20130718-e76fd63d1c015bd8fe58f391a7083305caa5cd824ccf93f9273017d-200The US model of individual land owners generally possessing mineral rights has certainly been a major contributor to the rapid development of US oil and gas. But is it correct to assume the lack of them works the other way and will slow down development in Europe? Many people think so, as this report by Marcellus Drilling News for Natural Gas Now from the Platt’s Global Energy Outlook in New York last week shows:

The other panelists spoke about Europe and addressed the question of whether or not shale gas would revolutionize Europe the way it has America. These points were made: Over the next 5-10 years shale gas will NOT be a game changer in Europe the way it has been in the U.S. Public resistance in Europe is higher than it is here. Europe lacks much of the infrastructure (pipelines) necessary. And perhaps most germane of all, mineral rights in Europe belong to the state and not to individual landowners!

There’s no incentive to allow drilling when you don’t profit from it, other than slightly lower energy prices. MDN’s view: We need to kiss the American ground and thank the good Lord that our country is founded on the principle of private property ownership rights. Freedom for individuals is what has made this country great. Lack of freedom (over-regulation) is what will kill it.

I’ve always disagreed with that “conventional wisdom” and here’s why:

Firstly, consider that the US is almost alone in individual mineral rights. Lack thereof hasn’t hampered extractive industries anywhere else, only two examples being Canada and Australia.

Secondly, the multi-well horizontal drilling technology available today makes US analogies no longer appropriate. In fact, one can say that the much larger infrastructure required to drill many wells from many surface locations makes the US experience an expensive outlier. Emphasis in the UK and Europe has been on the local surface, ignoring how the technology available today means that we can concentrate on the underground, i.e. where the oil and gas actually lies.

Instead of an entire industry of landsmen aiming at scores of individual landowners, where even paying separate royalties is expensive, far larger European blocks create advantages that the US doesn’t have. Cuadrilla’s UK license is just under 1200 sqkm or 296,000 acres. Getting access to similar size acreage in the US would be both time consuming and expensive, costing $1.48 billion at $5K an acre.

In short, while getting rights from even one authority is like pulling teeth yet far longer and more painful, the license process is easier with only one counter party, thus far cheaper. During production, the need to write just one cheque each month to the national authority, lowers operating expenditure considerably. A US player active in the Barnett tells me processing several thousand royalty checks is their greatest operating expense, far larger than processing or transporting the gas itself.

While multi pad drilling is becoming more common in the US, horizontal drilling is often constrained not by technology or geology or economics, but by lack of mineral rights. One company can’t drill under areas where the mineral rights belong to someone else, an  issue less likely to arise in Europe’s larger concessions.

While this is an important technical detail, the common ownership model is one where I’ve consistently pointed out Europe has other advantages. Common ownership means national advantages should be weighed in considering the local disadvantages. Dieter Helm is a big fan of shale, but his recent opinion in the FT , building on his other recent research barely mentions fracking in a big picture discussion of the UK’s current inability to build any kind of infrastructure. Simply put, he says we’re getting this back to front:

As long as each infrastructure project is treated in isolation, and as a technical rather than a political proposition, delays are inevitable as the process gets bogged down in battles between winners and local losers worried about house prices and back gardens. What is missing is the bigger picture of our infrastructure needs – the package of investments that together make us all better off – and an effective national infrastructure plan.

Dieter uses the Heathrow expansion as example, but this could mean any number of issues:

All projects have losers. But if the aggregate results in net gains for all, compensation for the losers can and should follow. The negative social and environmental impacts of any plans need to be offset by payments for improvements elsewhere from those who benefit. If a project is worth doing, those who gain should be able to compensate the losers – whether for noise from aircraft, disturbance from fracking or the house-price effects of HS2. The fact that proper compensation is the exception rather than the rule is part of the reason for such opposition.

Returning to the original point, the greater areal expanse of European shale licenses and the use of modern technology that lowers surface impact, means that disturbance can be mitigated. US drillers often drill because they have no option except to use the land they paid millions to access. In Europe, vast underground reservoirs of shale, in the Bowland, Paris and Northern German basins alike,  give much more flexibility as to choose locations. While there will be some losers, concentrating on the underground, means there can be far less than people are often led to believe. 

But where there are losers, then the principle of doing less harm applies. Forbidding shale extraction because a relative handful of local residents may see increased traffic for a few months is not fair to the millions of national owners of the mineral rights. They too have the right to exploit their oil and gas resources and to get the benefit of the financial and carbon reduction benefits - benefits local communities also receive.

What is not fair would be for local communities to get nothing at all. But with national benefits combined with the lowest possible local disturbance deriving from drilling efficiencies, local communities should be compensated accordingly. They may be disappointed if they expect a gold rush.

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