Unconventional oil and gas: Economic Impact Assessment and scenario development of unconventional oil and gas in Scotland

2 Introduction

2.1 Context and scope

The development of UOG has become increasingly prominent in a number of countries in the last decade. This has resulted in more focus being placed on the potential to exploit unconventional energy sources around the world.

In the UK, several companies are seeking permission to use hydraulic fracturing as an approach to recovery of resources. A large share of Scotland's UOG resource is thought to be located in the Midland Valley. Currently Scotland has a moratorium in place on granting of planning consents for the development of all UOG extraction. The moratorium is in place while the Scottish Government undertakes research and public consultation to increase understanding of the impacts for UOG development. The research will feed into a public consultation by the Scottish Government.

The Scottish Government commissioned, on behalf of the Scottish Ministers, a set of studies covering:

• Understanding and monitoring induced seismic activity;
• Decommissioning, site restoration and aftercare - Obligations and treatment of financial liabilities;
• Understanding and mitigating community level impacts of transport;
• Economic impacts and scenario development;
• Climate change impacts; and
• Separately a Public Health Impact Assessment ( PHIA) of UOG development are also being undertaken.

The objective of this study is to perform an economic impact assessment of the potential development of UOG in Scotland. Our research has demonstrated that there is considerable uncertainty around the potential for development of UOG in Scotland, in particular the productivity and size of the available resources (the complex geology of the Midland Valley and the unproven nature of any UOG resources in the area mean there is considerable uncertainty as to the viability of the industry) that could be economically extracted, the associated costs of development, availability of specialist teams to develop UOG and trends in the UK and international gas markets. As a result, the economic impact assessment presented in this Report is based on a number of scenarios for UOG industry development ^[16] .

The scope of work that this Report covers is:

• Identification of the potential aggregate impact of UOG development under a range of scenarios on the Scottish economy;
• Consideration of the specific impacts of the development of UOG in Scotland and in particular identify the key sectors and groups likely to be affected; and
• Consideration of the potential nature and extent of any community benefit payments.

For the purposes of this study, UOG activities focus on shale gas associated liquids development using hydraulic fracturing and coal bed methane ( CBM) developments. KPMG understands that Underground Coal Gasification is subject to a separate review process and is therefore not within the scope of this study.

2.2 What is UOG?

2.2.1 UOG defined

The term 'unconventional' in UOG refers to the types of geology in which the oil and natural gas are found. For the purpose of this study, UOG includes shale gas, associated liquids and coal bed methane.

Shale gas is natural gas coming from unconventional sources, i.e. it is found within organic-rich shale beds, which are layers of low permeability rock rather than a conventional 'reservoir' capped by shale or other beds (White, Fell, & Smith, 2016). Similarly, shale oil is oil obtained from bituminous shale, while coal bed methane is a form of natural gas extracted from coal seams.

2.2.2 What are NGLs?

Natural gas can be characterised as dry gas or wet gas. Dry gas is natural gas composed mainly of methane with only minor amounts of ethane, propane and butane and little or no heavier hydrocarbons in the gasoline range. In contrast, wet gas is natural gas containing significant amounts of liquifiable hydrocarbons.

Natural gas liquids ( NGLs) are the portions of gas from a reservoir that are liquified at the surface in separators, field facilities, or gas processing plants (Oil and Gas UK, n.d. ^[17] ). A number of different gases are considered as NGLs and have a number of different uses. Ethane, propane, butane, isobutane, and pentane are all NGLs. Table 2.1 shows NGLs attributes, their various applications and end use products.

Table 2.1 NGL attribute summary.

