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WHOLESALE ENERGY PRICES: OCTOBER 2018

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Despite the efforts of the US to almost brow-beat Saudi Arabia into increasing output, crude oil continued to march upwards and rose a further 9% amid open talk in trading circles of a possible three digit oil price at some point this winter, especially if crude or petroleum product inventories look like tightening further.

Paradoxically the latest intervention will have made the Saudis even less inclined to raise output, lest it reinforce the perception it is know-towing the US and working at odds with its cartel partners. There are other reasons why high prices (though below $100/bl) remain a policy goal for the kingdom, not least the delayed floatation of Aramco, for which a robust oil market remains essential.

There are also physical limits as to how much more oil it can produce. No OPEC oil producer should ever want its geo-politically priceless ‘swing capacity’ put to the test unless absolutely necessary. The same holds true for many North African and South American oil producers who may be strong on reserves but still have quite limited capacity to export more oil amid creaking infrastructure and worsening economic outlooks that will thwart foreign investment.

With the Russians and Iranians incentivised to rattle the cages of Western economies, this winter could see further stockpiling that alone will cause the market to tighten. The petro-dollar meanwhile has strengthened through the year, magnifying energy inflation effects in many oil importing countries. Indeed, inflation is a key factor to watch for general energy consumers, with rises in petroleum product prices evidently feeding to gas and liquid fuel markets with contract prices fixed against oil and escalation terms indexed to oil in a stronger petrodollar.

Gas

Natural gas prices increased another 12%, following on from their 15% climb over the May and June period amid expectations of continuingly high crude prices and a cold and protracted European winter that might extend into the shoulder months of March and April, when the Forward Market is generally at its most volatile and gas storage close to depletion in some regions.

In particular, the UK is now without a major gas storage facility following the closure of Centrica’s Rough platform. Whilst concerns over the security of supply from Russia and other Eastern countries may have been overstated in the past year, the forward market is probably now building, amid clearly rising East-West tensions, a higher risk-premium into prices out on the curve. Last month the UK’s annual gas contract hit a ten year high, breaking past 70 pence per therm at one stage.

However, today sees gas prices being influenced by an ever-expanding mixture of global supply & demand factors, with LNG playing a marginal supply role, including recent hurricanes in the USA which drove up crude and spot gas prices up in tandem. In fact, there has been no shortage of bullish news to keep the prompt market strong and this is now affecting gas prices further out on the curve, even if the actual justification for rising long-term gas prices is tenuous. Indeed from a resource perspective there is no actual or expected shortage of gas. The commodity enjoys an increasingly wide geographical spread as far as production is concerned and, according to the latest BP figures, the world has well over 300 years of forward supply at current rates of consumption. In reality however, short-term security of supply concerns, together with persisting long-term indexation to oil, have served to keep driving gas prices higher. The NBP traded over-the-counter price for gas has since risen by over 75% in the last eighteen months.            

Electricity

Although it had been hoped that most of Europe’s reactors would be back up after the summer hiatus, when a lack of cooling water supplies forced many to go offline, there have been reports of persisting outages. The age of nuclear fleets across the Continent is now a growing concern. In the UK too, all existing nuclear power stations, bar Sellafield, are due to close within five to ten years.

It is also becoming clear that renewable electricity and sub-sea interconnectors will not plug the gap, with new-build reactor projects arriving late, due to construction and safety problems, or not even getting off the ground at all amid concerns over technology, rising costs and funding.

In the backdrop, several European countries are quietly permitting the building of new fossil-fuelled power stations. Germany is currently installing coal-fired plants at a faster rate than the Chinese and last month it sanctioned the felling of an entire tree forest to produce the lignite dedicated to power generation.

The UK government itself has just given the go-ahead for a mammoth 2,500 MW gas-fired power station at Eggborough, the site of a former coal-fired plant that was closed only recently. This new power plant will produce some 80% of the output of Hinckley Point C; it will come on line sooner and it will not entail any meaningful subsidy, not from government or from the consumer by way of price-support under CFD tariffs added to bills.

Whether or not these examples mark a general policy shift towards fossil-fired generation remains to be seen. In the meantime, however, the market is tightening.                                                                                                                                 
About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MAY – JUNE 2018

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Despite reports of US influence, and of OPEC agreeing a relaxation in quota to offset supply problems from Venezuela and sanctions on Iran, crude prices extended their gains to end the period 11% higher.

