30 June 2014

Rural property news -summer: Property rights and fracking - who owns your land?

It has been predicted by Amec (an oil industry consultant) that the full exploitation in the UK of oil and gas reserves trapped in shale rock formations (a process known as ‘fracking') will be capable of producing more than twice the 100 billion cubic metres of gas consumed annually in the UK. Encouraged by estimates of shale oil and gas reserves in the UK, the British government is embarking on an overhaul of the law in this area. The industry is governed by a confused patchwork of statute, common law and regulation. The government has announced proposals to address this, including modernising the ancient law of trespass, and these changes will be incorporated into the new Infrastructure Bill.

The extent of ownership of land beneath a landowners property had not been thoroughly examined by the courts until the 2010 case of Bocardo v Star Energy UK Onshore Ltd. This case considered whether Star Energy had ‘trespassed' on Bocardo's land by drilling horizontally underneath it at a depth of 2,800 feet to access a conventional underground oil field. There was no suggestion that the oil belonged to the landowner; hydrocarbons have been reserved to the Crown since the Petroleum Act 1934. The question was whether Star Energy should have obtained permission from Bocardo before drilling under its land.

The Court found that there was a point at which the concept of ownership inside the earth approached ‘absurdity', but that the depth to which the wells were drilled in this case did not get anywhere near that. The landowners could still be said to ‘own' the strata from which hydrocarbons are extracted and anyone who wished to delve into that strata needed the landowner's permission. Although the landowner was entitled to compensation, the court determined that the compensation should be pegged to the loss suffered by the landowner and not the potential profits of Star Energy. Accordingly, the compensation was assessed at only £1,000, as the drilling had not interfered with Bocardo's use or enjoyment of the land ‘one iota'.

The discussions in this case are relevant to the UK's nascent fracking industry: shale wells are drilled first vertically into the seam of rock, then horizontally along it. As the law currently stands the exploration company will need the consent of every owner along the length of the horizontal part of the well shaft, which can extend for miles. There are compulsory purchase powers under the Mines (Working Facilities and Support) Act 1966 that could theoretically be used to take land away from landowners who refuse permission, but this route would be costly in both time and money. If a large enough number of landowners refused permission (as has happened recently in the village of Fernhurst in West Sussex) the court proceedings could be drawn out for years, scuppering any chances of commercial viability. Landowners could use this leverage to negotiate privately with fracking companies for the lease or sale of their land, but given the compensation benchmark set in Bocardo there seems little scope for making significant sums.

The new Infrastructure Bill will change the law so that it will no longer be a trespass to drill far beneath someone else's land without their permission. The removal of this last legal barrier may make setting up shale wells in the UK more attractive to investors.

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