This is Britain’s ‘get out of jail free’ card

By Bengt Saelensminde Mar 20, 2013

Bengt Saelensminde

Share with
friends:

Comments (12) Print this article

Yesterday, we learned that inflation is still bubbling away under the surface. It’s now at a nine-month high of 2.8%, according to the Office for National Statistics. Why? Well, mainly it’s the soaring cost of energy.

Long-term readers will know that I’m an energy bull. The world is filling up with people, and those in Asia are getting much richer.

Handy, then, that there’s a revolution happening in the energy markets...

A revolution in energy markets

I’m sure you’ve heard about shale gas. Basically, new drilling techniques now allow us to release previously inaccessible energy held in shale rock. It’s led to a glut of gas production in the US.

But for investors, it’s been a bit of a struggle to make any money out of this boom.

As the chart shows, US gas prices have plummeted over the last couple of years. The new gas drove prices down and down. Some thought that this would lead to a boom for the producers... but they’ve been severely disappointed.

Natural gas price chart
 
If you look closely at the chart, though, you’ll notice that recently gas prices have been ticking up.

As is so often the case, those that rushed headlong into the latest ‘thing’ ended up with losses. But by my reckoning, the worst of the price falls are now in. Things are looking up for this industry. Especially here in the UK, because George Osborne has made it clear that Britain needs to be at the forefront of the shale gas revolution.

Here’s what I see coming...

Special report

An exclusive report from The Right Side
"Bankrupt Britain?"

The three game changers for gas

The biggest problem with oil and gas is that when you drill a well, you can’t just switch it on or off depending on how much the markets are willing to pay for your energy. The economics just don’t work that way.

Once you start pumping oil or gas, you have to keep pumping. And as we’ve just seen, with all the new gas fields in production, that’s been a disaster for gas prices in the US. It's meant that over the last couple of years, producers have been less inclined to explore and develop gas production.

But the good news is that production is now starting to come under control. I suspect that’s what’s finally started to cause a rise in gas prices.

The industry is now on a more sustainable path... but gas is still cheap. Which brings me to the second game-changer...

##The Right Side##

As an energy form, gas is now some 75% cheaper than oil. And that’s led to huge changes in consumption. After all, gas is also cleaner than oil and now that it’s considerably cheaper, the big energy users are looking to profit from the situation.

In his autumn Budget statement, Osborne said that we’ll be looking to build 30 new gas electricity plants. And the UK desperately needs this infrastructure. Ofgem reckons that without a considerable investment, it could be lights out for Britain by 2015. That’s not very far away!

The point is, demand for gas is set to soar. Expect to see more gas-fuelled cars, buses and trucks too. And what’s more, this could all be home-grown energy... and that’s the third game-changer...

This government is dead keen to tap what could be the UK’s biggest ever ‘get out of jail free’ card. Looking back, much of the North Sea oil and gas production was squandered. Peak production ran as energy prices were on the floor. Now that energy prices are higher, North Sea production is waning. Let’s not even get into the debate about where much of the proceeds of the UK's oil boom went!

We desperately need a second bite of the cherry. And the gas revolution could be just that. Osborne knows it, and he’s putting in place measures to make sure the UK is at the forefront of shale gas production. In fact, I expect we'll learn more in today’s Budget.

The ‘trade of the decade’?

There are many ways to play the potential gas boom.

There are the infrastructure plays – quoted companies set to build out the new electricity plants and infrastructure demanded by government.

The explorers are making hay too. Recently I showed readers how North Sea oil producer EnQuest is raking in the cash as it uses all the latest drilling techniques to drain the last drops out of maturing North Sea fields.

My colleague David Stevenson has been hounding this story for a long time now. Whenever I meet him he always finds a way to bring the conversation around to his big gas play! He’s found a way to play it that he thinks is the ‘trade of the decade’… and I think he has a point. Click here to judge it for yourself.

This is an industry full of promise. Played right, we could be energy self-sufficient for decades to come. I’ll certainly be keeping a beady eye on the dramatic developments in the industry... and, of course, how we might profit from it!

For the moment, let’s see what Osborne says today.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd.

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

The Right Side is an unregulated product published by Fleet Street Publications Ltd.

Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do

Comments (12)

Published in Investing in oil, gas and energy | More articles by Bengt Saelensminde

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. Rayfield

    (20 March 2013, 05:09PM)  Complain about this comment

    In "Penny Sleuth" dated 28 July 2011, your colleague Tom Bulford highlighted AIM listed OILEX (OEX) and its Cambay shale gas project in Gujarat, India. For the last 12 months the company has been planning a new exploration and development programme for this world-class asset over the next five years, and this is now completed, awaiting final approval by the Management Commitee. I understand that the Indian government is shortly going to make a policy statement about future Shale exploration India, and Oilex is ready to go now. At the moment the share price is "on the floor" at 4p, but the potential upside over the next 12-18 months is huge! This is only an update on Tom's note of 20 months ago, but I thought it might make interesting reading for anybody wanting to get involved in the new Energy Revolution sooner rather than later, but do your own research!

