After much fanfare about its intentions to frack heavily in the UK, Ineos announced its first big deal in the sector this week – the biggest transaction the country’s fledgling shale industry has seen.
The Swiss-based chemicals group, controlled by the billionaire Jim Ratcliffe, plans to spend £168m in the next few years drilling for shale gas in north-west England after striking a deal with its rival IGas. The deal hands Ineos stakes of 50 to 60 per cent in seven of IGas’s licences in the region, giving it access to a quarter of a million acres of possible shale gas reserves, including sites near Chester and Ellesmere Port in Cheshire.
Ineos will also acquire IGas’s interest in acreage near the chemical group’s Grangemouth refining and petrochemical complex in Scotland, where it hopes to use any shale gas produced to supply the plant with cheap energy. “We think we can be the biggest in the UK in terms of shale acreage and this deal is not the end for us,” said Gary Haywood, head of Ineos’ oil and gas production unit.
“In order to be successful, you need to be a player of scale ... there’s a lot of acreage and there will be areas that won’t work – so we need to be diversified. And also to keep the costs down.”
Within the UK, Ineos will continue to focus on the north of England and the Midland Valley of Scotland, rather than looking to new areas of the country. Ineos will look to build its business by buying into existing licences and by snapping up new ones as they are issued by the Government.
Mr Haywood is also interested in producing shale oil and gas outside the UK. “We’ve been having a very high-level first look at what the options might be in other areas – in particular where we’ve got facilities because there can be some advantages of tying it up with your own facilities.
“We can see some opportunity in Germany – there are signs that maybe the climate in [traditionally anti-fracking] Germany is changing a little – and the US. We’ve got a very large gas facility near Houston. We haven’t progressed anything very far, but we’ve certainly had a look.”
Given the controversy over fracking, the deal is likely to make Ineos and its boss even less popular with various campaign groups. Mr Ratcliffe moved Ineos’s tax domicile from Britain to Switzerland in 2010 and in 2013 forced Grangemouth staff to accept a three-year “no strike and pay freeze” deal by closing the plant until they agreed – arguing that without the cuts, its losses were unsustainable.
However, the deal provides the clearest evidence yet that big energy companies are taking fracking very seriously, analysts say. “This is the fifth transaction in the UK in the past year or so that involves a major player coming into the shale industry,” said Charlie Sharp at Canaccord Genuity. “Ineos has said very clearly that it wants to get involved in shale in the UK and this deal does that – with the focus on north-west England, which is seen as the core of the story at the moment. And for IGas it’s a good price,” he added.
The other landmark deals include Centrica, the owner of British Gas, buying a 25 per cent in the Bowland shale exploration licence, while the French utility GDF Suez acquired a 25 per cent stake in 13 licences owned by the US fracking group Dart Energy to explore Cheshire and the West Midlands for shale gas. But despite the involvement of big players, the future of fracking in Britain remains very uncertain.
“Heavyweight companies are getting in early to learn the story and get a footprint in case it turns out to be a big industry,” Mr Sharp commented. He also said, however: “Nobody knows whether fracking is going to be commercial or not in the UK.”
Fracking has yet to produce any commercial quantities of shale oil or gas and most experts say it is likely to be several years before this happens – and at least a decade before production is carried out in any meaningful quantity.
There are growing concerns that the industry will never amount to anything – despite being championed by the Conservative Party Government through tax breaks, financial incentives for local communities and a change in the trespass laws to allow fracking under land without its owner’s permission.
Despite surveys showing that the UK is home to vast quantities of shale gas, the doubts over whether much, if any, can be commercially extracted, especially in the light of low oil and gas prices, are compounded by concerns that environmental concerns will stop the industry in its tracks.
Fracking releases oil and gas from shale by blasting a mixture of water, chemicals and sands into rock. In the US it has been linked to air and water pollution, although the UK Government is adamant it can be done safely if properly regulated. The only fracking to be carried out in the UK – near Blackpool – was shut down after being found to have caused earth tremors.
Last month, the Welsh government pledged to block fracking in Wales until more in-depth research can be done to assess its safety – a move which followed similar action in Scotland in January.
In England, the biggest setback came in January when Lancashire’s planning committee recommended that its councillors block an application by the shale firm Cuadrilla to frack on two sites near Blackpool because of fears that the operations would cause too much noise and traffic. The decision was seen as a particular blow because these were the first fracking applications since the Government lifted a moratorium on the practice in December 2012, imposed after the Blackpool tremors.
Experts expect that a final decision will not be made until after the general election, given the political sensitivity of fracking – with the result seen as too close to call. Although councillors typically follow the advice of their planners, they do not have to. Furthermore, Cuadrilla has persuaded the planners to reconsider their decision after submitting a revised plan that it says addresses their concerns.
However, Cuadrilla’s chief executive, Francis Egan, is still unsure whether it will be given the green light. “In the short term this is not good news, but if you look at the reasons the planning officer gave for their negative recommendation, we’re working hard on those and we’re hopeful –and I can say no more than hopeful – of getting a positive planning officer recommendation. Clearly then county councillors have to decide, and that’s a political decision.”
Mr Egan acknowledges that the future of Britain’s shale industry is far from certain, but says it does have considerable long-term potential that big companies are rightly taking seriously.
“In the shorter term, the situation in Lancashire is not good from our point of view ... but it doesn’t impact the fundamentals. And that’s why you see the Ineos deal happening. Ineos clearly is making a very big statement.”
He added: “I don’t think any of those [recent developments] are putting people off. And the Ineos deal reinforces that. The more and more people look at it, the more and more obvious it becomes that this can be done in a responsible way. But really we’re still assessing how much of this gas in the ground might we be able to get out, and not to even do that would be very silly in my view.”