The Impact of Shale Gas on Energy Markets
Written evidence submitted by Cuadrilla Resources (ISG 15)
This is Cuadrilla’s response to the call for evidence by the Energy and Climate Change Select Committee on the impact of shale gas on energy markets. We welcome the opportunity to discuss the potential for shale gas in the UK and in Europe. While much of the future impact of shale on energy prices is hard to predict, we are keen to make the case for UK shale as a potential valuable contributor to the UK’s future energy mix.
Cuadrilla’s team consists of highly experienced shale gas explorers and engineers, integrated with a risk management team and process that works with regulators and communities to manage and minimize health, safety and environmental issues. We adopt a structured and robust approach to identifying, assessing and mitigating potential health, safety and environmental risks. We are committed to ensuring that all stakeholders across Government and Parliament, along with the general public are fully informed about the practice of shale exploration, development and production in the UK. We understand the need for transparency and openness and endeavour to adopt this ethic at all stages of the process.
Cuadrilla is focused on the geological, engineering and social challenges of exploring appraising and developing tight gas and oil reservoirs in Europe. Our focus is to demonstrate that shale gas in the UK can be developed safely and sensibly in an environmentally responsible manner. As such, we are very interested in, but not necessarily the authorities on, the potential wider economic impact of shale gas on the UK economy.
It is apparent from our exploration and appraisal of the Bowland Shale formation in Lancashire that the UK has a very large amount of onshore gas in place. Our prior estimate for gas in place (OGIP) in the Bowland licence area alone was 200 TCF. We will review this estimate after further analysis of the 3D seismic survey we completed over the licence area, as well as analysis of data from the next well, which we are drilling at the Anna's Road site near Blackpool.
It is clear to us that the UK shale gas industry could provide tangible benefits to the UK in terms of 1) enhancing energy security, 2) reducing import dependency, 3) potentially lowering the cost and price volatility of energy to consumers, 4) reducing greenhouse gas emissions, and 5) job creation and economic contribution. By being the early mover, outside of the US, the UK could be at the forefront of an emerging global industry and set a world class standard.
The UK currently has a first-mover advantage in Europe, while being able to rely and improve upon expertise developed in the United States. However, the full potential for shale gas in the UK is still yet to be determined. This is largely due to the fact that it has not yet been properly commercially tested in this country and has yet to become an accepted norm for energy production by the British public.
Cuadrilla’s ambition is to set a standard of operational and social excellence for other Shale operators to work towards in the future, and we are continually investing to ensure that remains the case. We believe the operating practices and models of regulatory and community cooperation we are developing will be replicable by other operators.
Response to inquiry
1. What are the estimates for the amount of shale gas in place in the UK, Europe, and the rest of the world, and what proportion is recoverable?
1.1 Cuadrilla believes that the prospects for shale gas in the UK and in parts of continental Europe are very promising, based on assessments of a number of geological formations that are not dissimilar in scale to US and Canadian sites where major deposits of natural gas have been discovered.
1.2 While the full economic benefits of shale gas have not yet been fully ascertained, based on prior estimates and research, we believe there are at least 200 trillion cubic feet (TCF) of original gas in place (OGIP) in the Bowland basin. We will review this estimate after further analysis of the 3D seismic survey completed over the licence area, and analysis of data from the next well, which we are drilling at the Anna's Road site near Blackpool.
The recoverable reserve is a function of shale geology and as much, if not more a function of the number of horizontal wells that can be drilled and fractured. However, this in turn depends on the economic and social constraints of such development. Our exploration has shown that the Bowland shale in Lancashire is significantly thicker than any comparable US shale. This opens the possibility of developing with a much lower-density surface "footprint" than US shale plays.