This output increase is essentially a token gesture anyway, given that most OPEC and non-OPEC countries are already producing at or close to capacity whilst the global supply cushion stands below 4%, the lowest it’s been for 30 years. Consequently, Vienna’s meeting of minsters has done little to reverse the price trend. However, the recent levels also raise questions about the authenticity of the ‘shale oil’ argument.

It was barely two years ago when investment banks were issuing research papers declaring ‘$30 – $40 /bbl – the new norm’ amid expectations of fracked oil and gas keeping the world over supplied. As things turned out, oil prices doubled and many forecasts were promptly re-written. Perhaps a reasonable question to ask is that if there is (or ever was) close to this amount of surplus shale, then why are prices this high now, despite the actions or inactions of OPEC producers?

Prices might soften over the coming months but they are very unlikely indeed to return to anywhere close to the levels discussed in the market barely two years ago. Meanwhile, rising world inflation, which will add to transport, production costs and enhanced recovery budgets, could also drive oil prices higher, whilst the talk of US fiscal tightening and the strong petro-dollar have taken some of the sting out of oil price rises in nominal/dollar terms. Any relapse though, or renewed money printing that sees the dollar fall, could repeat the surge in oil prices last seen in the aftermath of the First Financial Crisis, which witnessed a flight into safe assets, hard commodities, including oil, that then dragged the market above $80/bl when demand was actually weaker than now. The forward outlook therefore appears stable and the current ‘high prices’ environment may be with us for a while.

Gas

Forward gas prices climbed a further 15% amid an unreasonably strong prompt market, with even spot prices trading over 50 p /th and sharply rising petroleum product prices. Oil prices themselves last fell below $40/bbl in April 2016, although their main assent (from $ 45 to $ 75) took place within the past 15 months. This timing may be significant and it may partly explain why wholesale gas prices are rising as fast as they are now.  The ‘low’ gas prices in 2016/17 are due to fall completely out of most long-term contract price escalation formulae soon, if not already. There will therefore be a contractual readjustment for gas via key take-or-pay Russian, Norwegian and LNG gas contracts, most of which account for marginal supply and will dictate forward prices as we move into the next buying round or into the next Gas Year on 1st October.

The OTC market has also seen carbon prices soaring. Today the EUA is trading above € 15/ tonne CO2 versus € 5/tonne CO2 exactly a year ago. While a sharply higher carbon price might be expected to depress gas demand, its overall (and certainly more immediate) effect will be to increase the principal feedstock price for gas generators. Events in the EU ETS will therefore be doing nothing to support any renaissance in new-build gas-fired generators, which may well be needed before long as the national generation margin shrinks further.

Electricity

Forward power prices surged 13% over the period. However, with the medium-term outlook for gas and most other indigenous power generation looking fairly soft, the grid will be relying increasingly on new interconnector imports from the Continent, Norway and potentially Iceland further down the line.

As previous articles have commented, this energy strategy may be unsound, not so much for ‘import/export’ reasons per se but basic reliability. Leaving to one side the question of plant reliability and ability or willingness of European suppliers to offer peak power when needed, the reliability of sub-sea cables needs to be considered as such systems are themselves prone to outages, even the newest cables with the latest electrical technology.

However, with the Hinkley Point power station (which when ready will barely supply 5% of the market) unlikely to produce at capacity before 2025, and other nuclear plants also delayed and unlikely to come online until ca. 2030, the short-term and medium-term generation outlooks are tight. However, rather than higher wholesale prices, the impact will be expressed in sharp rises in premiums and the cost of shape in end-users’ commodity prices, i.e. on top of capacity price increases and increasing eco levies and taxes (now seven in total).

The recent changes discussed above suggest that, if anything, the average businesses will now see power bills rising by 40 – 45% (the top end of the range estimate) within just three years. This prospect should spur end-users to look at energy reduction, demand-side management, on-site generation and profile-correcting batteries.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts. 

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: NOVEMBER – DECEMBER 2017:

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

The petroleum market continued to charge upwards. Dated Brent prices closed the two month period 19% higher. In the last two years, since the January 2016 Edition of Energy Highlights, world oil prices have risen over 80%. Whilst the so-far successful accord between OPEC and non-OPEC producers has certainly had an impact, shale has yet to have the dampening effect which some in the market had asserted it would.

