Shale Round Boosts Prospects For Exploration

BMI View : The country's first shale licensing round raises prospects for increased unconventional exploration in the UK, the speed of which has been sluggish to date. We maintain however that regulatory and social hurdles could hamstring the process, despite the new round.

The Department of Energy and Climate Change has launched its 14th onshore licensing round, the first in six years. Applications need to be made by end-October with licenses to be awarded within 12-18 months.

While the round could result in a pick-up of exploration in the UK, we maintain that it will take years for the UK's potential shale gas resources to translate into significant reserves and production. Our forecast sees a continuation of the gas production decline trend until the end of our forecast period in 2023. We forecast that gas output will fall from 39.31bcm in 2013 to 33.05bcm in 2018. From the early 2020s, shale gas production will begin to kick-in and stem the decline in the UK's gas output, with output hovering around 30bcm by 2022-2023.

Shale Hopes To Reverse Rising Import Bill
UK Gas Production,Consumption and Net Exports (bcm)

BMI View : The country's first shale licensing round raises prospects for increased unconventional exploration in the UK, the speed of which has been sluggish to date. We maintain however that regulatory and social hurdles could hamstring the process, despite the new round.

The Department of Energy and Climate Change has launched its 14th onshore licensing round, the first in six years. Applications need to be made by end-October with licenses to be awarded within 12-18 months.

While the round could result in a pick-up of exploration in the UK, we maintain that it will take years for the UK's potential shale gas resources to translate into significant reserves and production. Our forecast sees a continuation of the gas production decline trend until the end of our forecast period in 2023. We forecast that gas output will fall from 39.31bcm in 2013 to 33.05bcm in 2018. From the early 2020s, shale gas production will begin to kick-in and stem the decline in the UK's gas output, with output hovering around 30bcm by 2022-2023.

Shale Hopes To Reverse Rising Import Bill
UK Gas Production,Consumption and Net Exports (bcm)

Boosting Exploration Potential

The round is an important step in the UK's efforts to explore and unlock its shale-gas reserves. With declining gas production from the North Sea and the country's rising import dependency, the UK is turning to what it hopes could be large domestic reserves of shale gas. The Coalition government has been particularly supportive of shale gas exploration, offering consequential tax breaks for shale gas producers to boost exploration of shale gas resources in the country.

Large Acreage On Offer
14th Onshore Round Of Licensing Blocks Under Offer

The new licenses could help to speed up what has been so far a sluggish exploration scene: as of July 2014, only a handful of exploration wells have been drilled, and only one has been fracked. Telling of this situation, Cuadrilla's application in June 2014 to hydraulically fracture four wells on its Roseacre Wood shale exploration site was only the first application to horizontally frack a well since the lifting of the ban on shale gas exploration in 2012. As a result, knowledge regarding the geology of the UK's shale formations remains very limited ( see, 'Cuadrilla Application A Litmus Test Ahead Of Shale Round,' June 18).

We expect that small to mid-sized specialised firms as opposed to oil majors will show the largest interest in the licensing round. Given the UK's shale deposits remain largely unexplored, we believe that majors will be unwilling to take on the risks of the unproven play, focusing on larger and high-value-added projects elsewhere, leaving the exploration to the smaller specialised firms until significant exploration has de-risked the country's shale gas potential.

Existing acreage holders like Centrica and Cuadrilla will likely express strong interest in the round. Smaller unconventional specialised companies such as IGas and Edgon Resources had already begun to consolidate their position ahead of the round, and will likely bid for several unconventional blocks in the round ( see, 'Jostling For Position As Shale Round Approaches', May 14).

Shale Progress To Remain Slow

However, despite the new exploration acreage on offer, exploration will likely remain slow paced. Risks to quicker progress notably include:

  • Regulatory Delays: Bureaucratic hurdles for obtaining fracking permits means that exploration will likely take some time to take off. In addition to obtaining an exploration license, companies will also have to secure a planning permission, a permit from the Environment Agency and an agreement from the Health & Safety executive in order to hydraulically fracture a well. Onshore Operators Group, which represents the shale gas industry in the UK, said that approvals for fracking permits alone will take at least 6 months. To put this in perspective, Texas offers an expedited service for fracking permits in seven business days, and on average delivers permits within 11 days. In this sense, Cuadrilla's first fracking permission application will be a litmus test for regulatory efficiency and will be closely watched by companies planning to participate in the licensing round. 

  • Social Challenges: strong environmental, local and wider social opposition to drilling operations could delay developments. The larger geographical population spread compared to the US means that local populations will be more impacted by drilling.

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Related sectors of this article: Oil & Gas, Unconventional
Geography: United Kingdom
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