For years now, ‘fracking’ and ‘horizontal drilling’ have been the biggest stories in the energy sector.
Combined, these techniques have enabled America to unlock vast reserves of gas and oil from previously inaccessible ‘shale’ rock formations.
The US now looks set to be a global energy superpower, with internal pressure building to allow increased energy exports. And the states that are most heavily involved in fracking are enjoying spectacular economic growth.
The good news is that – while a US-style energy glut may be a while off – the fracking revolution is gathering ever more momentum on this side of the Atlantic too.
What’s all this stuff about ‘fracking’?
If you’re still slightly bamboozled by all the talk of ‘fracking’ and energy revolutions, let me just set the scene briefly.
‘Fracking’ or hydraulic fracturing, is a drilling technique that enables resource companies to extract oil and gas from previously hard-to-reach shale energy deposits. It basically involves pumping a lot of water at high pressure into these rock formations, and blowing them apart to get at the good stuff inside.
Fracking isn’t a new technique by any means (in fact, it’s been used onshore in Britain for many years). But a combination of high energy prices and advancing technology means it is now far more economically viable.
Another key advance – perhaps even more important – has been ‘horizontal drilling’. Again, keeping things simple, this technique means you can access a much wider area of resource without having to drill as many wells.
The US has been the biggest beneficiary of all this so far. Partly because landowners have good reason to encourage drilling on their properties – they own the rights, so can make a fortune if oil and gas are struck – shale has really taken off. As a result, US natural gas prices have tumbled. In turn, this has made life easier for consumers, and encouraged companies to ‘reshore’ – bring industrial plants back to the US – to take advantage of cheap energy.
However, the US isn’t the only place with substantial shale deposits. Here in the UK, we’ve got loads of the stuff. A report last year suggested that there could be as much as 1,300 trillion cubic feet of shale gas lying under 11 counties in the Midlands and northern England.
What does that mean? Well, oil companies won’t be able to extract all that gas. But even if just 10% was produced, that would be the equivalent of 51 years’ gas supply for the UK at current consumption levels.
Given that energy bills and energy security are both hot topics, you can see why the government is keen to promote shale energy in the UK – not to mention the economic growth and jobs boom that shale could potentially provide.
And of course, this could all be great news for investors too – assuming it all goes ahead.
But fracking is controversial. Environmental groups argue that it can contaminate water supplies and cause earthquakes. Supporters argue that these concerns are unfounded (and official studies do suggest that these risks can be easily contained, given a sensible level of regulation). They also point to the huge success of fracking in the US – given our own tenuous economic position, can we really afford not to develop this resource?
The perhaps bigger problem is that – as with almost any development, from wind turbines to nuclear power stations to airports to high-speed rail lines – nobody wants this in their back garden. Who would?
There’s no doubt that this is a sticky issue, and I suspect there’ll be a wide range of views among readers: from those who are all for it, to those who are dead set against it, to the pragmatists who don’t really like it, but don’t mind profiting if it’s going to happen anyway.
It’s certainly worth understanding what’s going on, because this is going to be one of the biggest stories in investment for a long time to come. For more on the ins and outs of the fracking debate, do take a look at this report that my colleague David Stevenson at the Fleet Street Letter put together.
Good news for investors in fracking
In any case, it’s been an exciting couple of days for shale’s supporters.
For one thing, on Monday, David Cameron announced that local authorities will be able to keep all business rates revenue from any fracking site. Previously, they would only have expected to keep 50%. That’s a significant boost – a typical fracking site will now generate an extra £1.7m a year in revenue for a local authority.
Meanwhile, there’s been a huge vote of confidence from one of the biggest companies in the sector. French oil giant Total, which has been a key player in global shale, is making a significant investment in UK shale. The company is buying a 40% stake in two licences in the ‘Gainsborough Trough’ in Lincolnshire. It’s paying $1.6m to the existing partners, and will then invest up to $46m to finance further exploration work.
The following companies are now in partnership with Total: Dart Energy (17.5%), IGas (14.5%), Egdon Resources (14.5%) and eCorp Oil & Gas UK (13.5%). Both Egdon (LSE:EDR) and IGas (LSE: IGAS) are listed in London. Shares in Egdon soared by 49% yesterday while IGas jumped 17%.
David has been holding his favourite companies in the sector for quite some time now in his Fleet Street Letter portfolio; he also recently tipped them in MoneyWeek magazine’s New Year issue). For other ideas on how to profit, you can take a look at our cover story from November.
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