Centrica (LSE: CNA) U.K. Shale Investing

Brian Hicks

Written By Brian Hicks

Posted June 10, 2013

Centrica Plc (LSE: CNA) may be close to buying up a stake in Cuadrilla Resources Ltd.’s licenses in northwestern England’s shale gas fields. This is significant, as Cuadrilla has previously claimed to have access to enough gas reserves as to increase England’s existing reserves eight times over.

England has been in the throes of revising its legal frameworks in order to account for controversial practices like fracking, which has significantly impeded exploratory activities. However, British Prime Minister David Cameron has already been putting some pressure on to push exploration and development ahead on a national basis.

Bloomberg reports:

“This would be a real boost for U.K. shale development,” said Peter Atherton, an analyst at Liberum Capital Ltd. in London. “Centrica brings great resources and great upstream experience. It’s also the one company whose absolute core is making sure that the U.K. is well-supplied with gas.”

Cuadrilla stands to benefit from Centrica’s involvement, since the latter has the financial clout to help Cuadrilla finance further development of its shale licenses after preliminary explorations. Centrica does own British Gas—the largest seller of gas across the nation—but the company has also noted decreasing production from existing fields. That means this could be a good deal for Centrica, too.

Of interest is the fact that Cuadrilla is responsible for England’s temporary moratorium on fracking, after the company’s activity in Blackpool’s Bowland Basin set off two minor earthquakes in 2011. The moratorium was lifted last December, and Cuadrilla has put Blackpool operations on hold until 2014 as it undertakes further assessment of risks. Production isn’t expected until almost 2015, if not 2016.

Despite this controversial history, Cuadrilla has asserted that its licenses may be holding as much as 200 trillion cubic feet of gas. That, as mentioned earlier, is a dramatically high amount—enough to cover England’s gas needs for the next eight years. Driven by such prospects, the national government is working to pave the way for shale gas development.

At present, tax breaks for shale drillers are under consideration, as are incentives for locals living near drilling areas (eg., lower bills). Production is sure to benefit the nation, since the North Sea’s production volumes are steadily declining, and England needs to find a sustainable, long-term replacement sooner rather than later.

England’s Shale Game

For England, this is certainly a positive development. However, international oil and gas majors have demonstrated a wary approach. First, Cuadrilla has thus far drilled just one exploratory well. Funding remains an issue because the viability of drilling for shale gas in England is not yet proven.

More importantly, the government’s positions on shale exploration remain somewhat hazy. Critical factors like ease and transparency in obtaining and managing drilling licenses and clarity regarding tax structures are still being worked out. That’s a big concern for companies like BP (NYSE: BP) and Shell (NYSE: RDS-A), which have not yet jumped at these recent opportunities.

Poland may provide an instructive case. That nation had been touting extraordinarily large reserve estimates, but these estimates were recently decreased by an alarming amount. On top of that, some early drilling attempts led to the realization that working Poland’s shale would be a rather tough proposition—almost uneconomically so, in fact.

A series of oil and gas majors—Exxon Mobil (NYSE: XOM), Marathon (NYSE: MRO), Talisman Energy (NYSE: TLM)—all departed Poland. Only Chevron (NYSE: CVX) still remains there today.

England has surely taken note. That’s why the national administration is working to revise licensing and permitting structures, tax frameworks, and so on. However, until real details emerge, it’s unlikely companies are going to flock to English shale. Why would they, when undertaking shale operations in the U.S. is a much more transparent and attractive opportunity?

Cuadrilla isn’t alone in wishing to exploit England’s shale. IGas, its closest competitor, is worth about 200 million pounds and has won funding of about 23 million pounds from investors, reports Reuters. IGas has claimed recoverable estimates between 15.1 and 172.3 tcf on its license.

Contradicting that, the British Geological Survey has indicated recoverable estimates of 4.7 tcf. Sometime within the next two months or thereabouts, the BGS will issue another report with latest figures. A lot of eyes will be poring over that one.


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