By John Kemp
LONDON, June 13 Britain's shale gas industry
remains more of a concept than reality. But Centrica's decision
to buy a stake in one of the most promising tracts provides the
capital, technical expertise and political muscle to move to the
next stage of development.
Centrica announced Thursday that it has bought a 25
percent stake in Petroleum Exploration and Development Licence
(PEDL) 165 which covers the Bowland shale in Lancashire, from
Cuadrilla Resources and AJ Lucas.
Centrica will pay £40 million in cash now, with a further
£60 million payable if the company elects to continue into the
In the meantime, Centrica will also pay up to £60 million to
cover the cost of drilling exploration and appraisal wells to
establish whether shale gas can be produced commercially in the
BOWLAND SHALE PLAY
Like its main rival, IGas, Cuadrilla holds attractive
exploration and development licences covering areas in both
northwest and southeast England that have already produced oil
and gas from conventional wells, and are known to have extensive
shale formations which might produce far more if they were
stimulated using hydraulic fracturing.
However, so far Cuadrilla has only drilled three wells in
Bowland, and only one of them has been fractured, at Preese
Initial drilling confirmed the thickness of the formation
and the presence of gas. Cuadrilla has estimated there could be
200 trillion cubic feet of gas in place in its licence area.
But the company was forced to suspend hydraulic fracturing
after attempts to stimulate the Preese Hall well induced a
series of small seismic tremors from nearby fault in 2011.
The moratorium was lifted by the government in December,
allowing fracturing operations to resume, subject to a strict
CASH AND RISK-SHARING
Before committing to large-scale development, many more
wells need to be drilled and fractured to confirm the extent of
the play, its organic content, the proportion converted to gas,
and flow rates following fracturing, as well as identify any
particularly productive sweet spots for development.
In practice, Cuadrilla and IGas are both "concept
companies." They have successfully marketed the potential of
Britain's shale to investors and politicians, but lack the
financial resources to undertake the cost and risk of an
extensive drilling programme. Both need strong financial
partners to scale up exploration programmes and turn theoretical
resources into proved reserves.
Cuadrilla and IGas have each produced credible but
optimistic estimates for the potential amount of gas locked away
in the country's main shale formations. In its own licence area,
which borders Cuadrilla's, IGas claims there could be up to 172
trillion cubic feet of gas in place.
These ambitious estimates seem likely to win a cautious
endorsement from the British Geological Survey (BGS) when it
publishes its own updated estimates this summer, which are
expected to show a big upward revisions of the amount of gas in
Cuadrilla and IGas have worked hard to rally support from
Britain's business establishment and elements of its political
class behind the idea shale gas could provide much needed jobs,
tax revenue and energy as the country's conventional oil and gas
Both companies have some experience navigating the complex
permitting regime that governs drilling and fracturing, which
requires at least 10 different licences from four different sets
of authorities, according to a recent pro-shale report by the
Institute of Directors ("Getting shale gas working" May 2013).
Cuadrilla sponsored the IOD report as part of its effort to
convince policymakers of the benefits of shale and encourage
them to remove the barriers to development, particularly in the
IGas has revenues from conventional oil and gas wells. But
neither company has the financial resources to undertake a
substantial drilling programme that entails a high risk of
It has always seemed inevitable that Cuadrilla and IGas
would need to bring in partners with bigger balance sheets to
fund more drilling and share the risk.
CREDIBILITY AND EXPERIENCE
Centrica makes a particularly attractive partner because it
brings with it credibility as a major gas producer, extensive
expertise with drilling, safety and environmental compliance,
and its own network of contacts with politicians and regulators.
Cuadrilla will remain the operator, and Centrica's
experience is mostly with conventional gas, but its involvement
lends the engineering reputation, compliance and assurance
systems that will be needed to convince politicians and local
communities shale can be developed in a safe and non-disruptive
In exchange, Centrica gets a fairly cheap option on one of
Britain's most promising shale plays.
Britain's last onshore licensing round was held in 2008,
before the transformational potential of shale was understood
and the country's resources had been estimated, and drew only
Most of the licences awarded in the 13th round went to small
speculative developers, many of which have subsequently been
consolidated or listed on London's Alternative Investment Market
The 14th onshore round, due next year, seems likely to draw
keener interest, given the upward revisions to Britain's shale
resources, though some of the most promising shale blocks have
already been taken ().
Buying into PEDL 165 has given Centrica priority access to
one of the two most promising tracts drilled so far.
Such transactions are inherently strategic and risky, but if
Britain's shale industry lives up to a fraction of the hopes for
it, Centrica will be a prime beneficiary.