U.K. Shale Development Will Bring in American Players

A story in yesterday’s Newcastle Journal aroused my interest. Apparently, the United Kingdom is on the verge of confirming massive shale gas reserves — shale reserves so huge, in fact, that the prospect of exploiting them may be too tantalizing for even the most ardent environmentalists and NIMBY activists to ignore.

Shale France

An employee of European Gas Limited shows a coal sample at British company’s offices in Freyming-Merlebach, eastern France, February 4, 2013. Picture taken February 4, 2013. REUTERS/Christian Hartmann

First, there’s the bounty. Next month, the British Geological Survey will unveil reserve estimates that, according to The Times of London, could peg shale gas reserves at 1,500 trillion cubic feet. That’s more than 200 times (!) greater than the current mark of 5.3 trillion cubic feet.

Then, there’s the price gap. In the U.K., natural gas sells for US$12 per thousand cubic feet. In the U.S., the same amount sells for US$3. That’s a sizeable incentive for the British government to do something to develop the industry — and they’ve already taken the first steps, lifting a moratorium on hydraulic fracturing, aka “fracking,” late last year.

Already, the junior U.K. exploration outfit Cuadrilla claims to have drilled into a large shale deposit, prompting speculation that a bid from Centrica PLC — a British energy major — is forthcoming. This is a domestic deal landscape at the moment, but if the industry really gets underway, American and Canadian energy concerns — which have the financial wherewithal and the expertise — are bound to turn their attention to the opportunities.

Robert Desbarats, a partner in the business law department of Osler, Hoskin & Harcourt who has a long history of dealmaking the oil patch, says the U.K. has been on his radar for a while. In fact, he already has a client who’s interested.

“I do have this one client who has always been interested in the U.K.,” says Desbarats. “You know, all that production in the North Sea? Well, the geology doesn’t change just because you go from the North Sea to the land mass. So there’s speculation that, if there’s production in the North Sea, why couldn’t you find some of it on shore?”

Shale development so far, however, has been a difficult sell in Europe. Jean-Pierre Pham, a partner in the oil and gas group at Bennett Jones, points out that Europe has a higher population density and heightened environmental concerns, which have led to fracking moratoriums in France and Germany. While the U.K. has lifted their own moratorium, the political obstacles are still daunting. Daunting, but not impossible, says Pham.

“The UK is in an economic slump and they desperately need an engine of growth, and perhaps even export,” he says. “And their energy costs are quite high at the moment, hurting competitiveness.”

“If they do decide to proceed, I expect that many North American oil companies and service companies will want a piece of the action based on their experience in North America. Shale development is very expensive and typically requires a large land base as well as technical expertise, so it would not be surprising to see the bigger companies buying the assets of smaller ones or entering into joint ventures to provide financial and technical support.”

Kent Kufeldt, a partner at Borden Ladner Gervais, agrees. He says that, if the U.K. government does give the industry a green light, North American energy concerns are likely to come out of the woodwork:

“Any time there’s a resource opportunity in a first-world country, where there’s rule of law and resources are open to development by private enterprise, companies sit up and take notice, because the regimes there tend to be stable and predictable, and that’s what you need. … So I think it will attract people.”

And that’s great news for Canadian and American law firms, which are bound to ride on the coattails of any large movement towards shale development in Europe, says Pham.

“There is no question that North American oil and gas lawyers have acquired deep expertise in drafting and negotiating joint ventures and joint operating agreements involving shale projects. Shale projects are often quite different from conventional projects. It is also possible that North American firms might be involved in advising the UK regulators on shale development, on the basis of the regulations being developed here in Canada and in the US.”

Kufeldt, however, warns us not to get ahead of ourselves. He points out that large natural gas reserves — even mega reserves — do not necessarily lead to development. It’s all a question of cost and economics:

“Just because they’ve found this shale, it doesn’t mean its economic to produce. If you look into China, they have significant shale resources as well but are having trouble unlocking the way to do it. I think it’s still a bit of a science experiment. … Something that works in the Canadian shale market may not work in the U.K. or China or France.”

David Dias

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