Coal Bed Methane (CBM) extraction – Property Aspects in Scotland

As outlined in an article in the March edition of the Energy E-Bulletin, CBM is a natural gas found within coal seams. This gas can be extracted to provide an additional source of energy. In respect of any CBM project it is important to note that as well as the obvious technical issues there are also important property issues that need to be considered both from a legal and practical perspective, the main property issues being:

Option Agreement
The developer must obtain (i) the requisite onshore Petroleum Licence from the Department for Business, Enterprise and Regulatory Reform (DBERR) and (ii) the consent of the Coal Authority. If works are to intersect coal and/or coal mine workings (whether abandoned or not), the developer will require to carry out ground investigations to assess whether or not the property is a viable CBM site.

A written agreement between the landowner and the developer should be entered into setting out the rights granted to the developer in return for an option payment and the obligations imposed upon both the landowner and developer (Option Agreement). The Option Agreement will specify the rights granted to the developer and any conditions imposed on the exercise of these rights, oblige the landowner to do all that is necessary in order to assist with any planning applications, planning agreements and anything else required to progress the project (this should always be at the cost of the developer) and provide for the restoration of the ground once investigations have been completed if decided that the site is not viable.

The Option Agreement is a personal contract between the parties involved and will not bind any future owner of the land. Accordingly, the developer may require the landowner to grant a security over the land so that in practice they would be unable to dispose of the land without either the developer's consent or obliging the new landowner to enter into a new Option Agreement with the developer on identical terms.

If the developer is satisfied that they want to go ahead with the project (i.e. once they know whether the site is viable) they will trigger the option and require the landowner to grant a lease of the property.

Lease
It would be usual for a draft of the lease to be annexed to the Option Agreement so that the lease terms are clearly set out and that there are no delays or problems in agreeing these once a viable site has been identified. The lease will contain many terms and conditions which are similar to those contained within a standard commercial lease including a mechanism for the calculation of the rent payable to the landowner, an obligation to restore the ground and make good any damage and an indemnity in respect of any contamination. It will obviously set out further terms and conditions in relation to the specific use of the property. The lease will endure for the period of the operation of the site plus time required to decommission and restore the site as will be required in terms of the planning permission and planning agreement.

It should be noted that in addition to a lease of the extraction site the developer may also require separate leases over ancillary areas for topside infrastructure.

Ancillary Rights
Inevitably access roads, pipes, cables and other service media will require to be put in place to facilitate the operation of the CBM project. Electrical cabling will be required for the operation of machinery, water pipes will be required to transport the water extracted from the wells and pipes will obviously be required to transport the gas to market once extracted. Accordingly, appropriate rights to construct such roads and install such pipes will require to be obtained over all land affected. The relevant leases and deeds of wayleave should set out the route of such roads and pipelines and set out all other rights and obligations (e.g. restoration) on the developer. This land may well be owned by third parties and accordingly the appropriate rights should be obtained in good time to avoid a ransom situation (e.g. the inability to transport the gas from the site to the network).

Scottish Environmental Protection Agency (SEPA) Consent
Water will normally be extracted from the wells throughout the CBM extraction process. The extracted water should thereafter be discharged into an authorised water treatment facility (e.g. Composite Energy's test well in Falkirk discharges into the Firth of Forth). In Scotland, this activity will be governed by SEPA who will give consideration to the quality of the water to be discharged as well as to the volume. The appropriate SEPA consents/authorisations will therefore require to be obtained as well as any necessary local authority consents.

Further Information
If you require further information on property aspects of CBM extraction please contact:

Caroline E Cumming
DL: +44 (0)1224 343547
F :+44 (0)1224 343545
caroline.cumming@shepwedd.co.uk

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