Centrica’s UK deal boosts credibility of Cuadrilla shale

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Recent weeks have seen a flurry of developments in the UK that have started to generate a frisson of excitement that shale gas could indeed become a big contributor to the nation’s energy supply. Some have even dared to suggest that onshore shale could be the UK’s next “North Sea”.

Among these various developments was the announcement that the British Geological Survey has upped its estimates of the potential volume of shale gas in the Bowland Basin and other parts of northern England to 40 Tcm or 1,300 Tcf. While the government has been quick to point out that this is not the recoverable amount, even a recovery rate of a single-figure percentage would mean a lot of gas.

Also interesting has been the government’s announcement that it plans to use its long-term infrastructure investment plan to “unveil a package of reforms to enable shale gas exploration”, adding that: “Though it is early days for shale in the UK, it has the potential to contribute to the UK’s energy security, [and to] increase inward investment and growth.”

Among the proposed reforms would be a package of community benefits “brought forward by the industry” which would mean local people near each exploratory hydraulically-fracked well getting a one-off payment of £100,000 and 1% of revenues from every production site. The idea, of course, being to de-fuse local opposition to shale gas development.

Centrica’s bold move: All very well. However, in my view, the really big development of recent weeks was the announcement last month that Centrica had decided to acquire a 25% interest in the Bowland exploration licence from Cuadrilla Resources and AJ Lucas for £40 million in cash, along with a commitment to pay exploration and appraisal costs of up to £60 million.

Following the exploration and appraisal phase, if Centrica elects to continue into the development phase “a further contingent consideration of £60 million will become payable”.

It should be remembered that it was when the big companies moved into shale gas production in North America that the production numbers really began to take off.

Reputational risk: It is not a decision that Centrica – one of the UK’s biggest suppliers of gas and electricity, under the British Gas brand – will have taken lightly. Getting involved to this extent in shale gas development carries significant reputational risk. Cuadrilla, after all, was the company that generated huge adverse publicity when its fracking operations in Lancashire led to some minor earth tremors – reported by much of the UK press as “earthquakes”.

Opposition to fracking is running high and it remains to be seen whether the “sweeteners” announced by the government will indeed make fracking more widely acceptable.

Announcing its decision on the 13th of June, Centrica quoted from an Institute of Directors report that estimates that “ . . . natural gas from shale could reduce the amount of gas the UK has to import in 2030 from 76% to 37%. Nationwide investment could reach $3.7 billion/year, supporting 74,000 jobs across the industry and its supply chain.”

Credibility boost: Centrica’s involvement is a big boost in credibility for Cuadrilla, so far the leading shale gas explorer in the UK, but still, in relative terms, a tiny company. It has since announced an update to its exploration programme in Lancashire, which involves applying for planning consent to hydraulically fracture and test the shale at its existing exploration well at Grange Hill.

It also intends over time to apply for consent to drill, hydraulically fracture and test the gas flow at up to six temporary exploration well sites in the Fylde.

A further three wells are planned. These will be vertical exploration wells that will not be hydraulically fractured but will allow additional rock samples to be taken to improve knowledge of sub-surface geology.

Answering the big unknowns: In all this excitement we should not get too carried away. It will be some time yet before the results of these endeavours will be known and longer yet before production begins in earnest. That said, it is precisely the kind of drilling that Cuadrilla is planning that will help to answer the big unknowns: How much shale gas is there? And how much will be technically and economically recoverable?

by Alex Forbes

(Photo courtesy of Cuadrilla)