Elizabeth Shepherd, Eversheds

June 2012, updated December 2013

Introduction

Across the EU, there is awareness of the dramatic effect that shale gas has had in the US on energy prices, energy security and job creation. However, Member States continue to take very different positions on shale gas, driven by their own political agendas, and shaped by their individual energy policies and energy security concerns. Environmental issues continue to dominate headlines and influence the debate.

Scrutiny of the facts around shale gas has continued through 2013. As a result the European Commission now intends to deliver a Shale Gas Enabling Framework for the EU early in 2014 to manage risks, address regulatory shortcomings and provide maximum clarity and predictability across the EU. 

This article considers the current status of regulation around shale gas activity in the EU, including the proposed EU Shale Gas Enabling Framework.

Current status in the EU

The European Commission’s proposed EU legal framework

The Commission Work Programme for 2013 included the initiative “Environmental, Climate and Energy Assessment Framework to Enable Safe and Secure Unconventional Hydrocarbon Extraction”. This initiative aims to deliver a framework on unconventional fossil fuels (through legislative and/or non-legislative measures) to manage risks, address regulatory shortcomings and provide maximum legal clarity and predictability to both market operators and citizens across the EU. The initiative is subject to an impact assessment. The impact assessment will look at options to prevent, reduce and manage surface and subsurface risks, to adapt monitoring, reporting and transparency requirements, and to clarify the EU regulatory framework with regard to both exploration and extraction activities. 

The Commission’s Programme is in line with the European Council’s call of February 2011 to assess Europe’s potential for sustainable extraction and use of conventional and unconventional fossil fuels in order to enhance Europe’s security of supply. The Programme equally addresses the European Parliament’s call of November 2012 to introduce an EU-wide risk management framework for unconventional fossil fuels exploration and extraction, with a view to ensuring harmonised provisions for the protection of human health and the environment across all Member States.

Commission studies and assessments, a public consultation and European Parliament reports setting out its position are all informing the Commission’s work. The Commission is expected to adopt a binding legal framework which will produce a base level of European regulation. Whilst the Framework’s legislative form is still to be officially confirmed, it is increasingly expected to take the form of a specific Directive similar to those covering waste water and environmental impact assessments. In Brussels this framework is being referred to as the “Shale Gas Enabling Framework”.

Four general principles and measures have been developed for the Framework. These principles are creating a level playing field in Europe, tackling public acceptance through increased transparency and a focus on health and environmental risks, being clear and simple to understand and a degree of flexibility regarding specific local features. Ultimately the framework must also be compatible with the EU’s long term strategy of a low carbon, resource-efficient economy. DG Environment has confirmed that rules will cover all potential environmental impacts of hydraulic fracturing.

The Commission is expected to make an announcement on the Shale Gas Enabling Framework in January 2014 which is likely to be too late to be acted on this parliamentary term. Due to the European Parliament elections in May 2014 and the appointment of the new Commission, to enter into office from 1 November 2013, it could take until 2015 to implement any legislation proposed (and depending on the Framework’s form several more years for Member States to implement this legislation in their own national legal systems).

The Commission’s public consultation “Unconventional fossil fuels (e.g. shale gas) in Europe”

As part of the Commission’s broader initiative to involve the public in the Commission’s on-going work an online public consultation was held between 20 December 2012 and 23 March 2013. The Commission also held a stakeholders’ conference in Brussels on 7 June 2013. The results of this public consultation have long been considered to be a key determinant of future EU shale gas policy.

A detailed analysis of the results of the public consultation was released in October 2013. This followed high-level results which were presented at the stakeholders’ conference. The detailed analysis was generally consistent with the high-level results. The detailed analysis concluded that the majority of respondents consider that the main challenge to the development of unconventional fossil fuels is a lack of transparency and supported disclosure of operational data (including volume of water and chemical additives). The majority of respondents also consider that the current legislative framework is not well adapted and favoured the development of comprehensive and specific EU legislation.

