The British shale gas revolution – will it boom or fizzle?

Britain could be sitting on much bigger reserves of natural gas than anyone expected. So are our energy problems over? John Stepek looks at whether we can replicate America’s shale gas bonanza, or whether it’s all just a mirage.

By John Stepek

published 4 June 2013

in Features

13-06-04-cuadrilla — Will Britain embrace shale gas?

Britain's energy problems are solved.

At least, that's what you might think if you took a quick glance at the business headlines this morning.

"UK shale Eldorado just off the M62", as the Financial Times puts it.

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In short, there could be lots more shale gas under Britain's green and pleasant land than anyone had previously expected.

So what's the story? And can Britain really hope to replicate America's shale gas revolution?

Britain has a lot more shale gas than anyone had expected

By now, most MoneyWeek readers will be familiar with the US shale gas revolution'.

Advances in drilling technology mean that natural gas (and oil) which was once locked away in shale' rock formations, can now be released. The technique used is hydraulic fracturing' or fracking'. This involves pumping pressurised water and chemicals into the rock and blowing it apart.

As a direct result of fracking and shale, it's now not outlandish to suggest that in energy production terms - the US may become the Saudi Arabia of the 21st century.

In turn, the price of natural gas (while recovering now) has fallen heavily. That's been good news for many industrial sectors in particular the chemicals industry. It's also been good news for consumers, at a time when there isn't much good news around.

The trouble is, because natural gas is not a global market, it's only really the US that has benefited from this bonanza. So while America has enjoyed cheap gas, the rest of us are still paying through the nose.

And while other nations have tried to duplicate the shale revolution themselves, so far, no one has made anywhere near as much progress as the US.

But maybe that's about to change.

In the UK, decades of dithering over energy policy by successive governments have left us in the troubling situation where we're gradually switching off our dirty' and outdated energy generation capacity, but have nothing to replace it with. We could do with a little bit of a miracle.

And that's why the prospect of a UK shale gas revolution has everyone so excited.

Yesterday, IGas Energy, one of the companies exploring for shale in the UK, announced that there's a lot more under there than previously thought.

According to the Financial Times, Britain consumes around three trillion cubic feet (tcf) of natural gas a year. In 2010, estimates put total British shale gas reserves at around 5.3tcf. Nice to have, but not a staggering amount.

But the new estimates (combined with those of rival driller Cuadrilla Resources) suggest that the Bowland Shale deposit in northwest England alone could contain as much as 500tcf of shale gas.

As Mark Wallace on the Conservative Home blog puts it: "That's a game changer."

As you may have noticed, we're not too optimistic about the UK's long-term prospects. But Wallace isn't wrong. If Britain managed to make use of shale gas reserves on this scale, we would be able to stop importing gas for "decades to come", as IGas chief executive Andrew Austin put it.

Being Britain, I suspect that consumers wouldn't feel much benefit, and we'd probably only squander any potential gains on short-term bribes for political special interest groups.

But still better to have it than to look a gift horse in the mouth.

Britain's shale gas bonanza might be a mirage

For me, the jury's out on whether Britain will realise the shale gas bonanza.

For a start, just because the gas is there, doesn't mean it can be recovered. The IGas reserves estimate is very wide at the low end, as Jonathan Guthrie notes in the FT, as little as 1.5tcf of gas could be recoverable. "Not to be sniffed at. But the company has not even established a functioning wellhead yet."

The quantities involved are so huge that perhaps this doesn't matter. But a more significant challenge is the politics of it all.

On the one hand, Britain could do with a good news story before the election. Solving our country's energy crisis is most definitely a good news story. So you can see why the government might want to push it.

But on the other hand, the local politics are messy. As Guthrie points out, the population density in the UK is much more challenging than in the US. America has 34 people per square kilometre. Britain has 257. "That represents an extra 223 potential objections to a 15 metre fracking rig at the local picnic spot."

I have a lot of sympathy for Nimbys'. I like the conveniences of modern living, but I don't really want a pylon, or a nuclear power station, or a drill rig, or a mobile phone mast, going up in my back yard. A wind turbine is a bit less offensive, but I still wouldn't be rushing to campaign for one in my garden.

So I can't really expect anyone else to embrace the idea. And I find it hard to believe that they will. Getting around all this, if it's possible, will be a time-consuming business. The election is in 2015. The benefits of any shale gas revolution will take a lot longer than that to come through.

So as an investor, I'd rather focus on the ongoing shale gas boom in the US. We look at some of the best ways to profit from the future of energy in the next issue of MoneyWeek magazine, out on Friday. If you're not already a subscriber, subscribe to MoneyWeek magazine.

However, I do think you can profit from the promise of UK shale gas, even if it doesn't meet expectations. My colleague David Stevenson over at The Fleet Street Letter has been on top of the UK shale gas story for literally years now and has already shown his subscribers several ways to profit from it. You can find out more about the newsletter and David's views on the UK shale gas revolution here.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.