In this week’s Autumn Statement, chancellor George Osborne unveiled a consultation into creating tax incentives for shale gas development. A single Office for Unconventional Gas will also be established to improve regulation in the area.
The chancellor’s move was welcomed by investors such as Christopher Wheaton, an analyst and portfolio manager for the oil and gas sector at Allianz Global Investors.
Wheaton pointed out that the US has seen gas prices fall to just 40% of the UK’s thanks to shale gas and predicted that businesses and consumers would benefit from a similar, if smaller, revolution over here.
“A successful recipe to make shale gas work requires good resource, oil services to drill and develop the resource, routes to market and sensible regulation,” he added.
“The UK already has a successful but underappreciated oil services industry, a network of gas pipelines and regulation which is sensitive to the environmental issues around shale gas drilling.”
With many investors already alert to the possibilities that shale gas is creating in the US, it may be time to look for similar opportunities that could arise on these shores.
Opportunities already exist in the US
If the example of the US is anything to go by, investors can allocate directly to companies involved in the shale gas business.
Bruce Jenkyn-Jones, managing director of the listed equity team at Impax Asset Management, said: “We could be about to witness a modern day equivalent of selling shovels during the gold rush.
“Some of the best investment opportunities arising from the shale revolution are in the suppliers helping the industry to operate more efficiently, reduce pollution and meet increasingly strict environmental controls.”
While energy companies such as oil services firms are the most obvious beneficiaries of the revolution, the effects are likely to be more widespread.
Jason Hollands, managing director of business development and communications at Bestinvest, said the rise of shale gas has the potential to spark a “renaissance” in manufacturing.
“When combined with pockets of high unemployment – providing downward wage pressure – but higher salaries in Asia, [cheap gas] has narrowed the manufacturing cost gap,” he explained.
“We therefore see the potential for increased re-domiciling of jobs back to the US, reversing the offshoring trend of the last decade.”
Other sector, such as the chemicals industry, will benefit from the cheaper input costs that come in the wake of shale gas and could become more attractive to investors.
Simon Edelsten, Alex Illingworth and Rosanna Burcheri, for example, have been playing the US shale gas theme in the Artemis Global Select Fund for the past year, buying companies such as PVC maker Shin-Etsu Chemical and manufacturer 3M in anticipation of lower costs.
Time for British shale gas allocation?
Should the UK successfully start its own shale gas revolution, British companies spread across a range of sectors would benefit. The positive implications for equity investors as well as the wider economy are clear.
However, work still needs to be done. For one, it is unclear just how much of the resource the country is sitting on. “What nobody knows yet is how much shale resource there is in the UK – and without that, the critical mass of oil services required to develop this resource economically will never be created,” Wheaton said.
So while it may be too early to start a direct UK shale gas play, the area appears to deserve close attention. Osborne’s suggested tax allowances could spur companies to move into the area, in the same way a similar move has funnelled investment into the difficult-to-develop North Sea oil resources over the last year.
The possibility of a gas glut – even if it is smaller than that expected for the US – and widespread benefits it would create make shale gas an important allocation theme over the years ahead. The UK could be joining the US in the modern-day gold rush.
