Shale gas: silver bullet or Trojan horse?
Shale gas has revolutionised the US energy market and, potentially, it may be on the verge of doing the same in other parts of the world, including the UK.
Until recently, gas was the fuel that the so-called informed view thought would be exhausted first but new extraction techniques developed and perfected in the US (notably the advance of horizontal drilling techniques) have made the recovery of unconventional gas, and particularly shale gas, economically viable. US energy policy has essentially been upended by developments in hydraulic fracturing or ‘fracking’, such that previously commissioned LNG import terminals are either being mothballed or re-engineered as export terminals.
There is often quoted commentary that the US is heading towards energy self-sufficiency. But what can we expect in the UK? Have recent events near Blackpool cooled the interest (or highlighted the difficulties) in this recovery
process and has the subsequently commissioned report (entitled "Presse Hall – Shale Gas Fracturing – Review & Recommendation for Induced Seismic Mitigation") effectively given the green light for fracking to become as commonplace here as it is in the US?Shale – what makes it different?
Shale is a sedimentary rock comprised of fine-grained clay particles. Its challenging characteristic relates to its permeability (ie the ease with which fluids can pass through it). Conventional hydrocarbons sit in more permeable structures such as sandstone and therefore are easier to extract. New hydraulic fracturing techniques have now made it economically viable to pass fluids through shale to force the migration of hydrocarbons and enhance recoverability. In short, the process stimulates the recoverability by causing fractures in the formation to increase permeability allowing the hydrocarbons to be recovered.
Shale gas is described as being an unconventional resource along with other sources such as coal bed methane and tight gas sands. The size of the potential resource from shale gas has been known for many years – its recoverability has been technically challenging and therefore financially unattractive. The US Department of Energy commissioned a number of projects in the 1980's and 1990's to assess unconventional resources by using fracturing technology as well as by applying horizontal well drilling techniques, both of which had actually been developed earlier in the 20th Century. The successful outcome of these initial projects provided the impetus for the subsequent very significant investment in, and roll-out of, the technology in the US, the break-neck expansion of the industry and the resultant drop-off of US domestic wholesale gas prices by as much as 70 per cent. According to some estimates the US now produces more natural gas than Russia – the giant Marcellus field in Pennsylvania containing some 500 trillion cubic feet.
Hydraulic fracturing, or fracking, involves the pumping of fluids into a formation at a particular rate and pressure specific to that formation in order to crack the rock and create twofractures. Typically the fluids are water or water-based often mixed with sand, which keeps the fractures open once actual pumping has stopped. The well process, following boring and lining, then involves using shaped explosive charges to perforate the lining and then to pump the fluid at relevant pressure to create the fractures. What is important is that every formation has its own unique structures and therefore its own particular pump rate and pressure parameters.The Blackpool incident
Cuadrilla Resources had undertaken fracking operations at the Presse Hall Well near Blackpool and in April and May 2011 two earthquakes were registered (measuring, at most, 2.3 on the Richter scale). These were immediately suspected to be linked to the fracking operations. As a result, those operations were suspended and Cuadrilla undertook a number of studies to determine whether its operations had caused the seismic activity. Some of the principal findings of those studies were:
- The earthquakes were indeed caused by direct fluid injection
- The maximum likely magnitude resulting from similar treatment is estimated at 3.0 on the Richter scale and such an event would not present any significant hazard
- There is very low probability of other earthquakes during future treatment of other wells
The Department of Energy and Climate Change commissioned its own report into these events and their likely causes. The report was undertaken by three eminent experts in the areas of hydraulic fracture and seismic activity and it reached a number of conclusions and made a number of recommendations. In the light of considerable media attention the report was interesting not least for the context it applied to the earthquakes that had occurred. It was subsequently reported that the findings had given fracking the go-ahead in the UK. In fact the report contained some important notes of caution, reserve and guidance as to best practice. What it did not do was recommend that fracking operations are subject to any moratorium, which has been the case in, for example, Quebec and France.
The Blackpool earthquakes have only increased the growing debate on fracking, particularly here in the UK, where a debate rages about how harmful it might be.
Cuadrilla admitted that its drilling operations were the most probable cause of the quakes but insisted that there had been no threat to people or property, adding that the minor seismic events were the result of an unusual combination of geology at the drilling site that would be unlikely to occur again.
As well as seismic impact, fracking has variously been charged with everything from depletion of underground aquifers to air pollution and chemical contamination of drinking water. The Oscar-nominated protest documentary, Gasland, famously showed footage of water coming out of the kitchen tap that was so heavily laced with methane gas it could be set on fire. Still, it is widely believed that much of the reported contamination in the US could have been avoided with better regulation. The industry has been evolving so fast that regulators have struggled to keep pace. The US Environmental Protection Agency is undertaking a far-reaching study and review, although the full report will not be available until 2014. However, US regulators have very recently revealed the first draft of regulations to govern fracking on public lands. The principal thrust of these regulations is to require the disclosure of chemicals used in the fracking fluid. Environmental groups have been underwhelmed by the draft regulations – they view the disclosure requirement weak on the basis that it allows operators to report the chemicals after completing a fracking operation rather than before.
The Presse Hall report made a number of key recommendations (having the benefit of its own investigations and the studies undertaken on behalf of Cuadrilla) to mitigate the risk of future earthquakes in the particular basin. These were:
- Fracking should involve a smaller pre-injection and monitoring stage before the main injection of fluids
- Fracture growth and direction should be monitored
- Future fracking operations in the basin area should be subject to an effective monitoring system that would provide automatic locations and magnitudes of any seismic events in near real-time
- Operations should be halted and remedial action undertaken if events of a magnitude in excess of 0.5 on the Richter Scale occur
It is interesting in particular that the report is very specific to the Presse Hall incidents. It does not comment in a wider sense on the fracking process (and indeed it had not been commissioned to do so). It is relatively early days in the UK, both for proponents and detractors of fracking technology, but an obvious advantage (or disadvantage depending on one's viewpoint) the sector has in the UK is that it should be in a position to learn from developments in the US.
Another interesting aspect of the Presse Hall report is its undoubted acknowledgement of the historic occurrences of seismic activity and the link to underground drilling and mining activity over the centuries. Presse Hall is by no means a unique event in the UK. There are examples of mining induced earthquakes of similar magnitudes in the UK that caused superficial damage, but these apparently occurred at shallower depths. There are numerous examples in particular of induced earthquakes in oil and gas fields related to production, and it is probably the case that some 50 per cent of the seismic activity experienced in the last century in the UK has been caused by coal mining activities.
What next in the UK?
The government appears to have given tacit approval for the nascent industry to move ahead – or at least it has not banned it. Doubtless, those opposing the drilling techniques (particularly given that they involve on-shore operations) will become more vocal and indeed DECC spokesmen have made it clear that they (and specifically the Environment Agency) will be keeping a very close eye on developments in the sector and this will inevitably mean casting regulation to specifically address the process and its effects and potential effects. But clearly also weighing heavily on any government's mind is the issue of energy security (and also energy prices). It is a difficult balance but given the very widespread use of the technology in the US it is, for the time-being, a ‘wait and see’ role that the government seems to be prepared to take.Stephenson Harwood
Jeremy Sheldon is a corporate partner specialising in advising on mergers and acquisitions in the energy sector at Stephenson Harwood, a full service international law firm with over 115 partners and 600 staff worldwide. Jeremy's experience includes advising oil and gas (upstream and downstream) and power related transactions, as well as advising on infrastructure projects in the UK and international energy sector.
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