Getting ready for UK Shale Gas
- We are at the start of the development cycle, with limited exploration results. So the pace and scale of growth is uncertain.
- The economic impact of shale for the UK could be significant — the Government and the industry are addressing challenges such as social acceptance, and streamlining regulation while ensuring it remains robust.
- The oil and gas industry needs to act now to prevent supply chain and skills constraints.
Pace of growth
The US has shown rapid development. The UK has more challenges to overcome, so we expect more gradual growth — at least in the near term.
The pace of growth in the US is highlighted in the graph below, which shows the rate of growth for the Bakken region situated in North Dakota compared to the High Case (4,000 wells drilled by 2032) and Low Case (1,000 wells drilled by 2032) scenarios published by the IoD.
A regular review of progress against the broader challenges through the development of options similar to the UK power market (‘Slow Growth’, ‘Gone Green’, and ‘Accelerated Growth’ scenarios would give the supply chain confidence to sustain investment.
Scenarios for growth in the number of shale-producing wells in the UK compared to North Dakota
Source: IoD Getting shale gas working, North Dakota Department of Mineral Resources Drilling and Production Statistics
Small to mid-size independent operators are the main industry players currently active in the UK onshore oil and gas sector. Typically, they do not have the majors’ balance sheet strength or financial flexibility, and uncertainty around the potential and pace of development makes access to funds needed to train crews and purchase equipment difficult.
To minimise investor risk, a number of operating models designed to increase these players’ flexibility are emerging, including joint ventures and/or strategic partnerships between:
- International oil and gas companies (e.g., Total, GDF Suez, and Centrica) and smaller shale operators
- Shale operators and suppliers
- Suppliers with complementary skills and service offerings who, by pooling resources, can compete against larger international players
- UK-based international oilfield services and manufacturing companies to plug gaps in British industrial capability, particularly around rig manufacturing.
Key considerations for UK shale as it prepares to ramp-up
Whilst still in its infancy, there are a number of factors that will influence the pace of the sector’s development:
Forecast growth in natural gas demand: UKCS oil and gas projections forecast that UK demand for gas will grow 8.3% between 2013 and 3010.
Established conventional onshore and offshore oil and gas supply chain: the UK has a long history of conventional hydrocarbon exploration, development and production, both onshore and offshore. The offshore supply chain represents an experienced £35bn industry with over 1,500 companies and 200,000 employees. This has led to the development of significant capability in many aspects of the supply chain1.
Most well-established liquid spot gas trading hub, and presence of private equity players: both factors mean shale gas is worth considering as part of a wider energy mix for the UK.
Export potential: By investing in specialised equipment and skills, the UK can take a leadership position in shale gas; for instance, a recent study2 suggests the UK is in a strong position to innovate in environmental management technologies such as fluid management, seismic monitoring and emissions monitoring and control. Combined with a strong regulatory regime, these disruptive technologies could establish a sustainable competitive advantage for the UK in Europe.
Positive political will: the UK Government recognises shale gas’ potential to provide the UK with greater energy security, growth and jobs, and is encouraging safe and environmentally sound development of the industry to go ahead as quickly as possible.
Demand uncertainty: private sector exploration firms are cautious about commitment due to geological uncertainty and resource estimates potentially subject to large revisions. In turn, demand uncertainty means there are currently limited incentives for capital markets to provide affordable financing.
Equipment availability: expensive and lengthy modifications are required for existing equipment to become compliant with EU regulations and the UK Town and Country Planning Act.
Local community benefits: unlike the US, ownership of hydrocarbons sits with the state, not individual land owners. To address this, the Government now require 1% of production revenues to benefit local communities.
Social acceptance: unfavourable public perception related to potential environmental concerns and messaging around the disruption to local communities are starting to be addressed through the engagement activities led by the Office of Unconventional Gas and Oil.
Permitting process: permitting and planning processes, especially at local level, are being streamlined — currently bespoke permits from the EA are issued within 13 weeks, and from summer 2014 standard rules permits could, subject to consultation, start reducing this timeline to two weeks.
1 UK upstream oil and gas supply chain: Economic Contribution, April 2014
2 OTM Consulting Limited, UK business opportunities for innovation in the extraction and utilisation of shale gas