Shale Gas Regulatory Framework a ‘Work in Progress’

On the first official day of the conference, panel members at Shale Gas Eastern Europe 2011 in Warsaw, Poland grappled with the regulatory landscape in Eastern Europe for shale gas.

One question, dealt with by Patrick Burgess, Partner and Head of Energy and Infrastructure Industry Group at Canada’s Gowlings, was whether regulation in Europe needed to mimic the North American experience. The difference, he contended, was that essentially regulations are not hindering the development of unconventionals in North America.

Burgess explained: “In Canada, as in the US, regulatory schemes are in the hands of the provincial governments (or at the state level in the US). We’re not facing regulatory challenges or barriers, but water challenges and the costs of infrastructure.”

He also mentioned infrastructural barriers, like access to Canada’s West coast, and a moratorium on tanker traffic, as well as resistance to unconventionals drilling in one Canadian province.

“Quebec is facing regulatory challenges, and the lack of a full regulatory regime. The population is not used to the O&G industry operating in their region,” he explained, adding that shale gas had faced great opposition there. “Fears are over the water table and water supply, so a shale gas drilling moratorium has been implemented.”

Al Holcomb, Vice President Strategic Planning at Lewis Energy Group offered his insights to the panel.

“In the US the unconventional plays in general continue to develop at a rapid pace,” he said. “In the US we see it in shale gas and shale oil or tight oil plays. Despite low gas prices, our production continues to grow, with top shale plays producing over 15 billion cubic feet per day of natural gas.”

“Texans have a habit for boasting,” Holcomb continued, “but I think I’m on solid ground in saying the top two shales are the Barnett and Haynesville which are producing about 15% of US daily demand.”

“I think it’s important that I also point out that the top Canadian plays produce a little more than 1 BCF per day, so our US producers are soundly beating them. In the US it’s full speed ahead: ‘frack, baby, frack.’ It’s strong and healthy,” he said of the industry.

He and others fielded the question whether hydrofracking would be banned at the federal level in the US.

Holcomb said on 17 March a bill was submitted to the US Congress to allow hydrofracking to be regulated at the federal level. “It’s being introduced for the third time, and not even getting out of committee earlier. This bill is the so-called ‘Frack Act.’”

“It’s like throwing a skunk in the room,” he explained of the industry’s reaction to the prospect of it being enacted. “It’s not a good thing for shale plays to be subject to EPA regulation, but I don’t think it’s going to go anywhere soon, presently it’s regulated at the state level.”

“At the state level, you have various initiatives underway,” Holcomb continued. “You have two different groups: In oil friendly states that have a long history of oil production, anti fracking legislation is going nowhere. I think the state regulators in the oil friendly states are trying to maintain their position of sole control over hydrofracking within their state boundaries. So in oil friendly states, they’re very supportive of these unconventional shale plays.

“In contrast, there are certain states which are anti oil field that have no history of oil production at all. New Jersey has gone so far as to ban hydrofracking,” he said as an example, adding: “I’m not worried about it. I think that states are going to take the initiative to push forward legislation that for the most part requires disclosure of chemicals used in fracking. The industry is seeing that the use of harmful chemicals is the greatest source of conflict along with water usage issues being a major point of concern.”

Holcomb said that the industry was responding by pushing their own initiatives to address these problems. “Some companies are applying ‘green fracks’ that use no harmful chemicals. And some are going forward with voluntary disclosure – smart and responsible ways of approaching the hydrofrack controversy.”

Regarding water issues, he said that much more recycling of frack water was being done, using less water for fracking. “Like any good technology, as it matures it gets better,” said Holcomb. “I’ve seen just recently a company going to use propane in a frack instead of water, which is good where water is scarce or unavailable.”

“Hydrofracking is going to get safer, cheaper and more effective,” he said. And I’m hopeful that self regulation along with some state oversight is what will become the proper approach.”

In terms of macro trends, Holcomb said there was a remarkable shift to shale oil in North America. “These plays are the hot thing, driven by the very low price for natural gas and the sky high price for oil,” he explained.

“Hydrofracking is being applied in tight oil plays and you’re seeing that it works. Probably the leading play is the Bakken in North Dakota. I think they’ve exceeded 500,000 barrels a day, and it’s developing in the Eagle Ford in Texas. Chesapeake expects to be producing 500,000 barrels a day. There are also a number of emerging plays,” he said, naming the Niobrara in Nebraska.

Holcomb reported: “President Obama is coming out in support of natural gas as part of his policy solution to reduce the US dependence on foreign oil. It’s a cheap, clean and readily available source of gas for the US and they’re getting behind it as a bigger part of the energy picture in the US.

“Without these unconventional plays, we would not have the large supply of natural gas that we have now, so it seems to me that if this administration supports natural gas use, you have to support the use of hydrofrack technology and the further development of unconventional gas plays,” he concluded.

Tomas Chmal, Partner at White & Case, recalled his experiences with the regulatory landscape in Poland.

“I participated in the shale rush in the last two years, getting late calls from Houston. It turned out to be a two year project, multiple clients and a number of great projects,” he said.

Chmal explained that Poland was a coal country and that 95% of its electricity was produced out of hard coal and lignite. “EU policy is not that friendly towards this, so searching for alternatives is a must.”

