Report to: Cabinet Member - Regeneration & Housing

Cabinet Member –Transportation Cabinet Member – Environment

Date of Report: 21 November 2011 Date of Decision: 28 November 2011 Subject: Shale Gas Exploration & Production in Lancashire Report of: Director of Built Environment Wards Affected: Harrington, Ravenmeols, Ainsdale, Dukes, Birkdale, Kew, Norwood, Cambridge, Norwood, and Meols Is this a Key Decision? No Is it included in the Forward Plan? No

Exempt/Confidential: No

Purpose/Summary To provide Members with an update on Shale Gas Exploration and Production in Lancashire.

Recommendation(s) It is recommended that: Cabinet Members for Regeneration, and Housing, Transportation and Environment:-

1. Note the content of the report.

Cabinet Member for Regeneration, and Housing

2. Consider the opportunity offered by Cuadrilla Resources Ltd to visit their site in Banks on either Tuesday 22nd November 2011, or Thursday 8th December 2011,

3. Subject 2 above to invite Cabinet Members for Street Scene & Transportation, and Environment, and Wards Members affected by the Shale Gas exploration and Production operation.

4. Request that Officers explore the opportunity of a similar visit to Aurora Exploration (UK) Ltd site.

How does the decision contribute to the Council’s Corporate Objectives?

Corporate Objective Positive Impact

Neutral Impact

Negative Impact

1 Creating a Learning Community /

2 Jobs and Prosperity /

3 Environmental Sustainability /

4 Health and Well-Being /

5 Children and Young People /

6 Creating Safe Communities /

7 Creating Inclusive Communities /

8 Improving the Quality of Council Services and Strengthening Local Democracy

/

Reasons for the Recommendation: To enable Members to understand Shale Gas Exploration and Production operation on site, and to assess its implications. What will it cost and how will it be financed? There are no direct financial implications as a result of this report, other than costs associated with Officers’ times spent in attending the site visit. Members and Officers interested in travelling to Banks, and Norris Farm, Downholland Moss Lane, would be expected to make their own travel arrangement on the day. Implications: The following implications of this proposal have been considered and where there are specific implications, these are set out below:

Legal None

Human Resources None

Equality 1. No Equality Implication

2. Equality Implications identified and mitigated

3. Equality Implication identified and risk remains

Impact on Service Delivery: There is no impact on Service Delivery as a result of this report. What consultations have taken place on the proposals and when? The Head of Corporate Finance & ICT (FD 1041) has been consulted and any comments have been incorporated into the report. The Head of Corporate Legal Services (LD 402/11) has been consulted and the legal implications are referred to in the report. Are there any other options available for consideration? The only other option is not to attend the site visit. Implementation Date for the Decision Following the expiry of the “call-in” period for the Minutes of the Cabinet Member Meeting Contact Officers: Mo Kundi Tel: 0151 934 3447 Email: mo.kundi@sefton.gov.uk Background Papers: Economic Impact of Shale Gas Exploration & Production in Lancashire and the UK - A Final Report by Regeneris Consulting September 2011. Poland’s Shale Gas Dilemma for Europe – an article in the Independent Newspaper dated Tuesday 27th September 2011 Fracking Firm Pledges Jobs Boost for Region – an article in The Champion

Newspaper dated Wednesday 28th September 2011

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1.0 Introduction 1.1 Cuadrilla Resources Ltd, an independent oil and gas company based

at Lichfield in Staffordshire, is currently exploring the potential for commercial shale gas extraction in the Lancashire area via a series of test wells. Exploration commenced in mid 2010, and if commercially exploitable reserves are identified, which appears to be the case, then a far more substantive and longer lasting phase of gas extraction could commence by 2013, subject to the necessary national and more local licensing and planning approval.

1.2 Shale gas is natural gas extracted from shale rock formation. It is one

of a number of so-called unconventional and non renewable sources of natural gas, with other unconventional sources of natural gas including coal-bed methane.