1.4 Cuadrilla understands that economies of scale and advances in technology will drive down development costs over time and that recovery estimates of 15 to 20% may in time prove to be conservative. Furthermore, a recovery factor of even 15% would yield a reserve of some 45 TCF from the Bowland shale alone. This is some five times larger than the UK's booked gas reserves of 8.7 TCF (proven reserves), and almost double the 25 TCF at a maximum (proven + probable + possible). (Source: DECC -- UK Gas Reserves and Estimated Ultimate Recovery 2012)
2. Why are the estimates for shale gas so changeable?
2.1.1 Estimates for mineral resources have always been dependent on the technical ability, at time of estimate, to both make assessments of and extract the resource. For example, while the resource itself remains the same, our ability to comprehend how much is there and what is viable to extract on economic grounds does change. Oil and gas fields are never abandoned because they have run out of oil and gas. It becomes a question of the economics of extracting the remaining reserve. Therefore, we believe a more appropriate question could be: why is the estimate for recoverable shale gas so changeable?
2.1.2 Estimates of recoverable shale gas are changeable because in addition to the technical and economic factors discussed above, the regulatory and socio-political context carries a much greater degree of uncertainty. Each of these factors impacts in its own way on the amount of shale that can finally be recovered. Technological improvement, better well design, multi-well strategies, greater political support and public confidence borne out of successful, incident free, operations all impact positively on recoverability.
2.1.3 The experience of the shale gas industry in North America is that improved knowledge, a product of continuous technical development and operating experience, leads to better recovery and some mature shale plays now have recovery estimates of up to 40%.
2.2 The technical context of recoverability
2.2.1 The technical limitations depend upon subsurface shale characteristics; the well deliverability, operational issues such as the pace of new drills; and the industry’s capacity to field rigs, fracturing equipment and crews. These factors in particular are what distinguish onshore shale gas extraction from the conventional deposits offshore.
2.2.2 The most important factors for determining whether shale gas is present and the scale of the resource is dependent on (1) the thickness of the shale; (2) the natural fracture intensity (high fracture intensity allows for increased production rates and recoverable reserves); (3) the ‘frac-ability’ meaning how brittle and easily the rock will crack; (4) the structural setting (extensional, compressional or strike-slip); (5) the total gas volume; (6) the amount of carbon remaining in the rock or total organic content (TOC); (7) the temperature and depths of the shale reserve; and (8) the reservoir pressure and its stress regime. All these factors and others interrelate in potential recoverability.
2.2.3 Shale is usually rendered by artists as a series of coherent horizontal layers. Overall this is a fair picture, but the reality under the ground is much more complex as the layers themselves have been disturbed by sedimentation and the displacements of fault lines in the subsurface. In the UK, Cuadrilla’s geoscience team has recently completed a major 3D seismic survey in the Fylde with the specific objective of accurately mapping this subsurface complexity. But even the best seismic view is only indicative. Recovery of shale is the product of continuous operating experience coming from both appraisal and production drilling. We drill horizontally, but the process of finding and "surfing" the best layers takes investment and experience.
2.2.4 There is a limit to the skills that can be imported. At the end of the day, development of UK shale will require the experience of an industry that has learned about our own particular shale sequences through empirical study. Some three hundred wells were necessary to learn how to optimise development of the Barnett shale in Texas. Recoverability depends on investment and continuous experimentation with the geology.
2.3 The development context of recoverability
2.3.1 Individual shale gas wells typically decline in production rapidly in the first year or two, then attenuate gradually as they continue to produce gas at lower rates for the next 20 or more years. Maintaining or growing production therefore depends on on-going drilling to penetrate the layers of shale and creating the sub-surface area through fracturing that allows the gas to escape.
