Shale gas exploration activity has transformed from being a theoretical discussion topic for opposing environmental and industry factions into reality. Barely a day goes by without protests being featured on national television and radio as local communities with concerns over the sanctity of their lifestyles and groundwater realize that land rigs and trucks may be headed in their direction.

Compared to the wide open spaces of the US, the cramped and people-filled land mass of the UK is a much harder place to conduct exploration activity without impacting those in the immediate vicinity.

In the newly heightened debate, the UK government is supporting the energy industry’s aims while taking pains to be seen as ensuring the necessary environmental safeguards (as well as generous recompense for local communities). But this open debate means that oil and gas companies now feel more comfortable about stepping into what previously was seen as a public relations minefield.

Watershed moment

There are many significant challenges still to be solved – the inadequate onshore supply chain and the necessary significant funding requirements needed to bring it up to scratch, for example.

But the rising interest in the UK’s (mainly England’s) shale potential shows no sign of fading after having been sparked last year by the British Geological Survey’s report into an area of northern England that estimated the Bowland-Hodder shale basin alone could hold approximately 37.6 Tcm (1,329 Tcf) of gas in place.

A watershed moment occurred in January when Total stepped into the UK shale scene, snapping up a 40% interest in two gas licenses in the Bowland basin, an area that other players including GDF Suez and Centrica also recently entered. The company is the first recognized major to enter the sector, acquiring its stake in a 240-sq-km (93-sq-mile) patch of the Gainsborough Trough, which is seen as having many of the physical attributes of the best basins in the US. The deal is expected to be complete by the end of June 2014.

As part of the agreement Total will pay US $1.6 million in back costs and earn its interest in the licenses in return for funding a shale work program of up to $46.5 million. The program will include acquiring 3-D seismic, drilling and testing a vertical exploration well and associated well pad construction, and drilling a second appraisal horizontal well if the first well is successful. At the conclusion of the program, Total will become the operator. Until then, the established onshore UK player IGas Energy – already operating a producing conventional field near one of the license areas – will be the operator.

Fiscal incentives

A contributing factor behind the company’s decision to enter the UK onshore play has been a range of government fiscal incentives, including cutting the tax rate for a company’s production income from 62% for conventional production to 30% for shale production and simplifying the application process through the environmental agency by creating a single application permit form. This is aimed at lowering permitting times for “low-risk activity” from 13 weeks to just two.

To help ease community concerns, British Prime Minister David Cameron confirmed that local district councils will be able to keep 100% of the business rates collected from shale gas sites. That is double the current amount and represents a commitment worth up to about $2.8 million a year for a typical single site. This is in addition to announcements last year that communities would directly get payments of approximately $164,000 when a test well is fractured and another 1% of production revenues if shale gas is exploited.

Cameron said in a prepared statement, “A key part of our long-term economic plan to secure Britain’s future is to back businesses with better infrastructure. That’s why we’re going all out for shale. It will mean more jobs and opportunities for people and economic security for our country.”

Rising gas imports

The prime minister’s support is particularly strong as there is a realization politically that, with the UK’s North Sea production likely to continue on its steady decline, the nation is increasingly reliant on the global market for its gas requirements. Indeed, this year will represent an unwanted anniversary – the UK’s 10th as a net gas importer. It currently imports about half of its gas, with imports forecast to rise to 70% by 2020 unless it can confirm and access its shale reserves.

Other supportive incentives being implemented to try to turn this situation around include an allowance for shale gas development projects that will be equal to 75% of each company’s capital spend on such projects.

As a result, according to analyst Wood Mackenzie, the UK’s tax regime for shale gas will be the most competitive in Europe. The aim is to encourage companies to explore areas beyond the current main focus of attention, the Bowland basin.

The industry’s representative body, UK Onshore Operators Group (UKOOG), believes fiscal stability is a must. Its CEO, Ken Cronin, said having the correct framework for operators is vital if the country is to build a strong unconventional industry with an appropriate and fair tax regime in place to incentivize the long-term nature of investments required.

