U.K. Shale Gas Investing

Brian Hicks

Written By Brian Hicks

Posted June 4, 2013

Could the British have the next Bakken or Eagle Ford on their hands?

IGas Energy Plc (LSE: IGAS) announced a quadrupling of its natural gas reserves, with a range of 15 to 172 trillion cubic feet, between the areas of Liverpool and Manchester in northwest England. A flat reserve estimate within a 300 square mile radius is 102 tcf—a far leap from the company’s original assessment of 9 tcf.

It is unclear just how much can be recovered, but British analysts believe there is a 10 to 15 percent recovery rate of said reserves.

super frackCEO of IGas Andrew Austin believes 15 percent could be recoverable—a percentage that would make the nation less dependent on imports for the next 10 to 15 years, The Guardian reports

The British Geological Survey held recoverable reserves at 5.3 tcf, with a time frame of less than two years for national consumption.

Drilling is expected to commence this year to find out how much of the reserves can be extracted and to see if the figures need to be revised.

Britain currently imports 1.5 tcf of gas per year but consumes up to 3 tcf per year.

Many British leaders, including Chancellor of the Exchequer George Osborne, are hoping to imitate the success of the shale gas boom in the United States to reduce reliance on foreign imports.

The government plans to make this happen through tax incentives and programs to spur investment in the region. Similar proposals have been made in regards to dwindling North Sea crude production.

A variety of factors will come into play to determine whether the U.K. could undergo a drilling frenzy of its own, including investment, political will, and drilling technology.

The government’s lifting of the fracking ban in late 2012 will certainly help matters.

Could the U.K. find its own energy bearings by using the same drilling engagements as the U.S.?

Too Soon to Tell

Until test wells are conducted, no one will know for sure just how big the reserves are and how much can be extracted.

And to make finding those reserves possible, the British government will need to give enough breathing room for energy companies to engage in more fracking.

In Britain, fracking faces opposition from environmental groups and local townspeople. And the drilling practice suffers from negative opinion in public polling.

But the British government has still handed out over 300 drilling licenses since the nation lifted its fracking ban. Right now, the number one issue for Britain is having sizable reserves.

Worst case scenario, drilling test wells could turn out a wash.

The new reserve estimates from IGas may be exciting for Britain’s energy sector, but Poland was also enthused about its shale deposits until actual testing dampened short-term hopes of a natural gas boom.

If Britain does have a good recovery rate and a large foundation of reserves, it is still unclear how these findings will conflict with Britain’s other energy campaigns – including nuclear power.

Will the same programs and incentives apply to other energy sectors, and which one will be favored most? And is there the necessary capital and political will to fund other energy fields like nuclear power on an equal basis?

Even if the British government chose to shine favor on natural gas, there must also be an effort to ensure that a drilling boom doesn’t turn into a drilling bubble.

In the U.S., natural gas production is suffering from insufficient domestic demand and higher production operations, and the Department of Energy is not exactly eager to approve too many export facilities just yet.

But let’s remember that the United States has an equally prosperous shale oil industry to fall back on when natural gas prices slumped. Chesapeake Energy Corporation (NYSE: CHK), an American company that focuses on natural gas exploration, is one company that defaulted to crude production in order to compensate for the natural gas glut.

The U.K. does not have the same crude boom as North America, and a North Sea crude renaissance is not on the horizon anytime soon. If Britain allocates investment funds wisely, perhaps leaders could rely on other energy sources, such as clean-burning nuclear power, in the event of a natural gas downturn.

And when it comes to dealing with lower natural gas prices, exporting is always a good option. But it is doubtful that the current political climate in Britain would favor an exodus of national resources—at least not for the time being.

British Shale Gas Exports

On the more positive side, IGas could be right about the estimates, and all Britain could need is a 10 to 15 percent recovery rate to drive down imports. It may not be the Bakken-like model the British were hoping for, but it will be enough provide import relief.

But if England discovered more recoverable reserves than initially thought, this could mean a paradigm shift in British energy consumption and international exports.

There are critics who speculate that IGas is overinflating its natural gas estimates to impress investors. No one knows if this is the case, but it has nevertheless renewed interest in the British natural gas sector.

If Britain proves to have a substantial amount of recoverable natural gas reserves, the primary focus will be on domestic consumption, reducing imports, and to foster job creation in a struggling economy. Currently, exporting natural gas and LNG is a long afterthought in Britain.

If you’re on the lookout for a U.K. LNG export boom, you may have to wait a tad longer. The British are currently looking to U.S. energy company Cheniere Energy Inc. (NYSE: LNG) for the supply of LNG imports to power 2 million British homes over the next 20 years. It will be the first time Britain has ever imported natural gas from the United States.

To date, Cheniere is the only company to have its export application approved from both the Department of Energy and the Federal Energy Regulatory Commission to export to non-free trade countries. Freeport LNG, a ConocoPhillips (NYSE: COP) operation, recently received approval from the Department of Energy.

U.S. LNG exports are a safe bet because many energy companies are itching to engage international markets, and there are buyers lined up.

The U.S. has direct export access to Mexico. There are also eager buyers in Asia like Japan and South Korea, two of the largest consumers of LNG in the world.

If you’re on the fence about natural gas drilling in Britain, it is best to wait and reserve judgment until IGas begins its drilling operations. 


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