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Fracking weakness exposed

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It is – as the former directors of Carillion can attest – entirely possible to simultaneously make and lose money hand over fist.  All you have to do is to persuade gullible investors to loan you vast sums of money against the promise of future riches.  Only when it becomes clear that your promises were supported by nothing more than fresh air will the big investors pull the rug out from under your business.  By that time, however, you will have trousered most of the money.  The protection of limited liability will allow you – the paid director or CEO – to walk away and leave your creditors to take the losses.

Fracking – the recovery of unconventional (i.e. expensive) oil and gas – is another industry notorious for providing investors with hugely exaggerated pledges of riches to come, while providing regulators with an altogether more modest picture.  For all the talk of “Saudi America” and the “Century of energy independence,” for example, the total shale oil reserves reported to the US Securities and Exchange Commission are the equivalent of just three years of US consumption – not to be sniffed at, but hardly a revolution.  Gas reserves are a little higher at eight years; but again, not the revolution touted in the investment brochures.

Notice also, that – despite the supposed energy revolution – none of the big energy companies have had anything to do with fracking.  There is good reason for this.  Outside a handful of so-called “sweet spots,” hydraulically fractured shale oil and gas is simply unprofitable at today’s prices.  In effect, US frackers have spent the best part of the last decade investing billions of dollars to recover million dollar oil and gas.

The reason fracking took off in the USA is the same as why Carillion was able to continue trading long after it should have been clear that the company was a long way into its journey down the u-bend.  In the post-2008 low interest environment, investors were desperate for yield.  A combination of the promise of future riches together with sufficient cash flow to service the debt was sufficient to keep the money rolling in.

Evidence that UK frackers were carrying out a similar “bait and switch” sting to those seen in the USA emerged last week following a freedom of information request by Greenpeace.  Whereas the UK frackers had been promising investors that they would have 4,000 wells supplying the UK with shale gas by 2032, it appears that they had been giving government a far more modest total.  As Greenpeace’s Unearthed journal reports:

“Far from the thousands of wells predicted by the shale gas industry just a few years ago, the government’s unreleased Implementation Unit Report on Shale Gas foresees only 155 wells drilled by 2025.”

While the industry had been promising the public an economic boom fuelled by 64,000 new fracking jobs and a massive quantity of cheap gas to power the UK economy, it turns out that just 17 shale oil and gas sites will have been developed by 2020.  With interest rates rising, even this may prove to be optimistic as companies struggle to service their debts, and investors find safer alternative places to park their money.

In part, of course, the inability to frack in the UK is due to the EU’s environmental and planning regulations, which are significantly tighter than those in the USA.  In part, it is due to public protests – although these were often just as disruptive in the USA.  The real killer, however, is simply that unlike the vast open spaces of Texas and North Dakota, Britain’s geography along with its tortured and twisted geology renders all but a handful of locations wholly unsuitable for gas recovery of any kind – conventional or unconventional.

Reckless investors may still opt to put money into UK fracking on a caveat emptor basis; but the UK government, it seems, is no longer prepared to take that gamble.  Earlier this month, Business and Energy Secretary Greg Clark effectively pulled the rug from beneath the UK’s most promising fracking site; announcing that while he was satisfied that the technical safeguards had been met, permission to proceed would only be granted when the company had demonstrated its financial viability.

Investors might also consider that since the UK government’s energy review was published last year, energy policy has shifted significantly away from gas in favour of electricity imports from the continent.  That is, while the UK Tory Party has no ideological opposition to fracking – and will no doubt continue to support entirely private sector drilling – the need to keep Britain’s lights on in the next decade has forced the government to shift to a Plan B that sees fracking as no more than a fringe activity.

The final give away, though, is that none of the big international (or even smaller national) energy companies are queuing up to take over the fracking industry.  Their investments are currently going into incredibly risky and expensive ventures in the Atlantic west of Shetland – a measure of just how risky (in profitability terms) land-based fracking is considered by companies that have actual experience of drilling for oil and gas.

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