[GGP] From Zero to Hero. The coming boom in UK shale.

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.

This article was written by Nick Grealy

After what seems like an interminable wait for UK shale gas, 2018 promises to reveal the emergence of what promises to be the most profitable natural gas resource on earth.  This is no fable - although it’s a classic tortoise over hare story.

While Britain -and investors- have been sleeping, the world has moved on. Just as US EUR’s have risen by 20 to 100 % annually since 2011, so too has the potential profitability of UK shales.  Everyone has to forget what they thought they knew five years ago. It’s 2018, and it’s time to cast aside outdated concepts

For example, it was once a widely held view among US investors, that the lack of private ownership precluded shale success internationally. That case could have been made in the past, although since oil and gas resources are state property in every other country, that shouldn’t be an issue. The conventional wisdom also stated, based on 2008 US rig counts that the UK was too crowded, too expensive, lacked drill rigs and public opposition was too strong.  In short, even the US industry often drank the Josh Fox Kool Aid as fast as he dished it out.

UK shale gas has four great advantages. Instead being a problem, public ownership with the obvious advantages of very large contiguous licenses - never less than 25,000 acres  and often up to 400 sq km or 98,842 acres, will transform both economics and public acceptance.  In short, lack of private ownership isn’t actually a  problem but a considerable advantage.

The top issue in the UK public’s mind for example is the destruction of natural environment cited by 62% of the public. That was placed in their mind by Greenpeace’s use of photos of places like the Jonah Field of the 1980’s.  Most people in the UK haven’t seen a drill rig except in the movies, and think it’s going to look like “There Will be Blood” or “Written on The Wind” from 1956. But since the last frack job in the UK in 2011, above ground impact has become minimal.  An excellent example is the success of the Utica Shale in Ohio which barely existed in 2011 and also went from Zero to Hero. The Utica also instructs on the key subject of geology.  The first wells were drilled (including by some now active in the UK) in 2004, and were considered pretty much worthless. Yet today the Utica needs only 29 horizontal rigs to produce 40 BCMY, greater than the entire UK North Sea offshore or three times UK 2016 LNG imports. Thus, at present EUR rates, less than ten well pads active at a single point will demonstrate how UK shale will have a minimal landscape impact, with obvious implication for both profitability and facing down the Paper Tigers of UK shale opposition . 

There are four ways that will make UK shale the most profitable natural gas resource on earth.

First to consider is entry costs. For any US wildcatter worthy of the name, the UK should be the Land of Make Believe.  Recent transactions in UK shale have showed acreage changing hands for less than $1k an acre.  How high they will rise once someone cries “Gold !” is for the near future. But entry costs also include other factors. US investors increasingly complain abut the profitability of the Permian for example but keep writing checks for $60K an acre to drill in a desert. Only then do they consider roads, water, labour and take away pipelines.  Some UK acreage changes hand for the costs equal to US title search and landman fees.

Cuadrilla’s well currently being drilled in Lancashire is certainly very expensive - over $15M, but each further well may be less than $7M But it also has water directly available from the mains system at night saving 9000 tanker truck movements. It also sits on a main road, with a motorway only two hundred meters north. Forget about man camps, nearby Blackpool has plenty of empty hotels including what must be the cheapest Hilton in the world. 

But the crown jewel of the UK shale story is neither the gas or market price. UK shale gas will have the shortest midstream on earth -and the missing costs involved thanks to an already existing  - and empty pipeline infrastructure. No one has to wait several years to commercialise abundant resource under existing markets.  No one will need to wait almost ten years as in North East Pennsylvania to produce stranded gas . The average cost of a UK Bio Gas connection to the grid is only £1 million for example.Yet Third Energy’s Yorkshire well is already connected via a gas to power model used for over 20 years. The Preston New Road well pad of Cuadrilla is less than 15 meters to the existing gas grid. It’s worth noting that although Cuadrilla see this a proof of concept well, the fact they are drilling four horizontal wells with 45 frac stages each indicates their optimism for a positive out come.  Cuadrilla are even confident enough to make advance payments to the local community fund. The UK company tax rate is only 19 % but there is an additional 19% extraction tax on top. This combination is well below combined US tax and royalty rates.

But it’s the little matter of price which will make UK shale gas profitable. UK gas will be sold into one the UK National Balancing Point market. The NBP 2017 average so far is  $5.9 MMBTU, or double Henry Hub, and enters the winter heating system at $6.45 MMBTU.

The huge arbitrage is a result of the basis between US LNG exports to Europe, despite few cargoes arriving in NW Europe.Arbitrage is all about the potential, for volumes to move prices, not the volumes themselves. Essentially US LNG has destroyed the oil index link and keeps Russian gas prices honest. The arbitrage may narrow, or simply move to Asia, but it will always exist. UK gas will be more profitable still if oil remains at current prices, as there is still a residual element of oil indexation. UK gas will be more profitable when using within day optionality to take advantage of short term price spikes. UK shale will thus also function as a storage play 

On the subject of oil, the Northern UK Bowland seems be more dry gas, but even here oil will reflect the historic Brent premium over WTI, currently almost 10%.

Since the Platts JKM Asian LNG market often references NBP to some extent, an opportunity to lower JKM via lower NBP is gas price play not lost on Asian investors, traders or end users. Similarly, Canadian, Australian and some US wildcatters been kicking the UK shale  tyres the last few months. Some were burnt by being too early and simply supporting various deal makers to a Mayfair life style in the past, but are now reopening an internal debate of getting in too soon or too late. 

In summary, UK shale will secure high price market with minimal entry costs and rapid commercialisation. All we need is to find demonstrable flow rates. Don’t worry - they’re coming. The only question is to invest today or wait for the crowd.

Nick Grealy

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.