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What are the challenges facing the shale gas industry?By: Kevin Gibbs and Anthony McNamee

Shale gas industryIn 2012 the UK government established the Office of Unconventional Gas and Oil to foster the shale gas and oil industry. In the three years since then we have seen major additions to planning policy and research being carried out by Government and professional organisations. All of this has set the scene for The Infrastructure Act ("TIA") becoming law on 12 February 2015. Though TIA is now law the outcome of the 2015 General Election ("GE2015") is likely to determine the future of the industry. The period leading up to GE2015 is itself causing disruption as can be seen by the sudden moratorium in Scotland and attempted moratorium in England & Wales.

Now that TIA is enacted this article focuses on the legal structures for the delivery of community benefits advocated by the industry itself and by the legislation.

Proposed community and landowner benefits following the Infrastructure Act

Section 43 and 44 of TIA make provision for using "deep Level Land" without the consent of the owner of that land for the purpose of exploiting petroleum or deep geothermal energy.

The disapplication of normal property rights is softened by Section 45 of TIA which sets the framework, in the broadest sense, for a statutory payment scheme to be set up by Government. Payments under regulations are to be made to owners or those with interests in the land or other persons 'for the benefit of areas' in which the land is situated – i.e. communities. The Government has also reserved to itself the power to determine the level of payments or set up a formula to do the same. Before any regulations are produced we can expect to see consultation on their form though not likely before GE2015.

Community benefit strategy and the planning process

Until regulations are made it will be for developers to voluntarily propose schemes and community benefits while bearing in mind that planning applications are determined on merit and community benefits cannot be considered as a part of the planning process. The UK Onshore Operators Group (UKOOG) recognises that their 'social licence to operate is linked to ensuring that they engage with the local communities that host operations'.

UKOOG aims to:

  • Ensure open and transparent communications
  • identify and address local issues and concerns
  • see greater understanding and involvement by communities in unlocking energy potential 

Pre-application consultation is clearly key to any community benefit strategy and in the planning process to identify concerns and needs within a given community.

Before TIA came into force, UKOOG had committed to providing communities which hosted shale developments with, as a minimum:

  • At exploration stage, £100,000 in community benefits per well-site where fracking takes place
  • 1% of revenues at production will be paid out to communities
  • publish evidence each year of how they have met these commitments

Individual operators such as INEOS have also publicised their intention to support land owners and communities affected by operations including a share in 4% of production revenues for land owners whose deep level land may be required and 2% of revenue for shale gas communities living within 100 square kilometres of the wells. As the shale industry moves to production, these proposals represent substantial financial payments to communities and individuals and robust and transparent financial delivery mechanisms will be key to manage these payments.

Different types of funding structures

Unlike the waste industry which has had for many years a Landfill Tax Credit Scheme which enables operators to fund community schemes in a regulated fashion, the shale industry is likely to follow the onshore wind industry where the provision of community benefits has evolved piecemeal over a long period with different mechanisms adopted by individual operators.

Possible methods to distribute benefits:

  • Community organisations or local charities benefit from existing governance structures. To meet the Charity Commission requirements, the charity and developer need to be sufficiently independent of one another to allow the trustees to take day to day decisions in the best interests of the charity.
  • New charities could be formed and which could attract significant corporation tax savings. Whilst the trustees would be independent the developer will be able to shape the nature of the charity to represent its own values and corporate branding, benefiting brand reputation and recognition.
  • Charitable companies and the charitable incorporated organisations are options benefitting from limited liability for volunteer trustees while allowing the charity to contract with third parties in its own name.
  • Community Interest Companies (CICs) could be created. More flexible than charities in how they carry on any commercial activities, CICs have a lock on assets (like a charity) requiring profits to be reapplied for their objectives, but are permitted to provide a limited return to investors although enjoy no special tax treatment.

Whichever structures are chosen, a rigorous and transparent procedure with clear documentation will be necessary to ensure payments to individuals for an orderly transfer of deep level rights as well as expenditure to communities affected by the development.

Challenges ahead for the shale gas industry

The Scottish moratorium means that the development of the shale industry and of community benefit schemes will be pioneered in England. The result of GE2015 will confirm whether or not David Cameron's 'dash for shale' really does kick off. Whilst the main legislative and policy framework is in place and the results of the 14th licencing round will soon be known, government support for the industry will remain critical for it to develop.

As with all new legislation, there will be a period of bedding down and unintended consequences will need to be carefully considered by advisors. However, solutions exist and lessons from other industries on planning, property acquisition and community benefit schemes will assist in devising remedies to overcome legal obstacles.

About the authors

Kevin Gibbs is a Partner and Anthony McNamee is a Solicitor in the Planning and Infrastructure team at Bond Dickinson LLP.

Features March 2015

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