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Frack Off?

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The unintended (?) consequences of imported industrial deflation.

Experts have warned that a rush to start fracking for oil across Britain may already be over before it has even begun as the slump in global crude oil prices makes the controversial method of drilling look increasingly uneconomic.

Bids from oil companies for licences to search and potentially drill for oil onshore in the UK are due on October 28. The auction of mineral exploration rights across vast swathes of the country will, it is hoped, spur a shale oil and gas “revolution” similar to that which has helped transform the US economy.

Hydraulic fracturing or fracking has made America increasingly energy independent and has broken its reliance on the volatile Middle East. The US, which pumps about 8.5m barrels per day of crude, is forecast to soon overtake Saudi Arabia as the top global producer of liquid petroleum.

However, the recent sharp declines in the price of oil traded on global markets – Brent is down around 25pc since hitting $115 per barrel in June – have cast a cloud of uncertainty over the process of opening up the UK to fracking due to the high costs associated with the process.

Fracking for so called “tight oil” involves the expensive process of cracking open shale rock formations deep underground and then pumping fluid and sand into the fractures under high pressure to force out the thick low quality crude.

The fear is that with the Organisation of the Petroleum Exporting Countries (Opec) – a group of 12 mainly Middle Eastern producers who pump a third of the world’s oil – apparently locked in a price war as each seeks to pump more crude than the market requires, it is the high cost of “tight oil” such as the projects being proposed in the UK that will suffer.

Recent research from Deutsche Bank speculated that if prices of Brent crude slump below $80 per barrel then almost 40pc of shale oil wells in North America could become uneconomic overnight. Although prices fluctuate, the German investment bank argues that relative to the US dollar a current “fair value” for Brent oil could be around $80 per barrels for a prolonged period.

“Investment decisions on future oil and gas developments in the UK have to be viewed in the context of the price over the next five years,” said a spokesperson for the trade body UK Onshore Oil & Gas.

Effectively, the embryonic shale oil industry in the UK finds itself caught in the middle of a global price war for control of energy markets. Although Opec countries need prices to hold at around $100 per barrel long term, analysts increasingly suspect that they are prepared to tolerate lower levels in the short term to counteract rising production in the US and even force some North American wells to shut down.


Edited by zugzwang

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In the UK isn't the vast majority of shale opportunities for gas?? I would have thought the UK itself has a very good market for gas. If we start replacing some old coal power stations with gas that provides an even larger market.

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I doubt I'd be the first person to speculate that part of the motivation for OPEC's aparent infighting and quota dismissal is specifically to prevent the further development of fracking.

Apparently, the major fracking boom in the US has caused serious concern among a number of members of OPEC, who were counting on the US continuing to suck at their teat.

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