Thursday, 25 May 2017

Conservative Energy Policy - 2017 manifesto - shale gas and oil rig decommissioning

Given the current polls (with the Conservatives leading Labour by 47% to 33%), we assume that the Conservatives form the next government and therefore take a look at what (if anything) we May glean from Theresa's manifesto.

Full excerpts from the manifesto are at the bottom, but unsurprisingly perhaps, there are few specifics. Shale gas takes top billing, with an assertion that it could play an important role in "re-balancing our economy". 

To enable this, the manifesto proposes a change in planning laws for shale drilling. "Non-fracking drilling will be treated as permitted development, expert planning functions will be established to support local councils, and, when necessary, major shale planning decisions will be made the responsibility of the National Planning Regime." 
We interpret this as suggesting that initial exploratory drilling will be able to progress much faster and may be made at the national level (aided by a new Shale Environmental Regulator), rather than the current emphasis on local decision making. This may be because of a number of local decisions not to allow drilling (for example in Lancashire in 2016). 

Initial exploration wells (that can prove up the existence of shales, take cores and provide greater insight on resources), would have to be followed up by fracking wells to more definitively gauge the flow rates of any shales discovered. From the manifesto, it is not clear at this point how local objections/councils would be involved in these decisions. 

However, it seems clear that if these proposals go through, it will be potentially easier and quicker to drill wells targeting shale gas deposits. If so, it should benefit existing players in the area (Egdon Resources*, Cuadrilla Resources, IGas, Third Energy, Ineos and Total)

Decommissioning
The government expects the North Sea to be the first major basin to decommission, and the manifesto promises support to a decommission industry, a multi-use yard and the UK first ultra deep water port to aid in this growth. If the UK can build world leading decommissioning expertise, we would expect material contracts to flow over coming decades as massive offshore structures are decommissioned in Europe, Africa and America. We would imagine that this capability will be fiercely changed by existing shipyards and deep water ports around the world (particularly in Asia for example).


Full text relating to oil and gas in the 2017 manifesto
"The discovery and extraction of shale gas in the United States has been a revolution. Gas prices have fallen, driving growth in the American economy and pushing down prices for consumers. The US has become less reliant on imported foreign energy and is more secure as a result. And because shale is cleaner than coal, it can also help reduce carbon emissions. We believe that shale energy has the potential to do the same thing in Britain, and could play a crucial role in rebalancing our economy.

We will therefore develop the shale industry in Britain. We will only be able to do so if we maintain public confidence in the process, if we uphold our rigorous environmental protections, and if we ensure the proceeds of the wealth generated by shale energy are shared with the communities affected.

We will legislate to change planning law for shale applications. Non-fracking drilling will be treated as permitted development, expert planning functions will be established to support local councils, and, when necessary, major shale planning decisions will be made the responsibility of the National Planning Regime.

We will set up a new Shale Environmental Regulator, which will assume the relevant functions of the Health and Safety Executive, the Environment Agency and the Department for Business, Energy and Industrial Strategy. This will provide clear governance and accountability, become a source of expertise, and allow decisions to be made fairly but swiftly.

Finally, we will change the proposed Shale Wealth Fund so a greater percentage of the tax revenues from shale gas directly benefit the communities that host the extraction sites. Where communities decide that it is right for them, we will allow payments to be made directly to local people themselves. A significant share of the remaining tax revenues will be invested for the benefit of the country at large."

Supporting industries to succeed section
"Other industries, like the oil and gas sector, are transforming. The North Sea has provided more than £300 billion in tax revenue to the UK economy and supports thousands of highly-skilled jobs across Britain. We will ensure that the sector continues to play a critical role in our economy and domestic energy supply, supporting further investment in the UK’s natural resources. We will continue to support the industry and build on the unprecedented support already provided to the oil and gas sector. While there are very significant reserves still in the North Sea, it is expected to be the first major oil and gas basin in the world to decommission fully, and we will take advantage of that to support the development of a world-leading decommissioning industry. We will work with the industry to create a multi-use yard and the UK’s first ultra-deep water port to support this industry."

Comparison - text on energy in the 2015 document
"We will continue to support the safe development of shale gas, and ensure that local communities share the proceeds through generous community benefit packages. We will create a Sovereign Wealth Fund for the North of England, so that the shale gas resources of the North are used to invest in the future of the North. We will continue to support development of North Sea oil and gas. We will provide start-up funding for promising new renewable technologies and research, but will only give significant support to those that clearly represent value for money."

*Note: Egdon Resources is a client of Edison Investment Research