COLUMN-Overcoming the barriers to shale gas in Britain: Kemp

Wed May 22, 2013 7:33am EDT

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(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON May 22 (Reuters) - Britain's complicated planning and permitting regime is the biggest barrier to the development of onshore shale gas, according to a report from the Institute of Directors (IOD).

Ten different licences from four different public agencies, involving two separate public consultations, must be obtained before a single exploratory well can be drilled and hydraulically fractured, according to the IOD report "Getting shale gas working" published on Wednesday.

"We do not question the need for the industry to obtain the necessary environmental permits, conduct the necessary environmental impact assessments and install the necessary seismic monitoring equipment," IOD concedes, but warns the current process "can seem a little cumbersome".

"In our view, the planning and permitting regime for shale exploration, as currently constituted, presents a major barrier to the development of shale gas in the United Kingdom."

Overall, however, the IOD presents an upbeat assessment about the industry's ability to surmount the obstacles to developing a substantial onshore shale industry in a small, densely populated island with a famously self-contradictory approach to construction and local development.

WAR ON RED TAPE

The IOD is a business lobbying organisation that has expressed strong support for shale gas and often campaigns against what it sees as excessive government regulations, so the report's conclusions are not entirely surprising.

The most interesting part of the report is the careful assessment of the various suggested barriers to shale development in chapter 5.

The report assesses barriers in five major areas: infrastructure and equipment; skills and the supply chain; finance and tax; regulation; and reputation.

It concludes that gas transportation and gathering pipelines, water supply and the availability of drilling and pressure pumping equipment are unlikely to pose serious obstacles to large-scale exploitation of Britain's shale formations.

The tax regime for onshore shale gas will not be a major barrier after the government made a series of concessions in the 2013 budget, which aim to balance the need to raise substantial tax revenue with the need to encourage development of the resource.

Skill shortages will be more challenging. There are already intense shortages of geoscientists, petroleum engineers and skilled labour for North Sea fields, which have pushed up wage rates. Onshore shale fields will offer more normal working conditions but will take time to redeploy workers from elsewhere and train new ones.

"Initially, outside expertise may be needed," IOD acknowledges. "The early development of the North Sea depended on skilled workers from the United States, and more recent shale gas development in states such as Pennsylvania has relied on considerable expertise from earlier shale gas development."

Importing expertise may prove controversial at a time when the major political parties are all worried about the level of immigration.

But the main obstacles to shale development are social and regulatory.

The industry needs to provide tangible benefits for local authorities and communities in areas where it operates. It must build public confidence in the safety of fracking and obtain a "social licence to operate" by promising to be a good neighbour. And it needs a much simpler process for obtaining exploration and production permits.

LOCAL BENEFITS

Neither local landowners nor local planning authorities stand to gain much from the development of shale resources in their areas.

In contrast to the United States, where minerals are owned privately and landowners receive royalties, in Britain oil and gas are state property and royalties are paid to the national treasury.

Shale drilling will generate business tax revenues, but they will be paid to the national government rather than retained locally.

"This state of affairs is not conducive to development since the planning authorities that will permit the development are at the local authority level, and the authorities that will benefit financially from the development are at national level. Fundamentally, incentives are not aligned," IOD notes.

Recent changes will allow local authorities to keep more of any increase in local business tax revenues above a given baseline, which should encourage them to promote local industrial development. But payments only start flowing only when wells enter production, which could be years after the initial permits are sought, and doubts about the future stability of these arrangements may make some local authorities cautious.

The tax regime may still not be sufficiently generous to persuade local planning authorities to look on drilling applications favourably and grant approvals quickly.

The same problem is true with local community benefits. "The downsides of development tend to receive more prominence than the upsides," IOD warns. "People can often feel that development is done to them rather than with them."

Ensuring that local communities benefit, including financially, is vital to softening local opposition. IOD cites the onshore wind industry's community benefits protocol, under which developers commit to pay at least £1,000 per year to the local community for each installed megawatt of capacity for the lifetime of the project as a possible model.

IOD wants any community benefits and greater local tax revenues offset by reduced payments to the national government.

SOCIAL LICENCE

Shale gas operations currently face a "confidence hurdle", which can be overcome only by successfully drilling and fracturing some wells and demonstrating that the technique is clean and safe. In the meantime, regulators and local authorities will take a cautious approach, which is inevitably slowing the pace of development.

Concerns about safety, earthquakes, water contamination and the impact of fracking remain high, though they have eased somewhat in recent months. IOD nonetheless sees some reasons for optimism. "Public attitudes ... are quite open minded and are improving," the report concludes, citing opinion polls.

The challenge is to develop the same positive attitudes towards shale that prevail in parts of the United States where shale development has been extensive, such as Texas and North Dakota.

Obtaining social approval is vital because it reduces opposition and greases the wheels for the swift and trouble-free approval of all the permits that operators need.

Permits remain the biggest obstacle. To drill a single exploratory well, the operator needs (1) a petroleum production and exploration licence from the Department of Energy and Climate Change (DECC); (2) separate licences for water abstraction, groundwater activity, borehole waste disposal, mining waste disposal and naturally occurring radioactive material from the Environment Agency; (3) notice to drill and a health and safety approval from the Health and Safety Executive; and (4) land use planning permission from the local authority.

Once all these other permits are in place, the driller needs to obtain final consent from DECC.

Operators need reassurance that permit applications will be reviewed favourably, or at least neutrally, rather than used as an excuse to block development that is not wanted in an area.

IOD thinks these challenges can be overcome, though the industry must work hard to convince the public of shale's benefits, and central government might need to streamline the planning and approval process.

The report is perhaps too sanguine, coloured by its obvious enthusiasm for the potential economic benefits of shale gas. Britain's planning system and attitudes to local development are notoriously dysfunctional.

Nonetheless, the report provides a useful roadmap for the steps industry and government will need to take if shale gas production is ever to become widespread in the United Kingdom.

("Getting shale gas working" is available from the Institute of Directors link.reuters.com/gep38t) (editing by Jane Baird)

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