Will Total’s Bold Move Into U.K. Shale Gas Pay Off?

Despite the U.K.’s large estimated gas reserves, Total faces a host of challenges as it seeks to develop two newly acquired shale gas licenses.

Jan 21, 2014 at 8:00PM

French multinational Total (NYSE:TOT) announced that it has acquired a 40% stake in two shale gas exploration licenses in eastern Britain, making it the first integrated oil major to invest in the nation's untested shale resources. Will the company's move pay off?

Total's bold move into U.K. shale
Total's acquired interests are in two exploration and development licenses in the U.K.'s East Midlands region and cover more than 90 square miles. Total will develop the licenses with partners including GP Energy, which holds a 17.5% stake, Egdon Resources U.K. (14.5%), Island Gas, or IGas, (14.5%), and eCorp Oil & Gas U.K. (13.5%). IGas will serve as the project's initial operator, but Total will take over as the project moves closer to development mode.

Total, which is also pursuing shale gas projects in the U.S., Argentina, China, Australia, Poland, and Denmark, is expected to become the largest oil and gas producer in the United Kingdom by 2015. The company is already developing the West Franklin Phase II and Laggan-Tormore projects, which are slated to start up this year and will have a combined capacity of 130,000 barrels per day.

Other European oil majors, meanwhile, have noticeably shied away from shale drilling in the U.K. BP (NYSE:BP), for instance, has thus far avoided this resource due to concerns about geology and uncertainty about whether commercial quantities of gas can be recovered economically. Shell (NYSE:RDS-A) has also held back from U.K. shale for similar reasons, as well as concerns that anti-fracking protests such as those that hampered Cuadrilla Resources last summer could attract unwelcome attention.

The U.K.'s shale gas potential
Total's decision to invest in shale gas drilling in the U.K. is shaped by encouraging estimates of the nation's shale gas potential. The British Geological Survey says the Bowland Shale, a formation underlying 11 counties in northern and central England, alone contains 1,300 trillion cubic feet of shale gas. Even if just one-tenth of this quantity can be recovered commercially, it would be enough to meet the U.K.'s gas needs for 50 years.

Policymakers there hope to replicate the success of the U.S. shale boom, which has boosted this nation's oil and gas production to multidecade highs and spurred a renaissance among its manufacturers, by offering tax breaks and other benefits to shale drilling companies.

Chancellor of the Exchequer George Osborne has cited numerous benefits that large-scale shale development could provide the U.K., including a more diversified energy mix, thousands of jobs, and lower energy bills for consumers and businesses.

Not everyone agrees. Many protesters are vehemently opposed to the process of fracking, which is necessary to exploit the U.K.'s shale resources, arguing that it can contaminate groundwater, cause air pollution, and even trigger earthquakes.

Potential challenges for Total
Given the untested nature of the U.K.'s shale gas reserves, the eventual outcome of Total's exploration efforts appears highly uncertain. If the recent experience of Poland -- another European country initially believed to have tremendous shale potential -- is any indication, shale gas development in the United Kingdom could be much more challenging than expected.

Though Poland was initially hailed as one of the most promising European countries for shale gas development, the combination of difficult geology, unclear regulations, and frequently unsuccessful drilling results forced several major companies to pack up their equipment and call it quits. ExxonMobil (NYSE:XOM) and Marathon Oil (NYSE:MRO), for instance, both retrenched from the Eastern European nation after test wells failed to produce commercial quantities of gas.

Total looking strong
While Total's foray into U.K. shale is a highly uncertain proposition, the company has a wave of new oil and gas projects slated to come online over the next few years that should significantly boost production even if this ambition doesn't pan out. Furthermore, with the company's high level of investment finally nearing a peak, cash flow should increase substantially over the next few years, allowing it to grow its dividend at a modest rate.

While Total and its integrated oil peers are turning to riskier exploration projects to help offset declining production from their mature fields, one energy company continues to mint profits. Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers