Britain’s energy problems are solved

MoneyWeek

Monday 10th June 2013

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.

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by successive governments have left us in the troubling situation where we’re gradually switching off our ‘dirty’ and outdated energy generation capacity, but have nothing to replace it with.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 3 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.

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