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The UK’s “Dash for Gas” – Which Companies Might Benefit from the Shale Revolution?

And Which Might Not

by Tsveta Zikolova

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Although there is still a lot of uncertainty surrounding the extent of the UK’s shale gas deposits as well as their economic feasibility, the shale gas revolution on the other side of Atlantic which transformed the US energy landscape in recent years has prompted the UK to explore its own shale gas potential. So, with all the hype surrounding the UK’s “dash for gas”, it is worth considering which companies stands to benefit the most from the shale boom and which will likely suffer as a result..

Significant Potential

Shale gas, often referred to as “unconventional” gas, is a natural gas found in shale rock. As noted on the website of the UK’s Department of Energy and Climate Change (DECC), exploration for shale gas in the UK is at an early stage with only a modest level of exploration activity. In its recently published gas strategy, however, DECC points out that large areas of the UK are underlain by shale rocks, with current work commissioned from the British Geological Survey (BGS), the UK’s leading geosciences centre, suggesting the presence of substantial quantities of gas present within shale beds.

The data are consistent with individual company estimates such as those of Cuadrilla, the explorer leading the way in developing the shale gas industry in the UK. In June, Bloomberg quoted Cuadrilla as saying that it had found more natural gas trapped in UK shale rock than Iraq had in its entire reserves. At the end of September, the Financial Times wrote that a report by the consultancy Energy Contract Company indicated that shale gas could bring £95 billion of investment and account for a quarter of UK consumption within 20 years.

Despite this optimistic data, however, the Energy department warns that “the proportion that can be economically produced is not yet known”.

Gas Strategy

Although the actual shale gas deposits and the extent to which they can be recovered are yet to be fully determined, the UK government is already making room for unconventional gas in the country’s energy mix. The DECC’s Gas Generation Strategy, published on December 5, puts shale gas into the energy spotlight, with the department calling it “potentially an exciting new prospect for diversifying our energy supplies.”

To fully explore the potential of this exciting new prospect, the Government will set up an Office for Unconventional Gas and Oil, intended as a single point of contact for investors, intended to provide a simplified and streamlined regulatory process.

Yet, in its gas strategy, DECC estimates that in the case of successful exploration, early production is expected to start in the second half of the decade. Any substantial contribution to the UK’s gas supply however is seen as unlikely until further into the 2020s.

Clear Message

A week after announcing the Gas Generation Strategy, the UK government took the next step in endorsing shale gas, namely lifting the ban on hydraulic fracturing, known as fracking. The process, which involves pumping water and chemicals into rocks to force the gas out, was suspended in the UK last year after causing two minor tremors on the Cuadrilla sites near Blackpool.

The government, however, concluded that the seismic risks associated with fracking could be effectively managed. The Department said that the decision to lift the ban followed a detailed study and further analysis by an independent panel of experts and a report by the Royal Society and Royal Academy of Engineering.

The DECC’s message to the industry seems clear, with Mr Davey noting in a press release that shale gas represents “a promising new potential energy resource which could contribute to the UK’s energy security”. In addition, in his ministerial statement, Mr Davey noted that he was “in principle prepared to consent to new fracking proposals for shale gas.” Reuters quoted Simon Toole, DECC's head of licensing, exploration and development, as saying that lifting the ban will prompt companies to apply for exploration licences.

The Licence Process

So, how does a company acquire a licence for shale gas drilling in the UK? DECC’s website outlines the process, which is the same regardless of whether a company wants to drill a well targeted at conventional or at unconventional gas. DECC issues licences in competitive offerings with the consent granting exclusivity to operators in the area covered by the licence.

Negotiating access with the owner of the land where the well is to be drilled is also essential, as are permissions by the Coal Authority, if the well encroaches on coal seams, and by the Local Planning Authority (LPA). In addition, the operator must consult with the Environment Agency (EA) in England and Wales, or the Scottish Environmental Protection Agency (SEPA) in Scotland.

Companies wishing to drill for shale gas in the UK, however, will also have to comply with the new requirements which DECC introduced together with lifting the ban on fracking. Some of those include a fracking plan to be submitted to the Department showing how seismic risks will be addressed, as well as monitoring carried out before, during and after fracking. In addition, information for all substances proposed for use during the fracking process will be made available to the public.

Companies Potentially Benefitting from the UK Shale Gas Boom

When it comes to shale gas drilling in the UK, the first company that comes to mind is Cuadrilla Resources, the UK shale gas explorer which suspended drilling near Blackpool after being accused of causing a couple of minor earth tremors. Yet, with the ban on drilling recently being lifted, Cuadrilla is expected to resume drilling at its Lancashire site. As reported by Bloomberg, Cuadrilla, which also holds licences in Poland and the Czech Republic, is privately held and backed by private equity group Riverstone Holdings LLC and Australia’s AJ Lucas Group (ASX:AJL).

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