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IGAS is well placed to aid ailing UK gas industry

It’s an unfortunate fact but Britain’s hydrocarbon reserves are dwindling. Hydrocarbon imports have overtaken exports and very soon the North Sea's once vast reserves of 'black gold' will be no more.  In the meantime demand for hydrocarbons within the UK is showing no sign of waning.

Conversely, consumption is accelerating particularly as the winters appear to be getting harsher and some experts are now predicting that Britain will be importing 90% of its oil and gas as soon as 2020.

These circumstances are emblematic of a host of developed countries who are heavily reliant on oil and gas and an increasing amount of money is being spent on finding alternatives or devising new ways to extract hydrocarbons.

However unbeknown to many there is a more than viable alternative that is present in huge quantities within the UK known as CBM (Coal Based Methane). CBM refers to gas which is trapped within coal seams which can then be extracted and is of a similar high quality to that of North Sea gas. 

CBM is already well established in Australia and accounts for around 10% of the natural gas produced currently in the US. Despite being relatively new to both countries, CBM growth has been described as exponential as its effectiveness as a reliable and economic alternative gains greater recognition.

Given the UK’s ever-worsening hydrocarbon outlook, the introduction of CBM could not have come at a better time and one company looking well placed to take advantage of the situation is IGAS Energy (AIM: IGAS).

IGAS was founded in 2003 and has since become one of the leading developers of CBM within the UK. The group has 11 production and exploration development licenses (PED-L’s) in total throughout England and Wales with preparation taking place to ready them for production and one pilot production already underway.

The group entered into a joint venture agreement with Canadian company Nexen (NYSE/TSX: NXY) in 2005 who are a significant global energy group and whose extensive experience, knowledge and technical nous regarding CBM in Canada has been of great use to IGAS. 

IGAS have progressed well since its initial inception to AIM in 2005 despite having to endure the extra hardship of the economic downturn. Apart from a few minor scrapes and a fluctuating share price IGAS emerged unscathed helped by the news that their net contingent recoverable resources had been upgraded over 41% to 807 billion cubic feet (Bcf) of gas.

Independent consultants Equipoise who carried out the evaluation also gave IGAS a high-case gas in place estimate in excess of 8.5 trillion cubic feet equivalent to approximately 1.5 billion barrels of oil equivalent (boe) - a figure which if even partially realised would significantly enhance the company’s status as a gas producer and developer and no doubt have a proportionate effect on the share price.

The group's focus on unconventional gas supply took an encouraging turn recently after it was announced a significant shale resource was discovered within its acreage.

Shale gas is similar to CBM in that it is a source of natural gas that is trapped within rock formations and requires recent technology to extract it. Fortunately over the past 5 years the extraction technique has been perfected, presenting an abundance of shale gas extraction opportunities. The perfection of the extraction process is very significant in terms of global natural gas reserves with some analysts predicting at the very minimum the development of shale gas could lead to a 30% increase in the world's natural gas reserves.

For Europe and North America this is equally significant as all of a sudden these continents are considered natural-gas rich again which has led to a cut in dependence for gas from other regions. Consequently in the US there are several large seaports which have been opened in the last decade to aid gas transportation from the Middle East that are being mothballed or working at very low capacity due to new-found shale gas production.

Owing to the success of shale gas in the US, many of the multinationals are now acquiring stakes in parts of Europe hoping for similar results. In the past 6 months Exxon Mobil, Conoco-Philips, Chevron and Shell to name a few have taken stakes in European countries and this year could see a bidding war ensue over remaining areas believed to hold shale gas.

The UK is also estimated to hold considerable shale gas potential and IGAS has the strategic advantage of being one of the first to hold significant shale concessions in the country. Its licenses cover over 300,000 acres and are thought to be hydrocarbon bearing.

The company has employed independent consultants to review the hydrocarbon potential of their licenses, the results of which could very well provide another considerable upgrade to their existing resources.