1.3 A significant growth in global shale gas extraction has been witnessed

in the last decade, mainly in the US (United States), and as a result of technological advances in hydraulic fracturing techniques, interest in shale gas has spread from US in recent years to Canada, Europe, Asia, and Australia.

2.0 Shale Gas in Lancashire 2.1 A 2010 report by the DECC (Department for Energy and Climate

Change) into ‘The Unconventional Hydrocarbon Resources of Britain’s Onshore Shale Gas Basins’ identified Bowland Shale as the most promising location for UK shale gas extraction. A UK Petroleum Exploration and Development Licence (PEDL) 165 was granted to Cuadrilla in September 2008 to allow the company to pursue gas exploration activities in the Bowland Shale, subject to the necessary drilling/development consents and planning permissions.

2.2 The licence area, shown below in Map 2, covers some 500 square

miles. The licence area covers the western side of Lancashire, predominantly to the west of the M6 motorway and including the towns of Blackpool, Preston, and Southport.

2.3 A small scale gas well at Elswick has been in operation since 1996,

and produces gas from a low permeability sandstone reservoir at a depth of approximately 4000 ft, and is used to generate power for supply to the local electricity grid.

2.4 The first shale gas test well commenced in August 2010 at Presse Hall,

and the second test well commenced in late 2010 at Grange Hill Farm. In the region of 4 to 12 test wells will be required as part of the exploration phase, roughly proceeding at the pace of three test wells per annum. The precise locations of future test wells within the license area have not yet been confirmed by Cuadrilla Resources Ltd, but could include parts of the Borough.

Map 2 - Bowland Shale Exploration License Area

Note: 1: Preese Hall; 2: Grange Hill Farm. The blue boundary represents the Bowland Shale license area. Source: Microsoft Bing Maps/Pitney Bowes Mapinfo. 2.5 Councillor Sue McGuire, a ward Member for Cambridge, and an Officer

from the Economy and Tourism Division attended a presentation given by Cuadrilla Resources Ltd in Blackpool on 21st September 2011, at which Cuadrilla stated that they have estimated from the results taken from the two test wells that the Gas in Place within the Bowland Shale to be some 200 trillion cubic feet.

2.6 Cuadrilla Resources Ltd emphasised that they were presenting an estimate of Gas in Place, and not reserves. The recoverable amount is dependent on a whole range of factors including technology, access, scale of operations, political will and price. Furthermore this estimate is not independently verified, and whilst Cuadrilla Resources Ltd do not expect the estimate to vary significantly, clearly they expect a lot more work and investment to be undertaken to establish how much can be recovered.

3.0 The Process of Extracting Shale Gas 3.1 Shale gas extraction is a sophisticated process. A typical test well site

is approximately 7,000 sqm in area to provide enough space for the drilling rig equipment, piping and storage, and other site facilities such as mobile portacabins for offices and worker restrooms. A test well pad of this size could typically support up to 10 wells spaced out across the site area, although for the purposes of test well extraction a single well will be drilled from each pad.

3.2 Key steps in the drilling process are as follows:-

• A drill bit is mounted on the end of a drill pipe. As the bit grinds away a mixture of water and additives called ‘mud’ is poured into the hole to cool the bit and to flush the deposits cut to the surface. The mud also coats the walls of the well providing greater resilience to the well wall. Once at the required depth past the freshwater zone (aquifers) the drill pipe and bit are removed from the bore hole.

• Surface casing is then inserted into the well hole to isolate the freshwater zone the bore has passed through, and to act as a foundation for the blow out preventer (a safety device which connects the rig to the well bore). Cement is pumped down the casing and out through the bottom of the casing, and forced up between the casing and the bore hole sealing off the well from the freshwater zone preventing contamination of the water supplies.

• The piping and drill bit is reinserted into the bore hole and drills through the plug and cement to carry on drilling down to the required depth. Hi-tech drill bits are then utilised to develop the angled curve to allow the bore hole to stretch out from beneath the main pad area out into the shale.

