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UTILITY Week 19th June USE

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14 | 19TH - 25TH JUNE 2015 | UTILITY WEEK Policy & Regulation Market view N atural gas plays an important role in the UK energy mix. According to the Department of Energy and Climate Change (Decc), oil and gas provide more than 70 per cent of the UK's total primary energy, of which 50 per cent is supplied from domestic production. The decline in North Sea production of conventional gas has resulted in a transi- tion from self-sufficiency as recently as 2004 to imports in 2014 of about 50 per cent of annual gas intake. North Sea production is expected to decline further, and indus- try body UK Onshore Oil and Gas (UKOOG) estimates that by 2030 the UK will import at least 70 per cent of its gas. Geopolitical conditions have also threat- ened the supply of Russian gas and forced Europe, including the UK, to rethink its reli- ance on imports. Although there has been an increase in coal-generated power in the UK, consumption of gas remains high because of its importance for domestic heating, indus- trial feedstock and heat processing. If the UK is to reduce its dependency on imported gas, it must look to its domestic industry, and given declining conventional gas reserves, this means serious development of uncon- ventional gas extraction. The rise of unconventional gas, and in particular shale gas, has revolutionised the US energy market, transforming it from an LNG importer to a major LNG exporter in less than five years. There has been discussion of whether this success can be replicated in the UK, and following the general election, development of unconventional gas appears high on the political agenda. Many viewe the appointment of Amber Rudd (a keen shale gas advocate) as energy and climate change secretary as a signal of intent, supporting David Cameron's position that his govern- ment is "going all out for shale". The government has announced tax reductions on early profits to encourage investment in onshore oil and gas, and government agencies, including Decc, the Department for Communities and Local Gov- ernment and the Environment Agency, are working to simplify existing regulations. Unlike the US or Australia, however, where the shale gas industry is well estab- lished, the UK lacks data about the extent of its technically recoverable resources and the impact of fracking on the environment. This has fuelled media speculation about poten- tial pollution levels and the effect of shale gas production on the UK economy. While it is generally believed that the UK has significant shales at depth, their geologi- cal characteristics and gas storage compo- sitions are unknown. The government has commissioned studies (including one by the British Geological Survey) to estimate total volumes of shale gas, but accurate prediction of technically and commercially recoverable reserves is difficult. These can be established only by exploratory drilling and testing. According to UKOOG, around 2,000 wells have been drilled in the UK, of which only 200 have been hydraulically fractured. There are reasons to believe, however, that an increase in the currently modest levels of shale exploration may be forthcoming: in addition to Cuadrilla's resumption of opera- tions and recent acquisition of exploration licences by a European major, recent leg- islation permits horizontal drilling under protected areas, provided that wells start outside their boundaries. Technical and geo- logical challenges aside, however, public opinion remains negative and the industry's success will largely depend on its ability to demonstrate that the onshore extraction of shale gas can be commercially viable and environmentally safe. Shale gas extraction differs from other types of hydrocarbon extraction in a num- ber of ways. The larger scale entails a greater number of wells, many of which are oen drilled more deeply. This depth, combined with a lack of natural fissures in the rock for- mation, means that extraction requires large volumes of high-pressure water and chemi- cals, and the reservoirs' low permeability at such depths means that a high number of wells is needed to produce gas at a commer- cial rate. These levels of activity are unwel- come to local communities, and in contrast to the US or Australia, the UK's relatively small size results in dense areas of activity. Mineral rights in the UK vest in the Crown. This is again in contrast to the US, where it is common for landowners to own mineral rights and receive up to 20 per cent of production revenues. As such, there is lit- tle encouragement in the UK for people to support exploration or production activities in their communities. An incentive package has been proposed by the industry with government support, comprising £100,000 for the affected com- munity and one per cent of revenues from production, with the local authority retain- ing 100 per cent of the business rates col- lected from the exploration sites. Whether this is sufficient to overcome negative public opinion and planning objections remains to be seen, and while the Institute of Directors has welcomed the proposal to allow local authorities to retain all business rates, others have raised concerns over potential conflicts of interest. The UK shale gas industry faces a number of challenges, some of which are inherent to the UK given its geology and mineral rights laws, and others which are more reflective of the European unconventional gas indus- try as a whole. For now, though, the greatest hurdle is negative public perception. Many of the environmental concerns might be assuaged through further studies, as well as regulation and technological improvements. Provided that the industry can convince communities in this way and offer attrac- tive financial incentives, it should be in a strong position to reiterate the benefits of a developed domestic industry and a reduced dependency on imports. Amy Comer, partner, and Anna Nerush, associate, London office, Morgan Lewis Is fracking the way forward? Fracking could potentially enable the UK to follow the example of the US and cut its reliance on imported energy, but negative public opinion must first be overcome, say Amy Comer and Anna Nerush. "The industry's success will largely depend on its ability to demonstrate that the onshore extraction of shale gas can be commercially viable and environmentally safe"

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