Commission studies

The Commission has released a number of studies as part of its consideration of whether new policy proposals for unconventional shale gas should be brought forward.

These studies include the January 2012 report produced by Brussels law firm Philippe & Partners which looked at experiences in four Member States (Poland, France, Sweden and Germany). In addition, three studies were released in September 2012 on the environmental and human health issues associated with hydraulic fracturing in Europe, the potential climate impact of shale gas production and unconventional gas’s potential energy market impacts. The latest study, released in September 2013, considered the regulatory provisions applicable to unconventional gas in 8 Member States (Bulgaria, Denmark, Germany, Lithuania, Poland, Romania, Spain and United Kingdom).

The September 2013 study concluded that there are a number of potential regulatory gaps and legal uncertainties in national Member States legislation. This is in contrast to the January 2012 report which did not identify any significant gaps in the legislative framework, either at EU or national level, when it came to regulating shale gas activities.

European Parliament Reports

On 21 November 2012 the European Parliament (in plenary) adopted two reports by two European Parliament Committees , the ITRE (Industry, Energy and Research) Committee and the ENVI (Environment and Public Health) on different aspects of shale gas. The reports are non-legislative and their purpose was to enable the European Parliament to set out its political position on the issue ahead of any new regulation or policy being proposed by the Commission.

The report by the ITRE Committee on “Industrial, energy and other aspects of shale gas and oil”, recognised the crucial role of worldwide shale gas production in ensuring energy security and diversity in the long term. This included the contribution which shale gas and oil can make to the EU’s decarbonisation goals. The report reiterated that each Member State has the right to decide whether to exploit shale gas and oil. It also called for states to put in place a “robust regulatory regime” and ensure the necessary administrative and monitoring resources for the sustainable development of all shale gas-related activities. 

The report by the ENVI Committee on “The environmental impacts of shale gas and shale oil extraction activities” confirmed that the risks are well-understood and could be effectively managed with existing technology and best practice. In particular, it stressed that wellbore integrity is key to preventing groundwater contamination. The report also called for a thorough analysis of EU legislation relating to shale gas production. 

Disclosure of chemicals used in fracturing fluid is a key issue for both reports. Oil and gas producers responded by creating the natural gas from shale (NGS) Hydraulic Fracturing Fluid and Additive Component Transparency Service, managed by the International Association of Oil and Gas Producers (OGP). The primary purpose of the service is to provide factual information concerning hydraulic fracturing of NGS wells, and other issues including voluntary disclosure of chemical additives on a well-by-well basis in the EEA.

Climate Action

The EU is committed to reducing greenhouse gas emissions to 80 – 95% below 1990 levels by 2050 and to 20% below 1990 levels by 2020. The EU is therefore exploring the challenges of decarbonisation. 

In March 2011 the Commission published its Roadmap for moving to a competitive low carbon economy in 2050. This Roadmap acknowledged that the EU needed to start working immediately on strategies to meet the 2050 target. It was used as a basis for the Commission‘s Energy Roadmap 2050 published in December 2011. Its aim is to develop a long-term European framework for energy supply which would complement, rather than replace national, regional and local efforts to modernise energy supply. It acknowledged the impossibility of forecasting the future so far as energy needs and sources of supply are concerned. It therefore presented various routes towards decarbonisation of the energy system, combining the four main carbonisation options – energy efficiency, renewable energy, nuclear and carbon capture and storage (“CCS”).

The Commission confirmed that gas has a key role to play in the transition to decarbonisation, and that gas could become a low-carbon technology if CCS becomes commercially available on a large scale basis. It noted that shale gas and other unconventional gas sources have become potential important new sources of supply in or around Europe which could potentially lessen the EU’s import dependency. The issue is however whether or not shale gas in Europe will prove viable, and if so when. This is currently not clear, due to the early stage of exploration in all Member States. 