No one knows how far oil prices may have to run before marginal supplies (i.e. not covered by the Accord, US shale being just one option available) arrive en masse. Whilst prices will not necessarily reach this level, E&P studies suggest that only once oil prices are sustained over $75/bl will significant new developments come online.

The Brent market spiked higher in December amid outages at Statoil’s Troll platform and Forties pipeline, which shut-in over 70 North Sea platforms in total at one stage, including the ETAP, Armada and Buzzard fields along with Forties itself, removing 45% of UK winter supply. While the pipeline is back online now, attention at the turn of the New Year turned towards troubles in Iran, which buoyed Dated Brent cargoes above $65 /bl into the New Year.

Natural Gas

Natural gas prices, on the other hand, took most of last month’s events in their stride, despite much of the upheaval relating to the gas market itself. Day-ahead spot leapt to a 4 year high of 80 p/th at one point amid concern over supply, as the UK entered its first winter with no principal (long duration) gas storage facility following the closure of Rough combined with a major explosion at the sensitive Russian import thoroughfare at Baumgarten in Austria. Yet, this barely affected the forward curve in the end. The Annual Contract rose just 2% over the two periods and gas prices actually fell 4% over the year. This relaxed market might symbolize the abundance of global gas supplies relative to oil, and also national aversion to building new gas power stations, efficiency and de-carbonisation globally.

However, gas prices, through oil-indexed contracts and (to an extent still) fuel substitution, will at some point respond to rising energy commodity prices if that trend continues, even if the indexation-lag is pronged (which it often can be). It remains to be seen whether gas prices will remain so calm, even though the forward supply picture remains robust.

Electricity

Forward power prices rose 5% between November and January to finish the year unchanged at roughly £48/MWh. The spark spread has been rising, although whether this will trigger some of the stalled UK gas generation projects remains unclear, with government policy the most likely determinate there. As regards the wholesale market, the outlook for significant price rises in base-load electricity looks muted still. However, for commercial & industrial markets, the outlook is significantly more bullish, with a cocktail of transmission, distribution tariff, existing surcharge and new energy tax rises in the pipeline. These could increase the annual bills for commercial customers by 30% inside three years, notwithstanding changes to wholesale prices.

Despite rising commodity prices elsewhere, forward curve and prompt market prices were also subdued by sentiment on wind generation. A ‘£57.50/kWh’ headline figure made the news in October (although it doesn’t imply many new wind projects will be commercial at such a price) and high winds across Europe in late December also suppressed the day-ahead market. That said, the take-up of renewables combined with certainly lower costs have surpassed expectations, serving to soften forward prices. A cursory look at the ‘speedometers’ on www.gridwatch.templar.co.uk in recent weeks demonstrates just how significant wind output was, amid several Triad warnings in December itself, frequently testing the 9 GW level. This, together with robust nuclear output, compensated for the sudden and unexpected closure of Drax, the UK’s largest power station, despite the outage continuing into the New Year.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2017: PART I: CRUDE OIL & NATURAL GAS

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Oil prices finished 2% down as the market remained pensive about the upcoming OPEC summit in April.

Although ‘OPEC Alliance’ countries (producers co-operating with latest output cuts) will not be attending the Vienna talks in a formal capacity, behind-the-scenes dialogue has been ongoing all the while.

With Iranian and Russian ministries having met up in January to discuss Russia extending its production cuts into next year and Saudi Arabia sending their foreign minister to Iraq (which was included in its latest production agreement) with a view to including Iraq in possible future production ceilings yet to be agreed.

Traders have been pointing out that there is no evidence to show that last November’s accord between OPEC and OPEC Alliance countries made any impact. Although it is true enough that crude prices have flat-lined since November (having jumped in the weeks running up to the accord), conversely there is also no sign the accord has not worked. The agreed cuts were modest, the first in over nine years and also the first of their kind in that they included several non-OPEC producers.

OPEC ministers are possibly playing a long game, with modest but universally-orchestrated limits in output, to be increased methodically rather than in any way likely to destabilise the market, and we would need to wait and see if and what OPEC ministers decide on in April before one can second-guess the success or otherwise of last November’s accord. The pace of oil price recovery has, however, been muted. This may or may not be connected to the delays to the public listing of Saudi Aramco, ostensibly due to ‘complexities in the structure’ of the company flotation plan.

