Unlocking the UK's Shale Gas Potential

• Following estimates of substantial shale gas resources underlying parts of Britain, the UK government is proposing incentives for companies and local communities to encourage its timely development.
• Even if it ultimately proved less transformative than in the US, shale gas could balance the UK's future energy mix, while setting an example that other shale-rich EU countries could follow. 

Shale gas development has been slow out of the starting blocks in Europe, for reasons that have been widely discussed.  These include differences in mineral rights ownership, smaller onshore oil and gas service sectors, and significantly fewer onshore wells drilled in the past, compared to the US.  Local opposition to hydraulic fracturing also plays a role in some countries. Last month the UK government announced new proposals intended to address some of these challenges and make shale gas more attractive to produce there. The Prime Minister underlined these proposals in an op-ed in Sunday's Telegraph.

The UK's natural gas market has been experiencing problems similar to those the US encountered in the last decade, prior to wide-scale development of shale gas resources.  Natural gas production from the offshore fields of the UK sector of the North Sea, which provided an energy surplus until about ten years ago, has declined rapidly. As a result, the Interconnector UK, a bi-directional gas pipeline linking Britain to continental Europe, has recently operated mainly in import mode. UK natural gas prices have been correspondingly high and volatile, spiking briefly to around $17 per million BTUs this March. Prices in excess of $10/MMBTU are typical.

Against this background, the UK government is understandably interested in pursuing the exploration of the country's potentially enormous shale gas deposits.  In June the British Geological Survey released its detailed estimate for the Bowland shale in the north of England.  With a range of 822-2,281 trillion cubic feet (TCF) of gas-in-place, and a "central estimate" of 1,329 TCF, this looks like a significant resource. Even at the low end of the BGS assessment, and using a conservative figure of 15% recovery based on relevant US shale gas recovery rates, the Bowland could provide 120 TCF or more of technically recoverable gas, the equivalent of over 40 years of current UK consumption.

Two aspects of the government's proposals caught my attention.  First, the Chancellor of the Exchequer indicated his plan to make development attractive for producers with a new tax structure that he intends to be "the most generous for shale in the world." Earnings from shale would be taxed at 30%, compared to 62% for other hydrocarbon projects.  With only a few companies currently exploring for shale, that should attract additional drillers, along with the service companies that perform many of the key activities at the well site. 

I was more intrigued by the proposal--apparently originating with industry--to provide local communities with a benefit of at least £100,000 per well-site that is hydraulically fractured, or "fracked", plus a small share of gas revenue. In a country where the government owns the sub-surface property rights, this could be a crucial step in gaining local support for projects that, in addition to significant economic activity and eventually local employment, will also result in unavoidable increases in noise, traffic and other intrusions in daily life during the weeks or months in which each site is being prepared, drilled, completed and brought on-line, and for the longer periods that crews would be operating in the area.

We've certainly seen the importance of local benefits in promoting receptiveness towards gas drilling in the US, where most shale development has occurred on private land, and where royalties from production provide property owners with regular payments ranging from helpful to lifestyle-altering, depending on production rates and the ownership interests. Sharing financial benefits from shale production at the community level, rather than with individuals, might even galvanize broader-based support than in some parts of the US. Much will depend on whether British communities consider the offered compensation sufficiently generous.

UK shale development still faces significant above- and below-ground uncertainties that only time and drilling can resolve.  Nor is it clear whether development of the Bowland shale would have as large an impact on the UK gas market as shale gas has had here.  Skeptics can be found among opposition politicians and respected energy analysts, though I must say their arguments about high costs and low production rates sound very similar to those that I heard in energy conferences in the US not many years ago.  Signposts to watch include the number of drilling companies moving into the north of England and emulation of the UK government's pro-development policies by other countries.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.