Jaishree Kalia assesses the big hopes and big risks facing the emerging shale gas industry
Every few years a new sector or niche comes along that promises huge opportunities for law firms that can tactically position themselves. Such hyped sectors often turn out to disappoint, but there is no doubt that the shale gas industry has become the latest – and hottest – touted market.
It’s not hard to see why interest has been piqued. In a little over a decade, shale gas has transformed the energy dynamics of the world’s largest economy, now constituting over 20% of US energy production. Having turned the US into an energy exporter, it is expected to exceed 40% of US energy output by 2035.
With governments eyeing significant reserves in Europe and Asia, the question is: can other countries repeat the shale revolution? Ashurst’s global energy head, Geoffrey Picton-Turbervill, comments: ‘Shale offers similar opportunities as did the North Sea oil and gas phenomenon. If shale takes off at this scale, there is huge opportunity for future energy development.’
Many think shale will become a significant force in the UK, with the British Geological Survey this year doubling estimates for shale reserves in northern England to 1,300 trillion cubic feet of gas. The government has also been increasingly vocal, talking up measures to stimulate the industry, lifting a moratorium on extracting shale gas and unveiling tax breaks to usher in investment.
Unlocking that potential will largely turn on environmental concerns, and the ability of energy companies and politicians to win over a sceptical public.
Vinson & Elkins London managing partner Alex Msimang says: ‘There are still a lot of environmental and regulatory issues to get through, as well as the public perception issues, before it gets to be the bonanza it has been in the US.’
That’s putting it mildly. Hydraulic fracturing or ‘fracking’, which involves high-pressure pumping of a cocktail of chemicals, sand and water into the ground, remains controversial in the UK and much of Europe.
There are considerable differences with the US experience that make the chance of a similarly quick revolution unlikely. In the US, mineral rights are largely held by private landowners; in the UK they rest with the Crown. Population density in the UK and Europe also means many believe that local residents will need incentives like lower energy prices to get them to back development.
‘The US got the public on side quite quickly – it’s like the value of your house increasing a thousand times overnight. It is very different to the UK where people won’t see the economic benefit immediately. The pace will be slower in the UK,’ predicts Msimang.
The stance of government and regulators is crucial. While the UK and Germany have been increasingly vocal in supporting shale, the prospects in bureaucratic France look much less bright. The unpredictable stance of the European Commission is also viewed as creating uncertainty regarding the potential emergence of region-wide standards and regulation, though Brussels is regarded by many as being broadly pro-shale.
Fears of red-tape have seen some energy groups focus investment in Poland, which holds Europe’s largest shale reserves, with CMS Cameron McKenna head of energy Penelope Warne citing strong interest from her clients in Eastern Europe.
Uncertainties aside, with a fifth of the UK’s existing power generation sources set to be decommissioned by 2020, the betting is that the shale industry is set for substantial development.
This would mean huge scope for advisers, comprising upfront development work, commercial contracts and joint ventures, planning and permitting issues, financing of new developments, infrastructure and M&A work.
Energy company Cuadrilla Resources is a leading player, alongside onshore hydrocarbon producer IGas Energy.
Major clients in the global shale market include American multinational energy corporation Chevron, Apache Corporation, Houston-based Noble Energy, Schlumberger (the largest oilfield services company), Halliburton and Baker Hughes.
Another sign that the UK industry is set for growth is the recent expansion in London by US energy adviser Bracewell & Giuliani, which has a well-established focus on the sector.
As to who will benefit, robust energy firms like Vinson, Baker Botts and Bracewell believe the US roots of the industry and better access to investors will give them a compelling position. UK advisers are, of course, looking to disprove that theory.
Paul Bowden, co-head of Freshfields Bruckhaus Deringer’s low carbon team, comments: ‘[US firms] will know the technology and the types of commercial agreements and this is very valuable, but at this stage, UK-based environmental, planning and real estate advice is needed in relation to planning and permitting infrastructure.’
UK firms to secure an early foothold include Allen & Overy and Norton Rose Fulbright, which in June won leading roles when Centrica acquired a 25% stake in Cuadrilla’s shale gas licences in North West England.
It is likely that UK firms with broad regional networks and a track record in energy, like Eversheds and Pinsent Masons, will look to profit from local networks, either directly or with international advisers.
With a steadily growing focus of major law firms on energy and natural resources, there will be a lengthy list of firms seeking to stake their claim. Big money, maybe. Easy money, not likely.