, GDF Suez, Total and Ineos have already invested over £100m in the sector to date. In addition, the Infrastructure Bill, which is currently making its way through Parliament, contains a proposal that shale gas developers may drill at a depth of at least 300 metres below the surface without the permission of the landowner. This is positive news for shale gas developers as the use of horizontal drilling would currently involve the developers obtaining the consent of potentially hundreds or thousands of landowners. One further development has included the various industry commitments on how local communities will benefit from shale gas development in their area. The industry body, UK Onshore Oil and Gas, has committed its members to providing £100,000 per fracked well along with 1% of all shale gas revenue to local communities. Ineos have, however, recently announced that they will provide 6% of all shale gas revenue to local communities.

Our Experience While the shale gas sector still in its infancy in the UK, Pinsent Masons is able to provide a wealth of experience in the wider oil and gas industry, both in the UK and internationally. Having acted for clients who have been developing shale gas at an international level for many years. We have a deep understanding of the shale gas sector and the issues likely to be encountered by shale gas developers here in the UK. Our specialist shale gas team can provide advice on all aspects of shale gas development, including: • applications for petroleum exploration and development licences • obtaining the relevant planning and environmental consents • securing land rights • managing protestor activity • constructing the shale gas project • health and safety advice • securing funding for the shale gas project. We have already obtained experience in the public listing of companies involved in the development of shale gas as well as acting in the merger of two shale gas developers.

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1 – 3 Years

Requirements • 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 • Requirement to relinguish licence acreage under PEDL? Just at exploration stage? Register any required substances with relevant body under REACH

Requirements • 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.

Exploration Once PEDL secured, Developer identifies locations within licence area with highest potential for shale gas and exploratory drilling undertaken.

1 – 3 Years

Identification Developer identifies suitable areas for shale gas exploration

Requirements • 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

1 – 2 Years

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

Requirements • 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

2 – 3 Years

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

Requirements • 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.

Over 20 Years

Full Development & Production Drilling of production wells across licence area and construction of commercial production facilities and infrastructure for large volumes of shale gas

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 REACH – Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals WAL – Water Abstraction Licence

Requirements • Rehabilitation of area in accordance with PP conditions • Well Abandonment in accordance with HSE standards • Aftercare of the site in accordance with PP conditions

Abandonment Well plugged and surrounding area rehabilitated in accordance with prescribed standards

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

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.

Shale Gas Extraction process timeline

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For further details and queries relating to Shale Gas or other matters, please contact: Bob Ruddiman Partner and Sector Head Energy & Natural Resources T: +44 (0)1224 377 925 E: [email protected]

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

Georgie Messent Partner Planning & Environment Energy & Infrastructure T: +44 (0)20 7418 8263 E: [email protected]

David Ross Associate Planning & Environment Energy & Infrastructure T: +44 (0)141 567 8646 E: [email protected]

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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For more information please visit: pinsentmasons.com/shale

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