2.3.2 In the case of onshore shale development, on-going drilling of new wells does not mean populating the countryside with ever-increasing drilling locations. Horizontal wells can radiate from the same well bore like the tines of a fork, and radially in several directions. Because, as we said above, we have learned the Bowland shale is unusually thick, this can be repeated at different vertical levels, so called "vertically stacked" horizontal wells. One pad can manage around 36 such horizontal wells, using present day technology, and as technology evolves, more in the future. Each horizontal well is equivalent to a piece of keyhole surgery. The "drill" is a remotely controlled turbine whose position may be two kilometres down and three kilometres away, but whose location is always precisely known. The horizontal wellbore is comparatively narrow, about 8 inches in diameter. All fractures are typically thousands of feet below aquifers. Above the Bowland shale formation in Lancashire lies the Manchester Marl, a thick impermeable rock forming the ‘regional seal’, a barrier between the hydrocarbons trapped in the Shale rock below and the aquifer a further several thousand feet above. A lot of development can thus take place from a single pad -- hence our view that the UK offers a low-density development opportunity.
2.3.3 Shale gas operations need to be commercially viable in order for them to be practical. Therefore, it is necessary to take into account development costs, market prices from gas and other liquids and other financial incentives and burdens. Importantly, the industry needs the efficiency of a small number of pads as much as citizens require it.
2.4 The regulatory and environmental context
2.4.1 The UK has a strict regulatory framework governing offshore and onshore oil and gas exploration and production, and this also covers onshore shale gas operations. Any associated risks with shale exploration are heavily regulated and closely scrutinised by the relevant independent bodies. With proper management risks should be minimal.
2.4.2 There is a stringent licensing and planning approval process for all stages of exploration and the surround environment highly safeguarded. Cuadrilla is committed to working closely with the regulator, DECC, HSE and DEFRA. The planning process itself requires approval from the Environment Agency in order to ascertain that the impact to the local environment will be minimal. A licence for exploration is also required from the Department for Energy and Climate Change alongside permission from the Health and Safety Executive prior to engaging in any drilling operations.
2.4.3 Cuadrilla also implements a number of precautionary steps to manage any potential risk of water contamination. We consider it exceedingly unlikely that hydrocarbons or fracturing fluid could leak into shallow aquifer water as a result of the fracturing process.
2.4.4 Regulation of course continually evolves over time in all industries and all countries with the objective of becoming ever more effective and more efficient i.e. regulating the right things the right way. Cuadrilla plans to be an active partner with the UK Regulators in that on-going evolution process within the Shale Gas Industry.
2.5 The socio-political context
2.5.1 At Cuadrilla we believe there are two key aspects needed to make the case for shale: (1) to prove that gas is present, technically recoverable and of a predictable quality and quantity, and (2) to prove the commercial, regulatory, and socio-political context is conducive.
2.5.2 The limitations of UK shale are highly dependent upon the level of public and political acceptance In the US, exploration firms have traditionally excelled at the technical side of shale development, but less so at understanding and effectively managing the socio-political context. In the UK, we need shale to tell a different story. Onshore shale development is a relatively new phenomenon across Europe, and because the sector attracted its share of controversy from the outset, Cuadrilla has fast come to grips with the challenges of what we term the ‘social license to operate’.
2.5.3 We are in the process of creating an integrated offering of technical expertise and social sensitivity. This is why we are focused on listening to a wide number of stakeholders at every stage. This gives us a unique understanding of the issues in play. We have learned that all stakeholders have a great deal to learn about onshore gas, and that easy comparisons with offshore gas, or indeed with US Shale gas experience, are often misleading. There are different challenges and barriers to onshore development in the UK that are not prevalent offshore, such as the degree of consideration that needs to be given to local communities and surrounding areas. It has become clear that perceptions are hard to change without evidence of what development will look like and we are working hard to ensure that an honest and transparent account is given of what this might be.
2.5.4 A consequence of what we have learned from our stakeholders, is the need for a form of ‘industrial education’ so that Government, opposition, industry bodies, academia, and our supply chain have the opportunity to learn from each other, and can work together to enlist the engagement and understanding of the local and national population. There is a good deal of mis-information and a number of myths about shale gas. Only a more informed population will understand all the issues and how they are being addressed.
