Expect to see more big names from the oil industry, such as Shell, ExxonMobil and Statoil, moving into the British shale sector now that one of their competitors – Centrica – has taken the plunge. The international companies have always taken a keen interest in the UK fracking scene, despite endless statements from their chief executives that there are better prospects in China and elsewhere.
There is some speculation this weekend that the reason Centrica paid a fairly toppy price for the stake in the Bowland Shale licence from Cuadrilla Resources was because it faced competition from Shell and others.
It is not so much the geological uncertainty that made big oil hesitate in the past, but the fear of reputational damage. And as one of the industry players told the Observer: “That all changes now because Centrica has elected to become the lightning rod for the industry.”
Indeed it will. Green groups opposed to fracking because of the chemicals used and because they believe more gas use means more carbon emissions have already condemned Centrica. A couple of small earthquakes in the Blackpool region that helped to trigger an 18-month drilling moratorium have heightened public concerns. Fracking remains banned in France, Bulgaria and some other countries.
In fact it was always likely that the British Gas parent group would be first out of the blocks, not least because it has the largest retail supply business in this country.
Equally, if anyone is going to have the inside track on what government is thinking about the future taxation structure planned for a shale gas regime, it is going to be homegrown Sam Laidlaw, chief executive of Centrica, rather than say Peter Voser, the boss of Shell, who spends much more time in The Hague than London.
Laidlaw is constantly in and out of Whitehall. Until recently he was part of David Cameron’s Business Advisory Group, while Centrica, as one of the UK’s few, and by far the biggest, British-owned power suppliers, stands most to gain from changes in UK energy policy.
Was British Gas pushed by ministers to front UK shale? Certainly Centrica had privately expressed reservations about the flack it might take if it got involved at an early stage. Ministers were keen to give credibility to a sector populated by small firms, even if some have big backers behind the scenes, such as IGas’s connections with the partly state-owned China National Offshore Oil Corporation.
But it seems more likely that Laidlaw, who as recently as January had expressed the view that UK shale was no “game changer”, just changed his mind and decided it was worth having first-mover advantage.
He had no doubt spent much time talking to John Browne, whose chief executiveship at BP was characterised by being first off the blocks (into Russia, mega-mergers with Amoco etc) and just happens to be a director of Cuadrilla and the UK government’s lead non-executive board member.
So Centrica is to spend £100m helping Cuadrilla with an exploration programme which restarts in earnest next year with a new, fourth, well. A further £60m is promised if the exploration turns into production.
But the size and scale of the shale sector in Britain remains unclear. The British Geological Survey is shortly expected to come up with some encouraging new reserve estimates. Equally, the Treasury will confirm the level of tax breaks available before the parliamentary recess next month.
But the issue that will decide whether Britain can replicate the enormous success of the shale frackers in America, where prices have dropped like a stone, is whether the gas can be made to flow from the rocks easily and in large quantities. That will only be known once more wells are drilled, but Centrica is clearly optimistic.
Deflation could be the way forward
Hard though it is to believe, historically Britain has been as prone to bouts of deflation as it has to inflation. Not in the past half-century, of course, but in the three centuries or so since the Bank of England was founded in 1694, there have been as many years when prices have fallen as there have when they have risen.
Indeed, until quite recently deflation was the natural order of things. Competition resulted in downward pressure on prices and it was only during wars that inflation moved upwards. The price level in the UK was lower at the outbreak of the first world war than it was when the guns fell silent after the battle of Waterloo.
Dhaval Joshi, an investment strategist at BCA Research, says we are on the cusp of returning to this sort of environment. The age of inflation, he says, has also been the age of credit growth, with a strong correlation between the annual increase in the cost of living and the annual increase in debt.
But debt is likely to rise far more slowly in the future than it has in the past, argues Joshi. Why so? Because debt levels are already uncomfortably high; the collateral against which the debt is secured is impaired; and there has been a widespread backlash against debt that was sparked off by the financial crisis.
As a result, the only way the age of inflation could be extended into the future is if central banks decide that it is a lesser evil than deflation. In the short term, that is certainly the case, which explains why central banks have been pumping credit into their economies through quantitative easing.
But will central banks really be comfortable with the next stage on from QE, helicopter drops of money into economies?
Joshi says that ultimately policymakers will prefer modest falls in the price level to the risk of runaway inflation, and that deflation will become the new normal.
Cosy chair awaits Tucker
Paul Tucker’s decision to quit his job at the Bank of England was not unexpected. He has been at the bank for more than 30 years, risen to deputy governor and had been regarded as the nailed-on certainty to take over from Sir Mervyn King. Missing out on the top job meant he was always likely to walk.
He now plans what Threadneedle Street describes as a sojourn in “US academia”.
But it is unlikely that Tucker, an expert in the way that banks work, will disappear into a black hole of research and quiet contemplation. He will without doubt be top of many headhunters’ lists when they cast around for candidates to chair UK banks in the coming years. And it just so happens a couple of jobs might just come along to suit his timing: Sir Win Bischoff has already made it clear that he won’t be hanging around at Lloyds Banking Group beyond next May. And if that is a tad too, soon then there will be a berth at Royal Bank of Scotland as soon as it has bedded down a new chief executive.
Tucker will be back.