Shale Gas & Fracking Toolkit. Property Rights Part 6

Shale Gas & Fracking Toolkit Property Rights Part 6

A changing landscape for property rights The very nature of the shale gas identification and extraction process means that property rights feature highly on both the political and business agendas. If we do nothing to address this issue, the commercial exploitation of shale gas and oil is unlikely to develop to a significant scale, in a timely manner, or at all. DECC Consultation on Proposals for Underground Access for the Extraction of Gas, Oil or Geothermal Energy, May 2014 Land Registry receives 73,000 applications claiming historical land rights... The Duchy of Lancaster and the Duchy of Cornwall have been among those to assert their historic manorial mineral ownership. Daily Telegraph, 15 January 2014 Ministers have admitted they are looking at overhauling trespass laws to make it easier for energy companies to explore shale gas amid concerns that efforts could otherwise be stymied by lengthy and costly court proceedings. The Telegraph, 15 August 2013 The Church of England has defended its decision to assert ownership of ancient mineral rights beneath up to 500,000 acres of land throughout the UK paving the way for commercial exploitation as speculation grows that it might embrace fracking. Investments Europe, 19 August 2013 1 www.pinsentmasons.com/shale 6540

Pinsent Masons Shale Gas & Fracking Toolkit Part 6 Securing Property Rights A crucial but challenging part of the fracking process and the successful exploitation of shale gas reserves is to secure those property rights needed at each phase of development. Without these, potential sites cannot be explored, appraised or developed. Fundamental to understanding the risks is an appreciation that not all ownership of surface land comes with an automatic right to exploit/own the minerals and subsurface strata. In certain instances ownership of the surface land and the subsurface minerals may have been separated. Owners of these property rights are increasingly recognising their value in the context of shale gas development. Many, including the Church of England and the Duchies of Lancaster and Cornwall have sought to register property rights (subsurface minerals rights) they may not have previously asserted to protect their position and rights and to comply with new Land Registry rules. Also arguably to participate in any potential negotiations with shale gas developers on access. Others opposed to shale gas and fracking development for environmental or other reasons are encouraging the strategic acquisition of land (surface and/or subsurface) to create fracking no go areas. The piecemeal nature of the regulatory requirements currently governing the shale gas industry in the UK means that property rights must be obtained independently of other licences and permissions. There is no automatic grant of all of the necessary property rights required to implement Petroleum Exploration and Development Licences (PEDLs). Scope of Property Rights Required The exact scope of the property rights required will vary in each case according to the nature of the scheme in question and also according to the relevant stage of the shale gas extraction process. By their very nature, shale gas extraction processes will involve works both above and below the surface and both vertical and horizontal drilling. Property rights must therefore extend to the subsurface where works may well be substantial and extend both vertically and horizontally across varying distances. As noted above, it is common for subsurface land to be in separate ownership to surface land. Furthermore, horizontal works and operations may also affect a number of landowners. Frequently, it is the case that rights over mines and minerals below the surface have been retained by the original or previous owners of the surface land. The duration and extent of property rights required may also vary. Initial exploratory and appraisal investigations are necessarily less intrusive than works associated with the full scale development and production phase. As a result, short term licensing may suffice for some activities whilst others may require the security of more permanent rights such as long term leases or a complete transfer of land ownership to those involved in the extraction of shale gas. Pending the outcome of initial exploratory and appraisal works and where the long term future of a site has not yet been ascertained, it might be appropriate for those looking to exploit the site to consider option agreements over land which will give them the first call on the relevant land and subsurface property rights in the event they require these. 2

