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British Government Seeks Shale Investment

The British government unveiled a new plan on July 28 to jump start the fledgling shale gas industry. The government will accept bids from oil and gas firms after putting into place what it says are rigorous environmental protection standards.

The United Kingdom has long been a substantial producer of oil and natural gas, but much of that up until now has come from its offshore oil fields in the North Sea. With its North Sea assets mature and declining, the British government is looking for alternative sources of energy.

The U.K. needs more energy supply, but due to concerns about climate change, is wary of increasing its dependence on coal. The government has offered support for new nuclear power, including a guaranteed price for a proposed nuclear power plant in southwest England to be constructed by EDF. But, that plant won’t come online until 2023 at the earliest.

The U.K. has been a global leader in wind power, having installed the most offshore wind capacity in the world. But, offshore wind still only makes up a small percentage of the nation’s electricity.

Shale gas, the British government hopes, could hit a sweet spot for its energy needs. It could provide domestically produced energy, reduce emissions relative to coal, and boost the stagnant economy. And with geopolitical events in Ukraine highlighting the need for Europe to improve its energy security, the British think shale gas can be a winner.

But fierce environmental opposition has slowed the rollout of shale gas across the British Isles. The U.K.’s most recent plan to move forward with shale development tries to address those environmental concerns. In a nod to conservation, the government will most likely deny permits to drill near sensitive environmental areas, unless in cases of “exceptional circumstances.” Known as areas of outstanding natural beauty (AONBs), the government hopes to protect national parks and other sensitive areas, while still allowing nearly half of the entire country to be considered for shale gas bids.

Environmental groups will not be placated but the British government hopes to gain enough support from the British public.

So how much shale gas are we talking about?

The British Geological Survey (BGS) has published data that suggested that there are three main regions that could be promising areas for shale development.

First, is the Bowland Shale, which stretches across central Britain. The Bowland could be home to between 822 and 2,281trillion cubic feet (tcf) of natural gas. In its central scenario the BGS estimates that there could be 1,329 trillion cubic feet of natural gas in the Bowland Shale.

Those are enormous numbers but only represent preliminary “gas-in-place” figures, and say nothing about what would be technically or economically recoverable. For now, the BGS cannot say with any degree of certainty how much of those reserves are recoverable. The data will only be refined once oil and gas companies move in and start exploration.

Further north is the Midland Valley of Scotland, in and around Glasgow and Edinburgh. In a report published earlier this year, the BGS projects that Scotland’s Midland Valley holds somewhere between 49.4 and 134.6 trillion cubic feet of shale gas, with a central estimate of 80.3 tcf. Scotland could also hold some shale oil, with BGS projecting 3.2 to 11.2 billion barrels. Again, investors should remember that these are “in place” estimates, not necessarily what is recoverable.

Finally, the Weald Basin in southeastern Britain holds some potential for oil. There are several different pay zones moving down in depth in the Weald Basin, but taken together, the BGS estimates that the Weald could hold somewhere between 2.2 and 8.6 billion barrels of oil trapped in shale. Their central estimate is 4.4 billion barrels. But unlike the other shale formations, the BGS did not find any significant resources of shale gas.

 Map

There are a few companies looking to jump in. Total (NYSE: TOT), unable to frack at home in France, was the first major company to purchase acreage in the U.K. shale patch. It took a 40% stake in 240 square kilometers in the East Midlands in January 2014.

A year ago, Centrica (LON: CNA) paid 40 million British Pounds for a 25% stake in shale acreage in the Bowland area. The company believes there could be around 200 trillion cubic feet of natural gas in the vicinity. It purchased the acreage from Cuadrilla, one of the earliest companies to actually begin exploratory drilling for shale gas in the U.K. However, Cuadrilla ran into some pretty intense public opposition in 2013 and Centrica would face the same public opposition.

The French utility company GDF Suez (EPA: GSZ) is also getting in the game. In 2013 it joined with Dart Energy (ASX: DTE), a small Australian unconventional gas exploration company to drill in the United Kingdom. GDF Suez will pay for the drilling of four shale gas wells in the Bowland basin.

The preliminary results suggest that the U.K. offers one of the most promising drilling areas in Europe. Other countries, often for political reasons, have been closed off. France has passed a ban on fracking, and Germany could be soon to follow. Poland has rolled out the welcome mat for oil and gas drillers, but after 50 drilled wells with little to show for it, major companies like ExxonMobil and Eni have packed up and moved out.

The U.K. hopes to be different, but it won’t be easy. Several obstacles stand in the way of a successful shale revolution taking off in Britain.

First, multiple permits will be required before drilling can begin, including a license, planning consent, environmental permits, and approvals from the Health and Safety Executive.

Second, fear and opposition to hydraulic fracturing runs deeper in the U.K. than it does in the United States. More importantly, the U.K. is much more densely populated than the U.S., and the Conservative government of Prime Minister David Cameron is moving forward cautiously in order not to alienate his support in rural areas that may be affected by an increase in drilling. The government went to lengths to praise the strict environmental protections included in their shale gas plan in an effort to assuage concerns of rural communities.

Lord Ahmad of Wimbledon, the Tory Communities Minister, was tasked with identifying areas of natural beauty that should be protected. “We recognize there are areas of outstanding landscape and scenic beauty where the environmental and heritage qualities need to be carefully balanced against the benefits of oil and gas from unconventional hydrocarbons. Proposals for such development must recognize the importance of these sites,” he said.

Balancing development and conservation will be tricky in a country that prizes its bucolic countryside. Public protest will be likely, and investors should not rule out the possibility that the Cameron government backtracks on its shale push if public opposition is more aggressive than anticipated.

Finally, and most importantly, the data is highly uncertain. The British Islands could hold vast shale oil and gas reserves, but for now, the figures are speculative. Until drillers frack a bunch of wells and see what happens, there are huge unanswered questions about what lies beneath.




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