Energy secretary Ed Davey has given the go-ahead to the controversial practice of fracking in the UK in order to exploit extensive shale gas resources locked deep underground.
The announcement reverses the unofficial moratorium on fracking that has been in place since early 2011, when drilling by Cuadrilla Resources, a private shale gas explorer, triggered two small earthquakes in Lancashire.
Fracking involves pumping water and a mix of chemicals underground at high pressure to shatter rock formations and release gas. While many environmental groups condemn the practice, it has revolutionised the energy landscape in the US and government ministers are keen to try to replicate that success in the UK.
Safety will nevertheless be a top priority, says Mr Davey. "Fracking must be safe and the public must be confident that it is safe." He added: "Shale gas represents a promising new potential energy resource for the UK. It could contribute significantly to our energy security, reducing our reliance on imported gas."
New government-backed safety measures include a requirement to extensively monitor seismic activity before, during and after drilling; a traffic light system used to halt fracking under certain conditions; and a requirement that drillers show they have built strong enough wells to prevent any gas or chemicals escaping into water tables near the surface. The names of any chemicals added to the water used in fracking will also be publicly disclosed.
The government is also likely to press ahead with a "generous new tax regime" for UK shale gas developers, as chancellor George Osborne hinted in October.
This should help to entice companies to enter the country's nascent shale gas industry. Cuadrilla is the only company to have tried fracking in the UK so far, but says its licences within Lancashire's Bowland shale complex could hold as much as 200 trillion cubic feet of gas in place. Other companies with UK shale gas licences include
Investors could also get exposure to this emerging sector by investing in drilling companies or service providers such as Schlumberger or UK-listed
Government endorsement of the resumption of fracking in the UK is clearly a positive development for the sector. But we advise investors to treat the junior shale gas explorers with caution for the time being. That's because it will take companies many months, if not years, to get all the necessary approvals to begin fracking activities and, crucially, test whether shale gas can be extracted from their licences at commercial rates. Remember, there hasn't been a single company that has managed to replicate US shale gas extraction at commercial rates in Europe thus far, despite years of effort. And while first-movers have an advantage and will receive plenty of hype, there will be a lot of public attention and scrutiny about their activities, which could adversely impact their shares. We nevertheless recommend shares of both Igas and BG for their existing operations.
Last IC view: UK shale gas hopes reignited