Property Rights Phases of Development Exploratory Stage Surface access and rights over land to enable analysis of seismic data and the siting of exploration wells and monitoring equipment Subsurface access (both vertical and horizontal depending on the wells in question) to enable drilling of exploration wells and carrying out of exploratory hydraulic fracturing. Property rights are more likely to be short term and less permanent such as licences option/exlusivity agreements or agreements for lease. Appraisal Stage Surface access and rights over land to put in place more significant infrastructure including drilling platforms for longer term testing and additional drilling, further wells and hydraulic fracturing Subsurface access (again both vertical and horizontal depending on the wells in question) for further wells and any additional infrastructure below ground. Property rights are more likely to be medium to short term and semi-permanent such as longer term licences option/exlusivity agreements or agreements for lease. Development and Production Stage Surface access and rights over land for more permanent infrastructure to facilitate the full scale exploitation of shale gas including production wells, production facilities, power generating and processing facilities Subsurface access (again both vertical and horizontal depending on the wells in question) for further and more permanent production wells and any additional infrastructure below ground. Property rights are more likely to be longer term and more permanent such as long term leases or achieved as a result of land purchase. General Surface and subsurface access and rights over land for any construction laydown areas, storage facilities, production and office facilities, necessary gas, water and other pipelines, cabling, parking and private transport routes etc. Property rights will depend on the relevant stage of the shale gas extraction process. Specialist wayleaves may be used for cabling and pipelines. 3 6540

Pinsent Masons Shale Gas & Fracking Toolkit Part 6 How to obtain property rights required? At present, such rights can be obtained in one of two ways: 1. Negotiation PEDLs do not grant ancillary rights over land. At present, the vast majority of property rights are obtained through negotiation with land owners. However, in some instances it is not possible to reach a negotiated settlement. This may be because: the relevant owner cannot be identified e.g. because the title to the land in question is unregistered or because the rights over the mines and minerals below the surface have been retained by the original or previous owners of the surface land when this was sold and they have not been registered in their own right commercial terms can not be agreed with the landowner in return for the grant of requested property rights. 2. Compulsory Acquisition under the Petroleum Act 1998 and the National Interest In such circumstances, developers in possession of a PEDL have the option of applying for compulsory acquisition rights under the Petroleum Act 1998 which incorporates and gives effect to the Mines (Working Facilities and Support) Act 1966. These rights include rights of access on land and to sink boreholes to exploit shale gas supplies (as a hydrocarbon), to build associated infrastructure and to use water supplies in connection with such works. To succeed in obtaining these compulsory acquisition rights, a developer will need to demonstrate (firstly to the Secretary of State and subsequently the High Court/Court of Session) that the grant of such rights is in the national interest and that negotiations with landowners have not been successful or that negotiations have not been possible. The Price of Property Rights Negotiated Rights Payments will depend on what is agreed by the parties involved. Compulsory Acquired Rights Compensation If rights are granted, costs and compensation are payable by the developer. It is considered that compensation will be assessed in line with established compulsory purchase principles. The regime is largely untested and unused. This is most likely because independently negotiated settlements are much quicker and have to date proved effective. In light of the recent moves to create no-go areas and the actions of the various anti-fracking campaigns this may be in the process of changing (subject to any reforms introduced as noted below). A Changing Landscape? If provisions set out in the Infrastructure Bill are given statutory effect and legislation is enacted (which DECC recommend in its response to its recent consultation, 25 September 2014) an underground right of access would be introduced. It would apply to drilling activities at or below 300m in England and Wales, and therefore much of the extensive horizontal drilling activities that are associated with shale gas activities and development. Experts have stated and DECC agrees that horizontal drilling activities would result in little impact on landowners. The provisions prescribed in the Infrastructure Bill do not apply to Scotland. The price of such access to drill would be a voluntary community payment of 20,000 per lateral well and there would be no payments to individual land owners. There would also be a clear notification system that would alert local communities to drilling activities. The existing regime for access would continue to apply above 300m. These proposals allow Shale Gas exploration to go ahead while protecting residents through robust regulation that is in place. DECC Consultation, September 2014. Nationally Significant Infrastructure Project (NSIP) Route If shale gas and fracking developments are brought within the scope of the Planning Act 2008 and defined as NSIPs then developers could potentially obtain rights as part and parcel of their application for a Development Consent Order (DCO) in England and Wales. However, the Government confirmed in July 2013 that such developments would not be treated as NSIPs at this time. 4

