* Hopes for Britain's shale industry rise on Centrica
* But big oil companies still favour U.S. shale, other
* Investment in UK shale likely to remain small til reserves
* Small company IGas says positive results will attract
By Sarah Young
LONDON, June 7 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
"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.