Expert Insight

Revolution or evolution? How the UK is backing fracking

It is now almost trite to say that the shale gas revolution in the US has transformed the global energy market.  What has been less prominent on the agenda, but is increasingly relevant, is Europe’s unconventionals future, given shale potential recently identified in countries like the UK, Poland and Ukraine. 

Taking the UK as a case study: unlike the US, its production of natural gas last year was the lowest since 1985 and it has been a net importer of gas since 2004.  Unsurprisingly, the desire for energy security and US success have brought unconventional gas resources in the UK to the forefront of public debate.

In June the British Geological Survey and DECC produced an assessment of the Bowland shale formation, estimating potentially recoverable resources to be 1,800-13,000 bcm. By comparison, UK annual gas consumption is 77 bcm and potentially recoverable conventional gas resources are 1,466 bcm.

However, there are a number of ‘above ground’ political and environmental concerns over the fracking process which pose significant challenges to shale development in the UK, leaving aside the distinct comparative advantage the US has over Europe in the shale race in terms of, among other things, rig availability, land access, geology and infrastructure.

These concerns were amplified when the first shale exploration wells (drilled near Blackpool in 2010) led to earth tremors.  This resulted in a moratorium on fracking in mid 2011, which was lifted late last year.  At the same time the government announced new regulatory requirements to mitigate seismic risks, including requiring operators to assess and report on the potential risks before fracking starts and rigorously monitor sites throughout the project. 

The UK is not the first place to impose such moratoria – a number of US states (including New York) and some countries (including Northern Ireland and France) have taken similar action, largely because of concerns around ground water impact.  In fact Francois Hollande has said that “while I am president, there will be no exploration of shale gas [in France]”. Unsurprisingly this has generated public concern which will only fuel further political pressure to ensure that shale gas extraction is increasingly regulated if undertaken at all.

By contrast and in a move that suggests that the UK is “backing fracking”, the UK has recently pledged to create the world’s most generous tax regime for shale extraction and has proposed cutting the fracking tax to 30% (compared with the 62% paid by most of the oil and gas industry). In a further move to show its support, the government has established a new Office of Unconventional Gas and Oil to streamline the approvals process. Whether this will create a “golden age of gas” remains to be seen, but it seems that while shale gas developments have the potential to close the energy gap in Europe, this will be in an ‘evolutionary’ rather than a ‘revolutionary’ way.

Commitments of governments to be cleaner and greener

In the race for energy security, and as developing countries hungrily demand more and more fuel, there is increasing focus on how the world can meet this demand in a cleaner, greener way. Governments across the globe have initiated various proposals (often controversial) to use cleaner fuels and reduce emissions which will have an increasing impact on the energy mix going forward.

Indeed, in Australia, the introduction of a carbon pricing scheme in 2012 as part of a broader move towards reducing emissions has been extremely controversial. The scheme, which requires entities emitting over 25,000 tonnes of CO2 equivalent to surrender annual emissions permits, has bitterly divided politicians and the public. In the lead up to the upcoming election next month, the opposition leader Tony Abbott has said that “if this election is about anything, it is about the carbon tax”.

The challenge to the oil & gas industry (and the extractives industry more generally) is to remain competitive.  Clean energy initiatives have been or are being established across the globe, including in the UK and the US, as well as many countries in African and Asia.  Most of the focus has been on renewables development, for example the UK’s Energy Bill 2012/2013 and South Africa’s Clean Fuels 2 specifications.

Emissions reductions also feature highly on the clean energy agenda.  For example, in Canada, the government has taken a sector-by-sector approach, and is expected to finalise regulations for the coal and oil & gas sectors shortly. In the US, the EPA has issued air quality standards requiring oil & gas companies to capture certain toxic gases from storage sites, wells and pipelines.  These regulations are the first federal effort to address serious air pollution associated with fracking, in response to complaints from environmental groups and citizens.  Industry groups are concerned about the associated compliance cost and impact on domestic gas production.  The US has also issued the Oil and Natural Gas Air Pollution Standards, which focus on reducing air pollution from drilling operations.  According to last year’s Carbon Disclosure Project report, South African companies are leading the way in calculating their carbon emissions and improving energy efficiency.

These are just some examples of the ways in which governments are committing to be cleaner and greener.  Obviously much depends on the outcome of an international climate change agreement to replace Kyoto in the future, where lack of a global consensus has stymied development to date.

“In an era of timid governments, operating without a social license is now perhaps the greatest risk to any industry”

This was a major Australian newspaper’s response last week to a decision by the Queensland government to scrap existing environmental protections and expand oil & gas exploration in an environmentally sensitive area, which it argues ignores the rising tide of community concern (in this case, about the impact of fracking, a prominent social and environmental issue).

The social licence to operate (SLO) is broadly the responsibility of companies to maintain the support of local communities and stakeholders, manage environmental and social impacts, use transparent processes, provide the local community with jobs and education, and optimise the use of local skills and resources.

Forbes predicted that 2013 is “the year of the SLO”, which has been echoed by commentators across the industry.  Ernst & Young’s annual report on business risks for mining and metals says that “the consistent ranking of maintaining a social license to operate within the top six risks over the last five years demonstrates it is an important element of doing business as opposed to being a compliance exercise”

The SLO has always been an essential component of oil & gas projects but it has taken on increasing importance in recent years and has become a ‘non-negotiable’ to get a project done. Today, a SLO requires more direct engagement with local stakeholders, ceding a degree of control to local players and building relationships with affected local communities.

One hurdle is that there is no definitive ‘standard’, although there have been industry attempts to create one (for example, there are a number of ‘good practice’ tools such as the OGP Environment-Social-Health Risk and Impact Management Process (e-SHRIMP) and the IPIECA guide to social impact assessment). Both stress consultation with local stakeholders and stakeholder dialogue as being key pillars of all oil & gas projects, and establishing accessible corporate grievance mechanisms.

This has been brought to the fore in recent years in Africa, where relations between local communities and developers have at times been fraught with tension and violence (for example, the terrorist attack at the Amenas industrial plant in Algeria this January and the shooting of 34 miners at South African Lonmin’s Marikana mine in August last year).  However, efforts have been made to collaborate more and in May 2013, the Institute for Human Rights and Business, together with the Kenya National Commission on Human Rights, organised a multi-stakeholder discussion to brainstorm the roles and responsibilities of oil & gas companies in Kenya’s emerging oil & gas sector, to build their SLOs.

As the oil & gas industry faces growing opposition from well-organised citizen opposition groups in developing nations, and an increasingly onerous duty to get ‘free prior and informed consent’ from stakeholders, companies globally will increasingly see their profitability and reputation tied to transparent and effective engagement with the communities they operate in.

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