In order to meet the long-term 2050 targets an energy and climate-change strategy to 2030 is being established. In addition, a binding international climate agreement is expected to be entered into in 2015 and implemented from 2020. The EU’s 2030 energy and climate change strategy is also being adopted to ensure that the EU will be able to meet this international agreement. 

In March 2013 the Commission adopted a Green Paper for consultation on the 2030 strategy. This strategy is also being developed to ensure that the EU will be able to meet any international agreements on climate mitigation expected to be adopted in 2015 and implemented from 2020. The Green Paper highlights that the developments relating to unconventional gas and oil, and concerns over the affordability of energy and competitiveness must be taken into account in the 2030 strategy. 

At the same time as the Green paper, the Commission published a consultative communication on “The future of CCS in Europe”, aimed at initiating a debate on the options available to ensure the timely development of CCS. This communication acknowledges the benefits of gas in that it has half the greenhouse gas emissions of coal and can be used to complement renewable energy sources. Responses to this communication will feed into the Commission's work on the 2030 strategy. It has been suggested that this strategy could be released at the same time as the Shale Gas Enabling Framework in early 2014.

REACH Regulation (EC 1907/2006)

The Commission is also looking closely at the application of the stringent REACH Regulation to ensure that shale gas activities are dealt with appropriately. This is in the context of a wider concern by ECHA (the European Chemicals Agency), regarding the completeness of registration dossiers, in particular the adequacy of the use descriptors for particular substances which are submitted as part of the registration process. 

REACH requires manufacturers or importers of substances in the EU to register those substances with ECHA within timescales which depend upon the toxicity of the substance and the volume manufactured or imported by each registrant per year. The final registration deadline is 31 May 2018 for substances manufactured or imported in quantities of 1 tonne or more. In addition, a chemical safety assessment (with exposure scenarios) is required where a substance is manufactured or imported in quantities of 10 tonnes or more per year.

The aim of REACH is to ensure that the risks of substances are properly understood and managed appropriately. In 2011, DG Environment expressed concern that chemicals used in hydraulic fracturing were not registered for that use under REACH. However, based on current levels of shale gas activity in the EU, it is likely that the tonnages necessary to trigger registration under REACH will not have been reached. In addition, the use descriptors which have to be submitted as part of the registration process do not require details of the precise use of the substance, simply that it is sufficient to allow adequate risk management measures. This means that use descriptors do not have to be specific to shale gas. 

In September 2013 the Joint Research Centre’s Institute for Health & Consumer Protection commissioned by DG Environment released its report on the use of certain substances in hydraulic fracturing of shale gas reservoirs under REACH. This report concludes that consideration be given to increasing available information on use, exposure and risk management for substances used in fracturing fluid and makes some suggestions. The report does not suggest that to date industry has acted in a non-compliant way. Careful legal and technical analysis of the recommendations is required to ensure that a disproportionate burden (bearing in mind the aim of REACH to ensure that the risks of substances are properly understood and managed) is not placed on industry. 

It is important to frame the debate regarding chemicals used to extract shale gas in the wider context of REACH and its specific rules regarding when exposure scenarios must be prepared. Outside of unconventional gas, all REACH registrants and downstream users are struggling with chemical safety assessments and exposure scenarios. For this reason the European Commission’s REACH Review identified that this was an area for improvement. 

Over the past two years recognition has grown that REACH (covering substances rather than additives) is not the mechanism to address public disclosure concerns regarding the chemical constituents of hydraulic fracturing fluid. Industry has responded to this concern by developing the NGS Hydraulic Fracturing Fluid and Additive Component Transparency Service.

Environmental Impact Directive

In October 2013 the European Parliament adopted proposed amendments to the Environmental Impact Directive 2011/92/EU by a narrow majority. These amendments included an automatic requirement for an Environmental Impact Assessment (EIA) for the exploration or extraction of shale gas involving hydraulic fracturing. (Currently an EIA is only required when the extraction of natural gas exceeds 500,000 m³/day). The proposed amendments now require the agreement of the European Council. Member States remain divided, however, the Council is expected to adopt a decision in January 2014.

