The United Kingdom cleared the way for hydraulic fracturing for
shale gas last week, ending an 18-month ban that was imposed
following two minor tremors that were apparently caused by the
procedure. While the move to lift the ban was widely anticipated,
hydraulic fracturing will now be subject to more stringent rules to
mitigate environmental risks. (See Also:
Schlumberger Benefits As The UK Looks To Resume
Shale Exploration
) Given the relatively nascent stage of the British shale gas
sector, we believe that
Schlumberger
(
SLB
), a leading provider of services and technologies for
unconventional plays such as shale gas, could benefit.
What is Hydraulic Fracturing ?
Shale gas reserves are trapped within shale rocks and need to be
stimulated so that gas can flow up to the well head. A procedure
called hydraulic fracturing that involves pumping a mixture of
water, sand and other additives into shale gas wells at high
pressures is used to create cracks in the rock to free up the gas.
While the adoption of the procedure has grown steadily over the
last decade, particularly in the US, it has come
with its fair share of critics who contend that it consumes too
much water, contaminates the ground water supply and could
potentially cause earthquakes.
What Prompted The UK To Lift The Ban?
Natural gas production in the UK has been falling for several
years with monthly production declining from around 350 billion
cubic feet (bcf) in 2000 to under 200 bcf in 2011. The
country's conventional gas reserves have been declining
as well with mature fields accounting for a bulk of current
production. This has caused an increasing dependence on
imports (over 50% of current supply), which has driven up energy
prices.
Tapping into the country's shale gas reserves could unlock a
relatively inexpensive and clean energy resource while helping the
UK improve its energy independence. For instance, the shale gas
boom in the United States helped to bring down natural gas prices
to around $3-4 per million British thermal units; in comparison
prices in Europe rule at around $10-11 per MMBtu.
While the reserves are estimated to be quite large, there
is still uncertainty about the exact volumes given
that only a few seismic analysis studies have been performed
country wide. The British Geological Survey (
BGS
) previously estimated reserves at around 5.3 trillion cubic feet
(tcf) while Cuadrilla Resources, a shale gas operator, pegs the
number as high as 200 tcf. The BGS is expected to update its
numbers in 2013.
More Stringent Regulations, Tax Breaks In The
Offing
Given the potential that shale gas could offer, the British
government is playing a proactive role to ensure the development of
the resource while balancing public concerns of its environmental
and safety impacts. Earlier this month the government
announced that it would create a dedicated government office to
simplify regulation and would offer tax breaks to
the fledgling industry. Any UK oil and gas firm with
an onshore license would have rights to shale gas reserves in its
license area.
The government will also oversee new safety measures that
include requirements for operators to monitor seismic activity
before drilling and throughout the entire drilling process,
adopting a traffic light system to stop drilling when conditions
are not favorable, and requiring the disclosures of chemicals
used in hydraulic fracturing.
Opportunities And Risks For Schlumberger
Schlumberger has among the largest fracking fleets in the world,
a large part of which is located in North America, a market which
is currently oversupplied and is reeling under low prices (the
US is home to nearly 80% of global fracking capacity). The supply
of fracking equipment in Europe is not as well-entrenched as it is
in North America. Besides, the higher natural gas prices in the UK
would give the company better control over the pricing of fracking
services.
Given that the shale gas industry is the UK is still in
its nascent stage, oil and gas firms may require experienced
contractors such as Schlumberger which has built its competence in
unconventional plays thanks to its exposure to the US shale gas
sector. Schlumberger has invested significantly in developing
efficient fracturing methods that require less pumping equipment
and raw materials. These technologies will lower the environmental
impact of fracking besides reducing logistics costs and provide a
smaller operational footprint, which could prove to be a welcome
advantage for the company in European markets.
However, there are some risks involved as it may take several
months for firms to get the requisite approvals to begin
exploration activity and could take even longer to bring production
on a commercial scale. The industry is still in a very nascent
stage with only one firm, Cuadrilla Resources, having carried out
fracking in the country. The structure of the shale formations
in the UK and the potential recovery rates are also yet to be
estimated.
We have a
$86 price estimate for Sclumberger
, which is about 25% ahead of the current market price.
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