  • 2. Tom Roundhouse

    (21 March 2013, 11:49AM)  Complain about this comment

    Picks & Shovels:

    The way I would play all this is to look at which companies behind the scenes stand to profit because their profits are less likely to be threatened from political interference such as windfall taxes. We all know that 19 century gold prospectors rarely did well but the businesses that sold the tents, picks and shovels made fortunes. Similarly, in this situation I would look to companies like Weir who supply pumps. Not sexy perhaps but with 20 to 30 year maintenance contracts running alongside their installations the income streams look very attractive.

  • 3. r

    (21 March 2013, 11:50AM)  Complain about this comment

    If this does turn out to be a "get out of jail" card, how are we going to stop the government of the day squandering all that extra income?

    It offers another opportunity after North Sea Oil for the government to properly fund the state pension scheme and, perhaps, the public sector schemes as well.

    This, alone, will get the country out of the mire - eventually. Just think how well off we would be now if we had had properly funded pension schemes from 1948! Government expenditure would be about 40% less than it is now.

    r.


  • 4. David

    (21 March 2013, 12:04PM)  Complain about this comment

    Shale gas might get the UK government out of jail and might make some money for energy companies and investors - though I'm not convinced that the US gas boom can be repeated in the UK.

    Either way, significant investment in gas puts runaway climate change firmly into the picture. Everyone loses big time then.

  • 5. bobsto

    (21 March 2013, 12:58PM)  Complain about this comment

    In the US I understand the government does not want the gas exported.
    They want to use it purely to lower the cost of domestic energy well into the future.
    I wonder if the UK will do likewise, particularly to prevent energy exports pushing up our exchange rates and making other exports unviable(as happened with North Sea oil).

  • 6. Omega

    (21 March 2013, 01:20PM)  Complain about this comment

    It's a ponzi scheme.
    http://www.youtube.com/watch?v=xAlYoWXe154

  • 7. Steve, UK

    (21 March 2013, 04:44PM)  Complain about this comment

    David,
    'Either way, significant investment in gas puts runaway climate change firmly into the picture. Everyone loses big time then'. Change the record mate, climate change for the last 30 years has been 0.5 degrees. The settled science is now discredited after statistics have been massaged to fit 'scientists' predictions. A con waiting to happen when you look at the money thrown at it.

  • 8. clive chafer

    (21 March 2013, 05:52PM)  Complain about this comment

    David, I couldn't agree less. All this exaggerated climate change piffle is destroying any sensible energy policy and covering our land with hideous white elephant wind turbines.
    Gas is a relatively low carbon energy form with huge potential to help British industry and reduce the virtually unaffordable bills suffered by householders.
    We should take advantage of this windfall and give the stuff about climate change a bit of a rest.

  • 9. MichaelL

    (22 March 2013, 12:02AM)  Complain about this comment

    @Omega - the reason why our utility bills are so high is because 'we' have listed to the 'hug a tree / world is going to end' nut jobs for far too long.

    Time we got fracking, drilling, building thorium nuclear reactors - the whole lot - so we can have cheap energy and make no difference to the environment.

  • 10. dumnut

    (28 March 2013, 10:53AM)  Complain about this comment

    Clive @8, I sort of agree, but for different reasons. I come from one of the few places in the world which is actually likely to benefit from climate change.

    In the event that climate change is half as bad as some predict and the UK discovers just how far north it really is, then I won't care because I and my descendants will not be here. But then, judging from your style of writing, you will have long since gone as well.

  • 11. Orb

    (02 April 2013, 02:21PM)  Complain about this comment

    "virtually unaffordable bills" & "our utility bills are so high"...

    I don't know about anybody else, but I find it rather hypocritical of the Master Criminal to be so 'concerned' about 'fuel poverty' when my CT 'bill' is MORE than my utilities+phones+internet (incl. water & mobiles!) combined. In fact, it's more than twice my average energy bill!

    Then there's income tax, N.I., stamp duty, sin taxes, fuel duty, VAT... why are we paying so much 'protection money'???

  • 12. theonejoshua

    (14 April 2013, 07:06AM)  Complain about this comment

    Great idea and hope it comes off cos oil has had its day nuclear has never been safe! I live in Japan yesterday i was woken up at 5.30am with an earthquake 6 on the richter scale shaking my house thanks to Owaji Island it was 3 at home. I am in! this looks good for a long term play! Just worry about deflation since all the economic indicators seem to point that way since the Summer of 2011! I will play with the big boys and the suppliers however. Thank you FSL and The Rightside!

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>