3. What have been the effects of shale gas on the LNG industry?
3.1 With the US now effectively self-sufficient in natural gas, more liquified natural gas (LNG) has become available on world markets. This has increased options for consuming countries to source natural gas while at the same time reducing global gas prices. Since gas-fired power stations tend to set electricity prices in the UK, this has led to a reduction in wholesale electricity prices compared with earlier levels and we believe that further production of shale will increase these trends. Provisional results from independent research indicate that a growing UK shale industry could potentially decrease the reliance of the UK on imported LNG.
4. What is the potential impact on climate change objectives of greater use of shale gas?
4.1 Shale gas, like all natural gas, has significantly lower carbon content per unit of energy generated when compared with other fossil fuels such as coal or oil. Research into the UK Electricity market indicates that shale gas production will displace coal in electricity generation and reduce reliance on imported pipeline and liquefied gas. Both outcomes would be positive in reducing CO2. Gas is likely to continue to play an important part in the UK’s energy mix for some decades to come and Cuadrilla believes that producing indigenous Shale gas will prove to be a less CO2 intensive way of filling that UK demand than gas imports.
5.1 As a socially responsible company, Cuadrilla has made it a key goal to demonstrate that shale gas from the its UK Bowland and Bolney licenses can be developed safely and in an environmentally responsible fashion that is acceptable to all affected communities. As we have outlined there are two journeys in this mission, the technical journey and the socio-political.
5.2 While the full economic benefits of shale gas have not yet been fully ascertained, based on prior estimates and research, we believe there are at least 200 trillion cubic feet (TCF) of original gas in place (OGIP) in the Bowland basin. We will review this estimate after further analysis of the 3D seismic survey completed over the licence area and from data from the next well we are drilling at the Anna’s Road site, near Blackpool. We have every reason to believe that the aggregate of onshore UK shale natural gas resources is a multiple of our estimate for the Bowland formation. This resource estimate is not the amount of recoverable gas. This can only be reliably determined by further development and production testing.
5.3 We await operational clearance to resume our fracturing operations so we can prove that this gas can be hydro-fractured and will flow successfully. Achieving one or two proven flowing shale gas wells will be a major milestone for Cuadrilla and for the UK.
5.4 Maximising the benefit of shale gas for the UK will require a process of on-going and long-term investment and technological innovation and improvement by Cuadrilla and others. Shale gas specific expertise can be imported from the US, but the UK has significant oil and gas knowledge and can and must further develop its own shale gas capabilities. These capabilities can then be employed not just in the UK but also in the wider European and Global shale markets as they emerge. Shale has the potential to make a major difference to the UK over the next 50 years, but developing and sustaining this capability will take investment and patience.
5.5 Socio-politically, we are a society that has respect for the environmental regulatory regime, and looks to it for leadership in managing risk for all stakeholders. Cuadrilla’s ambition is to set a standard of operational, environmental and social excellence for other operators to work towards in the future, and we are continually investing to ensure that remains the case. We believe the models of regulatory cooperation we are developing will be replicable by other operators.
5.6 We additionally believe there are upsides to development of an indigenous shale gas industry:
· reducing our import dependency, through lower-than-anticipated imports of LNG and pipeline gas;
· a decreased carbon footprint as indigenous natural gas displaces coal and gas imports;
· an opportunity to make the UK a leading centre of shale expertise for Europe and the developing world; and
· substantial tax revenues for the Treasury and significant employment opportunities.
5.7 The UK currently has a first-mover advantage in Europe, while being able to rely and improve upon expertise developed in the United States. However, Cuadrilla recognises that shale gas is a sovereign resource, and ultimately the decision over whether or not to develop it, and at what speed, is a political one. The balancing of local concerns with national priorities is a difficult act. In this, we err on the side of the communities that we are in the process of becoming part of. Their interests and our interests are the most closely intertwined. At the same time, clear directives from the centre regarding the national interest, alongside stable and pragmatic policies, will give us the confidence to invest in those communities for the long term.