Shale Gale UK-Style or Premature Optimism?

Centrica's recent acquisition of a 25% stake interest in Cuadrilla's UK Bowland Shale license in North England has put the spotlight on very nascent UK shale gas prospects. Cuadrilla has been looking for a partner since late last year, but the end of a fracking moratorium and increased government support for a new "dash for gas" as the holy grail of Britain's energy future are likely responsible for the timing of the farm-out to Centrica.

The GBP 100 million price tag sets a moderate benchmark for such deals in the UK. The deal, along with Total's general expression of interest in UK shale gas exploration and a recent reserves estimate update from the British Geological Survey (BGS) has UK hopes for a shale gas boom and a recovery in energy independence running high. But are these hopes justified or is it too early for cheers?

US parallels? The new BGS study has been conducted in response to early shale gas drilling activity in the UK by independent Cuadrilla, which pegged estimates for the Bowland Shale alone at about 200 Tcf in 2011. The BGS doubled previous estimates for the area and exceeded bold previous expectations of 1,000 Tcf in place. But it has to be cautioned that too little exploratory drilling has been undertaken to date to confirm the 37.6 trillion cubic metres (Tcm; 1,329 trillion cubic feet) in shale gas in-place resources (P50) that the BGS now estimates.

For comparison, IHS CERA estimates the US recoverable shale gas resource base to be 1,311 Tcf. A current North America shale gas in place estimate to compare to the BGS figure is not available due to the continual learning process taking place in Canada and the United States.

Thus, one of the major questions remaining unanswered is to what extent UK resources will be economically recoverable. Recovery rates for shale gas in North America have ranged between 10 and 30% at this stage in the technological evolution, implying that as much as 270 Tcf of gas could be technically recovered from the Bowland and possibly more as technology continues to develop.

Incentives galore The UK government is obviously keen to get companies drilling. Together with the new resource assessment came an announcement by Chief Secretary to the Treasury Danny Alexander that the government would be streamlining permitting and planning procedures in a new set of guidelines for onshore unconventional hydrocarbon drilling. In line with these efforts to stimulate British shale gas development, the UK government also initiated a consultation process on potential tax incentives for the shale gas industry. Operators have welcomed the new resource figures as well as the government's efforts.

Significant potential… On the back of the Bowland Shale study, the BGS is set to look at the Weald Basin in the southeast of England next. So far, the United Kingdom has issued 176 shale licences to independent operators, and expectations are high that major industry players such as Total might join in next year when the 14th onshore licensing round is launched. Should BGS' first estimates indeed prove realistic, potential shale gas riches could not only put the United Kingdom in a leadership position in Europe in unconventional hydrocarbon development, but also have enormous implications for the country's economy.

IHS CERA estimates that the country could see shale gas production reach 5bcm by 2030 or roughly 11% of 2012 natural gas imports. Moreover, shale gas could contribute to the UK reaching its carbon target because it burns cleaner than coal and might replace some coal-fired generation, if the price of shale gas is lower than that of coal and fugitive methane from gas production is managed by operators.

… but unlikely transformative However, the scope of recoverable British shale oil and gas resources remains unknown, and the fight over onshore hydrocarbon drilling in scenic and densely populated English regions is promising to keep the pace of development rather slow. The combination of public skepticism, anti-drilling groups like Frack Free Sussex, and the fact that UK shale formations are comparatively thick might mean fewer wells to be drilled in England as operators are considering multiple horizontal sections to access gas laterally distant from the surface location but at multiple depths. Such a scenario could potentially help limit surface footprint, but likely at a higher cost.

Another consensus approach might be to focus on brownfield developments, meaning drilling on sites that have been used industrially previously and would not significantly disturb communities - a route Cuadrilla's competitor IGas is following.

Addressing public concern over community disruption from shale gas drilling and associated industrial activities, the UK government in cooperation with the industry also introduced community benefits for those choosing to host shale gas drilling. These benefits would include GBP100,000 (USD153,000) in funding for each community in close proximity to a hydraulically fractured well, and a 1% revenue sharing offer from every production site. Although the offer is meant to allow communities to reap some of the benefits of potential shale gas drilling beyond the more immediate positive effect on the local job market, it might be perceived by some citizens eligible for these packages as a precautionary compensation payment.

Lingering public uncertainties about whether risks are being properly managed remains a key challenge, but the UK's stringent regulations, mandated community benefits, and demonstration of responsible resource development by operators should facilitate increased levels of community acceptance.

Pushing a new "dash for gas" The question is how to navigate around these issues, as the government is obviously keen to herald this new "dash for gas". The government has also alluded to the offshore shale potential in previous communications. Taking the shale game offshore would solve the issue of fervent onshore opposition and take potentially controversial international investments offshore where these foreign investments are more common. At the same time, such a scenario would provide the United Kingdom with an opportunity to pioneer the technology for offshore shale - a resource that has not been tapped anywhere else, due to the fact that onshore reserves are simply easier and cheaper to access.

If offshore shale resources could in fact be proven, there could be both new economic potential along the English coastline and environmental attention from groups concerned about fugitive methane and other impacts. However, the North Sea oil and gas industry has decades of experience in proper development and environmental mitigation that could be brought to bear. Similarly, explorers and producers could fall back on existing infrastructure that could help the economics of such frontier hydrocarbon exploitation efforts. In addition, offshore, governmental incentives might make the real difference.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.