• Once the bore has reached the required distance, the drill pipe and bit are removed from the well. Production casing is then inserted in to the full length of the well. This process permanently secures the well bore, preventing hydrocarbons and other fluids from seeping out in to the geological formation. Testing is carried out at this stage to monitor the well and to ensure that it is safe.

3.3 A schematic of a Bowland Shale well is provided in diagram 1 below.

Diagram 1 - Bowland Shale Well Schematic

Source: Cuadrilla Resources. 3.4 The next stage in the test well process is the perforation and hydraulic

fracturing of the well to release the shale gas. This process typically starts about 3-4 weeks after drilling has been completed, and the key steps are:- .

• A perforating gun is lowered in to the well to the targeted section. An electrical current is sent to the perforation gun, and sets of the charge,

which perforates the casing and cement, as well as a short distance out into the shale formation.

• The hole is then hydraulically fractured, or fracked, by pumping a mixture of water, sand and additives (99.85% water) in to the well bore and casing under extremely high pressure. The mixture is forced out of the perforations and into the surrounding rock; the pressure causes the shale to fracture. This process widens the fractures in the rock and makes these pathways wider for the gas to flow more easily from the rock to the well. The process of perforation and fracturing can be repeated several times to cover the distance of the well.

• Once fracturing has been completed a period of up to 8 weeks is typically taken to test and monitor the well. Plugs are inserted and gas levels are monitored, both for production levels but also for health and safety reasons. Once the main period of testing has been completed the plugs can be drilled out to allow the gas to flow up the well bore. A permanent well head is then installed and the test well is closed until production commences.

3.5 Once production commences infrastructure is required to feed the gas

into the mainstream energy supply. The two main options are (i) additional pipelines to connect into the main UK gas pipeline network and (ii) on site electricity generation, which is then connected into the national grid. It may well be the case that in Lancashire a hybrid solution is put in place, which combines gas pipelines at some wells and electricity generation at others.

3.6 An ongoing maintenance resource will be required to oversee the well field once it is in full production phase. This resource will carry out routine and scheduled maintenance on wells and also respond to any emerging issues.

4.0 Economic Impact of Shale Gas Operation 4.1 According to Cuadrilla Resources Ltd a full cycle test well pad

preparation, drilling, and fracturing can take up to half a year to complete, and, in 2011 prices, can cost in the region of £10.5 million, made up of Cuadrilla’s own costs, that of its two internal service companies and expenditure on an extensive range of first tier suppliers.

4.2 Regeneris Consultants estimate that total test well activity will support

some 250 FTE jobs per annum across the UK. This is based on the assumption that three test wells will be completed per annum, and includes jobs within all tiers of the supply chain and so-called induced jobs arising from the personal expenditure of employees.

4.3 Some 15% of the jobs (circa 40 FTEs) are estimated to be taken by

Lancashire residents. These result from a number of the more localised

contracts (pad preparation, security, some haulage activities etc) and the extensive hotel and related expenditure of visiting workers.

4.4 Viewed in isolation, the test well employment impacts will be relatively short lived. However this would change under a full commercial extraction scenario developed by Regeneris, and is based on three possible scenarios, namely:-

• Central Case Scenario – assumes 40 well pads (with c400 wells) drilled over 9 years, starting from 2013. At peak activity 60 completed wells/annum are assumed, which implies the need for c10drill rigs operating in tandem

• Lower End Scenario – assumes 20 well pads (with c200 wells drilled over a period 6 years. Peak drilling is 40 completed wells/annum.

• Higher End Scenario – assumes 80 well pads drilled over a period of 16 years. Peak drilling is 60 wells/annum as per Central Case

4.5 In the Central Case Scenario the FTE employment impact peaks at 5,600 FTE jobs at the UK level, in the period 2016 through to 2019. At Lancashire level, the FTE employment impact peaks at 1,700 FTE jobs over the same period.

