In announcing late last year a potential billion-dollar program to develop shale gas in the U.K., global chemicals major Ineos quickly revived discussions about where the first major unconventional development outside North America could be.

And at press time, Ineos said it is acquiring at least a 50% interest in seven shale gas licenses held by IGas, a British E&P, in northwest England, along with the option to acquire a 20% interest in two further IGas licenses in the East Midlands. It also is acquiring IGas’ interest in a license in Scotland. The deal gives Ineos almost a quarter of a million acres of potential shale gas reserves. It will pay IGas about $45 million in cash and has agreed to fund a two-phase work program of up to $205 million.

But just as independent producers in the U.S. pioneered resource plays, the independents are leading the way in the U.K. as well.

As yet there is no unconventional onshore production in the U.K., but that is likely to change. The U.K. Environment Agency granted permits in mid-January for shale gas exploration wells to Cuadrilla Resources, a portfolio company of Riverstone Holdings. The development is planned at Preston New Road, Plumpton in Lancashire, inland from the port city of Blackpool on England’s west coast.

Cuadrilla Resources plans to drill eight horizontal wells into the Bowland Shale, inland from Blackpool, England.

“We plan to drill, fracture and test eight horizontal wells in Lancashire,” said Fran­­cis Egan, CEO of Cua­drilla. “If all goes well we should be drilling by midyear, and fracking in the fall. We will be drilling into the Bowland Shale, which is unique because it is so thick—at least a kilometer thick.”

Egan added, “We have drilled four wells so far to test the composition of the Bowland, and it seems to be gas-bearing throughout, so with the development program we will be looking for the sweet spots. The estimates are 200 Tcf of gas in the ground in our areas.”

For all the optimism, unconventional shale development has gotten this far in several other countries over the past few years, but has not lived up to the initial hopes, for different reasons in each area. Poland was an early favorite, and the national government supported domestic production to free the nation from having to import gas from Russia. But the rocks were generally found to be less than prolific.

“One of the competitive advantages for U.K. development is that the country is already all piped up for gas,” Egan said. “About 80% of homes use gas for heating and cooking. At the upstream end, one of our two sites is close to a national transmission line; the other is on a regional system. The gas we have found so far is 96% methane, with no H2S, no CO2, and no heavies. We also don’t have to truck water in.”

The National Grid owns and operates almost all of the transmission and distribution pipelines in England, Wales and Scotland.

The next bonanza?

According to the U.S. Energy Information Administration, U.K. gas demand was 2.6 Tcf in 2013. That strong penetration of which Egan spoke was built over decades, based on production from the North Sea, but with those volumes declining, the country now imports half its gas. By 2020, imports are estimated to rise to 75%-80%, so there is a strong incentive for domestic development. In 2013, the U.K. imported 41 billion cubic meters of gas, according to Wood Mackenzie.

It also seems the hydrocarbons are there. The British Geological Survey has undertaken three major studies considering in-place resource for shales in the U.K. The most recent detailed the Bowland Shale in 2013 and the Jurassic and Midland Valley in 2014. Gas-in-place estimates for the Bowland range from 822 Tcf (P90) through 1,329 Tcf (P50) to 2,281 Tcf (P10; see table). The recovery factors are not known, BGS emphasized in the reports.

For the carboniferous shales of the Midland Valley in Scotland, estimates of resource in place vary widely: 3.2- to 11.2 billion barrels of shale oil. The central estimate is 6 billion barrels. Additionally, there is an estimated 49.4 to 134.6 Tcf of shale gas; the central estimate is 80.3 Tcf. For the Jurassic shales in the Weald in southeastern England there are an estimated 2.2- to 8.5 billion barrels of shale oil; the central estimate is 4.4 billion barrels.

So there seems to be enough to go around.

“The Ineos announcement [in 2014] was broadly helpful,” Egan said. “Having another player, especially a large one willing to commit considerable resources, demonstrates a vote of confidence in U.K. shale development. From the published figures, the resource potential is very high indeed.”

