IoD Report Makes Strong Economic Case for UK Shale Gas Development
Building on recent positive developments concerning the future development of the UK’s shale gas resources, including the April 2013 Energy and Climate Change Committee report on the impact of shale gas on energy markets, the establishment of the Office for Unconventional Gas and Oil within the Department of Energy and Climate Change, and the anticipated upward revision of estimates of the UK’s technically recoverable shale reserves due to be reported by the British Geological Survey later this year, the Institute of Directors’ report, “Getting Shale Gas Working”, published on May 22nd, 2013, makes a strong economic case for proceeding without delay to explore for and develop the UK’s shale resource.
The IoD references the UK’s experience in developing North Sea unconventional oil & gas as an example of the economic potential shale may hold for the UK in terms of jobs and skills creation, tax revenues, lower energy prices, positive climate change impact, and reduced energy import reliance. It focuses on Lancashire as a potential centre for shale industry development in the UK in the same way that Aberdeen developed to service North Sea oil & gas.
Drawing on a wide range of sources which underpin the referenced assumptions, the report seeks to quantify in detail the potential characteristics of a producing shale gas facility / well pad, putting numbers on gas production, investment (both capex and opex), jobs, drilling schedule, power generation, water usage and waste, and associated truck movements and infrastructure impact. In revising its figures from a September 2012 report, the IoD estimates that the industry could generate £3.7 billion in annual investment, supporting 74,000 jobs with a wide-ranging and positive impact in the traditional oil & gas related jobs sector, associated well services and water supply chain sectors, and in energy intensive industry sectors including chemicals and manufacturing.
Echoing the Energy and Climate Change Committee’s April 2013 report, the IoD identifies a number of barriers to the development of shale gas in the UK for which it provides recommendations. These include the need to develop a suitable structure to incentivise local authorities and communities to approve and support shale developments (including the recommendation that 100% of business rates should be retained by the local authority) and to appropriately compensate them for the citing of such developments in their areas, as well as the requirement that Government streamline the planning and permitting regime to better facilitate shale developments in a coordinated manner.
The IoD’s report - like last month’s Energy and Climate Change Committee report - follows the lifting in December 2012 of the 18-month moratorium on UK shale gas operations, and the announcement in the March 2013 Budget of various measures to promote investment in the UK shale gas industry. These included the introduction of a favourable tax regime, together with new planning guidance (expected by July 2013) to provide clarity around planning for shale gas operations during the exploration phase. They also included the development of specific proposals (also expected by summer 2013) to allow local communities to benefit from shale gas operations. The Government has stated that development of these community benefit proposals will be one of the priorities for the Office for Unconventional Gas and Oil, with the objective of "promoting the safe, responsible and environmentally sound recovery of the UK's unconventional reserves of gas and oil". These reports should provide interesting context to interested industry participants given that the UK 14th Onshore License Round was originally anticipated for summer 2013. There is speculation now that this timeframe may be extended to allow for the implementation of measures outlined in this year’s Budget, which may now themselves be influenced by the IoD’s recommendations.
Although the report understandably focuses on the significant economic prospects for the UK if shale gas development goes ahead at scale and puts forward some reasoned and evaluated figures on potential levels of job creation and investment, its concerns with respect to the regulatory, social and environmental barriers to the development of the industry are well made and consistent with similar concerns raised by industry and more recently by the Energy and Climate Change Committee.
The IoD’s findings on the likely levels of water consumption and associated trucking / infrastructure may be premature given the lack of data on the geophysics and characteristics of the UK shale formations, but the report is on-point to highlight the need to review the planning and permitting systems for shale exploration and developments in order to implement a regulatory one-stop-shop that meets the specific requirements of the shale industry in a timely manner. The IoD’s conclusions on the impact on atmospheric emissions and climate change of increased UK usage of domestically produced shale gas - whilst broadly consistent with other recent commentators - will undoubtedly be contentious with those opposed to widespread shale gas development.
Hamish McArdle, energy partner at Baker Botts LLP