Will The UK Fracking Boom Make You Rich?

There is a growing belief that the UK is on the verge of an energy boom, as the country begins to explore the vast onshore oil and gas reserves trapped in shale rock formations.

Indeed, fracking — the process used to extract these shale rock hydrocarbon reserves — has been touted as the UK’s next big industry. It is estimated that there is 1,300 trillion cubic feet of gas locked underground in the north of England alone.

With these reserves available, Prime Minister David Cameron has claimed that fracking could create up to 74,000 jobs. The government has also claimed that the UK could be set for £3.5bn of investment as energy companies fight to get their hands on reserves.

However, a key question is, how realistic are these claims; will shale oil really make the UK rich?

It will take time Oil well

Privately owned Cuadrilla — led by former BP executive Lord Browne — is spearheading the UK’s shale exploration plan. 

Lord Browne estimates that it could take up to five years, and require around 40 fracking wells to discover whether the UK has a viable shale gas industry. But this process could take longer as there are concerns about the UK’s strict planning laws which could hamper progress.

However, the news from energy minnow Union Jack Oil, released only yesterday, highlights how much potential the UK has as an onshore energy powerhouse. 

Union Jack estimates that there could be 5.4bn barrels of oil in place under the “PEDL 201” license area, a 40-square-mile block between Nottingham and Loughborough. That said, the company has cautioned that there is no certainty that any of the estimated resource would be commercially producible, which in itself is an extremely worrying statement. 

Hyping up expectations

The caution expressed by many producers exploring the UK’s shale reserves has led to claims that the government is hyping up fracking expectations. Indeed, like Union Jack, some geologists have cautioned that while the oil and gas is there, it could be harder to get out than expected.

Further, there is a strong resistance from environmental groups and communities where large hydrocarbon reserves are located.

Staying away

Unfortunately, both BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), the UK’s two leading energy giants, have stated that they will stay away from the UK’s fracking scene for now. 

Shell’s management summed up its feelings towards the UK fracking boom in a single statement, stating that the company has “more attractive opportunities” elsewhere. The company’s management also shocked some analysts when it revealed that Shell would not throw money into shale “because the UK feels it’s a good thing”.

Meanwhile, BP’s management told analysts that the company was not partaking in the drilling for “geological and commercial reasons”, although the company continues to monitor the situation. 

One thing that Shell and BP are really worried about is the amount of negative publicity surrounding shale oil. As environmental groups express their concern, Shell in particular has commented that it has no desire to “be in the headlines every day in the UK”.

Taking the plunge 

Nevertheless, while BP and Shell are staying away, Centrica (LSE: CNA) has taken the plunge and committed £160m to shale exploration. 

Centrica’s cash has brought the company a 25% stake in Cuadrilla’s licenses within the Bowland shale region of north-west England. The cash will also help Cuadrilla fund its drilling and exploration program. 

Still, it’s not yet clear how much Centrica will benefit from this investment. Indeed, considering the fact that Shell and BP are staying away from UK shale, the returns on offer could be minimal for the risks involved. 

Risky business

Only time will tell if the UK's fracking boom will make you rich, but one thing is for sure, speculating on the sector will be a risky business.

That's why the best investors build a portfolio with a combination of both risky oil companies and reliable dividend paying stocks.

With the dividends flowing in, you can reduce risk and sleep soundly at night.

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Rupert does not own any share mentioned within this article.