The mooted delay (up to 18 months) may reinforce scepticism about the expected speed of any oil price recovery, if this reflects the kingdom’s pessimism of the accord holding together. The value of the share offering is estimated at over £2 trillion and clearly very sensitive to prevailing oil prices. If market estimates are correct, the new company is valued at 20 times the capitalisation of the next largest oil major, ExxonMobil. It is conceivable that there have been worries that the oil market might not recover in time and these may have played a factor in the delay, although that itself is pure speculation. The Vienna meeting April could though be a turning point, in either direction.

With this week being CERA Week in Houston, perhaps we can expect the annual splash of shale stories over the next few days.  While shale drilling should place a price ceiling on any sustained oil price recovery, as pointed out in past issues of Energy Highlights, shale plays are generally short-term and expensive. Oil prices could comfortably ratchet up to $75/bbl or beyond before shale and higher-cost conventional oil output starts to kicks-in. Either way, the oil market will never loose its capacity to take people by surprise.

Natural Gas

The forward-year gas contract finished the first two months of the year off 10%, closing below 45p per therm. This reflects the view held by most traders of a fundamentally well-supplied market with a spate of further LNG export projects set to come online this year and next, many landing at European terminals.

Notable supplies include projects in Australia and South East Asia, although shale gas from the Americas will have a role will to play too. The UK market recently saw shale gas imports from the Peruvian jungle due for landing at Milford Haven shortly before going to press, and this healthy looking forward supply-picture has been helped along by Japan.

The country has gradually been releasing more and more gas on to the world spot market: the LNG contracts it had bought up in the immediate aftermath of Fukushima. This may have contributed to (or certainly given the impression of) an ‘LNG glut’.

The demand-side also paints a weak picture, with limited demand-call from generators and industry. However, there are some bullish signs on the horizon too. Geo-politics have recently turned adverse, with under-the-radar conflict areas in Russian-Ukraine and even the South China Sea among the potential supply-area worries.

However, any sustained uplift in gas prices is perhaps most likely to occur as a result of an indexation and long-term contracts issue. Indexation to crude prices still has the propensity to push prices up, with much of the piped and LNG sold across Europe still covered by these clauses. Within these contracts, even where oil and petroleum product indices may have seen their price-impact reduced or possibly removed altogether over the last 20 years, these price escalators indices have in most cases simply been substituted for producer price indices, which have recently been rising faster than oil prices themselves.

In fact, over the last five months alone, UK producer prices have been rising at annualised rates well over 10% according to estimates provided by industry trade associations. These will ultimately soon be reflected in official government statistics and will later directly influence gas contract prices, where the indexation effects can be lagged for six to nine months or, in unusual cases, even longer.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MARCH – MAY 2016 PART I: OIL

In this new series of articles, Dominic Whittome covers wholesale energy prices between March and May 2016, discussing issues such as fluctuations in the price of Brent crude, falling shale production and decreasing prices across Europe’s gas and electricity exchange, as well as the possibility of these rising again in the future.

The cost of Brent Crude went on a rollercoaster ride in March and April. Prices began rising amid hopes of a possible agreement at OPEC’s production ceiling talks in Doha, only to fall back once those expectations were dashed. Prices then soared to $50/bl by the end of April, far above the “new $20/bl -$30/bl range” discussed in some trading circles as recently as February. In the event, the market shook off the stand-off in OPEC and the 15-Dated Brent contract ended the period up over 23%.

Meanwhile, North American shale production has proved much more price-sensitive than some pundits anticipated. Shale projects generally have a very short plateau period so ongoing development is key. Production may well have been set to decline anyway as indirect government subsidies were to be curtailed, although the prolonged slump in oil prices may have bought this to a head. The IEA itself predicted a possible fall in shale investment at the end of last year, observing a sharply increasing price sensitivity once oil prices fall below $60/bl.

