COLUMN-Frack on Your Majesty, you may be a shale gas winner:Kemp

Fri Dec 14, 2012 10:22am EST

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By John Kemp

LONDON Dec 14 (Reuters) - Her Majesty Queen Elizabeth II could be in line for a windfall now that her government is prepared to start granting licences to frack for shale gas again.

In her capacity as the Duke of Lancaster, the Queen owns more than 50,000 acres and subsurface rights to tens of thousands more across northern England, the part of the country that has drawn the most interest from companies hunting for shale gas. Fracking firms will have to pay to put wells on her property or to drill through the subsurface mineral layers that she owns.

Potential payments to the Duchy are just one example of a wider phenomenon. The prospect of widespread fracking, or hydraulic fracturing, has helped set off something of a rush among the owners of ancient mineral rights to register them ahead of an October 2013 deadline set by the Land Registration Act, in order to claim possible compensation.

THE DUCHY OF LANCASTER

The Duchy of Lancaster, which dates back to the 14th century, is separate from the Crown Estate, historical land holdings and other royal possessions. Revenue from that property goes to the government in exchange for an annual payment to help cover the costs of running the monarchy.

The Duchy holds assets in trust to provide an income for the Queen and her successors as sovereign. In March 2012, it had assets valued at 405 million pounds ($653.5 million) and was providing an annual income of 13 million pounds, which the Queen uses to meet her private expenditure and official expenditure incurred as sovereign.

The Duchy has valuable commercial property in central London (clustered around the ancient manor of the Savoy around the Embankment and the Strand) as well as in northern England.

But the major part of its landholding, in terms of surface area, is held as rural estates spread across the counties of Lancashire (10,000 acres), Yorkshire (16,000 acres), other parts of northern England and the Midlands.

In addition, over the centuries when the Duchy sold off some of its holdings, it reserved ownership of the subsurface mineral rights. As a result, it also owns mineral rights beneath tens of thousands more acres across the north of England, even though the surface is now owned by others.

ANCIENT LORDS OF THE MANOR

Mineral rights and royalties produced an income of just $270,000 in the year ended March 2012. However, like other major landowners, including the Church of England, the Duchy has been busy registering its historic ownership of these mineral rights ahead of the deadline set by the Land Registration Act.

"Mineral interests are a relatively small element of the Duchy portfolio, but windfall opportunities do emphasise the importance of protecting these interests," the Duchy explained in its annual report.

"The Land Registration Act has necessitated mineral owners to register their titles with the Land Registry, and the Duchy has been doing this in respect of both its surface and mineral ownership."

Fracking has set off a modern land rush. According to the "Daily Telegraph" newspaper: "The Duke of Northumberland, Duke of Bedford and Earl of Lonsdale have all registered manorial rights. Ordinary people who live in manor houses or old rectories may also have 'lordships of the manor' and therefore own mineral rights in the area." ("Lords of the manor to cash in on fracking" November 2012)

DRILLING AND ANCILLARY RIGHTS

Like other private landowners, the Duchy of Lancaster does not own the oil and gas found under its estates or as a result of its reserved mineral rights.

In contrast to the United States, where oil and gas deposits are in private ownership and the owner receives royalties from fracking firms for extracting them, in the United Kingdom petroleum resources are in state ownership.

Under the 1934 Petroleum Production Act, all oil and gas deposits are owned by the Queen in her official capacity as "the Crown", which in practice means they are government property.

Section 1 of the Act states: "The property in petroleum existing in its natural condition in strata in Great Britain is hereby vested in His Majesty, and His Majesty shall have the exclusive right of searching and boring for and getting such petroleum", which means oil and natural gas.

Licences to explore and exploit oil and gas resources onshore are granted by the government. But "the rights granted by the landward licences do not include any rights to access, and the licensees must also obtain any consent under current legislation, including planning permission," according to the British Geological Survey.

So anyone wanting to get at the oil and gas must negotiate with the surface owner for permission to drill a well and build other facilities such as access roads and storage tanks. If the surface owner refuses, the driller must apply for a court order under the 1966 Mines Act to acquire the ancillary rights needed to get access to the oil and gas and pay what the court rules to be appropriate compensation.

As a major landowner in the north of England, the Duchy of Lancaster will be able to charge anyone who wants to drill on surface land it owns. Under a recent court ruling, however, it may also be able to charge anyone who wants to drill through the underground areas it owns, even if they build surface facilities on someone else's land.

DEVIATED WELLS, SUBSURFACE OWNERS

In 2009, in a case that pitted Star Energy against Bocardo, a company ultimately owned by well-known businessman Mohammed Al-Fayed, the Court of Appeal ruled that Star had to pay compensation for trespass for drilling a deviated (angled) oil well under Bocardo's property, even though the well started on someone else's land and was at least 800 feet below the surface when it entered the area under Bocardo's land.

"I reach this conclusion with reluctance," the judge explained. "The trespass is purely technical, because it did not interfere with Bocardo's use or enjoyment of its land one iota. Moreover, Bocardo has lost no rights because it neither owned the oil that has been removed from strata within its land; nor did it have the right to search, bore for and get such petroleum. Those rights belonged exclusively to the Crown and its licensee (Star)".

Nonetheless, even though Star possessed a licence, it still needed to negotiate Bocardo's permission to drill through all the other layers and minerals Bocardo owned underneath its property or apply to court and pay compensation. Having failed to do either, Star was ordered to pay £1000.

But that was for using three pipelines beneath Bocardo's land at depths between 800 and 2800 feet below the surface, and extending just 500-700 metres below Bocardo's Oxted estate. Fracking will employ much longer horizontal wells and affect much bigger areas of the subsurface. The compensation required could be correspondingly larger.

Since the Duchy of Lancaster owns the mineral rights across large swathes of the north of England, frackers will have to negotiate appropriate payments to drill through all the strata it owns (including for example the coal deposits it has been busy registering).

In contrast to conventional oil and gas fields, which have a fairly limited impact on the surface and cover a restricted underground area, fracking involves drilling a much larger number of wells with horizontal sections extending thousands of feet. It has a very large footprint on both the surface and the subsurface, and a corresponding increase in compensation payments to a large number of land owners.

Revenues from fracking are unlikely to put the Queen's personal income on a par with the sultan of Brunei, and she should probably not starting ordering a new Royal Yacht, but they could make a small addition towards the cost of running her household.

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