Member States’ positions

As confirmed in the Lisbon Treaty (2009) and re-iterated in recent Commission communications, each Member State has “the right to determine the conditions for exploiting its energy sources, its choice between different energy sources and the general structure of its energy supply” (Art. 194). 

Due to political, historical and geographical differences between the Member States they have very different energy supply structures. Due to these differences Member States have also adopted very different positions on shale gas. At their most extreme, reactions range from Poland’s enthusiasm for shale gas, where it is seen as an opportunity for independence from Russia, to France’s continued reluctance even to allow exploration, despite potentially significant shale gas reserves.

Elsewhere across the EU, shale gas continues to rise up the political and social agenda. Member States demonstrate sharp differences between public opinion and political opinion. Political support for shale gas is not yet reflected in activity and even in countries where there is strong political support development has been slow.

UK

The UK is arguably the best informed Member State in that it was the first to carry out a detailed study which concluded that there is no direct risk to water aquifers, so long as the well-casing is intact. Concerns were however raised following seismic activity near Cuadrilla’s drilling site in Blackpool, in the North West of England in April/May 2011 which led to a temporary moratorium. 

2013 has been an important year for shale gas producers in the UK following the lifting of the temporary moratorium in December 2012. The lifting of the moratorium was subject to new controls to mitigate the risks of seismic activity. These new controls include a traffic light system to categorise seismic activity and direct appropriate responses. The Government’s decision followed analysis of detailed studies and advice from leading experts. At the same time the Government announced that there would be a consultation on how the current licensing regime could be modified to support the particular characteristics of shale gas developments and that a tax regime specific to the shale gas industry would be developed. 

Since December 2012 the Government has continued to demonstrate its support for shale gas. In June 2013 the UK Government announced that the 14th onshore licensing round would be launched in 2014 (this is the competitive process by which the UK allocates permits to explore for and extract petroleum). 

In July 2013 the Government published a consultation paper on proposals for a tax regime for shale gas. In this consultation the Government recognised the potential for shale gas to increase energy security, create jobs and generate substantial tax revenue. The proposals in the consultation aim to unlock early investment and support industry development.

At the end of July draft technical guidance for onshore oil and gas exploratory operations was released for public consultation. The Government has also produced guidance on how shale gas (and other onshore oil and gas) developments should proceed through England’s planning system. 

The Chancellor , in his Autumn Statement on 5 December 2013, announced a new tax allowance to kick start the exploitation of onshore oil and gas (including shale gas). The allowance makes the effective tax rate for shale gas projects lower than that in the US and the most competitive in Europe. Legislation to implement the allowance is expected to be included in the Finance Bill 2014.

The United Kingdom Onshore Operators Group (UKOOG) (the representative body for UK onshore oil and gas companies including exploration, production and storage) has also published industry guidelines covering best practise for shale well operations in the UK. The Department for Energy and Climate Change (DECC), the Health and Safety Executive (HSE), the Environment Agency (EA) and the Scottish Environment Protection Agency (SEPA) provided input into these guidelines. The guidelines also provide a template for the public disclosure of hydraulic fracturing fluid composition. 

UKOOG has also entered into a Memorandum of Understanding with Water UK (which represents the UK water industry) to ensure their respective members co-operate through the shale gas exploration and extraction process. The memorandum’s key aim is to give the public greater confidence and reassurance that everything will be done to minimise hydraulic fracturing’s effects on water resources and the environment. 

Overall the UK government remains positive and whilst the legal framework is being clarified the overall approach of the UK appears to be that it does not see the need for further EU legislation on shale gas activity, it simply wants the freedom to explore and understand the extent of its shale gas opportunity. In spite of this political support the rate of exploration has been slow and no further hydraulic fracturing activities have been undertaken in the UK since the moratorium was lifted. Public debate regarding onshore hydrocarbon production (both conventional and unconventional) has increased and there have been high profile protests highlighting public concern regarding hydraulic fracturing.

