The chief executive of shale gas company, Cuadrilla, gave evidence last week to peers on his company’s operations, financing and plans for the future.
During an hour-long hearing before the House of Lords economic affairs select committee Francis Egan said:
- Lancashire site construction was due to start in early 2017, drilling in the spring and testing later that year
- In the four years it has taken Cuadrilla to drill one shale well in Lancashire, the US has drilled 120,000
- Low oil and gas prices benefitted exploration by reducing service costs – but Cuadrilla hoped to time production with rising prices
- Cuadrilla was likely to fund future expansion from the equity or debt markets
- UK shale gas would be competitive with imported LNG
- A 2ha shale gas site could host 40 wells
- UK shale gas sites could get fugitive emission down to 1%
DrillOrDrop has picked out the key sections of his evidence so that you can read what he said, in his words. You can also watch the hearing here
Cuadrilla’s future funding for expansion
Baroness Wheatcroft (Conservative) asked whether the government had provided a regime in which the company was confident enough to invest in shale
“Shale is quite an interesting investment proposition, quite different from, say a Hinckley Point, probably more akin to a power station. It’s an incremental investment so each shale production pad, as we call a site, is a self-contained investment, so it’s a bit like a cookie cutter approach, not like a North Sea where you’re putting in several hundred millions, or as we’ve just heard, $4bn. That’s a big gamble. if the oil price tumbles the day after that comes on everyone’s very sad. Whereas shale can be, for large companies (we’re not a large company), but it’s useful to have shale in the portfolio exactly for that reason because you can balance the $4bn investment with ten $100m investments.
“So yes, people are comfortable to invest in four wells. The next test is whether they’re comfortable to invest in a production site of 10 wells or 15 wells or 20 wells.
“We don’t get any government money. As a company, we’re private equity backed and in due course we’ll probably have to go to the equity markets or the debt markets to scale up.
“I think there’s still an appetite to invest in oil and gas, particularly gas, in the UK, but we’ll be testing that.”
(Starts on recording at about 16.43)
Low oil prices benefit Cuadrilla
Asked by Lord Layard (Labour) about the impact of low gas and oil prices, Mr Egan said:
“Perversely, as it might seem, it is rather good for our business at the moment, being an exploration company with the high-class problem of no revenue.
We are finding that the cost of services have declined dramatically so it’s costing us a lot less, or will cost hopefully a lot less once we get started to drill and test the wells than it might have done a few years ago. Another perhaps perverse, perhaps not, depending on where you sit, impact of Brexit has been that we are funded in dollars so we get more pounds for our dollar than we did three or four weeks ago. So again, that has helped from where we sit.
“Obviously as we move through into a production phase, hopefully, the opposite will come into play where we’ll be hopeful for somewhat higher prices. And I’m not even going to try and forecast what the gas will be because I’ll be wrong. But at least of late, US gas prices have been picking up and UK prices have been picking up as well. So we might hit the perfect point in the market if we’re lucky.
(Starts on recording at about 16.35)
Shale prices versus LNG
Former chancellor, Lord Darling (Labour), said:
“We’ve heard evidence that there’s some doubt about whether shale gas can ever be cheaper than imported gas given that imported gas prices are so low at the moment.”
Mr Egan replied:
“It depends on where it’s imported from. I’m sure you’ve had evidence that it’s pretty widely accepted that by 2030 we’ll be importing virtually all our gas. That’s not all going to come from one place. So, Norway’s a pretty low cost supplier of gas sitting next door to us with developed infrastructure.
“We’re probably competing in shale gas with imported LNG [liquified natural gas]. And so if you look at US gas prices at about $3 a unit, add $1 or so to liquefy, another $1 or so to transport, another $1 or so to translate it back into a gas, you’re talking about $6 landed in the UK, ish. Which is what we have to compete with. And we’re comfortable we can compete at that level.”
(Starts on recording at about 16.48.46)
Does the energy market work for shale gas?
