Shale Drillers Offered Water Cheaper Than U.K. Residents

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Cheaper water along with tax breaks and government support for the technology support Prime Minister David Cameron’s goal to draw investment for petroleum production in the U.K. as wells in the North Sea go dry.

Britain’s water utilities, which coped with at least three separate periods of drought in the last decade, are ready to offer discounts for drillers needing supplies for fracking oil and natural gas wells.

A reduction would help make the technique to extract hydrocarbon reserves more profitable in Britain, where municipal water rates often are two-thirds higher than in the U.S., according to data compiled by Bloomberg. Hydraulic fracturing uses high volumes of pressurized water mixed with chemicals and sand to crack open underground deposits.

“You send them an economic signal, and they will respond,” Ian O’Gara, U.K. head of new energy at the consulting firm Accenture Plc (ACN), said in an interview. “You can’t allow the water price to be such that it hinders development.”

Cheaper water along with tax breaks and government support for the technology support Prime Minister David Cameron’s goal to draw investment for petroleum production in the U.K. as wells in the North Sea go dry. It would benefit companies such as Cuadrilla Resources Ltd., backed by former BP Plc (BP/) Chief Executive Officer John Browne, and anger residents concerned that toxins in drilling fluids will poison their water supplies.

United Utilities Group Plc (UU/), the U.K.’s largest publicly traded water company, said it’s negotiating tariffs with large industrial customers that generally are lower than households pay. Fracking companies qualify for those rates, said Helen Wilson, a spokeswoman for the company.

Water Costs

Southern Water Ltd. said its industrial rate is 1.05 pounds ($1.69) per cubic meter. That can drop to 88 pence for the biggest customers, 25 percent less than homes and business pay. The lower rates would apply to shale drillers, though it hasn’t had any applications.

In Britain, water from municipal utilities costs $2.23 a cubic meter on average, above the $1.34 average across the U.S., according to Su Gao, a water analyst at Bloomberg New Energy Finance. A cubic meter is about 6.29 barrels.

U.S. drillers typically pay on average about $2.70 a cubic meter for water, although there’s a wide variation between companies. Some get supplies for free, and others buy cheaper wastewater that’s been treated for reuse.

Water supplies are crucial to drillers. Fracking one well requires 5 million gallons on average, or enough to fill seven Olympic-sized swimming pools. The amounts used depend on the number of fractures and the length the wellbore travels horizontally into the reservoir rock, according to Richard Davies, director of Durham Energy Institute at Durham University in England.

‘Huge Volumes’

“Fracking has the potential to use huge volumes of water in areas where water resources are already stretched,” said Leila Deen, a Greenpeace campaigner. “It is not right that the shareholders of fracking firms benefit from cheaper access to precious water than the households that will see all the local impacts of shale gas extraction on their doorsteps.”

Water is more of an issue with frackers partly because much of what drillers use is lost down the wellbore. That’s a contrast with traditional power plant owners, which return flows to rivers after cooling their systems.

With fracking, water is typically mixed with toxic compounds added to drilling fluid. Leaving that in the wellbore protects nearby drinking water supplies from contamination. It also excludes the water from natural recycling through evaporation, rainfall and seepage into aquifiers.

Fluids Lost

Recovery of injected fluids for possible recycling ranges from 15 percent to 80 percent of what’s sent down the well, according to the U.S. Environmental Protection Agency.

Cuadrilla, IGas Energy Plc (IGAS) and Dart Energy Ltd. (DTE) are preparing to explore in Britain. Environmental groups object to allowing drillers access to water in regions where supplies are already overstretched at a discount to what residents must pay.

The three periods of drought in England since 2004 have made water a more touchy issue. The worst spell culminated in April 2012, when seven water companies imposed restrictions for 20 million customers including bans on people using a hose to water gardens. There were also restrictions the year before following the driest spring in a century.

Protests against fracking halted work for almost a week in August at Cuadrilla’s project in Balcombe, a village in West Sussex about 30 miles (48 kilometers) south of London. A single exploratory fracking well would use enough water to supply the 1,800 residents of Balcombe for three days.

Government View

Government officials are attempting to balance the need for more secure supplies of energy with “clear, robust controls” that protect water supplies and ensure the industry only develops where it’s safe, a spokeswoman for the Department for Environment, Food and Rural Affairs said by e-mail.

Cameron’s government wants to tap shale gas as a way to curb energy costs. U.K. natural gas production is at its lowest since 1985. Fracking in the U.S. reduced gas prices to their least in a decade last year.

The U.K. government controls water prices through the industry regulator Ofwat. It authorizes cheaper tariffs for users of more than 50 million liters (13.2 million gallons) a year, reflecting cheaper costs of supplying large volumes.

Britain’s utilities by law must supply water for non-domestic purposes such as shale exploration unless it risks other supplies. Providers say they don’t know how much water drillers will need and want rules establishing the parameters.

Industry Questions

“We need robust answers to the questions around water needs -- how much per well, how many wells, and over what period and what the input quality needs to be,” said Jim Marshall, the policy and business adviser at Water U.K., representing water utilities. “If we get it wrong, then water has the potential to stop the industry in its tracks.”

Cuadrilla of Staffordshire used 9,300 cubic meters (2.5 million gallons) of United Utilities’s supplies fracking at Preese Hall, Lancashire, the U.K.’s first shale-gas exploration well. It’s the only company to have fracked yet for shale gas in Britain. It doesn’t disclose the rates it paid.

Cuadrilla plans to get water for fracking in Lancashire from the regional supplier, Chief Executive Officer Francis Egan said. It expects to pay the same as any industrial user and may pipe in its own supplies, according to a company spokesman. It may take sea or river water or drill an underground reservoir or take treated water.

Water utilities by law must produce drought strategies every three years. South East Water Ltd. and Southern Water, with no fracking customers, say their proposals don’t include supplying shale drillers. Balcombe is served by South East Water Ltd.’s Ardingly reservoir, which is now at three-quarters of capacity following a drought in 2011.

Cuadrilla Talks

United Utilities said its water resource plan allows flexibility for shale drilling. “We’re presently in discussions with Cuadrilla to understand their potential water requirements in North West England to help us plan in more detail,” said Wilson, the company’s spokeswoman.

The utility is concerned that climate change may by 2040 reduce by 6 percent the amount of water it gets from “surface resources” such as rivers and rainfall, which account for 90 percent of its supplies, according to its website.

South East Water, which charges commercial customers 1.58 pounds a cubic meter, received an application to supply Cuadrilla’s exploratory drilling in Balcombe. Any requests for fracking would be assessed individually, the utility said. It said exploratory wells use less than ones that develop production from shale gas deposits.

“The charge for non-potable water would be on a case-by-case basis,” said Steve Andrews, head of customer and commercial services.

Dart Testing

Dart, the Australian explorer with plans for test wells in the next year, doesn’t need drinking water for its operations, said Douglas Bain, the company’s manager of U.K. operations. The issue is rising up the agenda in the U.S. because of water shortages in Colorado and elsewhere, said Sarah Fletcher, an analyst at IHS Inc. (IHS), an industry consultant.

“There’s a lot of public concern in the west U.S. about the impact of unconventional oil and gas development on water,” Fletcher said. “There’s a feeling that if municipal suppliers are going to provide it to oil and gas operators in water-scarce areas, they need to be doing so at a higher price.”

To contact the reporter on this story: Sally Bakewell in London at sbakewell1@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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