Championing UK gas

Chemicals firm Ineos believes the best way to secure its feedstock is to go out and find it. Gary Haywood, chief executive of its shale division, talks to PE

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INEOS is expecting to receive its first cargo of American ethane into its Grangemouth refinery and petrochemical plant in September. The Scottish facility has the capacity to produce around 9m litres (57,000 barrels) of oil products a day and around 1m tonnes of petrochemicals per year.

But the plant's ethane cracker has been running at less than half its capacity for the past three years, lacking the gas it needs as a feedstock - a victim of the decline of the UK's Continental Shelf.

Enter the Marcellus, the huge shale gasfield in the US' northeast. Gas piped through Pennsylvania to the Marcus Hook liquefied natural gas terminal on the Delaware river will be received in Scotland. Gary Haywood, chief executive of Ineos Shale, says it will allow his firm's cracker to get back to capacity: a "new lease of life" for Grangemouth and major boost for the local economy.

"For every job we have at Grangemouth it multiplies by a factor of five in terms of good for the local community," Haywood says. "There's a lot cost associated with bringing US ethane in. It would be a lot more economic and sensible to make that ethane in the UK."

That's the rationale behind Ineos's entry into the UK's nascent shale gas business and the reason it has been such a vocal advocate for exploration. Ineos put its money where its mouth was in 2014, buying BG Group's 51% stake in the PEDL 133 licence in Scotland's Midland Valley. In a UK licensing round last year it won 21 more licences to explore for shale across northern and central England. The company has lodged around 30 planning applications to drill test wells over the next 18 months. It hopes to complete a handful of wells this year.

"The question is whether we're going to find the quality of gas in the UK which will yield the ethane we need for the cracker," says Haywood. He's "hopeful" that homegrown shale-based methane will at least allow Ineos to reduce its need to import it.

A two-year-long campaign of seismic studies to map the rocks, and a string of test wells, should at least tell the company if British shale gas is commercially viable. The drilling campaign will focus on northern England - not Scotland, where a ban on hydraulic fracturing remains in place. (Although there is no ban on test drilling without fracking in Scotland, Haywood is sceptical whether planning applications would be approved.)

After a hiatus in shale-related activity in the UK, things are picking up again. In May, Third Energy, a UK independent explorer, was awarded the country's first licence to frack since 2011.

The firm plans to start fracking at its site outside Kirby Misperton, near the North York Moors National Park, in northeastern England, later this year. Haywood, naturally, will be watching the results of those test wells closely.

"If it works really well that will be very promising for commercial development but the question is when you'll see enough test fracks to encourage commercial production," he says.

In 2014, Ineos tried to diffuse some of the long-standing public opposition to developing UK shale gas by pledging to give 6% of revenues from future shale gas production to local communities bettering earlier compensation pledges made by its peers in the sector. The government has since announced it plans to offer the public up to 10% of tax revenues from future shale gas production.

Bearing in mind the uncertainties surrounding the UK's shale gas potential, this seems quite a generous compensation scheme for a newcomer to an industry still in its infancy.

"How do we know 6% of a good amount? We don't really," Haywood says. "But if this amount of money makes a difference between this industry being profitable or not then it's probably not looking that great anyway."

Aside from making the geology work, developing a vibrant service industry and managing costs will be essential to getting the sector off humming .

Political risks are often an obstacle for hopeful frontier oil and gas provinces - and the UK's shale sector is one. But, with shale gas in mind, Haywood isn't much troubled by the UK's decision to leave the EU. (Ineos founder Jim Ratcliffe has been a prominent business voice claiming the UK will thrive outside the bloc.) Many EU countries remain opposed to fracking and the European Commission has hardly done its utmost to promote it either.

Nor is Haywood concerned by the swift change in regime that followed the Brexit vote this summer. "The changes we've seen don't compromise the government's commitment to encouraging a (shale) industry to flourish," he says. "The functions that were existing in Decc are surviving," he adds, referring to the now-abolished Department for Energy and Climate Change. "There's no evidence to suggest there are going to be any big changes there. I've seen the government say they're committed to seeing it being done with proper regulation. Which we support as well."

Some UK watchers expect new prime minister Theresa May's government to be much more proactive in its support for fracking, bettering former leader David Cameron's vocal but rather ineffective backing for the sector. But few of the new government's energy policies are not yet clear.

Without a thriving shale gas industry, it's hard to see anything but rapid growth in the UK's dependency on gas imports. Around 85% of UK homes use gas to generate electricity and the country imports over half of the gas it consumes. Without a new source of domestic supply, the share of imports is expected to rise to over 80% in the next 15 years.

"Renewables will cover an increasing proportion of our energy mix, but if you're going to cover the periods when the sun doesn't shine and the wind doesn't blow you need gas," Haywood says. "It's a question of if you're going to get gas from here or somewhere else. Getting it from here is more secure and creates jobs rather than sending the money overseas. And there isn't a better solution from a climate perspective."

The UK won't be totally shorn of alternatives. Supplies also reach the country through interconnectors with the European gas network, not to mention imports of LNG from the global market.

"But some of that gas may come from places that aren't necessarily reliable," Haywood says. "If I were in the government that would keep me awake at night: worrying about energy security."

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