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

Britain’s fracking industry has so far failed to reach its full potential. But new regulations could soon change that. Matthew Partridge explains how you could profit.

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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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