Who’s betting on UK shale gas…and who’s betting against it? Right now there’s a dramatic gulf between pessimistic statements at last week’s World Energy Forum meeting in Davos that UK shale gas is no great game changer, and the fact that the next few days might witness an energy major farming in to the one company that intends to revolutionise UK gas production.
To start with the pessimism, if only to err on the side of caution. At Davos on Thursday, Centrica CEO Sam Laidlaw, one of Britain’s biggest gas chiefs, was quoted as saying that said it would be at least a decade before the UK saw any shale gas production and that, even then, it would not be “the game changer we’ve seen in North America”.
But on Friday, a source close to Cuadrilla, which says it has some 200 trillion cubic feet (about 5.7 trillion cubic metres) of gas-in-place in its section of the Bowland Shale Group, told this blogger: “They are dotting the ‘i’s and crossing the ‘t’s” on a farm-in agreement with an energy major.”
Who this is has not been disclosed, but Shell, BG and Statoil have all been sniffing around. And at least one market seems to believe something big is afoot; on Friday, shares in AJ Lucas, which holds some 41.5% of Cuadrilla, jumped on the Australian Stock Exchange from Australian $1.56 to almost Aus $1.90.
Blog post continues below…
|Request a free trial of: International Gas Report|
|International Gas Report intelligently analyzes the natural gas industry. Through its unrivalled network of global correspondents, it covers the whole gas chain, from the well-head to the burner tip, in Asia, Europe, the Middle East, Africa and the Americas, including gas transport, regulation and the ever-present problems posed by shifting geopolitical concerns.|
A farm-in by such a major would certainly help Centrica, in terms of both cash and technology. Cuadrilla may be sitting on a potentially massive resource base, but it is still some way from converting that base into actual reserves, let alone production.
Even so, Laidlaw’s comment that it will take 10 years to see production — by which one can presume he meant significant sustained production as opposed to start-up activities — seems both highly pessimistic and at odds with what is known of Cuadrilla’s development programme.
Cuadrilla, in a 2012 presentation, said that under its central case for development of its Bowland Shale resource, “we expect the drilling phase to last around nine years.” If the company’s hopes are fulfilled, and they secure the go-ahead for fracking later this year, first production could start as early as next year. Were this to happen, it would certainly confound Laidlaw’s pessimism, although it is worth noting that the combination of UK bureaucracy and technical challenges could well add a year or two to such a timetable.
But when will actual production start? Cuadrilla CEO Francis Egan provided the most up-to-date public assessment on corporate activities in testimony to Parliament last month. He noted that although the company was drilling wells, a current moratorium on the key issue of hydraulic fracturing meant they were not able to flow-test them all. “So we can tell you how much is in the ground, but we cannot tell you how much will flow out of the ground,” he told the Energy and Climate Change Committee.
The government already has signalled its willingness to permit a resumption of hydraulic fracturing in the wake of investigations into minuscule earth tremors recorded during previous Cuadrilla fracking operations, but it will still take some months to secure local environmental impact assessments and complete public consultations before fracking resumes.
But long before Laidlaw’s decade is out, Cuadrilla should have started contributing significantly both to actual and potential British shale gas production. Moreover, it intends to do so in a way that should counter a further reported comment of Laidlaw that it would take time to develop UK shale gas “partly because of the environmental concerns and partly because we don’t have a well-developed supply chain”.
On the environmental front, Cuadrilla must be particularly careful. The heart of its license area is the Fylde peninsula, a stretch of small town rural England full of pretty villages and neat small towns lying between the old cotton mills of Central Lancashire and the seaside resorts of Blackpool and Lytham St Anne’s. It’s an area that relies heavily on tourism, which generates as much as £500million a year for the local economy.
Cuadrilla is understood to be looking to address environmental problems by concentrating its production units on a few specific sites that would extend deep underground, becoming, in effect, reverse skyscrapers. Like giant dams in which you take the elevator 10 or 14 floors down to the turbine hall, each level would serve a cluster of wells. This is a highly ambitious and, one would presume, expensive approach, but it does signal the scope of Cuadrilla’s ambitions, and may also be one reason why it would be happy to see a major farm-in.
Does all this constitute a game changer? The potential is stunning; it’s the delivery that is still questioned. When Cuadrilla announced in September 2011 that it had discovered 200 trillion cubic feet (tcf) of gas-in-place, it said that “even if a fraction of this could be extracted at a commercial rate, then this could have a positive effect on the UK’s energy mix.” Since then, there’s an increasing assumption that eventual recovery rates of around ten to 20 per cent might prove reasonable, with some asserting a much higher recovery ratio is possible. But even a 10% recovery rate would eventually yield some 20 trillion cubic feet (570 billion cubic metres); not bad when one considers that the UK only produced 1.6 tcf (45.2 bcm) in 2011, while its consumption amounted to 2.8 tcf (80.2 bcm).
And the resource does look promising. In places, it’s 6,000 feet thick; by comparison the Barnett and Marcellus formations in the US are generally around 300 feet thick. And then there’s the issue of probable under-estimating on the underlying resource. There’s speculation in the industry that the overall size of the Bowland Shale might be as high as 1,000 tcf (around 28 tcm), of which Cuadrilla’s license area accounting around one-quarter or a third.
Whether such a figure is justified will soon be known. The UK’s Department of Energy and Climate Change updated version of its study on “Unconventional Hydrocarbon Resources of Britain’s Onshore Basins” is currently expected at the end of February (although no firm publication date has yet been set). The study will include a basic geological assessment of gas-in-place for the Bowland Shale although it will not include any specific figures for recoverable reserves. For that, the DECC, along with Cuadrilla, wants to see flow data.
But, so long as Cuadrilla receives permission in due course to resume fracking, then the scale of its resource base, together with the prospect of new investors, means that UK shale gas production should get well under way well before Laidlaw’s ten year prospect.
And as for being a game changer, well, if Cuadrilla only has a quarter or a third of the Bowland Shale…