Natural Gas Liquid	Applications	End use products	Primary sectors
Ethane	Ethylene for plastics production; petrochemical feedstock	Plastic bags; plastics; anti-freeze; detergent	Industrial
Propane	Residential and commercial heating; cooking fuel; petrochemical feedstock	Home heating; small stoves and barbeques; LPG	Industrial, residential, Commercial
Butane	Petrochemical feedstock; blending with propane or gasoline	Synthetic rubber for tyres; LPG; lighter fuel	Industrial, transportation
Isobutane	Refinery feedstock; petrochemical feedstock	Alkylate for gasoline; aerosols; refrigerant	Industrial
Pentane	Natural gasoline; blowing agent for polystyrene foam	Gasoline; polystyrene; solvent	Transportation
Pentane Plus	Blending with vehicle fuel; exported for bitumen production in oil sands	Gasoline; ethanol blends; oilsands production	Transportation

Source: U.S. Energy Information Administration (2012)

NGLs are used as feedstock for petrochemical plants, used for space heat and cooking, blended into vehicle fuel, etc.

Research by the British Geological Survey indicates there are both shale oil and shale gas resources in carboniferous rocks in the Midland Valley of Scotland (British Geological Survey, 2014). Table 2.2 below shows BGS's most recent assessment.

Figure 2.1 overleaf shows how UOG differs from conventional oil and gas in terms of geology and approach to development. Section 2.2.3 provides a high-level explanation of how UOG is extracted.

2.2.3 How is UOG extracted?

The development of UOG involves four phases:

• Exploration;
• Well development (including hydraulic fracturing);
• Production; and
• Site decommissioning and post production management.

In order to exploit UOG, it is necessary for an operator to obtain a licence for exploratory drilling and production. The exploration stage involves the search for rock formations ( i.e. shale beds) associated with oil or natural gas deposits. This involves geophysical analysis and/or exploratory drilling to identify whether or not there is oil or gas present. A borehole is drilled into the shale surface at a specific site. A well is drilled vertically to the depth of the resource after which the well bore curves to become horizontal - termed a lateral. A collection of wells at a single site with a shared surface infrastructure is known as a pad. Pads vary in size, depending on the number of wells they have.

Table 2.2 Estimates of the potential total in-place shale oil and shale gas resource in the Carboniferous Midland Valley of Scotland study area.

	Total potential shale gas estimates (tcf)			Total potential shale gas estimates (tcm)
	Low	Central	High	Low	Central	High
Shale gas	49.4	80.3	134.6	1.40	2.27	3.81
	Total shale oil estimates (billion Bbl)			Total shale oil estimates (million tonnes)
Shale oil	3.2	6.0	11.2	421	793	1,497

Source: British Geological Survey (2014).

Figure 2.1 Conventional vs unconventional deposits

It is usually necessary to undertake hydraulic fracturing to access any oil or gas held within the shale. Water containing sand/proppant, is pumped at high pressure into the rock. This process creates fractures in the shale rock which contains the oil and natural gas (White, Fell, & Smith, 2016). The sand is left in the fractures in the rock in order to keep them open when the pump pressure is relieved. This allows previously trapped oil or natural gas to flow to the well bore more easily. Chemicals are also added to improve the efficiency of the hydraulic fracturing operation.

The Independent Expert Scientific Expert Panel report on UOG (2014) state that: "While a simple fracturing process to increase permeability was carried out on vertical boreholes during early exploration of CBM in Airth in the mid-1990s [...], none of the coals appraised for commercial-scale CBM in Scotland to date should require hydraulic fracturing of the horizontal borehole. This is due to their distinctive physical properties compared to those found in other continents".

Well development occurs after exploration has located an economically recoverable resource. Whilst UOG can be recovered using single lateral wells, it is also possible to drill several laterals from one point on the surface pad and reach difficult to access areas. Multi-lateral wells are increasingly used in the US but it is unclear at present whether this approach would be successful in Scotland due to complex geology and thinner shales ( BGS, 2014).

Once the site has been developed the production of oil or gas can proceed.

When all of the oil or natural gas that can be recovered technically and economically from a reservoir has been produced, the site can be decommissioned and restored typical decommissioning procedures include wells are blocked with cement plugs and the casing cut off 1 metre to 2 metres below ground level and the well is buried. All surface equipment is removed and the well pad is removed. The site can then be restored to its original use ( e.g. pasture) or restored for other beneficial use ( e.g. recreational use or as a wildlife habitat).

