In the first of a two part series on recent developments in the UK shale gas industry, this blog post considers the potential impact of the announcement on 28 July 2014 by the Business and Energy Minister, Matthew Hancock, inviting applications for Licences in the 14th Landward Licensing Round (the 14th Round) on the exploitation of shale gas in the UK, in the context of key recent developments in this fledgling industry.

The licensing system for the exploitation of the UK’s onshore and offshore oil and gas reserves is administered by Department for Energy and Climate Change (DECC). The award of a Petroleum Exploration Development Licences (PEDL) by DECC grants the licensee exclusivity in respect of oil or gas exploration or production within the licence area.[1]

The 13th onshore licensing round (the 13th Round) was the latest onshore licensing round in the UK, occurring in 2008. In the 13th Round, onshore PEDLs were awarded by DECC for the exploration of unconventional hydrocarbons, including shale gas, for the first time. After planning permission was granted, consent was given to drill for shale gas in five locations, two of which were held by Cuadrilla, an independent UK exploration and production company. To date, the UK shale gas industry remains in the exploratory phase, which is the earliest phase of development.

During this initial stage, the shale gas industry in the UK has experienced notable setbacks. The UK Government announced a moratorium on fracking in the UK following seismic tremors (with magnitudes of 2.3 and 1.5) arising from fracking activities at Preese Hall in Lancashire in April and May 2011. Preparations for the 14th Round originally began in December 2010, but were suspended after the events at Preese Hall.

In December 2012, the Energy and Climate Change Secretary of State announced that new regulatory requirements were being introduced to reduce the potential seismic risks associated with fracking activities in the UK and that fracking could resume in the UK. With this announcement, preparations for the 14th Round also resumed.

Further positive news for the industry followed in June 2013, when a report published by the British Geological Survey (BGS) in association with DECC estimated that there is 1,300 trillion cubic feet (tcf) (central estimate) of shale resources deposits in the Carboniferous Bowland-Hodder Shale area, which stretches from Blackpool and Wrexham in the North West of England to Scarborough in the North East of England. The potential significance of these estimated reserves for the UK’s future energy needs is put into perspective when compared to the annual consumption in the UK of just over 3 tcf.

In June 2014, the BGS announced that it had completed an estimate for the amount of shale gas and oil in the Midland Valley of Scotland. The shale gas in place is estimated at 80.3 tcf (central estimate), and the shale oil in place is estimated at 6.0 bbl (central estimate). The UK Onshore Operators Group (UKOOG), the representative body for the UK onshore oil and gas industry, welcomed the BGS’s estimates as a “reassurance to investors who wish to explore for oil and gas onshore in Scotland”.

However, the commercial viability of extracting some or all of the country’s potential shale resources must also be considered. A 2013 report by the US Energy Information Energy has estimated that technically recoverable shale oil and shale gas resources in the UK could amount to up to 26 tcf. Various studies have been undertaken on the potential impact of the commercialisation of shale gas for the UK, but so far have not produced concrete conclusions on the outlook for shale gas in the UK. For instance, an Energy and Climate Change Select Committee (ECCC) inquiry in 2011 concluded that although shale gas resources in the UK could be considerable — particularly offshore — shale gas was unlikely to be a “game-changer” as in the US. A follow-up ECCC inquiry in 2013 on the impact of shale gas on energy markets concluded that it was “too early to say whether domestic production of shale gas could result in cheaper gas prices in the UK” and that “[…] it remains uncertain whether industry will consider shale oil economically worthwhile to explore”.

DECC’s plans to create an attractive and effective framework for the exploration of shale gas are intended to encourage the development of the shale gas industry in the UK. In addition to inviting bidders to apply for PEDLs in the 14th Round, the UK Government has recently introduced measures to make the tax environment more appealing to investors in unconventional hydrocarbons. The development of the shale gas industry will, in turn, help to more accurately ascertain the amount of estimated reserves that can be viably extracted and exploited from the UK’s underground shale deposits, as the most accurate estimates can be obtained from test drilling.[2]

The announcement of the 14th Round represents a step forward in this development plan, creating the first opportunity for applications for new onshore PEDLs since the BGS published its estimates of the UK’s shale gas reserves. The competition for licences is likely to attract significant interest from energy companies seeking to explore the UK’s potentially vast shale reserves. Of particular interest are likely to be the Bowland basin of the north-west, a central belt of Scotland and the Weald in the south-east.

The identity of the bidders for PEDLs in the 14th Round will be noted with interest. In June 2013, Centrica acquired a 25% stake in Cuadrilla’s interest in the Lancashire Bowland shale gas exploration licence area. The introduction of larger players, such as Centrica, investing in UK shale gas after the 13th Round indicates an increased confidence in the industry. However, it would be premature to conclude that this acquisition marks the beginning of a trend of activity in UK shale gas by larger energy companies. At present, the industry remains dominated by independent energy companies, notably Cuadrilla.

[1] In addition to the award of a PEDL, there are various other statutory and legal requirements in order for exploration or production activities to be commenced within the licence area. The licensee must also obtain: access rights from landowners; planning permission under the statutory planning regime (which may also involve undertaking an Environmental Impact Assessment); permits from the Environment Agency; and approval from the Health and Safety Executive. Further activities such as the drilling of wells, installation of facilities or production of hydrocarbons require additional authorisation by the Secretary of State for Energy and Climate Change.

[2] Parliamentary Note SN/SC/6073, 5 June 2014.