"If all goes well, we should be drilling by midyear, and fracking in the fall," said Francis Egan, Cuadrilla CEO.

Cuadrilla has its own rig to get the drilling started, and Egan said he can call upon experienced frack crews in Poland in addition to the skilled labor force in Aberdeen, Scotland.

In announcing the Ineos initiative in November 2014, Jim Ratcliffe, chairman, said, “I want Ineos to be the biggest player in the U.K. shale gas industry. I believe shale gas could revolutionize U.K. manufacturing and I know Ineos has the resources to make it happen, the skills to extract the gas safely, and the vision to realize that everyone must share in the rewards.” The company has proposed returning 6% of revenues to local communities.

Ineos originally said it planned to invest as much as $1 billion in U.K. onshore shale gas exploration and appraisal. Substantial further investment would follow if the company moved into development and production. The vast majority of the Ineos bids are in Scotland and the north of England, which already house a strong resource and industrial history.

The company, a global producer of petrochemicals and polymers, would use its gas for feedstock and energy. It has created a new subsidiary, Ineos Upstream, and named Gary Haywood CEO.

To support him, Ineos has hired former Mitchell Energy & Development Corp. executives Nick Steinsberger, Kent Bowker and Dan Steward. The trio was instrumental in helping Mitchell pioneer unconventional development in the Barnett Shale outside Fort Worth, Texas, in the 1980s.

Ineos now has two substantial shale licenses in Scotland comprising more than 120,000 acres. Priming the pump, it also has underway a $600 million project to bring ethane from the U.S. to its petrochemical plants in Scotland and Norway.

The Bowland Shale offers significant potential for resource development. The shale is at least a kilometer thick in many areas.

Some majors are interested

“Production from the U.K.’s conventional onshore fields is oil weighted and very small compared to offshore production,” said Fiona Legate, U.K. upstream research analyst for Wood Mackenzie.

“For the first six months of 2014, onshore liquids production averaged 3,509 bbl/d and gas production 34 MMcf/d. Comparatively, in the same period offshore liquids production averaged 832,000 bbl/d and gas production 3,971 MMcf/d. Currently there is no unconventional production in the U.K.

“Pilot coalbed methane wells have produced during tests at the Airth project in the Midland Valley and the Doe Green project in the Cheshire Basin.”

Looking ahead to development plans, Legate observed, “The corporate landscape in U.K. unconventional gas has changed considerably in the last 12 months. In January 2014, Total became the first major to acquire interests in U.K. shale acreage. In the second half of 2014, Ineos picked up acreage in the Midland Valley through deals with BG and Reach CSG.”

The bigger firms may have a financial edge, she added. “Small companies in the U.K. may have restricted access to finance, which could inhibit their ability to progress projects through the development life cycle. There is also potential for privately owned companies to have issues financing development, for example, if the investors become cash strapped.”

On the regulatory and economic front the outlook is positive, Legate said.

“The political climate in the U.K. has been mixed to date. In 2011, the government introduced a ban on hydraulic fracturing following earthquakes at Cuadrilla Resources’ Preese Hall site. That ban on hydraulic fracturing was lifted in late 2012. The current coalition government has been vocal in its support for shale gas through setting up the Office of Unconventional Oil & Gas, commissioning joint studies with regulators into the resource prospectivity and introducing fiscal incentives. However, there is a threat this support could diminish depending on the outcome of the 2015 general election.”

The biggest inhibitor to the commercial development of shale gas in the U.K., said Legate, is the public perception of the industry, the associated negative media attention and the lengthy permitting process. Four government agencies and local communities are involved in gaining permission to drill, totaling nearly 25 decision steps in the process.

“Despite those barriers, there is clear government support and attractive fiscal incentives in the U.K.,” Legate said. “The government announced a pad allowance in July 2013, to encourage the development of shale gas. This value allowance effectively removes the liability for a supplementary charge tax on a certain amount of production revenue.”

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