Centrica talks show UK shale promise but big guns watch and wait

Fri Jun 7, 2013 10:28am EDT

* Hopes for Britain's shale industry rise on Centrica interest

* But big oil companies still favour U.S. shale, other emerging plays

* Investment in UK shale likely to remain small til reserves are proved

* Small company IGas says positive results will attract funding

By Sarah Young

LONDON, June 7 (Reuters) - A significant new investor in Britain's shale industry suggests there are prizes to be had, but big oil companies are unlikely to cough up serious funding until they have more reassurance about the size and shape of UK reserves and regulations.

British Gas owner Centrica is in talks with driller Cuadrilla about buying a stake in its north-west England field, a source with knowledge of the discussions told Reuters on Friday, renewing speculation about whether Britain can follow the United States into energy independence by using shale.

Europe's largest gas consuming nation could have shale resources of more than 200 trillion cubic feet (tcf) according to some estimates, which a recent Institute of Directors' report said would require investment of up to 3.7 billion pounds ($5.69 billion) a year.

But funding for exploration has been very limited, not least because it is not yet known whether the estimated resources will produce gas that can be produced commercially. Cuadrilla has drilled only one well so far to explore for UK shale gas.

Add to that complicated licensing laws and a lack of clarity about government tax incentives, and names like Shell and BP, which helped pioneer Britain's other great hydrocarbon resource the North Sea, are concentrating elsewhere.

Contacted on Friday, both companies referred to earlier statements made by top executives on UK shale.

"It is not an area where we have been involved in, and it doesn't mean we won't be in the future, but it has not been a focus for us," BP chief executive Bob Dudley said in at the company's AGM in April.

Shell's chief financial officer Simon Henry said in May that the company would not rule out looking at the UK if it reaches similar levels of potential attractiveness as other shale areas in the U.S., China and Ukraine.

"Do we want to be first in and be in the headlines every day in the UK? Your answer is we are not. There are much higher priorities and more attractive opportunities," he said.

RED TAPE, SMALL PLAYERS

For some big players, their recent experience in Poland - the last big European development hope - put them off the region. Initial reserve estimates were revised down, then early drilling suggested extraction would be tough. Swathes of red tape and environmental regulation were the last straw: Exxon , Canada's Talisman Energy and U.S. oil firm Marathon all quit.

Chevron, which has stayed the course in Poland, said Europe needed an EU-wide regulation framework if it was to tap into its shale gas reserves quickly enough to reap the benefit.

"There's a big unknown here," Derek Magness, Chevron onshore Europe general manager, told Reuters recently.

Britain has promised tax breaks and new planning guidance for shale gas firms but the details have yet to emerge. Meanwhile its planning and permitting regime, which can require numerous licenses from different agencies for just one well has attracted criticism as a barrier to development.

"If you're a global oil major, you can probably make a higher return in percentage terms and billions of dollars by going after the next place in North America, rather than coming here - where you might make a billion dollars over a very long period of time," said UBS head of EMEA Oil & Gas Philip Wolfe.

However for Centrica, which knows the offshore geology near Cuadrilla's onshore Lancashire licence area well, the UK shale deal is attractive. It currently operates gas fields in nearby Morecambe Bay and is looking to diversify its portfolio for gas, which it supplies to UK homes for heating and cooking.

"Given their (Centrica's) long term commitment to the power sector in the UK, an investment in a shale play would be a cheap option especially as there are limited investment opportunities," VSA Capital analyst Malcolm Graham-Wood said.

In fact, Britain's shale scene consists of a few small companies on small budgets.

Private equity-backed Cuadrilla Resources has received $73.6 million in funding from one of its backers, Australian engineering company AJ Lucas, since 2007, according to the latter's website. Cuadrilla's nearest rival is IGas , worth about 200 million pounds, which raised 23 million pounds through a placing with institutional investors in January, to help pay for shale exploration including the drilling of two wells.

These amounts are tiny compared to Shell's plans to spend at least $1 billion a year trying to exploit China's shale gas. But bigger amounts will follow, IGas's chief executive Andrew Austin predicted.

He believes British shale production could start coming onstream in the years 2015 to 2018, and that major companies will be circling as soon as reserves have been proved.

Ian Marchant, chief executive of UK gas and electricity company SSE agrees: "I think when unconventional gas gets to that mature phase you will find utilities investing but whilst it's still at the early development frontier stage, you get utilities just doing what we're doing, just watching the space carefully," he said last month.

Current estimates for north west England's Bowland shale, the most promising area, vary wildly from the British Geological Survey's 4.7 tcf recoverable estimate to IGas estimates of between 15.1 to 172.3 tcf of gas on its licence alone. So all eyes are on a BGS report in the next six weeks in which it is expected to revise its estimate of gas resources upwards.

IGas is already on the radar of one major oil company. It is 21 percent owned by Nexen Petroleum UK which since February has been a subsidiary of CNOOC, China's top offshore oil producer.