4.6 In the Lower End Scenario the total peak UK employment is less significant compared to the Central Case Scenario (3,400 FTEs/annum versus 5,600 FTEs). This reduction is largely due to the assumption that only 40 wells are completed per year under the Lower End Scenario. At a Lancashire level the peak employment impact also reduces (a peak average of 560 FTEs versus 1,700 FTEs under the Central Case).

4.7 The total peak UK employment impacts are higher than in the Central

Case (6,500 FTEs per annum, versus 5,600). The impacts are sustained over a longer period, with the peak maintained over a 11 year period from 2016 to 2026 inclusive. At Lancashire level the peak employment impacts is considerably higher than the Central Case (a peak average of 2,500 FTEs, versus 1,700), and the jobs are also sustained over the same period level as the UK level.

4.8 Regeneris Consultants have in their report indicated that according to their survey of Cuadrilla and its suppliers the average wage levels are around £55,000 per FTE per annum, reflecting the high skill levels required through out the drilling and hydraulic fracturing process both on site and in the supply chain.

4.9 In addition to the creation of employment opportunities, and specialist supply chains in the new industry, Cuadrilla Resources Ltd, have also estimated that it will create the ‘Aberdeen effect’ in Lancashire resulting in some £120 million in income through Business Rates over a 20 year period, and other levies for Councils, as well contributing to UK’s energy security, and lower energy bills for consumers. Total potential

tax revenues generated for public services from shale gas exploration and production could be over £5 billion to £6 billion over a 30year period.

5.0 Sefton Council’s Involvement to Date 5.1 According to the Map 2 above, the license area for shale gas

exploration and extraction by Cuadrilla Resources Ltd includes all of Southport, Ainsdale and parts of Formby. Whilst Cuadrilla have not given any indications as their plans for the Sefton area, Sefton Council as the adjacent highway authority has been consulted by Lancashire County Council on this proposal.

5.2 The first planning application by Cuadrilla Resources Ltd dated 26th

July 2010 relates to temporary change of use of field from agriculture to a site for the drilling of an exploratory borehole and testing for hydrocarbons including the construction of a drilling platform and the creation of temporary access track to include one passing place, at Becconsall Exploration Site, Land at Banks Enclosed Marsh, Bonny Barn Road, Hundred End, Banks.

5.3 Planning permission was granted by Lancashire County Council on 20th

October 2010 subject to subject to conditions relating to time limits, working programme, soils and overburden, hours of operation, highway matters, noise, floodlighting, safeguarding of watercourses and drainage, landscaping, restoration and aftercare.

5.4 As part of the consultation process Sefton Council’s Highways

Development Control raised no objection subject to conditions on temporary signage, demonstration that abnormal loads can negotiate the Plough roundabout and requesting that site traffic is controlled to avoid the AM and PM peak periods. Conditions were proposed relating to signage and lorry routing, the provision of visibility splays and sightlines and the impact of abnormal roads on the Plough roundabout within Sefton.

5.5 A second planning application Aurora Exploration (UK) Ltd dated

February 2011 relates to proposal to Drill Boreholes to Evaluate the Redevelopment Potential of the Abandoned Formby Oilfield, at Norris Farm, Downholland Moss Lane, West Lancashire. Aurora Exploration (UK) Ltd hold the PEDL 164 licence. Sefton Council was consulted on this planning application and no objections were raised.

5.6 Abandoned in 1965, the shallow Formby oilfield was one of the UK’s

first oilfields. Whilst prospective for shale gas to the north, the Bowland Shale within PEDL164 is in the oil generating window, being the source of the oil in the shallow Formby oilfield and the numerous active oil seeps in the area. Recent biostratigraphic dating in PEDL 164, has proven a minimum drilled thickness of the oil-prone Bowland

Shale of 700 ft, with the total thickness of the Bowland Shale on the licence estimated at several thousand feet.

5.7 West Lancashire District Council considered the planning application, and Sefton, as the adjacent authority through which site traffic will be directed was consulted and raised no objections. Map 3 below shows the licence areas covered by both Cuadrilla Resources Ltd, and Aurora Petroleum Ltd.