Mr Egan was asked by crossbencher Lord Burns for his general comments on whether market works for Cuadrilla and whether it was delivering the government’s objectives, Mr Egan said:
“For us, it is partially working, I would say. We have well-documented interests in exploring for shale gas. Irrespective of how we generate our electricity, there will be a requirement for gas in the UK, and I think everyone accepts that, all forecasters accept that.
“But for us it has been remarkably difficult to get to the point where we can drill some exploration wells.
“To put that in context, we started our application process in mid 2013, we submitted an application in ’14, it was heard in ’15, we got an appeal ’16, and we might drill a well in ’17. So that’s four years. We’re still subject to planning conditions, touch wood. So that’s four years to get to the point when you can drill a well.
“In the US they are drilling 30,000 a year. So in the time it takes us to drill one well, they will have drilled 120,000. That might give you a pointer as to why gas prices are $2 a unit in the US and they are $5 a unit in the UK. There’s no natural reason why that has to be the case.
“So I think the government has good intentions. We’re grateful for their support but frankly our investors are patient but taking four years to drill a well is beyond most people’s patience.
“More generally … security of supply and the desire to decarbonise, they’re not the same thing. You can get a secure supply without being low carbon and it’s quite easy to get a low carbon without it being secure, we’ve seen that already. Getting the two together is quite difficult. And ultimately – and this is my personal view – somebody has to say something is more important than something else because they are never all equal. And somebody has to make that call.
“If you want low carbon to be the most important, you probably have to put up with some [in]security and you have to put up with higher prices.”
(Starts on recording at about 16.20)
Plans to drill Lancashire wells in 2017
Lord Livermore (Labour) asked Mr Egan when he expected exploratory drilling for shale gas would take place and whether government policy was now clear enough to encourage development of the industry.
“We’ll be the first to drill wells. We now have approval to drill four wells in Lancashire. We’re going through the planning conditions with the county council. We’d expect to have discharged those by the end of the year, start site construction probably the beginning of next year, drill the wells second quarter of next year and be testing them by the end of next year. That’s for the initial four.
“These will be the first exploration wells drilled in the UK shale, certainly not into shale or in the UK, obviously, but the first into UK shale, horizontal wells, tested, so they will be very closely watched.
“We’re obviously very technically excited about this but I’ve been long enough in the oil industry to know that the proof of the pudding is in the eating, so we have to drill them, test them, flow them.
“The government’s policy has been very supportive. I think the issue that we’ve found, as I’ve alluded to earlier, is translating that through the Town and County Planning Act has been a fantastic experience that I wouldn’t recommend for anything.
(Starts on recording at about 16.39)
Lord Darling asked how long after preliminary drilling would Cuadrilla decide whether to go ahead with production. Mr Egan said:
“Typically shale wells decline over an 18-month period from initial flow-rate before they stabilise at the lower rate which can carry for 20 years or more. So a 12-18 month window would not be uncommon. But that said, these being the very first wells drilled and tested in the UK shale I’m sure we’ll some surprises along the way that will either accelerate or decelerate that but that’s the ballpark.
(Starts on recording at about 16.48)
Progress of the UK shale gas industry
Lord Darling said he was aware of four shale gas sites in the UK and asked Mr Egan about how far the country’s shale gas industry has progressed. Mr Egan said:
“IGas is looking at a site, I don’t know where the other two are. I know INEOS are looking at numbers. There are no production sites in the UK, if that’s what you mean.
“I don’t think anyone else has got an application in to drill a horizontal well but there is an application in Yorkshire to fracture a vertical well, which is subject to an appeal and there’s an application in Nottinghamshire to drill a vertical well, not even fracture. So I would say we are about a year-and-a-half, two years, ahead of everyone else.”
