(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON May 22 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
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
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
But the main obstacles to shale development are social and
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.
Neither local landowners nor local planning authorities
stand to gain much from the development of shale resources in
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
Shale drilling will generate business tax revenues, but they
will be paid to the national government rather than retained
"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
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.
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
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
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)