May 28, 2014 2:44 pm

Can I make a fortune from fracking?

An oil pump jack in North Dakota, where fracking has transformed the state©Bloomberg

The prospect of fracking in southern England came a step closer last week after the British Geological Survey revealed the extent of the region’s estimated hydrocarbon wealth.

The Weald Basin, which covers a large swath of London’s commuter belt from Hampshire to Kent via Sussex and Surrey, reportedly hides a bounty of shale oil, potentially recoverable via the controversial process of hydraulic fracturing.

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Should shale explorers start prospecting the Home Counties for black gold, there will be public outrage at the disruption to rural tranquillity and potential for environmental desecration.

The “battle of Balcombe”, set in a verdant and well-heeled Sussex village last summer, illustrates popular opposition to the industry in the Tory heartlands.

However, for the minority of country-dwellers whose estates cover shale formations, could successful drilling deep beneath their land deliver a financial bonanza?

To the disappointment of any excited landowners, the Crown’s ownership of mineral rights extends across the nation. Although companies must gain a landowner’s consent to drill under their ground, locals have no claim to the oil themselves.

In 2010, former Harrods owner Mohamed Fayed failed in his legal bid for a share of the proceeds from oil conventionally drilled from under his Surrey estate.

Opportunities to negotiate large payments from oil companies for the right to gain access to land are set to vanish with government proposals to prevent locals from holding up projects by changing trespass laws.

Citing the similarities between deep shale drilling and coal mining – and even rights over air space above a property – the government has proposed a statutory right of access to extract gas or oil at least 300m below the surface.

Moreover, a one-off payment of £20,000 per well – on top of £100,000 per site – would not be payable to individual landowners but to a community body, according the government’s consultation document. Payment to the former would be nominal, it states.

While these proposals may avert further speculation in the fields and woods of the rural southeast, the removal of planning obstacles will do little to curb investors’ enthusiasm for oil and gas explorers looking to tap the country’s shale reserves.

But is the case for investors compelling? There are questions over the geology, in the Weald at least.

If an estimate proved accurate that only 1 per cent of Weald oil was recoverable, this would lead to production equivalent to only 50m barrels. The UK consumed the equivalent of almost 1.5m barrels a day in 2012.

The Bowland Shale formation in northern England is more promising. The British Geological Survey estimated last year that the area held around 1,300tn cubic feet of gas. If only 10 per cent were extracted, this would be equivalent to 40 years’ gas supply for the UK.

However, there are questions over the value of shares in listed shale explorers, most of which have limited or, in some cases, no production to boast of. Companies such as Aim-listed IGas and Egdon Resources are not as cheap as they were at the start of the year.

While French oil major Total has announced an investment in the UK shale sector, the amount committed – around $50m – is small fry. Their caution may be informed by the experience of their peers. In North America, both BP and Shell have burnt their fingers, writing off $1bn and more than $2bn respectively on shale assets.

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Despite optimism for a UK shale revolution, the reality is that the extraction of resources is far from certain and, at best, several years away.

Investors may wish to take heed of the commentator, quoted in Nick Butler’s FT blog, who said that the only people making money out of shale in the UK were conference organisers and the security industry.

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