Poland

Poland is recognised as another EU frontrunner in shale gas development. This is due to the combination of political will and in the case of Poland, potentially favourable geology. Poland is currently dependant on Russia for its crude oil and natural gas. Development of shale gas is considered by the Polish authorities as a key component of its strategy to diversify Poland’s energy mix and improve its energy security.

The Polish Geological Institute released a report in June 2012 which suggested shale gas reserves could be up to 1.9 trillion cubic meters. More recent reports have suggested these reserves may be less favourable with the US’s Energy Information Administration reducing its previous estimate for Poland’s reserves by 20%. The Polish Geological Institute is expected to publish a new report on the country’s shale gas reserves in 2014.

Politically Poland remains supportive of shale gas development with the Deputy Environment Minister announcing Poland would commence commercial shale gas production in 2014. However, the terms of and delays in the enactment of new legislation to regulate the licensing and tax system have led to industry criticisms. This new legislation is now not expected to be enacted until after the end of 2013 and key terms are still disputed.

Germany

Prior to the Federal Elections in September 2013 progress was made to develop draft legislation to regulate hydraulic fracturing. The draft legislation clarified that hydraulic fracturing was in principle permitted in Germany other than in areas which are or are planned to become water protection areas. An attempt to implement the legislation stalled in June 2013 when the coalition government withdrew the draft legislation due to internal opposition (see SHIP article).

The Federal Elections have resulted in changes to the Federal Parliament and a new coalition government. It is expected that any legislation proposed by the new coalition will be less favourable to hydraulic fracturing than that proposed by the previous coalition.

The Christian Democratic Union and the Social Democratic Party have reached agreement for a new coalition. The agreement is unclear over whether the new coalition will establish a formal moratorium (although it has been widely reported that a moratorium has been agreed) on the use of hydraulic fracturing until the risks to health and the environment (particularly water) can be fully assessed. The use of eco-toxic substances and the disposal/injection of flow-back water are raised as particular concerns. The coalition is recommending that the German States, together with the scientific community and industry, work together to gain a better understanding and close knowledge gaps around hydraulic fracturing.

It is expected that the coalition will propose legislation to improve the protection of groundwater, require an EIA for the exploration and extraction of unconventional resources through HF and a restriction/prohibition on the use of ecotoxic chemicals in HF operations. The approach to regulation is likely to be informed by two comprehensive studies by experts into the environmental impact of hydraulic fracturing which were commissioned by the Federal Ministry for the Environment and the State of North Rhine-Westphalia.

France

In France, shale gas activity was suspended in July 2011, with a ban on the exploration and exploitation of hydrocarbons by hydraulic fracturing and the cancellation of exploration permits which had been granted. It has since been confirmed that this decision will apply throughout President Hollande’s 5 year term in office. However, it has been stressed that if other techniques for shale gas extraction were developed this decision could be reassesse (see report). 

Despite politicians, experts and industry continuing to debate the merits of shale gas and a number of pro-shale reports (including reports produced by the French Parliamentary Office for Scientific and Technological Choices and the Academy of Sciences), France is no further forward in promoting its shale gas potential. At the beginning of October 2013 the French Constitutional Court rejected a challenge to the exploration ban imposed in 2011. The Court noted that in the current state of scientific knowledge, the ban was not disproportionate.

Romania

Since coming to power the current Prime Minister has declared his Government’s support for unconventional gas and the government programme for 2013 – 2016 specifically refers to the exploration and exploitation of unconventional resources as a priority activity. The moratorium imposed in May 2012 has been lifted and Chevron has been granted the permits necessary to commence exploration. The Prime Minister has confirmed that it will be up to the government in power beyond 2019 (when exploration is expected to complete) to determine whether shale gas exploration will progress into exploitation. 

