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Investment prospects for shale gas

In recent weeks there has been much debate surrounding the impact of shale gas production or ‘fracking’.

In recent weeks there has been much debate surrounding the impact of shale gas production or ‘fracking’. The technique has had a significant impact in the United States and there is a hope that this can be replicated on British shores.

In spite of major resistance from environmental campaigners, the Government is hopeful that fracking will help to reduce the cost of living for many families in the UK.

Investors are already beginning to show an interest in fracking, and this is understandable given the effect that it has had on the other side of the Atlantic. Whilst it is far too early to say whether Britain will benefit to a similar degree, individuals looking to invest in something a little different might consider this area.

The idea of fracking was pioneered in the 1990s, although it has only really come to prominence in the past few years. The technique was developed by a Texan called George Mitchell and involves blasting shale rock with water, sand and chemicals in order to extract the natural gas contained within.

During President Obama’s spell in office, the production of natural gas through fracking has expanded significantly. According to a recent article in The Economist, shale gas production has played a decisive role in bringing the USA out of recession. The weekly publication goes on to say that the process can ‘create jobs, lower bills and reduce dependence on unreliable, autocratic oil and gas producing countries’.

David Cameron believes that the use of fracking could bring similar benefits to this country. In a recent piece written for The Daily Telegraph, the Prime Minister sought to justify his advocacy of the process, in the midst of opposition from environmental groups.

He argued that fracking could play a crucial role in the increase of the country’s energy supply. Ultimately this will serve to reduce the cost of people’s domestic energy bills. This is a persuasive argument in the context of an energy market characterised by annual price rises!

He also pointed to the fact that shale gas production is likely to create an estimated 74,000 new jobs, as well as the financial benefits for the local communities which play host to a fracking site.

Individuals contemplating investing in the shale gas industry would be likely to base their decision on the success enjoyed in the USA and the potential benefits to the UK set out by David Cameron. However, there are also various counter arguments for potential investors to be aware of.

Due to the extensive media coverage of the recent protests, the most apparent drawback is the potential impact that fracking could have on the environment. Indeed, the nature of the environmental protests has already been enough to deter exploratory fracking in parts of the UK.

Campaigners opposed to the technique argue that it triggers the release of large amounts of methane into the environment, thereby exacerbating the greenhouse effect. Another concern is that the process might trigger earthquakes. However, a properly regulated fracking industry would be able to minimise such risks.

There are also fears that it may be difficult to emulate the success enjoyed by the United States, elsewhere. BG Group is a supplier of liquefied gas to industrial nations and the company’s vice president for global energy marketing and shipping, Matt Schztzman, believes that the US was a ‘sweet spot’ in this regard.

Other commentators have also argued that due to a combination of geological and legislative barriers, countries such as China and India may not be so conducive to fracking. As a result of these uncertainties the area still represents a risk to potential investors. However those looking to pursue this avenue do have some options and might consider a focus on the United States’ ‘rust belt’.

This term refers to areas such as Ohio and Virginia, which represent the heartland of shale gas production in the USA. A recent article written by Pamela Morris for ‘Fund Web’ has pointed to the significant GDP growth experienced by these areas over the past twelve months.

As a result, fund managers from leading investment companies including Henderson, Jupiter and Artemis are beginning to select stocks with either a direct or indirect link to the fracking industry.

Individual stocks are also an option but for most investors, a collective investment such as a unit trust or OEIC, would be the best way to gain exposure to this area.

The column has previously discussed the benefits of using collective funds which offer the stock picking expertise of a fund manager in return for an annual charge. This is the most appropriate course of action for most individuals, who have neither the time nor expertise to monitor a portfolio of individual stocks.

* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull.

* E-mail: tilaw@meritofs.com

 

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