Cuadrilla Resources’ Preese HallN1 the UK’s first shale gas well targets the CarboniferousNage Bowland Shale Formation

Aurora Petroleum’s PEDL 164 (AP 100%) is located within the highly prospective Bowland Shale oil zone

6.0 Comments from Other Departments

Economy and Tourism 6.1 The focus of the Economic Impact of Shale Gas Exploration &

Production in Lancashire and the UK by Regeneris Consultants makes no reference to any economic or financial benefits that Sefton may accrue from the shale gas exploration and production.

6.2 However, given the way Sefton led the way with attracting oil and gas

exploitation to Liverpool Bay, and helped to pump £40 million a year into the regional economy, it would be safe to say that sufficient expertise, and knowledge would reside in the region to take advantage of the opportunities offer by Bowland Shale exploration. Clearly, these opportunities are more likely arise should the operation from its current exploration stage to full production.

6.3 It is proposed that should the current operation moves to full production

stage, then a more detailed analysis be undertaken as to how Sefton could benefit from the economic opportunities offered with shale gas and oil production.

Planning, Traffic & Highways

6.4 Planning considerations would include a range of issues and impacts. These would include the employment and economic benefits but also traffic and highways; impacts on local residential amenity from traffic and from the process itself and impacts on human health; visual impacts; impacts on nature conservation; loss of agricultural land. Advice from MEAS would be sought on many of these as detailed in their response below.

Merseyside Environmental Advisory Services (MEAS) 6.5 Shale gas exploration and extraction would require appropriate planning

consents from the Local Planning Authority as well as other consents from Regulatory Agencies such as the Environment Agency. It is also unclear whether Sefton Council would be the Competent Authority under the E.U. Habitats Regulations. Should that be the case it does confer additional statutory responsibility on the Council.

6.6 Whilst large scale commercial development could offer very substantial

economic and employment opportunity for Sefton there is significantly uncertainty on whether these benefits could be captured and sustained locally. The proposed technology is also not without its challenges and environmental risks. These can be broadly categorized as follows:

• Risk of contamination to groundwater resources – to access the shale bed the Sherwood aquifer would need to be penetrated by the drill well, perhaps on multiple occasions. Whilst this is a proven technology and the aquifer and groundwater resources can be sealed off, experience in the US has shown that shale gas extraction brings a significant risk of ground and surface water contamination. In particular, the potential pollution pathways can be complex and challenging to understand. Whilst largely a matter for the Environment Agency to regulate, until the evidence base is developed a precautionary approach to development would be the only responsible action.

• Requirements for water – extraction could put considerable pressure on water supplies at the local level because shale gas extraction requires high volumes of water. Whilst the source of the water could potentially be from the aquifer, detailed impact and risk assessment would be required before the Environment Agency would grant any abstraction consents.

• Direct land take – extraction could result in direct land take from, for example, land in agricultural production. Whilst this could be relatively modest, it still needs to be considered as does any land take associated with infrastructure e.g. transmission and distribution system; connection to local energy users, road infrastructure.

• Visual and amenity matters – including proximity to urban areas, potential effects on landscape / local character from construction and operational activities including traffic.

• Greenhouse gas emissions and risks – shale gas has very high global warming potential both through combustion as a fuel source and accidental release into the atmosphere.

• Impacts of Nature Conservation Designated sites – potentially through direct land take, potential effects on water resources affecting wetlands, potential disturbance to sites and adjacent non-designated functional hinterland (e.g. for bird feeding).

6.7 Large scale shale gas production could assist with energy security in

the medium term helping to balance the reduction in UK generation of natural gas and reducing gas imports from Eastern Europe and Russia. However, there are some polarised views that large scale shale gas exploration in England could hamper the transition to a UK decarbonised energy generation system for the following reasons:

• Shale gas is a non renewable, high carbon energy resource - there is little to suggest that shale gas will play a key role as a transition fuel in the move to a low carbon economy. Furthermore rapid carbon reductions require major investment in zero-carbon technologies and this could be delayed by exploitation of shale gas;

• Without a meaningful cap on emissions of global GHGs, the exploitation of shale gas is likely to increase net carbon emissions - which is counter to much of the global direction of travel to reduce carbon emissions;

• Ground stability – concerns remain regarding the effect of the fracking process on ground stability e.g. recently reported low magnitude earth tremors near Blackpool which are currently being investigated by BGS.

