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Fracking Comeback As Britain Seeks Shale Bonanza

Nidaa Bakhsh, Bloomberg

Two UK drillers are taking the lead in exploring for the country’s first shale gas after a moratorium ended, with one of them backed by ex-BP Plc (BP/) chief John Browne and the other soon to count China as an investor.

Engineers at work on the drilling platform of the Cuadrilla shale fracking facility in Preston, U.K.

Cuadrilla Resources Ltd., part-owned by Browne’s private-equity firm Riverstone Holdings LLC, and IGas Energy Plc (IGAS) said they’ll drill at least four wells in 2013. New investors are set to enter the U.K. industry, with Cuadrilla holder AJ Lucas Group Ltd. (AJL) in talks over its share in the Bowland Basin, an area that may hold 100 times the gas imported by the country every year.

Britain gave the go-ahead to renew drilling last month and plans to spur shale exploration with tax breaks as fuel prices rise and falling North Sea output squeezes supply. That may buoy an industry facing resistance in Europe, where nations such as France outlawed hydraulic fracturing, the extraction method that’s raised the U.S. to the top spot in natural-gas output.

“We could be looking at shale resources that are at least a third the size of the North Sea and this would be of huge benefit to the U.K. economy,” said Tom Crotty, director of Ineos Group AG, which uses gas to make power and chemicals. “We could even see the U.K. becoming a net exporter of gas again.”

Following earth tremors blamed on shale tests in 2011, fracturing, or fracking, was suspended in the U.K. for about 18 months. The government decided in December that testing could resume after setting up controls to cut the risk of earthquakes.

The U.K. expects to detail its proposed tax incentives as soon as April and is undertaking an environmental study for the next bidding round, Energy Minister John Hayes said Jan. 16.

Fracking Plans

Cuadrilla plans to fracture and test one well at its Becconsall site in Banks, Lancashire, and another at its Anna’s Road site near Blackpool in 2013, subject to planning approval, the company said Jan. 17. Fracking, a process that uses water, sand and chemicals to blast underground rock, probably caused the quakes in the area in 2011, Cuadrilla said at the time.

The company, which counts ex-BP Chief Executive Officer Browne as its chairman, has said output from the shale formation it’s exploring in northwest England may start as early as 2014.

IGas, a London-based gas producer that raised 23.1 million pounds ($36.5 million) selling shares this month, may apply for a fracking license next year.

“We are planning a two-well shale appraisal program commencing in 2013,” CEO Andrew Austin said Jan. 25 in an e- mail. “Any subsequent flow-test of a well, which would be subject to a separate planning application, is likely to take place in 2014.”

Chinese Investment

IGas, which hired investment bank Greenhill & Co. last June to help find an investor in the Bowland prospect in northwest England, is yet to announce a partner. Its biggest investor is 24.5 percent owner Nexen Inc., the Canadian explorer that agreed to be taken over by China’s Cnooc Ltd. for $17.4 billion including debt last year.

Exxon Mobil Corp. (XOM) has been in talks to buy a stake in IGas’s Bowland operation, the Sunday Times reported in December, without saying where it got the information. Richard Scrase, an Exxon spokesman in Leatherhead, England, declined to comment.

The newspaper subsequently said Lichfield-based Cuadrilla had hired Jefferies Group Inc. to bring in an investor, and named Centrica Plc (CNA), Exxon, Royal Dutch Shell Plc (RDSA) and BP as possible buyers of a stake in the company or its assets.

BP, Centrica and Shell declined to comment.

‘Risky’ Shale

“I don’t think it’s a bad time to be having a look at shale now that the moratorium has been lifted,” Sanjeev Bahl, an oil and gas equity research analyst at Numis Securities Ltd., said by phone on Jan. 17. “But with a caveat that it’s at a very early stage and so is risky.”

Exxon previously pulled out of shale drilling in Poland after reporting “disappointing” well results. Europe has come later to large-scale fracking than the U.S., where industrial- level shale gas production began in the 1980s, according to the Energy Information Administration. Shale output accounted for 23 percent of U.S. dry-gas production in 2010, EIA data show. Shale is projected to make up 46 percent of U.S. gas output by 2035.

In the U.K., Cuadrilla holds an estimated 200 trillion cubic feet of gas in the Bowland area, according to CEO Francis Egan. That’s more than Iraq has in its entire reserves. Two wells near Blackpool have already found shale formations almost 10 times as thick as typical U.S. deposits, Executive Director Dennis Carlton said in September.

Multiple Wells

“The geology is there but the question is: How much can we get out?” Richard Davies, director of Durham University’s energy institute, said by phone on Jan. 15. “Like the U.S., hundreds or even thousands of wells will need to be drilled to get enough gas to have an impact in the U.K., and therefore it needs social acceptability.”

European nations have hesitated to endorse fracking because of concerns it may pollute water. Britain argues that it needs to diversify its energy mix, reduce imports and secure new fuel resources as aging coal-fired and nuclear power plants are shut.

The U.K. produces about 1.5 trillion cubic feet of gas a year and consumes roughly 3.3 trillion cubic feet, Davies said. While shale could help close the 1.8 trillion-cubic-foot gap, “it will take some time for shale gas to develop as we don’t have significant numbers of onshore drilling rigs,” he said.

Assuming that recovery rates average 10 percent, the U.K. shale resources already identified would meet a quarter of the country’s gas needs for about 40 years, according to a September statement from the Institute of Directors, a group representing professional leaders. If recovery averages 18 percent as in the U.S., the timeframe extends to about 75 years.

Replace Coal

“U.K. shale gas has the potential to create highly skilled jobs in parts of the country that need them most, halt the rise in gas imports, increase tax revenues and benefit the environment by supporting renewables and replacing coal,” said Corin Taylor, the institute’s senior economic adviser.

Development of North American shale sent U.S. gas prices to their lowest in a decade. By contrast, crude oil has almost quadrupled to more than $95 a barrel since the start of 2000.

“Shale gas has had a transformational supply impact in the U.S.,” Jon Clark, director of oil and gas transaction services at Ernst & Young LLP, said by phone on Jan. 14. “It’s unsurprising that companies are working hard to try and establish whether there is a potential for similar success in the U.K.”

AJ Lucas, the Sydney-based owner of 43 percent of Cuadrilla, said in a Jan. 14 statement that discussions on selling a stake were “at a preliminary stage.” Neil Cameron, a spokesman for Cuadrilla, declined to elaborate on that statement. Riverstone Holdings also owns 43 percent, and the remaining shares are held by senior management, he said.

Bloomberg, 28 January 2013