(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
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
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
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
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 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
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
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
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
(editing by Jane Baird)