Last month the IEA announced that non-OPEC oil production was falling at a faster rate than at any time in the past 25 years. Looking forward, one key price driver will be how soon the current impasse between Iranian and Saudi oil ministers can be broken. Longer term, there is also the issue of how quickly wider Middle Eastern and Venezuelan crude production can be ramped up and brought to market as global oil demand gradually recovers, especially if non-OPEC production continues to disappoint.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article remains the copyright property of Prospect Law and Prospect Energy and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Energy.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 01332 818 785 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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CUADRILLA FRACKING APPEALS OPEN IN BLACKPOOL

A Public Inquiry into four planning appeals under s.78 of the 1990 Town and Country Planning Act have opened in Blackpool in Lancashire, against the decision of Lancashire County Council to refuse to permit drilling at two well sites in Little Plumpton and Roseacre Wood, hydraulic fracturing those wells and flow-testing the shale gas, and associated monitoring works. The appeals are listed to last for 5 weeks.

They are the first appeals to consider the Government’s shale gas policy, and have all been recovered by the Secretary of State for his personal determination. The appeals have raised a number of interesting, and inevitably controversial, issues.

First, there is the application of the presumption in favour of planning permission contained within paragraph 14 of the National Planning Policy Framework (NPPF). The Appellant argues that because the development plan does not expressly provide for hydrocarbons expressly, in line with the PPG, it must be either absent, silent or out-of-date. However, absence and silence have been interpreted as a high threshold, see Lindblom J in Bloor Homes East Midlands Limited v SSCLG [2014] EWHC 754 (Admin.). As to whether a policy is “out of date” by reference to paragraph 215 NPPF, the Inspector will have to resolve whether a given policy is inconsistent with the corresponding parts of the NPPF.

Second, there is a significant conflict in the expert noise evidence, between whether to use the British Standard for construction and open cast sites, or to use the British Standard for industry and commercial sources of noise – in short whether the drilling and fracturing operation (nearly 2 years) is akin to a construction site or an industrial site. There is also dispute as to the extent to which the WHO Night Noise Guidelines (2009) replace the WHO Community Noise Guidelines (1999) on Lowest Observed Adverse Effect Level (SOAEL) and Significant Observed Adverse Effect Level (LOAEL), or indeed whether LOAEL and SOAEL in WHO Guidelines are targeted to, less intrusive, anonymous (transport) noise, rather than noise with a specific character, as the appeal schemes are said to be.

Third, there is debate as to the weight to attach to the Joint Ministerial Statement on Shale Gas “Shale Gas and Oil Policy” (16 September 2015) (“WMS”). However, that debate may ultimately be somewhat redundant as it appears to be common ground after the first week of cross-examination of the Appellant’s witnesses, that the WMS is not encouraging unsustainable (by reference to the NPPF) shale gas exploration. Thus an exploration project which conflicted with the NPPF judged objectively, as a whole, would not derive any support from the WMS.

Fourth, the weight to be attached to benefits. Planning permission is sought only for the exploration stage. It is a real possibility that following 6 years of exploration, shale gas is not commercially extractable at the proposed locations and thus the wells are decommissioned and plugged. Therefore, the decision taker can only place weight on the very small number of construction and security jobs that will be created to construct and maintain the wells, and the receipt of knowledge of the commercial viability of extracting shale gas at the locations. Placing weight on the benefits of a wider commercial shale gas industry in the North West is highly unlikely given that this would require at least a further planning application and may not even be a commercial reality.

Without question these appeals are a definitive test for the fledgling shale gas industry in England (readers will know that hydraulic fracturing is not presently permitted in Scotland or Wales). The seven planning barristers appearing in the appeals, including Prospect Law’s Ashley Bowes, reflects the scale of the financial stakes and the importance and complexity of the legal issues under consideration.

 

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article is not intended to constitute legal advice and Prospect Law and Prospect Energy accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article.

This article remains the copyright property of Prospect Law and Prospect Energy and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Energy

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A STEP CLOSER TO FRACKING?

Britain has moved a step closer to ‘Fracking’ with the news that a decision to block the extraction of Shale Gas in South Lancashire could now be overturned by the Secretary of State.

Although a local planning inspector at Lancashire County Council will still hear the Energy firm’s appeal in February as per the usual course in planning appeals, they will now only have the power to compile a report and forward suggestions. A final decision will instead lie in the hands of Greg Clark, the Secretary of State for the Department for Communities and Local Government, who has chosen to depart from the usual process because the prospect of extracting Shale Gas is a matter of “major importance having more than local significance”.

This follows Mr Clark’s September decision to afford himself a final say over planning appeals concerning Shale Gas, as s.62A of the Town and Country Planning Act 1990 allows him to do.