However, oil services investor Epi-V, which has experience via its partners in the international fracing industry, has pointed out obstacles in the way of the fledgling shale gas industry. According to one of its partners, Glynn Williams, the government “has yet to address the vital issue of the huge funding requirements for developing the supply chain for the UK shale gas industry to ensure that all the jobs promised are created and, more importantly, that they go to domestic oil and gas services businesses.”

Williams suggested the government should consider shale-targeted funding schemes to help give service suppliers the finance and confidence to commit the substantial levels of investment in personnel and equipment required. Technological support and expertise are undoubtedly needed and could provide an opening for companies working in already developed shale markets such as the US to step in.

Supply chain study

With this in mind, UKOOG has launched a study to understand the industry’s needs as it enters the next phase of activity. The study will build on work undertaken by individual onshore operators at a regional level and will be conducted by EY (formerly Ernst & Young). It will be bankrolled by the government’s Department of Business Skills & Innovation and UKOOG.

The aim is simple – identify what the industry needs in terms of skills, materials, and equipment to construct and operate a single pad site in production. It will include all associated requirements such as water treatment facilities, transport requirements, and rigs. This work will then be extrapolated to look at the potential requirements on a UK-wide basis and provide a detailed inventory.

It also will look at the nature of jobs that could be created both directly in engineering, geology-associated technical services, IT, construction, and transport as well as indirectly.

“The development of a robust UK onshore oil and gas supply chain will improve the economics of the projects being developed by the oil and gas industry,” Cronin said. “We have a huge opportunity of creating that supply chain here in the UK; this study is the first plank in ensuring that this happens and that the UK fully benefits from the natural resources below our feet in terms of investment and jobs.”

Chris Lewis, a partner at EY, agreed. “Engaging with suppliers and operators and assessing their capabilities and requirements will help UKOOG map out a development path that demonstrates how value can be maximized for the benefit of the wider UK economy.”

A report last year by the UK’s Institute of Directors identified a “mid-case” scenario with the potential to create 74,000 jobs in the onshore oil and gas industry as well as peak investment of $6.1 billion per year. By way of comparison, a recent IHS Global Insight study found that unconventional gas activity in the US supports more than 1 million jobs (direct, indirect, and induced) at present and is projected to support more than 2.4 million American jobs by 2035.

Scenarios

Further challenges were identified by the UK government’s Department for Energy and Climate Change in its recently revised Strategic Environmental Assessment (SEA) report on the impact of high- and low-activity scenarios over the next two decades for conventional and unconventional E&P activity and natural gas storage. The “high-activity” scenario in the SEA report envisages a substantial amount of shale gas being produced – between 122 Bcm and 243.5 Bcm (4.3 Tcf and 8.6 Tcf) – by the 2020s. That’s three times the current level of gas demand in the UK.

The looming challenges to overcome to achieve this include the disposal of flowback fluids, especially where this has to be undertaken off site. Under the high-activity scenario 108 MMcm (3.8 Bcf) of fluids would require treatment (equating to about 3% of the UK’s total annual wastewater treatment). This could place a burden on local infrastructure, the report stated.

However, this challenge is only likely to arise during the 2020s, the report continued. Controls under the planning and environmental regulatory regime and a recent memorandum of understanding between the water industry and UKOOG should mitigate potential negative effects.

The volume of water required for fracturing in the high-activity scenario, while difficult to forecast accurately this early in the process, is likely to be 9 MMcm (318 MMcf) per year. Although this will almost certainly put pressure on local supplies, the SEA report added that the planning and environmental controls in place should be capable of mitigating the effects at a local level. It also noted that even under the high-activity scenario, the annual usage is “less than 1% of the UK’s annual nondomestic water use.”

The SEA report is currently in a consultation period until the end of March.

Evolutionary process

No one believes that the UK is on the cusp of a US-style shale revolution, which in any case has been more of an evolution over the course of several decades, helped by supportive legislation; dedicated R&D; and a large, long-established onshore industry already in place.

But the UK does have a lengthy history of onshore drilling, including the previous use of fracturing techniques and creating low-impact well sites. Establishing whether its unconventional resources are actually economically or technically feasible to recover is the next step along its own evolutionary path. Only after that will the likely pace of any development and production activity start to emerge.

Comments