Avoid the pitfalls To proceed with shale gas development in the absence of all the required property rights puts shale gas developments at risk of trespass claims. Bocardo SA v Star Energy (2010) Supreme Court (England and Wales) Oil companies were held to have committed a trespass by boring pipelines at depth below the land of a private landowner in order to recover petroleum which they had a licence to extract as they did not have the landowner s owner agreement before doing so. Reasons The landowner s title extended down to the strata below the surface including the minerals that were to be found there and as a consequence the landowner was entitled to possession of the subsurface strata through which the pipelines passed. The licence granted to the oil companies to extract petroleum pursuant to statute conferred no express or implied rights to bore pipelines through the land of another within the licensed area in the absence of agreement or the grant of an ancillary statutory right. Penalty A payment based on ordinary compulsory purchase principles which would have been 82.50 had the oil companies not been prepared to pay 1,000 in negotiations. A payment of 1,000 was ordered. Warning Notes The Court was heavily influenced by the fact that there was no interference in any practical sense with the land through which the pipeline passed. Trespass cases in intervening years (not on drilling cases specifically but more generally) have led to the grant of injunctions halting or preventing activity and/or substantial damages claims where interference was significant/where developers behaviour was deemed unacceptable. This case proceeded to the Supreme Court which incurred significant time, cost and uncertainty for the parties involved. Notwithstanding the ultimate outcome. The owner of the subsurface is entitled to say that his land is being interfered with when it is bored into by someone else. His right to object is inherent in his right of ownership of the land. It is nothing to the point that he is not making any use of it. The fact that an underground wayleave is included in the ancillary rights referred to in section 3(2)(b) of the 1923 Act reinforces the conclusion that is to be drawn from the provisions of the 1934 Act that a licensee who does not already enjoy a right to enter upon someone else s land needs to acquire an ancillary right from the owner of that land if he wishes to do this. Bocardo SA v Star Energy (2010) That the present context is one of compulsory acquisition of rights over land seems to me indisputable It would seem to me most odd had Parliament in 1934 expropriated with no compensation whatever the property in all subterranean petroleum together with the exclusive right to search, bore for and win it, and yet at the same time intended that the landowner, beneath whose land the Crown s licence holder must necessarily bore to achieve the statutory purpose of maximising petroleum recovery in the national interest, should thereby become entitled to a fair share of the spoils as the appellants contend. And to my mind such a supposition becomes more bizarre still when one recognises that Parliament expressly stipulated for not less than a 10% uplift in the statutory compensation payable on account of the landowner being powerless to deny the licence-holder the ancillary right he requires. Why would Parliament both allow him to exploit his bargaining position for all the world as if the parties negotiation was taking place in a routine commercial context beyond the reach of legislation and then add upwards of 10% simply because he cannot at the end of the day refuse to grant the ancillary right required and is unable to charge for it more than is fair and reasonable? Bocardo SA v Star Energy (2010) 5 6540

Pinsent Masons Shale Gas & Fracking Toolkit Part 6 Strategic and Tactical Considerations Establish all relevant landowners at the outset (including surface and subsurface owners) to ensure any negotiated settlement is comprehensive and parties are less able to create a ransom situation. Ideally complete settlements simultaneously. Give early consideration to the property rights required and the duration and extent of such rights to ensure that what is being agreed is not more significant than required. Consider options to reserve or exercise more substantial property rights pending the results of exploratory and appraisal works. Consider obtaining title and/or insurance to cover off risks of trespass to land whose ownership cannot be established. Consider the strategic acquisition of land through alternative corporate entities. To support any claim for compulsory rights collate evidence of all attempts to negotiate an appropriate settlement with landowners. 6