The Prime Minister has assured the public that hydraulic fracturing will not be used to exploit shale gas in Romania for the next 4-5 years and that a final decision on shale gas will be taken once the country’s resources are confirmed. Confirmation of Romania’s unconventional gas resources is expected to take about 5 years. Chevron’s country manager has since explained that hydraulic fracturing may be used in the final stages of its exploration operations (2-3 years time). 

A new royalties system is expected to enter into force in 2015 which will impose different requirements for unconventional, conventional and offshore hydrocarbons.

What about the economics?

The economic significance of shale gas cannot be underestimated. Domestic gas production in the EU is falling, and there is increasing reliance on imports from outside the EU. France currently imports gas from Algeria, the Netherlands, Russia and Norway, the UK from Norway and the Netherlands and LNG from Qatar.

In the meantime, thanks to shale gas, the US may well become a LNG exporter and there are several LNG terminals, originally built to import gas, which are now looking to start exporting from the US, possibly to Asia and the Middle East where the margins are better. This is bound to have a huge impact on international gas flows and, by extension, gas prices, which already look set to continue to rise. 

Certainly in the US shale gas has had a dramatic effect on gas prices which have come down by 85% from an all-time high in 2005. In addition, there are estimates that shale gas in the US has created around 600,000 direct and indirect jobs in the last few years, this is predicted to increase to 800,000 by 2015 and 1.6 million by 2035. 

But can shale gas be produced on an economically viable scale in the EU? It is one thing finding shale gas, and another generating commercially viable production from it, as Poland is finding. For example, geological factors may make shale gas in the EU more expensive to produce, and there are also infrastructure challenges. Other challenges include greater urbanisation in the EU, and different land ownership rights from those in the US. 

Pipeline infrastructure is variable across the EU, and less well developed in eastern Europe. Significant investment may be required in some countries to upgrade the network to cope with increased gas flows. Investment has already started in Poland to expand its domestic and transit infrastructure with EU support. In September 2011, a gas interconnector was opened between Poland and the Czech Republic, which could form part of an enhanced north-south gas corridor which may be required if Poland’s shale gas production supports exports.

Another concern is the limited supply of suitable drilling rigs in the EU. Many new drilling rigs will either have to be built or brought into Europe to drill the types and numbers of wells that commercial-scale shale gas production would require. However commentators make the point that where there is demand, supply will follow, and this was certainly the experience in the US.

Conclusion

Whilst energy prices and security of supply continue to dominate the headlines, the reality is that shale gas cannot be ignored without potentially damaging consequences to European energy security and prosperity. 

There is no doubt that shale gas will influence the global energy market, which in turn will impact on the EU. Outside the EU, China is very keen to take advantage of its recently announced large shale gas resources. China has potentially the world’s largest shale gas resources. China has offered subsidies to Chinese operators, introduced a gas floor price and Chinese companies have entered into agreements with international shale gas operators to bring the necessary technology to China and set up joint ventures to exploit reserves. 

Whether the EU will be left behind depends on how it engages in the debate. Much rides on the proposed EU Shale Gas Enabling Framework. The EU and Member States need to allow shale gas exploration to advance, at least to understand the scale of the opportunity. There must be a concern that unless the EU is able to provide a favourable environment (including regulatory stability) for that exploration, US companies which have the technical expertise to help will look to easier targets, such as China and Australia. 

Public acceptance is of course key. Despite the potential benefits of shale gas exploitation, exploration of this resource has not yet gained widespread public acceptance in the EU. It is essential for there to be open and transparent debate, based on sound, peer reviewed, scientific analysis which examines the opportunities and the issues. Only if the public, as well as the regulators, can be satisfied that shale gas can be produced safely can there be any hope of replicating across the EU the job-creating, economy transforming effect which shale gas has had in the US.