(Starts on recording at about 16.52)
Footprint of shale pads
Asked by crossbencher Lord Turnbull about the surface area that you have to take to drill a well, Mr Egan replied:
“A well is very modest. You could drill a well in that area there. A typical site, so our sites in Lancashire where we’re drilling four wells, is 2ha, which is the size of two football pitches. But on 2ha you could fairly easily fit 40 wells on it. The surface area is probably the most modest of any energy development.
“The issue tends to be typical planning issues around traffic and noise. The land take for shale is an order of magnitude lower than wind or solar or nuclear or anything per unit of energy produced, because it’s all happening beneath the ground, 8,000ft beneath the ground. So the surface land impact is quite small.”
Climate change and emissions
Baroness Wheatcroft asked Mr Egan how he squared the production of shale gas with UK emissions targets. He replied:
“Well the climate change committee squared that and the government squared it.
“But in terms of how I square it is that we’re going to need gas and that’s going to have to fit into emissions targets or we’re going to have shut off the heating and the cooking in the country, and that’s not going to happen. So really, what we have to demonstrate is that we can produce gas at lower emissions that we can import it.
“You’ve got to remember that emissions for us is revenue. So we’re burning dollars or pounds so in terms of emissions, people say we have to be heavily regulated. We don’t have to be heavily regulated, that’s our profit. It’s like Tesco’s throwing away its food. So with best practice you can get down to less than 1% and there’s no reason in the UK why we can’t get down to less than 1% emissions.”
(Starts on recording at about 16.41)
Displacing imported gas
Lord Darling asked for Mr Egan’s reaction to evidence to the committee that shale gas was only ok if it displaced an equal amount of imported gas. Mr Egan said:
“It’s like the Archimedes principle of shale gas. It’s an interesting accounting balance because you end up with a perverse situation where it’s actually better for the climate to develop your own gas. But on your books it’s worse because you don’t count the emissions of the production of the imported gas. The climate is not British. If you take a sensible view of the world, then if it’s lower emissions to develop it here than it is to import it from the US, you should be developing it here.
“The situation you find yourself in, for example, in Scotland, where we’re importing shale gas from the US and have a moratorium on exploring for it, never mind producing it, in a country that has led Europe for oil and gas development for 25 years is beyond belief.”
(Starts on recording about about 16.49.50)
Carbon capture and storage
Lord Darling asked whether cost was deterring development of CCS. Mr Egan said:
“Personally, I think, yes., The economics of it aren’t proven. But you’ve seen last week, some of the very large oil companies, BP, Statoil are there, Total, are putting some serious money into it again. The technology is there. Personally, I am quite optimistic about it. I think the technology is there but people haven’t been able to make it economic.”
(Starts on recording at about 16.51)
Future energy consumption
Baroness Wheatcroft asked him to forecast expected energy use in the UK
“Most people say gas will come down not least because we are looking to increase renewables in the electricity sector and that’s probably the case. Equally the population is going up and I don’t know whether energy usage per head is going down that much. So I would expect there will be a marginal decrease from our point of view for gas usage but I can’t see it falling off a cliff any time soon.”
(Starts on recording at about 16.45)
And why Statoil turned its back on UK
Another witness to the committee, Tor Martin Anfinnsen, Senior Vice President, Marketing & Trading, Statoil, said his company had interests in shale but only in the US. He explained why:
“We had a look at the UK sometime back as part of a global survey with Chesapeake, of the US, but we decided against going into the UK.
“We believed we were operating in a more prolific basin in US than what the UK could offer. But I think it was primarily it was what we call the above ground risk, not so much government policy but it’s a fairly densely populated country this and there have been obstacles, if you will, to our activities in the Marcellus field in the US as well and we thought they may be even tougher to overcome here.”
Asked by Lord Livermore if he expected a situation where he would reconsider that decision, Tor Martin Anfinnsen said:
“You can never say never but I don’t expect that. For us, it’s much more cost efficient, at least based on our own calculations, to develop offshore fields, our offshore Norway assets, and bring that gas into the UK by pipeline.”
(Starts on recording at about 16.40)