(The opinions expressed here are those of the author, a columnist for Reuters.)
By John Kemp
LONDON May 12 They were crazy dreamers who dared to believe that oil and gas could be produced from beneath England's rolling green hills.
Small companies such as Alkane, Egdon, Cuadrilla, Dart, Island Gas, Newton and Star bid for and won Petroleum Exploration and Development Licences (PEDLs) in Britain's 13th onshore licensing round held back in 2008.
Some of these firms were hoping to find small onshore oil and gas fields. Others thought money could be made from capturing the fugitive methane emissions from abandoned coal mines or by drilling into unworked coal seams and capturing methane directly from the source.
No one imagined that oil and gas could be fracked from almost impermeable shales buried thousands of feet below the surface.
But Britain's small onshore energy companies are now in the midst of a mini boom as they seek to capitalise on the new-found interest from investors to consolidate their holdings and raise external finance.
LUCKY LICENCE HOLDERS
Britain's oil and gas resources are the property of the crown. PEDLs give the holder the right to drill wells to search for and produce them and are awarded through a competitive process in exchange for an agreed work programme.
PEDLs awarded in the 13th round, as well as some still outstanding from earlier licensing rounds, give the holder the right to explore and develop all the hydrocarbons in the licence area from whatever source they come.
The North American shale revolution has suddenly made those licences far more valuable - at least potentially.
Most of the current onshore licences are concentrated in areas such as the Bowland Basin in northern England and the Weald Basin in the south. They have already produced conventional oil, gas and coal, and now have been identified as well as having extensive shale formations that could be fracked for unconventional gas and oil.
So companies that were once exploring for coal-bed methane and other hydrocarbons have reinvented themselves as shale firms.
The problem is that most of them are very small, valued at just a few million pounds, while drilling dozens of wells to explore and then appraise an area before deciding that it is worth entering commercial production will cost tens of millions or even hundreds of millions of pounds.
The drilling and fracking of a single well costs several million pounds. To identify and appraise a field, dozens of wells may be needed. Would-be frackers must obtain up to 10 different permits from four different authorities. The risk of failure is high either because the necessary permission is refused or because the wells come up dry.
Britain's myriad small shale gas developers lack the scale and capital to develop its reported shale resources. Most are essentially "concept companies".
After having successfully pushed the issue onto the political agenda and won broad acceptance of the need to develop the indigenous gas resources, they need bigger partners to help finance large drilling programmes and spread the risk.
CONSOLIDATION AND CAPITAL
Cuadrilla Resources, the largest and most prominent of these shale developers, has access to considerable external finance from institutional investors through its main shareholder Riverstone, a private investment firm which has raised approximately $27 billion to fund projects worldwide.
IGas Energy, Cuadrilla's main rival, reached a farm-out agreement in February with Total in which it sold a 40 percent interest in two PEDLs to the French oil major. In exchange, Total agreed to fund an equivalent share of exploration and development costs.
Total committed to contribute at least $20 million, and possibly nearly $50 million, to help pay for the acquisition of 3D seismic data; drill and test a vertical exploration well; and conditional on the results from the first well, to drill and test a second horizontal appraisal well.
On May 9, IGas announced it had also agreed to take over Dart Energy, an Australian company that owns more than a dozen PEDLs for areas across the Bowland Basin, including many adjacent to licences IGas already owns.
"The combination of IGas and Dart will create a market-leading onshore UK oil and gas company with the largest area in the UK under licence of over 1 million net acres including major UK shale basins," IGas said in a statement explaining its rationale.
On Monday, Egdon Resources, with 27 exploration and production licences across Britain and France, confirmed that it is advanced discussions to acquire the onshore shale assets of Alkane Energy.
Alkane operates mid-sized gas-to-power generators using fugitive methane emissions from abandoned coal mines. But as part of its business, Alkane also has PEDLs for blocs and part blocs across the Bowland Basin, where Egdon has existing licences.
A GAME OF SKILL AND CHANCE
No shale gas has actually been produced in Britain yet. Only one well has been hydraulically fractured, at Preese Hall in Lancashire, and that triggered a series of small earthquakes in April and May 2011, leading to a moratorium on future fracking treatments that has only recently been lifted. ("Preese Hall shale gas fracturing: review and recommendations" April 2012)
The political appetite for fracking on a large-scale remains untested, though the idea has received powerful backing from finance minister George Osborne and strong endorsement from a recent report by the House of Lords Committee on Economic Affairs. ("The Economic Impact on UK Energy Policy of Shale Gas and Oil" May 2014)
"The UK will certainly feel the impact of the shale gas revolution. It has its own shale gas resource. The question is whether the UK is to be a producer or simply an importer," the committee wrote, urging the government to streamline the permitting process.
Environmental groups remain staunchly opposed, and many communities object to large-scale oil and gas drilling. It remains unclear whether drilling firms will ultimately be able to overcome these obstacles.
Sceptics might suggest Britain's shale gas companies are on the cusp of a bubble, with more investment being made before anyone is certain that the shale formations will yield commercially meaningful amounts of gas and oil.
But bubble-type enthusiasm is essential to the success of any new technology. The same criticisms could have been levelled at George Mitchell, who pioneered shale drilling in Texas amid much scepticism in the 1990s and early 2000s but is now hailed as a genius and one of the most influential businessmen of the late 20th and early 21st centuries.
"Businessmen play a mixed game of skill and chance," as John Maynard Keynes observed. "If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation." ("General Theory of Employment, Interest and Money," 1936)
Shale pioneers in the United States, and now in Britain, all have something of the characteristics of the successful entrepreneur, including an obsession with commercial ideas that appear to have long odds.
Ultimately, if shale development proves successful, the small pioneering companies will sell their rights to established operators.
There is no guarantee of success for the industry as a whole or in individual licence areas. But if shale is eventually produced in large quantities and draws in more majors like Total, some of these early licence holders could become very rich indeed. (editing by Jane Baird)