In June of this year, Cuadrilla’s applications to instigate ‘Fracking’ at two sites, Roseacre Wood and Little Plumpton, were rejected by Lancashire County Council’s Development Control Committee, with nine from the fourteen strong committee rejecting the proposals on the grounds that the sight of Fracking operations and the noise arising from them would cause an ‘unacceptable adverse impact” on the rural setting that was to host them.

As we previously reported, central government have appeared keen to promote ‘Fracking’ despite indications that support for the technique has reached an all time low. Moreover, with opposition to the extraction of Shale Gas often heard at local levels, the significance of this development cannot be underestimated. Groups such as Friends of the Earth have been quick to voice concerns that this development will help to sideline local opinions.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resources projects in the UK and internationally.

For more information, please contact Edmund Robb on 07930 397531, or by email on: er@prospectlaw.co.uk.

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FALL IN PUBLIC SUPPORT FOR FRACKING

The government are failing to win public support for Fracking, with surveys hinting at a sharp decline in public support despite efforts to create a market for Shale Gas.

YouGov and the University of Nottingham have studied public reactions to Fracking extensively since early 2012. The results of their latest survey, involving over 6,000 people, suggested that little more than one in ten people now support the technique. If its previous studies are to be believed, support for Fracking reached a high of nearly 40% in July 2013.

More correctly known as hydraulic fracturing, ‘Fracking’ involves pumping a mixture of chemicals and sand into rock fractures so as to extract gas and oil. The technique dates back to the 1940’s. In the UK, areas such as Nottingham, Derbyshire and parts of Leicestershire have long been known to have excellent potential for the extraction of shale gas.

In spite of this, ‘fracking’ has been suspended in the UK since 2011, when drilling in Blackpool was linked to minor earthquakes. Earlier this year, two planning applications, submitted by Cuadrilla, were also rejected by Lancashire County Council amidst vocal opposition, with the decision issued on the grounds that operations could cause auditory and visual pollution in a rural landscape. Opponents of Fracking also frequently contend that drilling has the potential to pollute drinking water.

Nonetheless, in recent years the government has appeared keen to change public perceptions; reducing the subsidies available for wind and solar energy whilst insisting that Fracking could be key to making the UK energy self-sufficient. Companies like Cuadrilla, GDF Suez and Ineos have recently been granted over 1000 miles of land to explore for potential fracking, whilst another 5000 square miles will be subject to consultation, given their proximity to protected areas.

Yet falling support has also been reported in research conducted by the Department for Energy and Climate Change (DECC), who interviewed over 2000 households in July and found a support rate of approximately 21%, 6% lower than in February last year. The DECC Public Attitudes Tracker seemed to suggest a public preference for wind and solar, finding that 75% of the public supported sources of renewable energy.

Although these results suggest they are facing an uphill struggle, DECC have made a clear commitment to Fracking; they have previously argued that it could contribute billions to the UK economy. As such, it would be surprising to see them give up their battle to convince the public right now.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resources projects in the UK and internationally.

For more information, please contact Edmund Robb on 07930 397531, or by email on: er@prospectlaw.co.uk.

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DIFFERENT APPROACHES TO CORPORATE SOCIAL RESPONSIBILITY (CSR)

Mark Jenkins, Prospect Energy
The philosophy behind western approaches to CSR

Western approaches to the formulation of Corporate Social Responsibility strategy are overwhelmingly secular. They tend to flow out of one of a number of paradigms. We can perhaps categorise these paradigms as follows:

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MITIGATING THE EFFECTS OF THE CURSE OF RESOURCES: CSR STRATEGY

Mark Jenkins, Prospect Energy

In my last blog I looked at some of the security consequences of the Curse of Resources; using the specific examples of Nigeria and Egypt.

In this blog I will look at some of the social consequences of the Curse of Resources, and consider the role that can be played by Corporate Social Responsibility (CSR) in mitigating these consequences.

Undermining the local social fabric

The initial arrival of oil companies in Chad generated significant impact on the country’s social fabric. Eleven primary schools were closed as teachers left their posts to seek employment as middle managers in the oil industry – on infinitely better terms.

There was a sudden growth in prostitution. The clients came from expatriate oil workers, and local farmers who were suddenly extremely rich as a result of compensatory payments given to them by oil companies, for access to their land.

There was an increase in paramilitary activity, both in regard to the protection of oil assets, and also as a result of local “bunkerers” purchasing arms with the profits they had made as a result of selling oil on the black market.

