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Josh Lelliott

Josh Lelliott

Josh writes at Fluent Financier, a source of financial education and analysis. Outside of finance, his biggest interests are languages & world culture and he…

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Is a UK Fracking Revolution Inevitable?

Is a UK Fracking Revolution Inevitable?

Ten years ago, the idea of the U.S. exporting its gas and oil was unthinkable. Dwindling domestic production meant energy supplies had to be topped up from abroad, leaving the nation at the mercy of foreign producers. Today, however, the U.S. energy market is booming. It surpassed Russia in 2009 to become the world’s largest producer of natural gas and is soon expected to overtake both Russia and Saudi Arabia as the largest oil producer in the world. The shale gas revolution is the key to America’s future, and a similar revolution is on the verge of taking place in the UK.

While the UK’s shale gas production has a long way to go before it can begin to rival the mighty fields of the U.S., momentum is slowly and surely gathering in the industry. Total became the first oil and gas major to join the land grab for exploration sites at the start of this year, investing more than $20 million to acquire a 40 percent stake in two Lincolnshire sites. Only last week IGas, the UK’s largest pure-play shale company and partner of Total in Lincolnshire, announced that it had secured a suitable rig to drill a third site at Ellesmere Port for early 2015.

In 2012, the UK consumed the equivalent of 34.5 million kg of oil in energy, a figure that has more than doubled since the 1960s. However, domestic production has actually been in a state of decline of late; extraction is becoming increasingly difficult and costly. Sixty-two percent of the UK’s energy needs are currently met from imports. In these uncertain geo-political times, reliance on foreign energy can prove disastrous.

The UK’s energy mix is also evolving. Coal accounts for 31 percent of UK electricity, and officials find this figure regrettable. In a world searching for renewable, green sources to tackle climate change, ‘dirty’ forms of energy of its type must be replaced. Coal plants are being closed to meet carbon emission targets. Of the available alternatives, gas is the best bet; it emits just half the CO2 generated by coal, and already powers 80 percent of the UK’s heating. The 30 percent of national electricity it currently provides is expected to rise quickly.

The EU lends its support to the quest for renewable energy. It has provided the UK a target of sourcing 15 percent of its total energy consumption from renewable sources by 2020. What once might have seemed wishful thinking now seems more plausible; the evolution in the technology and efficiency of renewables has been extraordinary. But renewable energy still lacks the firepower of its more traditional cousins. The sheer density of fossil fuel energy means they can innately store their value for thousands of years, before alighting for instant and stable energy flows. Other sources have much ground to gain.

Indeed, the UK is the windiest country in the EU but 30,000 wind turbines in the country still produced only 6 percent of the electricity in the UK in 2013. Hydro and solar accounted for an even smaller percentage. While renewable energy is clearly on the rise, until technology is more efficient in storing generated power and costs decline, fossil fuels will not disappear from the nation’s energy mix.

That’s not to say that lasting change cannot begin now. Most of the UK’s domestic gas and oil is produced in the North Sea, though that production is now in decline. This means a growing void has emerged in the energy market. Ostensibly, government officials seem to wish for that gap to be filled with shale gas and oil, with the dream that the UK will become an innovator in the industry. Indeed, a law was recently passed that will allow companies to drill a certain depth underneath private property. Investment in exploration sites and the rush for land by large energy providers is surely now imminent.

The British Geological Survey estimates that in the north of England alone, there is 1,300 trillion cubic feet of shale gas. That withstanding, at current prices the gas would command an asking fee in excess of $5 trillion. Naturally, not all shale gas is retrievable with current means. Current conservative estimates hold that around 10 percent of that figure would be possible to extract. Even this amount would still represent a very lucrative market. Certainly, it could cover the 3 trillion cubic feet of gas consumed each year in the UK.

Extraction costs have been an important point of discussion recently, and early indications are that this won’t be a concern. While accurate estimates have proved elusive, in 2014 IGas reported an average operating cost per oil barrel of $38. Compared to North Sea operating costs, which average $28, and with many economies of scale yet to exploit in this burgeoning industry, that figure is more than reasonable.

The main foreseeable downside is that, unlike the North Sea rigs, where production is expected to decline at a steady rate of around 7 percent per year, a shale site will extract 60 percent of its gas or oil in its first year, quickly necessitating the drilling of more sites. But the UK’s geology is very different to that of the U.S. Shale in England’s Bowland basin is about three times as thick as deposits in northeastern U.S. This means that horizontal wells can be stacked on top of each other at each site, minimizing the number of entry points extruding from the surface. This is essential in a country much more densely populated than the sprawling U.S.

The question of whether fracking in the UK is, in the long run, sustainable, requires serious debate, and there are no decisive answers yet. Still, a wide range of driving factors is pushing the UK towards a wide-scale adoption of these measures. Politically, the move is a near-certainty; both government and opposition are welcoming of the new industry and keen to diversify energy consumption away from frequently unstable foreign producers. Declining production in the North Sea has strained domestic supplies to be shorter than ever. The enviable success of friends across the Atlantic and the large quantity of gas and oil thought to reside within the UK’s thick shale crust will entice British companies to launch their own explorations.  

Make no mistake: investing in fracking is high risk. Yet the rewards are handsome, indeed. Eyes will be fixed not just on early ventures like IGas and Caudrilla resources, each among the first to market, but also equipment suppliers like Weir Group who may join the advance. Investors should make no mistake: in the United Kingdom, fracking is here to stay.

By. Josh Lelliot of Fluent Financier

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