He said Poland could supply about 30% of it’s own natural gas needs, which were small at present.

“The policy of the Ministry of the Environment has been liberal. The pricing and the shale rush were possible because of the rather good, liberal policy of the Government, who is the gatekeeper. The Polish Geological Institute has geological information,” said Chmal. “You need to contact them to know what information is already available.”

He spoke of the necessity of dealing with the regional directorates of environmental protection in Poland to evaluate how one’s project would impact the environment.

“You also need to deal with the mining authority. There’s a regional division,” he said.

“It seems like politics is fully supporting shale gas,” opined Chmal of Poland, “as I haven’t heard any critical or challenging voices. They will probably appear.”

He added: “There’s a discussion in the media on the impact, whether it will destroy the landscape. There’s a huge lack of information, something I don’t feel comfortable with. The industry communicates too little with the public, creating false opinions about the damaging of groundwater. So there’s a need for better communication and it’s an opportunity.”

“Poland is traditionally a gas country,” said Chmal, “but the Geologic and Mining Law does not say anything about hydraulic fracking or horizontal drilling. The new law being discussed doesn’t cover these either.”

Conference Chair James Elston, Director of Palladian Energy, raised questions about the taxing of the oil and gas industry in Poland. Mr. Chmal obliged with some observations.

“It happens either through tax royalty regimes or through production sharing contracts, which are common in much of the developing world that allow private participation in the oil business,” he said.

Chmal added that in Europe a percentage was taken off the top line, at the sales prices, which varied from less than 1% to 20 or 30%. Corporate taxes, he added, varied from 10 to 40%.

“In Europe, they’re attractive for onshore exploration and production. Conventional exploration has died down to a trickle, so there was a need to have a regulatory regime in place to attract unconventional. That’s appropriate because resource plays are very high unit cost. Returns from shale gas and shale oil plays are limited,” he explained. “You can’t just drill one well and have huge production.”

Tax royalty regimes, he said, would naturally evolve. “Parties don’t need to worry that oil companies are going to run off with usury returns, because they can be modified.”

Chmal said it would require a great deal of hard work and great deal of good luck before the industry would reach that situation.

How difficult, though, would it be for Poland to switch from coal to natural gas?

“Basically CO2 emissions from gas is half of that generated from coal, so we have a chance to reduce emissions,” Chmal pointed out. “Coal is cheap, while gas is expensive in Poland. Gas fired power plants are good for balancing renewables, as is the case in Germany. It can allow for the balancing of windfarms in their electricity system.”

“Construction of a power plant is not a one year process, it requires several years and not many projects are being developed. It’s an opportunity for Europe to develop it’s domestic gas production,” said Chmal.

According to him, Polish energy conglomerate PGNiG was a monopoly that was considering diversification of their portfolio, and likely going into the electricity business. “We’ll see how those plans are fulfilled to build a gas fired plant.”

James Elston pointed out that the catastrophe at Japan’s Fukushima nuclear reactor highlighted the need for energy diversification in Europe, perhaps providing an opening for power generation via unconventional gas sources.

“Most of Europe is seismically stable and our companies are better run, but the world’s media are highlighting what’s going on there, that nuclear is bad,” he explained.

“It’s difficult envisioning the nuclear generation set being renewed,” he pointed out. “The replacement of existing nuclear - which is low carbon - is not going to happen. There are planning processes and public inquiries all over Europe, so there’s going to be much greater demand for gas,” he explained, adding: “We’re going to need an awful lot more of gas generation, which could lead to growth demand.”

The panel considered the fact that Poland hadn’t been resource rich, feared the Russian bear and gas shutoffs. The country, they said, wanted and demanded energy security and shale gas could ensure energy dependence. Indeed, they said, it could become an exporter.

“It’s still years to come even if that’s what we’re hoping for,” said Tomas Chmal. “It requires infrastructure and what to do with this gas. This is problematic that we joined the EU pretty late. The old 12 has the pipelines and infrastructure. Now we are joining the club of rich societies, but the Polish roads are not that developed, nor the electricity grid or pipelines. So shale is a good start, but not the end. We’ll see how it progresses.”

Local communities was a point he emphasized.

Chmal opined: “There are a lot of details and power lies with these local communities. At each concession block there must be consultations with a great number of authorities, changing farm land to production land, giving building permits, etc. They control roads, water permits. They have the power to block this, and the central government can’t allow for that or give the permission. The Prime Minister or Environmental Ministry can’t overrule them.”

He said it was important for the industry to know that if the mindset of local mayors was bad, it could block things.

“It’s very important that some of that royalty goes to the local communities, and that aspect will require some finessing to make sure that all stakeholders are getting what they want,” James Elston proposed.

“It’s important for all of us to get out there, it will be minimally invasive; it’s important to identify where it will be attractive and carry that through to win over communities, having the whole service chain working in your area, staying in your hotels and shopping in your shops – there are great benefits at a local level.

He added: “The tens of thousands of jobs you hope would be generated in Poland would have a great benefit just in terms of the taxes that people pay.”

Further Reading: Rules and Regulations of Shale Gas Development in Poland HERE