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European Business U.K. opens more than half of country to drilling, goes ‘all out for shale’

The Cuadrilla drilling site is seen in Balcombe, southern England on August 15, 2013.

GARETH FULLER/REUTERS

David Cameron's long and risky campaign to unleash a shale gas revolution in Britain finally met with success on Monday, when government ministers opened up more than half the country to drilling.

The prime minister and his top deputies had been promoting shale gas for years, declaring that his government is "going all out for shale" as a way to reverse the country's dependency on imported fuels, create jobs and bring down, or a least slow the relentless increase, of energy prices.

Lately, the crisis in Ukraine added a geo-political boost to their effort. Russia is the top supplier of gas to Europe and much of that gas travels through Ukrainian pipelines.

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But the drilling approval has come with severe restrictions that deprived Mr. Cameron of total victory. Drilling in national parks and "areas of outstanding natural beauty" will only be allowed in "exceptional circumstances," government guidelines dictated. Those circumstances were not immediately clear.

A spokeswoman for the department of communities and local government, publisher of the new drilling guidelines, said "defining exceptional circumstances is not an easy thing to do. It all depends on local communities and local conditions."

National parks cover 9.3 per cent of the land area of England, 20 per cent of Wales and 7.2 per cent of Scotland. Areas of outstanding natural beauty cover about 15 per cent of England.

While those areas are not technically off limits, any attempt to drill in them would be fiercely opposed by nature, heritage and environmental groups, some of whom decried the government's Monday decision to open Britain to shale drilling.

A few European countries, including France and Germany, have banned shale gas "fracking" – the injection of high-pressure water, chemicals and sand into shale reserves to crack them open – for fear the process would pollute groundwater and trigger earthquakes.

While the shale industry lobby group, the UK Onshore Operators Group, predicts "sizable production" from shale gas, it is doubtful that a U.S.-style gas bonanza is either imminent or probable in the next couple of decades. The oil and gas industry itself is wary.

Francis Egan, CEO of Cuadrilla Resources, one of Britain's few fracking pioneers, in effect said that that a shale gas evolution is more likely than a revolution.

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At a Chatham House event in London in April, he said that even if Britain were in the throes of an energy emergency and all restraints on shale gas exploration and development were scrapped, "it would take two, three or four years to get up to appreciable production rates."

Britain does not have a single commercial shale gas well but there is little doubt it is sitting on potentially vast quantities of gas. Recently, the British Geological Survey put the shale resource at 1,300-trillion cubic feet.

Britain consumes about 3-trillion cubic feet a year. If only 10 per cent of the potential resource were produced, the country would have enough homegrown fuel for 40 years.

Getting permission to drill is the big obstacle in Britain. In the United States, the landowner owns the rights to the subsurface minerals. The shale bonanzas in the U.S. Midwest and in Texas have turned thousands of farmers into overnight millionaires, or "shaleonaires," as they lease land to the drillers, or take a royalty on production, or both. In Britain, and elsewhere in Europe, no such subsurface rights exist, reducing, or even eliminating, landowners' incentive to give their land up for gas exploration and production.

The plan in Britain is to buy favour with the local governing councils buy promising them a payment equal to 1 per cent of production revenues. But the payments would not directly enrich landowners.

Europe's high population density is another obstacle. There is little open land available for production sites and the pipelines that would deliver the gas to industrial and consumer buyers.

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Still, competition for the new British drilling licenses – the first in six years -- is expected to be fairly robust. That's because natural gas prices are about three times higher than they are in the United States, where gas production climbed by a third between 2005 and 2013, and because North Sea oil and gas production is in rapid decline. Britain became a net importer of as in 2004. Qatar has emerged as the biggest single supplier if Britain's imported gas (in the form of liquefied natural gas), raising concerns about security of supply.

In an interview on Sunday with the Sunday Times, Matthew Hancock, the government's new energy minister, cited energy security as a prime reason behind the shale gas push. Russia supplies almost 30 per cent of Europe's gas and half of that amount goes through Ukraine. In the past decade, Russia has cut gas supplies to Ukraine three times, over gas-contract disputes; the cut-off in severe winter of 2009 created shortages in 18 European Union countries.

"Shale gas has the opportunity to increase our energy security, potentially to cut costs and also to reduce carbon emissions by reducing the amount of coal that we burn," Mr. Hancock said. "With what we've seen in Russia over recent weeks, the importance of an indigenous energy supply can't be overestimated."

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