The decline in local agricultural activity generated a sharp rise in the local price of millet and food. Unemployment among locals living in the vicinity of exploration and production activities occurred at the same time as the sharp rise in food prices.

Social License to Operate (SLO)

The term Social License to Operate (SLO) refers to a stakeholder perception of the legitimacy of a project, a company or an industry. Ernst and Young have said that a failure to achieve a SLO represents the fourth biggest risk to the success of commercial operations in the extractive industry.

Corporate Social Responsibility (CSR)

A Social License to Operate is often expressed using terms such as CSR, Community Acceptance and Reputation. Kenya is an example of a country which, keen to avoid the kinds of problems inflicted by the Curse of Resources on countries such as Nigeria and Egypt, has enshrined the principle of public participation in its constitution, under Article 10, (2) and Article 69 (d).

Escalating social and economic problems brought about by globalisation have raised new questions – as well as expectations – about corporate governance and ethical and social responsibilities.

In general CSR is taken to denote corporate activities – beyond profit making – which include issues such as protecting the environment, caring for employees and conducting ethical trade and community investment policies.

The increased interest in CSR that currently exists throughout Europe, especially Scandinavia, reflects a growing discontent with corporate self-interest and self-indulgence.

A role for multi-national corporations in resource rich countries

Multi-national corporations are increasingly encouraged to resolve economic and social problems, especially in frontier/emerging markets, many of which are resource rich.

In such situations multi-national corporations are capable of resolving economic and social problems in a way not possible for national governments, especially if those countries are suffering from the typical effects of “resource curse” such as a rentier mentality, corruption, over-centralisation and a collapse of local industry.

Exploration and production operations of the oil and gas industry tend to take place in remote locations. Consequently, the extractive industry tends to have an especially acute awareness of the issues faced in remote areas where the government’s writ does not apply, and the challenge of acquiring a social licence to operate is significant.

The empowerment of local communities

Renewed contemporary interest in CSR is also due to factors such as growing market pressure for CSR principles to drive commercial activity, increasing regulatory pressure (especially from NGOs concerned about environmental damage and the rights of workers), the prevalence of social media – empowering local communities whose voices previously were not heard, and the increasingly competitive edge given to companies who implement CSR driven policies.

Issues to be addressed by CSR when combating the effects of the Curse of Resources

There is a connection between the Curse of Resources and CSR. Many of the effects of the Curse of Resources are exactly the kinds of issues that CSR policies seek to address. Examples include:

  • The environment. Usually local communities are especially concerned about matters such as air and water pollution, water extraction, impacts on bio diversity and waste management. As we have seen one of the effects of the Curse of Resources is increased pollution of the environment.
  • Business conduct. CSR policies strive for transparency and ethical commercial practice. One of the effects of the Curse of Resources is less transparency and increased levels of corruption.
  • Workers rights and safety. CSR policies strive for better rights and safety conditions for workers. One of the effects of the Curse of Resources is reduced safety measures and rights for workers.
  • Community relationships. CSR policies cover matters such as land access and ownership, equitable sharing of benefits and human rights violations by security forces. We have seen that the features of the Curse of Resources involves violent disputes over land access and ownership, a failure to ensure equitable sharing of benefits, and human rights violations by security forces.

 

Introduction to Prospect Energy, Prospect Law and Mark Jenkins

Prospect Energy is an energy specialist technical consultancy firm based in London and the Midlands of the UK. It is a sister company of Prospect Law. The two firms provide advice on energy development projects and energy related litigation for clients in the UK and internationally.

Mark Jenkins advises clients on how to achieve commercial resilience in high-risk/non permissive environments. Among Mark’s specialist areas of expertise are the management and motivation of traditional communities such as Bedouin tribesmen in the Sinai Desert, Somali Muslims in NE Kenya and Eastern Orthodox Christians in remote parts of Eastern Europe. He has a particular interest in Islamic culture and has worked on the staff of HRH Prince Ghazi bin Muhammed bin Talal, Special Advisor and Personal Envoy to HM the Hashemite King of Jordan. Other interests of Mark’s include renewable energy, especially solar power, and economic solutions which are based on the principle of sufficiency, rather than consumption.

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For more information please contact us on 01332 818 785 or by email on: info@prospectenergy.co.uk.