Is the UK’s Planned Fracking Boom Already Over?

Published at 12:55PM - 21/10/14

UK gas and oil industry experts have voiced fears that the UK’s fracking dash may already be coming to a close before it has even begun. The warnings come as global prices for crude oil slump, making the controversial drilling method look too costly.

October 28th will see oil companies bidding for search and drilling licences for onshore UK fracking operations. The government hoped that the auction of these rights across vast stretches of the UK would generate a shale revolution akin to the mineral exploration drive that has aided the US economy in its own economic revival.

Fracking has allowed the USA to rapidly elevate its position as an energy-independent nation, and has allowed it to end its reliance on the ever-volatile Middle East. America is currently pumping around 8.5 million barrels of crude daily and is now forecast to become the world’s biggest producer of liquid petroleum, overtaking even Saudi Arabia.

However, oil prices on the global markets have sharply dropped in recent months. Brent has plummeted by 25pc since reaching $115 a barrel earlier in June, and this has led to real uncertainty over the value of opening up Britain to the fracking industry, particularly given the elevated costs that come with the technology.

With OPEC currently engaged in a price war, and with each member producer from the predominantly Middle Eastern group aiming to over-supply the market with crude, costly ‘tight oil’ projects such as those fracking developments being lined up for the UK simply look uneconomic in comparison.

The UK’s fledgling shale oil sector is now locked in the centre of an international price war, with the biggest players grappling for control of the global energy market. OPEC countries are keen for prices to remain stable at the $100 a barrel mark in the longer term, but many market analysts believe that they will be prepared to weather shorter-term pain in the form of lower prices if this forces US shale activity to slow and even cease in some cases. With the US typically having shorter drilling contracts, their shale activity could potentially be sensitive to fluctuating prices in the shorter term.

Meanwhile in the UK, fracking’s high break-even cost is likely to dissuade major producers from progressing with the technology. This could see some of the bigger players opting out of the current round of exploration licensing. The UK also currently lacks significant infrastructure for its onshore operations. The Home Counties are believed to hold 4.4 billion barrels of the oil. However, the extraction costs would currently exceed those of America’s, particularly when the environmental regulations imposed on UK drillers are factored in.

However, the DECC says that this licensing round will progress regardless of market price fluctuation and that it is still confident about awarding permits for exploration early in 2015.

Deutsche Bank recently suggested that if oil prices drop below $80 a barrel, then nearly 40pc of America’s shale oil wells could immediately become uneconomic.

A spokesperson for UK Onshore Oil & Gas said that investment decisions for the UK’s future gas and oil developments needed to be considered within a five-year price context.