6.8 Merseyside EAS as technical advisors to Sefton Council would

therefore be involved in any pre-application discussions on scope of technical work, potential effects and how these can be avoided and mitigated for to ensure that economic opportunities are maximised and the environment is protected.

Coastal Erosion Management

6.9 From a flood and coastal erosion risk management perspective, there

is no expectation that there will be any implications associated with shale gas exploration and extraction.

Legal

6.10 In terms of any site visits, the Head of Legal has advised that Members

should, of course be very cautious about accepting any hospitality or gifts from the operator. Also, Members particularly those who are on the Planning Committee should be careful as to any comments that might make, so that they could not be said to have predetermined their position in relation to any subsequent application. In other words, they should be there to obtain information but not to give their views on the process and its effects. The purpose of the visit should primarily be to gain information and that it is not an opportunity to discuss the pros and cons of the operation.

Financial Implications

6.11 There are no direct financial implications as a result of this report. Any

future requests to drill for shale gas in the Sefton area would have to be considered on the basis of the economic benefits to the area etc. It is unlikely the Council itself would benefit from such exploration, other than through the issue of a licence, unless drilling were requested on Sefton owned land.

7.0 Comments 7.1 Shale Gas Exploration and Extraction is a new and complex industry.

Whilst the US has and continues to be at the forefront of this innovative and controversial approach to extracting shale gas, and as the report undertaken by Regeneris Consultants demonstrates there are significant economic benefits from the supply of additional domestic gas. However there is also a strong opposition lobby in the US challenging some of the assumptions made by the shale gas industry, and in particular the environmental cost of shale gas extraction.

7.2 The US lobby has highlighted a number of cases of contamination of ground water, well blow-outs, ground and air pollution, as well as health problems associated with gas shale extraction. In one incident shown on UK television, gas coming out of a domestic cold-water tap was set alight, thus highlighting the presence of a significant amount of methane gas in the water supply. These incidents have clearly raised strong objections to shale gas exploration and extraction within the US, and even inspired an Oscar-nominated film on the subject called ‘Gaslands’. The film focuses on communities in the US impacted by shale gas drilling, and specifically on the stimulation method known as hydraulic fracturing.

7.3 Within the UK, as more and more UK Petroleum Exploration and

Development Licences (PEDL) are issued, and planning applications made to local authorities, there is also a growing number of individuals and environmental groups against the exploitation and extraction of shale gas. The Blackpool presentation event was attended by ‘Campaign Against Climate Change’ an umbrella organisations representing such groups as ‘Ribble Estuary against Fracking’, national anti-fracking group ‘Frack Off’, ‘Climate Camp’, ‘Friends of Earth’ and the ‘Cooperative Society’.

7.4 These UK individuals and environmental groups also object to

exploitation and extraction of shale gas for similar reasons as their US counter parts, but also on the basis that this is a diversion from developing renewable sources of energy to build a low, ultimately zero carbon economy as fast as possible. Furthermore the groups claim that shale gas exploitation, and extraction has been banned or a moratorium imposed in France, New York, New Jersey, Quebec, the Swiss province of Freibourg, and most recently South Africa for these very reasons.

7.5 Whilst there are currently no shale gas test wells operating within

Sefton, it should however be noted that Sefton is included within the area licences issued to both Cuadrilla Resources, and Aurora Petroleum, and in discussions with Cuadrilla in Blackpool the possibility of potential test well sites in Sefton were not ruled out by the company.

7.6 Consultation undertaken above with various departments has raised a

number of opportunities as well as challenges should Cuadrilla Resources and/or Aurora Petroleum decide to exploit potential shale gas and oil opportunities within Sefton.