The next few months could be very exciting for investors in fracking

Fracking: new laws should boost returns

We’re pretty excited about the potential of ‘fracking’.

The process of pumping chemicals, water and sand into seams to bring oil and gas to the surface may seem messy. But it could slash our energy bills and boost our manufacturing sector, not to mention make us less dependent on imported energy.

However, it’s still controversial. While the evidence suggests that most concerns can be addressed with sensible regulation, many people are yet to be convinced.

As you’d expect, feelings are especially strong in areas close to drilling sites, where genuine environmental fears unite with traditional Nimby-ism. The latest tactic being employed is for landowners to deny access to their land, pushing the process into a legal quagmire.

But the government is about to take steps to solve this problem – which should be good news for companies involved in fracking.

No wonder landowners aren’t getting behind fracking

It’s hard not to sympathise with the landowners opposing fracking.

British property laws give the Crown (with some exceptions) control over the oil and gas under the ground. So while the government has made some efforts to enable communities as a whole to benefit from fracking in the vicinity, landowners themselves have little incentive to co-operate with efforts to exploit these resources.

As our editor-in-chief Merryn Somerset Webb and regular columnist Matthew Lynn have pointed out, this is daft. Compensating landowners would not only be fair, but would also probably have people lining up to welcome the drilling rigs.

Instead, they are turning to legal loopholes. In 2010, the Supreme Court ruled that, while landowners are obliged to let companies drill under their land, they don’t actually have to let the companies move their equipment onto their land.

In theory, this restriction should not be a fatal blow. Most fracking involves horizontal drilling, so companies can simply sink the well on a nearby patch of land and drill across. However, this can be a major inconvenience for firms, especially if the only land they can access is far from the main seam.



Farmers are also banding together to make even horizontal drilling impossible. One group has already forced energy company Celtique to stop prospecting in the village of Fernhurst in the South Downs National Park. If it succeeds, we can expect groups in the rest of the country to follow suit.

As a result, the government is seriously considering giving companies the right to demand access to the land itself, not just the mineral under the ground. The measure could be announced in the Queen’s Speech when Parliament re-opens in June.

This might sound draconian, but in fact it merely puts oil and gas in the same position as coal. So while it may not be the fairest solution, there’s a precedent for it. And it would also be good for fracking firms – by speeding up the process of exploration and drilling, and slashing potential legal bills, it should boost returns.

Why the timing of the legal changes matters

The changes to the law come at a particularly good time for the fracking industry. Until now, the spotlight has mainly fallen on oil and gas reserves in the north of England. Last year the British Geological Survey estimated that, at the very least, the Bowland and Hodder Shales in Lancashire could just about hold the equivalent of total proven oil reserves of Saudi Arabia.

The latest report will also try to estimate the potential of oil and gas fields in the south of England. The report will be released at the end of May. All the indications so far are that it will show there is also a huge amount of hidden oil and gas in the south.

That’s why the timing of these new laws matters, because the loudest objections so far have come from the Home Counties, where land and house prices are higher than in the north.

So how can you benefit? One company that we particularly like is iGas (LSE: IGAS). As well as having a substantial conventional energy business, it is one of the most aggressive investors in the British shale gas story. The costs involved mean that iGas is not currently making a profit, but it has already made some promising discoveries.

For instance, exploratory drilling in its Barton Moss well near Salford found enough traces of gas to suggest it will be a major field. There may also be some recoverable coal as well.

If you want to learn more about fracking, you should watch this video from our colleagues at the Fleet Street Letter. It’s from the viewpoint of an interested investor, but it does aim to present a rounded look at the issue, looking at the risks as well as the benefits.

Whatever your views on fracking, this is a subject that matters, and it’s going to affect a huge number of people in this country, whatever the outcome.

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10 Responses

  1. 22/04/2014, Jacket wrote

    What a pity that fracking has brought out the dark side of MoneyWeek. Even intelligent people who are already wealthy, safe and secure being wooed by the prospect of making a quick buck from another dirty source of energy.

    We’re all here in the MoneyWeek community to find a decent return for our hard earned savings. So why consider fracking any differently to investing in another opportunity?

    This is why. Because the only real issue that matters to the next generation and the one after that (+ every other species on Earth) is that releasing all this CO2 into the atmosphere is screwing up this incredible place we are lucky enough to call home.

    Come on folks, can’t we agree that its time to stop behaving like cavemen? No more of this digging carbon out of the ground and burning it. It’s so last century!

    Lets invest in the brilliant minds across Britain (and abroad) by putting our money into making solar power cheaper than fossil fuels. We’re not even that far away from it. Then conjure up some fancy new graphene battery that stores power reliably & cheaply. We’ll be some way towards solving the single biggest issue deserving our attention.

    Oh, we’ll also be rich.

  2. 22/04/2014, mikeT wrote

    We follow the US in everything else so,clearly, the landowner should benefit directly by getting a % of the value of the resource after costs of extraction, refinement etc. Some get lucky (sadly,not likely to be me) but we all benefit from cheaper energy, a manufacturing base, better balance of payments et al

  3. 22/04/2014, mikeT wrote

    PS Deep down, I agree with Jacket. Perhaps new fracking wealth could, and should, be invested by The State in developing low-cost solar power – not special tariffs, just cheap installation.

  4. 22/04/2014, MikeH wrote

    I am afraid “The tree huggers” have the upper hand on fracking. We need a bridge energy to cope with the massive costs of turning “green”. This is ignored by the general public!
    The State is only interested in keeping the economy on track, they will invest a very small portion of a fracking revenue in “green technology” to appease the Public, nothing more!

  5. 22/04/2014, CityFarmer wrote

    Of all the renewable energy options Solar has the worst carbon footprint, panel production is massively polluting, and although we’ve largely offshored production to China I’m sorry to break it to you, but we breathe the same air as the Chinese.

    Installed on prime agricultural land and huge solar farms dent much needed food production, installed on marginal land and we lose increasingly scarce wildlife habitat by blanketing huge areas with panels.

    If it’s fracking versus solar, give me fracking any day because fracking is much much less environmentally damaging than solar.

  6. 23/04/2014, Oscar Foxtrot wrote

    I sold my igas shares yesterday. Having done some more research I decided that it was not a venture I could support – too much potential environmental damage. Additionally, I think it could easily become a huge focus for the green movement with civil disobedience on a scale which makes projects unworkable – similar to the anti-Poll Tax protests. I believe the French government has banned fracking. Labour might do the same if elected.

  7. 23/04/2014, Pinkers Post wrote

    Well, not so sure… no harm looking at recent developments in the US

  8. 26/04/2014, mikeT wrote

    @CityFarmer I must admit that I didn’t know solar panel production created such a carbon footprint. Is that because of the Chinese manufacturing process? Is it environmentally better in the US? Also, rather than huge solar farms, why not panels on every house/building, each making small contributions to the grid but large in aggregate? Costly in the short-term, maybe,and in need of State subsidy but a more enduring use of tax payers money than propping up the housing market.

  9. 26/04/2014, Angela wrote

    Building enormous solar farms of hundreds of acres is the industries preferred option. Economies of scale and absolutely vast taxpayer subsidies are available on such projects.
    There are large international companies making millions out of such solar plants. Green, they are not.

  10. 30/04/2014, NicoleH wrote

    Whichever way you look at it, it seems energy production is going to have an environmental impact. “green” energies look to minimise adverse impact, becoming sustainable and natural, whereas fracking is unstable and along with other more traditional energy sources, unsustainable. The world has finite resources.

Commenting on this article closed

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