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The British House of Lords has declared today that it is time to stop talking and to start fracking. The Economic Affairs committee said today that unless Britain gets cracking it is going to miss opportunities for lower energy bills and a massive opportunity for as many as 250,000 jobs, not to mention a secure source of energy at home. The committee’s report said that retrieval of shale oil and gas by the fracking process has become “an urgent national priority.”
To be fair, not everyone in the UK supports the methodology of fracking. There are those who protest (literally) that fracking is harmful to the environment. From an economic and investment perspective, those protesters are about as dumb as one of the stumps they try so valiantly to protect. My latest theory is that they despise anything that provides economic growth, prosperity, security, and – God forbid – jobs. They might have to get one. But I digress.
The report says that “Some estimates suggest that the amount of gas recoverable could be over 40 times greater than the current annual UK gas consumption.”
Let’s pause for some perspective.
- North Sea oil & gas production has declined by almost 40% since 2010.
- The UK’s consumption of gas has increased by 227% since 1970.
- Fracking could create ≈ 250,000 jobs.
- Fracking could supply all of Britain’s gas energy needs for 40 years.
And we have tree-huggers now trying to save rocks? What is wrong with this picture?
As of December 2013, about 60% of the UK had been approved to be licensed to oil companies for fracking. Licenses, when issued, would permit fracking for a period of 30 years at any single site. But without any actual fracking being done, the gas is nothing more than potential energy, potential jobs, and potential wealth. The last time I checked, banks were not willing to accept potential of any kind as a deposit.
What the Lords fear is that, unless something is done to cut through the red tape, it will be another decade before fracking can be fully functional in the UK. Frankly, the country cannot afford to wait another ten years. “In the absence of shale gas development, imports will rise. By 2030, DECC has forecast that the UK could be importing three quarters of its gas. The Institute of Directors estimates the costs of such imports at £15 billion per annum. The IoD report’s central scenario for UK shale gas production suggests that gas imported could be reduced to 37 per cent of consumption in 2030, with the cost of imports falling to £7.5 billion which ‘would assist with the UK’s balance of payments and support energy security.'”
Applying fracking to the stock market
When fracking exploration begins on a large scale, and especially when retrieval and production begin, companies hitherto considered common may well emerge as strong investments. Consider one example: sand. The demand for sand as a major component of fracking fluid is nothing to be taken lightly. Look for suppliers of commercial silica to make huge profits. Demand will also rise, but perhaps not quite so dramatically as silica, for isopropanol, gaur gum, citric acid, and sodium and potassium carbonate, to list a few.
One Investment Illustration
Setting aside the relative size of the companies’ market caps, a recent study compared the returns of Haliburton (fracker) versus ExxonMobil (traditional). Over the six month period from December 2012 to June 2013, Exxon returns increased by a meager 5%. While shareholders may brag that 5% is still better than the banks (what isn’t?), Haliburton returns increased by nearly 45%. I wouldn’t build my case on that fact, but I would recommend that it be given due consideration.
Whilst this may not be the ideal time to think about investing in fracking companies and their suppliers, it is the right time to develop a strategy that will have you prepared before the train leaves the station.