Figure 2.2 European shale gas resources.

Source: U.S. Energy Information Administration, (2015)

Note: Recoverable reserves are the proportion of gas in a reservoir that can be removed using currently available techniques (Oil and Gas UK, n.d.).

2.3 International development of UOG

2.3.1 Resource development in Europe

The consideration of UOG exploration in the UK and specifically Scotland is in the context of the development of these resources in other countries. The greatest beneficiary of UOG development to date has been the US. Within the EU, other countries are seeking to develop UOG resources further.

Published estimates show there may be opportunities to develop UOG further in countries such as Poland, France, Romania, Russia and the Ukraine. In comparison, countries such as Sweden have not shown interest to proceed while Northern Ireland has a moratorium on the development of shale gas. France has a continued ban on hydraulic fracturing since 2012 (shale gas europe, n.d.). Figure 2.2 shows the unproved technically recoverable resources of shale gas in some European countries. In the UK, Scotland is especially well positioned given its central part in the development and extraction of North Sea gas, and may have a skilled workforce available. The UK Government has shown some appetite to develop a UOG industry and this has also been demonstrated in North Yorkshire where county councillors approved the UK's first hydraulic fracturing exploration tests ^[18] in five years (Bounds & Stacey, 2016).

2.3.2 Resource development globally

The US has been the first country to significantly exploit UOG, specifically shale gas, which started with the drilling on Barnett shale in Texas in the late 1990s. Between 2000 and 2012 the US 'shale boom' saw annual production of shale gas rise from 0.3 tcf to 9.6 tcf making up 40% of US dry natural resource production (Independent Expert Scientific Panel, 2014). Production expanded during this period to other shale plays such as the Marcellus shale. The development of UOG in the US resulted in a decrease in its share of imports of natural gas, a drop in the domestic price of energy and the US surpassed Russia to become the world's largest natural gas producer in 2015 (International Energy Agency, 2015). Due to increasing gas production in the US and higher prices in outside markets the Energy Information Administration expects the US to become a net exporter of gas in H2 2016 (U.S. Energy Information Administration, 2016). In February 2016 the US exported its first liquefied natural gas ( LNG) cargo (Reuters, 2016). The development of the UOG industry in the US has benefited from significant government funding of research and development in the early stages of the industry's development (Resources for the Future, 2013).

Similarly, Australia has also seen a rapid growth in the development of UOG, through the extraction of coal bed methane. Exploration has been ongoing since the late 1970s but since 2007 there has been rapid growth in the production of CBM and activities are expected to continue for at least several decades (Australian Government, 2015). The commercial production of CBM in Australia has seen many positive economic impacts in relation to employment numbers and gross value added in nearby regions.

2.4 UOG in Scotland

Scotland currently has a moratorium on planning consents for UOG development in place. Two companies currently hold licences for exploratory drilling, INEOS and IGas. However no drilling has taken place due to the moratorium. INEOS acquired Petroleum Exploration and Development License ( PEDL) 162 in 2014 which area covers 400km ² in the Midland Valley of Scotland next to PEDL 133 in which INEOS owns a 51% stake of the shale layer (INEOS, 2014). IGas owns PEDL 158 and 163 which are blocks in West Fife and Caithness acquired in December 2013 (IGas, n.d.).

Research conducted by the BGS suggests there could be a potential resource of between 49,400 bcf and 134,600 bcf of shale gas in Scotland (British Geological Survey, 2014). This could be enough for Scotland to reduce the country's reliance on imports for a number of years. However, there remain uncertainties around how much of this is actually technically and economically recoverable in the current economic and energy market climate of low prices.

2.5 The structure of this Report

The remainder of this document is divided into three further sections:

• Section 3 of this Report outlines our approach to the study and our methodology for the economic impact assessment;
• Section 4 describes the production scenarios considered in this study;
• Section 5 presents our findings on the economic contributions to Scotland; and
• The appendices to this Report produce supporting details for our assessment.