Centrica will pay £40 million for a 25% interest in the Bowland exploration licence, which both Cuadrilla and Australian engineering firm AJ Lucas hold interests in, plus up to £60m in exploration and appraisal costs.
"This is a further vote of confidence in the UK's fledgling shale gas industry" said environment and energy law expert Simon Colvin of Pinsent Masons, the law firm behind Out-Law.com. "The fact that one of the main players in the UK energy sector is making such an investment is a very encouraging sign."
Shale gas is natural gas trapped within shale formations at significant depths below ground. It has become an increasingly important source of natural gas in the United States, in particular over the past decade. A combination of drilling and hydraulic fracturing, or 'fracking', has facilitated access to large volumes of shale gas that were previously uneconomical to exploit.
Fracking involves pumping water at high pressure into the rock to create narrow fractures which allow natural gas to flow out and be captured. As part of this year's Budget announcement, the Chancellor of the Exchequer committed to consult on the creation of new tax breaks for shale gas developers. The Government will create a new shale gas 'field allowance' and extend the current ring-fenced expenditure supplement from six to ten years specifically for shale gas projects, according to the Budget document.
The Government also plans to produce technical planning guidance for shale gas projects by July 2013. Industry guidance, ensuring that the planning system is properly aligned with the licensing and regulatory regimes, is also expected before the end of the year.
Three exploration wells have been drilled to date at the Bowland site, near Blackpool. According to Centrica, this drilling has confirmed the thickness of the shale formation and the presence of up to 200 trillion cubic feet (tcf) of natural gas. However, further drilling will be required to establish whether the discovery can be commercially exploited, it said.
Once the exploration and appraisal phase of the project is over, Centrica has the option to continue into the development phase in return for a further investment of £60m, according to the announcement.
Simon Colvin said that the arrangement was an "expected step" in the development of the UK shale gas industry which "mirrored" early growth seen in other parts of the energy sector.
Mark Hanafin, managing director of Centrica's International Upstream business, said that the investment was an "attractive opportunity" to explore the commercial viability of shale.
"With North Sea gas reserves declining and the UK becoming more dependent on imported gas supplies, it is important that we look for opportunities to develop domestic gas resources to provide affordable sources of gas to our customers, and to deliver broader economic benefits to the UK," he said.
"The Government's clear commitment to developing the UK's shale gas industry is creating the right environment for companies to invest and to deliver those benefits," he said.
