Energy Security – Sourcing The Gas

Energy Security – Sourcing The Gas

CategoryArticles Author Stephen Tromans QC Date

In my last posting, I considered the Government’s ambitious aspirations for investment in new gas fired power stations between now and 2030, in order to provide the capacity to keep our lights and computers on. For any investor, two questions will be uppermost: what will the gas cost over the lifetime of the station and what price will the electricity fetch? The last blog outlined the second of these questions; this one looks at the first.

DECC’S December 2012 Gas Generation Strategy, Cm 8407[1] Chapter 4 looks at the question of securing an affordable gas supply, and Chapter 5 looks at the possible, but controversial, answer: developing shale gas resources.
A little history: BP was producing gas from onshore resources in the UK on a limited scale before the Second World War and there have been numerous discoveries of oil and gas since then which have been exploited to varying degrees.[2] But onshore production of gas has been utterly dwarfed (it is less than 1%) by offshore production.[3] In 1964 the Continental Shelf Act was enacted, and the first shipment of natural gas to the UK (from Algeria) arrived. The following year, gas was discovered in the West Sole Field by the ill-fated rig “Sea Gem” which later tragically sank with the loss of 15 lives. In the 1960s and 70s, North Sea oil and gas were going (it was thought) to be transformative of the UK’s ailing industrial landscape. Although new fields are still being brought into production, for example the Cygnus field in 2012, offshore gas production has been in decline since 2000, and by 2030 – when the gas will be needed to fuel all those new CCGTs which are going to be built – it is projected to be around 18% of what it was in 2000.

It is thought that current conventional gas reserves worldwide will sustain current levels of consumption for 130 years. Add in unconventional shale gas and the figure becomes 250 years. However, what is highly uncertain is what future levels of demand will be, and their effect on prices. The International Energy Agency expects demand to rise by 55% by 2035 alone, largely due to the growth of demand in Asia. Wholesale gas prices have fallen in the USA to half those in the UK, due to the shale gas boom, but if such gas is to be imported to the UK the high costs of the liquefaction process would have to be accounted for, making the economics uncertain. Further, the ability to buffer consumers against price rises in gas by switching production to coal fired stations is likely to diminish as more of these are driven into closure by EU environmental law.

It has been known for many years that there are considerable reserves of gas trapped in impermeable shale strata. It is only relatively recently that the technology to exploit them has been developed on a commercial scale by combining the existing techniques of horizontal drilling and hydraulic fracturing. A number of geological, political, legal, social, economic and commercial factors have combined to drive such exploitation in the USA, in a way that has been genuinely transformative of many sectors of the economy. Fracking on that scale is not going to happen in Europe any time soon, but we do know that there are significant shale formations present in parts of the UK, which could in principle make a significant contribution at some point during the 2020s – possibly just at the point when a secure supply of competitively priced gas could be critical.
As with any large scale industrial activity, fracking presents environmental risks at a variety of levels, from its carbon footprint to the impacts on local communities. These will have to be addressed (one suspects, probably at EU level ultimately) if the practice is to take off. They are not insuperable, by any means. The excellent report in 2012 of the International Energy Agency, “Golden Rules for a Golden Age of Gas” tackles this issue head on.[4] The industry, and its regulators, will have to win and maintain its social licence to operate through adopting, implementing and enforcing appropriately high standards, which the report encapsulates in seven Golden Rules ((1) measure, disclose and engage; (2) watch where you drill; (3) isolate wells and prevent leaks; (4) treat water responsibly; (5) eliminate venting, minimise flaring and other emissions; (6) think big – take cumulative impacts properly into account; and (7) ensure a consistently high level of environmental performance). Applying these would it is said add only about 7% – less with economies of scale – to production costs. Attention will no doubt focus on how regulation develops in the US, notably the studies by the USEPA being undertaken on possible impacts on drinking water resources.

DECC has some matters in hand to support the technology’s development in the UK – it is reviewing policy, undertaking strategic environmental assessment on the licensing process, looking with The Treasury at a targeted tax regime, and setting up an Office for Unconventional Gas and Oil, to encourage investors and look at streamlining the regulatory process. All very good, but under the current planning regime, potential frackers would have to seek planning permission from local authorities, well by well, project by project, against concerted local opposition in many cases, no doubt. The nascent industry could all too easily become bogged down in a morass of planning applications and appeals.
On 13 December 2012, Energy and Climate Change Secretary, Ed Davey announced that exploratory fracking could resume, following the moratorium imposed after the seismic tremors experienced in Blackpool in April/May 2011. This is of course not a general green light for general shale gas production, far from it, though the clear signs are that the technology currently enjoys at least provisional government support.

The Growth and Infrastructure Bill, now in the House of Lords, includes at clause 24 a proposed amendment to the Planning Act 2008 to allow the Secretary of State to direct that further types of development fall within the major infrastructure regime, taking them out of the hands of local planning authorities. As proposed, this could include development which is, or forms part of, a project in the field of energy, if the Secretary of State thinks the project is of national significance, either by itself or when considered with one or more other projects in the same field. It would depend on a qualifying request being made by one or more persons proposing to carry out the development. This would, if enacted, offer a clear, though highly controversial and probably legally fraught, route for developers of shale gas faced with an intransigent local planning authority. This has not escaped the attention of the House of Lords in debating the clause on 4 February 2013 (HL, col. 63). Lord Adonis described the assessment factor proposed as to when the project would be regarded as nationally significant as “a profound exercise in waffle” and later Baroness Young characterised the scheme as “artificially designated simply to enable developers to chance their luck with the Secretary of State rather than the local planning authority”. A number of their Lord and Ladyships made clear the need for a National Policy Statement of fracking, if this course is to be pursued. Baroness Hanham for the Government (col. 76) was plainly not going to be drawn, with the following beautifully equivocal statement:

“It may be that national significance and fracking will be one and the same but that gives an indication that at present we would expect this to be dealt with locally and local people would have a big say in what was to happen.”

Watch this space for further developments…

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