What Does The UK Lifting Its Shale Gas Ban Mean For Exxon?

Exxon Mobil (NYSE:XOM) has joined the race to take advantage of shale gas prospects in the UK after the government lifted an 18-month old moratorium on hydraulic fracking. The company is reportedly in talks with IGas, a London-listed company that owns the Bowland shale gas project in Lancashire. Other companies looking to woo IGas are Shell, Statoil and Total.

IGas had launched a search this summer for a partner to develop this project. There is speculation that IGas, valued at around $200 million dollars at the end of last week, could eventually be bought out by the incoming partner. This would give the partnering firm complete control over the Bowland shale gas reserves. Bowland is estimated to contain 200 trillion cubic feet of shale gas which could potentially supply gas to UK for several decades. The first mover advantage could also help in bagging future projects and reserves, hence Exxon is motivated to make this work. ^[1]

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Why Was A Fracking Ban Imposed In The First Place?

Like in the US, hydraulic fracking has its critics in the UK. However, this constituency is much stronger in UK because of several reasons. The UK government has exclusive rights over underground minerals unlike in the US where private landowners are entitled to royalty payments from the companies leasing their land. This helps in creating a constituency of stakeholders who support fracking and shape the public discourse in favor of the technology. Further, the US has a lower overall population density and large tracts of empty land are available where fracking can be carried out without causing major environmental concerns to the population. ((U.K. Dash for Shale Gas a Test for Global Fracking, National Geographic))

The immediate trigger for the ban in the UK was a series of earth tremors caused by fracking operations of the mining company Cuadrilla Resources near Blackpool where huge shale gas reserves have been found. Cuadrilla has claimed that it has already started installing some 140 seismic monitoring devices in Lancashire at a cost of millions of dollars. It has also argued that modifications to its procedures, including lower injection rates and less fluid and sand volumes, would mitigate the seismic risk. ^[2]

Why Has The Ban Now Been Lifted?

Shale gas is being looked upon as a means to ensure energy security for the future. The production of natural gas from the North Sea has been dwindling after production peaked in 2004. The UK has been a net importer of gas since 2004. Last year, gas imports accounted for more than 40% of domestic demand. Higher availability could also lower prices and boost industrialization by attracting manufacturing companies looking for cheap fuel.

The Picture May Not Be All That Rosy

However, a US style shale gas revolution may not materialize overnight. There are some crucial differences between the two countries which may limit the potential benefits expected to accrue to the UK. For one, the shale clay is of a different quality than in the US which requires the development of new technologies suitable to local geology. As a result, the technology from the US cannot work in the UK in a simple plug-and-play mode.

The UK also does not have a robust oil services industry. The government has thus far not put up money for development of new technology. This would shift the onus of doing the same on companies like Exxon which might factor in the extra cost while charging for the gas they produce, thus negating some of the expectations of low shale gas prices. Tax breaks in the US for the shale gas industry have been a major driving factor behind its development. While the good news is that the UK government is planning to begin consultations for similar tax breaks in the UK, it is not a done thing yet. In the absence of these, Exxon and other companies may not invest in development of new technologies which is require huge capital outlays.

Exxon will still have to contend with strident public opposition if and when it starts fracking operations in the UK. It would have to be careful about not making mistakes and avoid mishaps which might provide fodder to industry opponents. If government policies make the operating environment attractive, Exxon would stand to gain enormously from the Bowland reserve alone, assuming that it is able to strike a partnership with IGas.

We currently have a Trefis price estimate of $98 for Exxon Mobil, which is around 10% above the market price.

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1. Exxon eyes stake in UK shale gas, The Sunday Times [↩]
2. UK gives green light to fracking, Financial Times [↩]