Financially the company is in a strong position having completed a placing in December 2009 for £13.75million. To better understand how the money will be used we will look at each of the company’s properties in turn.

Production and Exploration Development Licenses (PED-Ls)

The group's PED-Ls are all located within one of six areas each of which varies in size and contingent resources. Point of Ayr comprises 4 licenses and contains the greatest prospective resources of the group’s portfolio with a best-case gas in place estimate of 2312 Bcf.  Point of Ayr is located on the North Wales coast with 3 of the 4 licenses situated offshore. IGAS holds a 75% working interest in each.

The second most prospective area is Swallowcroft/Greater Swallowcroft which comprises 6 licenses. IGAS hold working interests ranging between 35% and 100% and have a best-case estimate resource of 760Bcf.

Following this is Parkside which is situated in South Lancashire and comprises just 1 license. IGAS holds a 35% working interest and has a best-case estimate resource of 825Bcf.

The next property is Four Oaks which is located between Liverpool and Warrington and comprises 2 licenses. The group has working interests of 100% and 35% respectively and a best case estimate resource of 249Bcf.

Following on from this is North Dee which is located in and around the Runcorn area and comprises 2 licenses. IGAS holds working interests of 35% in each and has a best case estimate resource of 601Bcf.

Last but not least is the Drax property situated in Yorkshire which comprises of 1 license. IGAS holds a 20% working interest and has a best case estimate resource of 227Bcf.

The group certainly has a busy work schedule cut out with plans to have first full site production up and running by 2011 and a target of between 20-50 sites for production between 2011 and 2014. IGAS is expecting each site to produce between 4-10 mmscfd (million standard cubic feet of gas per day) at their peak equivalent to 650-1,700 bopd so investors shouldn’t have to wait long until the company starst generating healthy revenue.

The company has already announced it has received planning permission for the first full scale production site at Ellesmere Port in Merseyside and also indicated that it is waiting to hear back from 4 further full scale production site applications.

In the short term the company has a pilot production underway at the Doe Green site in Warrington. The site is currently producing in the region of 45,000 scfd (standard cubic feet per day) of high quality methane and management believes as production increases, electricity generated from this site alone should be able to power 1,200 homes.

A second pilot production site will operate from the Keele University Science Park within the Swallowcroft property, with drilling expected to get underway in the first half of this year. IGAS hopes to achieve similar gas rates to those achieved at Doe Green and proposes that gas from the site will be sold directly to the University for electricity generation.

The electricity generation figures for the pilot production site alone are very impressive and give a good insight into the potential size the operation could grow to once all sites are in full scale production. Estimates by IGAS based on its current mid-case resources of 807 Bcf suggest the group will be able to supply electricity to around 7% of the UK for at least 15 years with the potential for this figure to be increased should its resources receive further upgrades.

With these figures IGAS will not only be turning over a regular profit but should have additional capital which could be used to fund further acquisitions whether domestically or internationally. This will also be a tremendous help in its efforts to be part of the shale gas revolution which could be the most significant form of profit generation for the company particularly as many countries such as India are considered to contain substantial resources though as yet have no significant exploration underway.

Either way given the current rate of progression the company will not be limited in its options.

There is no doubting the UK’s gas demand is strengthening while domestic gas supply is weakening, therefore demand for CBM and shale gas is only going to increase.  As CEO Andrew Austin recently said “IGAS now has the funds, the technical knowledge and the sites close to major industrial areas to start delivering secure gas commercially”. Furthermore the forthcoming results from the evaluation of their shale gas licenses carry a lot of significance and could have a massive influence on the group’s direction going forward.

If a significant resource is delineated it will be a very strong boost and should provide strong support for the share price.

Management has done extremely well up until now delivering on promises therefore there is no reason to believe why the latest aggressive production plan cannot be achieved.  One thing is for sure:  the next five years promise to be very exciting for both investors and management alike.

Disclosure: The author holds no positions in the company