Chelgate Autumn Newsletter 2014
The UK stands on the launchpad of a shale revolution, but while this prospect is threatened by ill-informed and ill-intended opposition, it is not helped by the reluctance of the UK oil and gas industry to do more in terms of information dissemination, engagement and community contributions.
Huge potential reserves of oil and gas have been identified in various areas of England and Scotland which, if exploited, could lead to an economic boom similar to that experienced in the US in recent years. But protest groups have been very effective in swaying public opinion against hydraulic fracturing, or fracking, mainly based upon exaggerated or dubious arguments citing selective experiences in the US (where, among millions of such wells, there have inevitably been some mistakes by irresponsible drillers).
The Government certainly sees the potential of shale to replace dwindling North Sea reserves and, despite this orchestrated public opposition, is pressing ahead with developing shale. It has launched another round of licence awards, covering much of the UK, with winners likely to be announced in the next few months. It has also published proposed law changes allowing energy companies to legally drill under property without permission. This freer operating environment is balanced by a strict regulatory and supervisory regime far in excess of that in place in many states in the US.
The economic arguments are unequivocal. The shale revolution in the US has transformed the country in just a few years from an importer of up to 56 billion cubic feet of natural gas each year to the prospect of energy independence being within reach. Jobs in the US oil and gas industry rose by 40% between 2007 and 2012, with the shale industry supporting 2.1 million jobs in 2012, expected to grow to 2.5 million in 2015, and projected to grow to 3.0 million in 2020 and 3.9 million by 2035. Jobs in other sectors, in particular chemicals and manufacturing, are on the same upward path due to the competitive advantage low energy costs provide, with the US trade deficit set to fall by $180 billion by 2022, and US government revenues (federal, state, local) predicted to grow by $1.6 trillion from 2012 to 2025.
Even with these arguments, there remains significant opposition in the UK. Public opinion has been swayed by arguments about water table contamination, methane in water, earthquakes and methane emissions, as well as overall carbon emissions, but these claims have not been challenged or countered, in effect giving opposition groups free rein.
There remains a significant public relations challenged for the industry. It needs to gain broad support, although realistically just general acceptance, of exploration and the fracking process would suffice. The industry does have significant arguments in its favour in terms of the economy, social impact, safety and environmental impact, much based on research and experience from the US where and fracking and horizontal drilling has been taking place for some time, but it needs to communicate these effectively to be able to influence the public in a positive way.
Blackpool last year, Balcombe last summer and Barton Moss in Manchester this year have all seen demonstrations, protest and civil disobedience.
Leading on from this, individual companies are having huge issues when taking forward actual projects – Blackpool last year, Balcombe last summer and Barton Moss in Manchester this year have all seen demonstrations, protest and civil disobedience. However, as most operators will admit, they do need to ‘up’ their game and would approach it differently next time. They need to use the tried-and-tested engagement and consultation techniques developed over the last two decades with housing, commercial and infrastructure projects, directly engaging with communities around the proposed site, in local groups (including environmental and protest groups), information dissemination needs to be far greater with local meetings, updates, newsletters and information websites, and they need to listen to people through forums, direct Q&As and through online feedback. This will not remove the protest but, at the very least, it will allow a balanced debate to take place enabling people to make up their minds based on real communication, engagement and consultation. And on facts, not fiction.
A key part of the debate must be community contributions. Although they will not appease the protestors, they will certainly increase support. Current proposals in the UK are to pay £100,000 and 1% of income, which can hardly be considered generous, as in the US up to 25% of net income is paid to landowners through the royalties system. An average Bakken well in North Dakota should yield around $23 million in profit to the producer over its life. The same well will generate over $4 million in taxes. This level of payments to local communities make a real difference.
Ineos, a chemical company which owns several potential areas for shale exploration in England and Scotland, has gone some way: recently announcing that it will pay 6% of revenues from fracking sites – 4% to landowners and 2% to councils. Chief executive Jim Ratcliffe feels this will encourage development in the UK. This is a bold step by Ineos, but one which has largely been rejected by the rest of the industry.
Perhaps adapting the US royalties model for use in the UK, involving the payment of similar amounts to those in the States, splitting payments so that all levels of the community benefit, would be a logical next step. For example, owners of homes and land under which fracking takes place could receive a 60% share (split between them), the parish or town council 20%, and the local planning authority 15%, leaving 5% as a levy for local environmental projects and enhancements. If there were numerous wells in an area, this could make a significant difference locally.
The key to shale development must be to share the wealth created with all levels of the local community, as they are the ones who are going to have to tolerate the drilling and fracking activities, and the associated traffic, for a period of time.
If the industry was more forthcoming, more engaging and, most important, more generous, support for fracking would certainly increase, and perhaps the opposition would become more muted.