Property The Shale Gas Extraction Process, from identification of a potential development area to the full commercial exploitation of that area, contains many stages and can last over 30 years. At each stage Developers must meet a number of regulatory requirements that are set out in the time line below. Refer to table on page 3 of this Toolkit for details of relevant property rights that may be required at each phase of development. SEISMICITY: this issue has the potential to be a stumbling block to proposed or commenced operations and is something to which Developers must give considerable thought. Developers must assess the risk of activating faults in the proposed licence area and also monitor background seismicity before fracking operations commence. Real time seismic monitoring will also be necessary during operations and operations will need to be paused or halted where seismicity passes a certain level Identification Developer identifies suitable areas for shale gas exploration. Exploration Once PEDL secured, Developer identifies locations within licence area with highest potential for shale gas and exploratory drilling undertaken. Appraisal Drilling of wells to assess commercial viability of gas production. Gas produced at this stage can be used for small-scale commercial electricity generation. Initial Development First production wells constructed as well as necessary infrastructure to facilitate the sale of shale gas. Early sales revenue generated and project tailored to maximise production. Full Development & Production Drilling of production wells across licence area and construction of commercial production facilities and infrastructure for large volumes of shale gas. Abandonment Well plugged and surrounding area restored in accordance with prescribed standards. 1 3 Years 1 3 Years 1 2 Years 2 3 Years Over 20 Years None. PEDL to search for, and extract shale gas. (PEDL mirrors stages therefore PEDL extensions will be necessary) Property Rights negotiate with Landowners to purchase or secure rights (license option/exclusivity agreement or agreement for lease) over land to facilitate the process. PP from MPA (LPA in Scotland) for drilling EXPLORATORY wells, change of use in land and any associated works EIA depending upon nature, size and location of development proposals and consultation strategy to be adopted. PP from MPA for drilling of APPRAISAL wells and any associated works and upgrades (e.g. drilling platforms) EIA depending upon nature, size and location of development proposals and consultation strategy to be adopted Section 106 planning obligations linked to pp and PPAs if appropriate (Section 75 agreements in Scotland). PP from MPA for drilling of initial PRODUCTION wells as any associated works and site upgrades EIA Possible Section 106 planning obligations linked to PP PPAs if appropriate. PP from MPA for large scale commercial drilling of PRODUCTION wells and any associated works or site upgrades (i.e. construction of large scale production infrastructure) EIA Possible Section 106 planning obligations linked to PP PPAs if appropriate. PP from MPA (if further consent required for changes to the development strategy from that consented in PP for stage 5) Possible EIA connected to PP depending on the changes that have been made. Acronyms PEDL Petroleum Exploration & Development Licence CA Coal Authority DECC Department for Environment & Climate Change EA Environment Agency EIA Environment Impact Assessment EP Environmental Permit HSE Health & Safety Executive LPA Local Panning Authority MPA Minerals Planning Authority SEPA Scottish Environment Protection Agency NRW Natural Resources Wales PEDL Petroleum Exploration & Development Licence PP Planning Permission PPA Planning performance Agreement WAL Water Abstraction Licence EPs dealing with environmental risks WAL needed where water for fracking operations sourced from groundwater/surface water CA CONSENT to drill through coal seems where necessary Well Examination Scheme implemented to confirm Well designed and constructed in accordance with industry Notify EA of intention to drill (or SEPA/NRW) Notify HSE of well design and operations 21 days prior to drilling HSE Consent where significant alteration of well needed Fracking Plan to address the risk of seismicity submitted to DECC Fracking consent from DECC (or Scottish Ministers). PEDL Extension Once PP granted the Developer must repeat the process of notifying the EA and HSE of drilling before being the green light by DECC Additionally HSE Consent would be necessary where the Developer wished to significantly alter existing wells. PEDL Extension for full commercial exploitation Again, once PP granted the Developer must repeat the process of notifying the EA and HSE prior to drilling before DECC give the ultimate green light to commence operations. Again, once PP granted the Developer must repeat the process of notifying the EA and HSE prior to drilling before being the green light by DECC. Rehabilitation of area in accordance with PP conditions Well Abandonment in accordance with HSE standards Aftercare of the site in accordance with PP conditions. 7 6540

Pinsent Masons Shale Gas & Fracking Toolkit Part 6 Contacts Bob Ruddiman Sector Head Energy & Natural Resources T: +44 (0)1224 377 925 M: +44 (0)7767 316970 E: bob.ruddiman@pinsentmasons.com Paul Rice Partner Head of Client Relationships Energy & Natural Resources T: +44 (0)20 7490 6282 M: +44 (0)7798 617709 E: paul.rice@pinsentmasons.com Melissa Thompson Legal Director Property Dispute Resolution T: +44 (0)20 7490 9675 M: +44 (0)7771 345814 E: melissa.thompson@pinsentmasons.com Neil Whitaker Legal Director Property T: +44 (0)113 294 5214 M: +44 (0)7885 514093 E: neil.whitaker@pinsentmasons.com Kevin Boa Partner Property T: +44 (0)20 7490 6529 M: +44 (0)7989 575025 E: kevin.boa@pinsentmasons.com Alicia Foo Partner Property Dispute Resolution T: +44 (0)121 260 4024 M: +44 (0)7747 791215 E: alicia.foo@pinsentmasons.com 8

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