The propositions on shale gas in the new infrastructure bill are less restrictive than market fears. The concentrated names should see a relief reaction. The macro environment is challenging with political risk and weak commodities, but operational successes in the sector are showing good prospects.
The UK government has made concessions to environmentalists in its latest provisions for fracking in shale gas exploration. The latest infrastructure bill now contains provisions that fracking will not be allowed in national parks, areas of outstanding natural beauty and areas important for drinking water collection. The trespassing provisions that allow fracking without homeowners permission are unchanged. The bill will go to the House of Lords next.
There is political resistance and the pre-election period has certainly sharpened ministers’ minds towards a sensitive issue.
No conspiracy theory, but there is OPEC’s long arm, too. I do not see any material interest by OPEC to slow down UK shale development. The quantities are important, but not of US size. But oil price weakness as a pure market phenomenon may have had an influence on legislators. Some urgency is removed.
I still see UK policy overall as supportive of shale gas development.
It may well be that further amendments are made to the bill. In the first instance, the House of Lords has the power to do so. More generally, specifications about allowed depths would not be unthinkable. The German government has taken that approach.
A stable framework that is respectful of natural assets and environmental issues is required and long term supportive for industry development. The main issues about fracking are risks to ground water contamination, wildlife protection and chemicals leaks. According to industry sources, water contamination risk can be eliminated when a distance of 800m to acquifers is kept. Noise is an issue brought up by local residents but not one of environmental scope.
The bill means a reduction of accessible reserves, but not large enough to alter the case very materially.
Scale development is required for swift build up of infrastructure and cost reduction.
Reserves in the Bowland Shale are largely 800m below the acquifers in the region. Shale oil resources in the South Downs shale are at least 650m below the acquifer.
UK shale gas is a high risk sector. This is a set back that a concept sector is bound to experience at some stage. It is a reminder that political risk is high as will be volatility in the sector.
The concentrated shale names have all seen falls in their share prices that now imply very little value for development. A reminder, this is an early stage sector where public names are very sentiment driven. The negative visibility is much stronger so than the positive operational performance of the private part of the sector.
The actual bill is restrictive, but by far not as bad as market fears. There might be a relief reaction.
Cuadrilla is the most exposed and sentiment and concept name. Its key exploration area is the Bowland Shale. There will be a negative impact over the short term. Its partner Centrica (CAN LN) is also impacted. GDF Suez (GSZ FP)’s Bowland exposure is through its 25% stake in Dart Energy’s licenses.
Egdon (EDR LN) is also active in the Bowland Shale as is IGas (IGAS LN). Short term downside risk is larger for Egdon as IGas has greater underpinning from conventional assets. There is an impact on Total (FP FP) through its direct investment and partnership with IGas.
The large integrated names have bigger struggles at the moment, namely globally weak commodities. The shale news is a hit on a potential growth area. Albeit small, it does not help current sentiment.
The private names should see continued good prospects from operational progress even though they will need to address resistance constantly.