UK Shale Gas Prospects – Preparing Bespoke Joint Operating Agreements and Gas Sales Agreements (Part I)

Abstract

The rapid recent growth in the scale of shale gas exploitation in the United States has been revolutionary, with the capacity to transform the country from a gas importer to a gas exporter. Other countries with shale gas deposits have recognised the potential and have been investigating their own opportunities for exploration and exploitation. This is particularly so in the United Kingdom, where recent government pronouncements have propelled shale gas to the forefront of the energy agenda (but not without some societal debate and disagreement about the wisdom of doing so). This article has two parts, to be published in this and in the next issue of the Journal. The first part of this article examines how a conventional joint operating agreement (JOA) will need to be modified to reflect the nuances of an onshore shale gas project. The risk and the cost of developing a shale gas project could compel project developers to band together to share the burden, and the prospect of investing into such projects could also be attractive to non-operational investors. Thus, a joint venture could be created between the various interested parties, and the terms of the JOA will be critical. The second part of the article, which will be published in the first issue of 2014, examines how a conventional gas sales agreement (GSA) will need to be modified to reflect the nuances of an onshore shale gas project. The ecological credentials and energy efficiencies of natural gas as a feedstock for power generation, in comparison with combusting coal or fuel oil, are well known. Shale gas production is often earmarked as a feedstock for power generation, in preference to reliance on the vagaries of imported gas. The composition and production characteristics of shale gas will require a different means of contracting for the supply of gas for power generation, however, in comparison with conventional gas. Each of the JOA and the GSA must evolve from the offshore, conventional gas project world to which they typically relate in order to meet the requirements of an onshore shale gas project for two particular reasons:the essential operational characteristics of an onshore shale gas project will demand such an evolution if each of the JOA and the GSA is intended to be properly suited to the needs of the project; anda participant in a joint venture that has experience of shale gas development from a particular jurisdiction will expect to work within the terms of a bespoke JOA and GSA. Recognising that some project participants might be new to the business of shale gas development means that some education as to how the shale gas JOA and GSA each needs to be different could be essential.Of course, not every provision within each of the JOA and the GSA will need to be modified to apply to an onshore gas sales project, but some evolution will be needed.