Britain's arrival as a heavyweight in shale gas has been confirmed by a key report that revealed the nation’s reserves are far larger than first thought.
According to the British Geological Survey, the unconventional hydrocarbon bounty contained in the Bowland shale area in north-west England could be somewhere in the order of 1,300 trillion cubic feet.
Nobody knows exactly how much gas can actually be liberated using the controversial fracture stimulation technique, known as fracking. However, even if only 10% of those reserves can be tapped, there is enough gas below tracts of Lancashire and Yorkshire to meet Britain’s demand for the next 40 years.
Advances in technology, particularly the advent of fracking and horizontal drilling, led to a revolution in the US gas industry that saw prices plummet.
It is hoped the same sort of transformation could occur here with a similar impact on prices and energy security.
Currently, the nation stands on a precipice as dirty coal-fired power stations are de-commissioned with nuclear and green sources of electricity unable to fill the gap.
Shale is being touted as the saviour that ensures the UK doesn’t have to rely on supplies imported from Russia, which brings with it the prospect of intermittent ‘gas-outs’.
This, and the potential bonanza tax revenues generated by a shale boom, might explain why Treasury chief secretary Danny Alexander is keen to move quickly. It is reported that he will consult on a tax break and publish detailed planning guidance within the next three weeks.
This, then, could pave the way for the Environment Agency to offer permits for fracking projects more quickly, and to set them to defined timetables in a further bid to encourage firms to invest.
Even before today’s developments, there had been interest in the two listed companies with significant shale acreage here: AIM-quoted IGas (LON:IGAS), and Dart Energy (ASX:DTE), an Aussie firm with a Scots chief executive.
In the last month IGas shares have advanced 53%, while Dart’s are up 54% as investors have raced to gain an early stake in what could be a massive shale bounty. The shares are up 5% and 13% respectively today.
Privately-owned Cuadrilla is the only company so far to have drilled for the unconventional gas here in the UK and its US$160mln deal with British Gas owner Centrica has provided a sense of the value of what’s locked into the Bowland shale.
Cuadrilla, which has drilled four wells to date, believes its slice of the Bowland contains 200 trillion cubic feet of gas in place and in much higher concentrations than have been seen in the US. At a recovery rate of 10%, the gas extracted would be worth well over US$200bn at current prices.
At this point you start to understand just why investors are getting excited about shale.
IGas is reckoned to be sitting on 102 trillion cubic feet. Meanwhile, Dart has seven licences spanning 300 square miles that are currently thought to have about 60 trillion cubic feet - although this estimate reflects the earlier stage nature of the acreage.
Indeed, both IGas and Dart are still lagging behind Cuadrilla in terms of the amount of work carried out on their respective properties.
City broker Canaccord reckons the Centrica deal is significant for the whole area, as it is a strong signal of commitment to the Bowland. In the coming years Centrica will help drive the basin forward, said analyst Charlie Sharp.
“The scale of the investment will provide the backbone of a proper appraisal of the Bowland Shale potential,” he said in a note to clients recently.
“We think that the partners will now be able to drill, frack, and test, six to eight wells over the next two to three years, and carry out a whole raft of technical studies.
“This should provide the information needed to extend the programme to the 20 or so wells that we anticipate will be required before large scale commercial development could be considered.”
According to Sharp, the deal implies the project is worth a total of £340mln, which in turn points to a valuation of £1.7mln per trillion cubic feet.
This, when totted up on the back of an envelope, loosely values the IGas assets at £174mln and would suggest the possible 60 trillion cubic feet on Dart’s property could, at this stage, be worth about £100mln.
Clearly, though, much more work will be needed to better define both the scale of the resources as well as their commercial value.