Picks, shovels and the shale gas phenomenon

The startling pace of shale gas production growth has seen output of this unconventional gas account for 20% of US gas production in 2009 - some 2.4 trillion cubic feet (tcf) - up from 1% in 2000.

The US Energy Information Administration forecast a rise in US shale gas production to around 5.5 tcf by 2030, an increase of some 130%, with growth likely to be quickest over the next 10 years. Further areas for exploration have been identified in Poland, Hungary, Romania, Turkey, UK, China, Argentina and Chile.

Michael Ulrich, who manages the F&C UK Mid-Cap Fund, is reminded of the well-quoted corollary that the best way to make money in the gold rush was by selling picks and shovels. Fast forward 150 years, replace gold with shale gas, and perhaps the old adage is still true.

Ulrich commented: "Once a shale gas play has been identified there is a relatively high drilling success rate. They also tend to be spread over a wider area than conventional deposits and the wells deplete faster. They therefore require many more wells to be drilled than a conventional field - which is good news for the pick and shovel providers!"

Shale gas deposits are trapped within rocks meaning that the gas does not flow as easily as conventional gas. The big growth in shale gas drilling has been driven by technology allowing horizontal drilling and hydraulic fracturing using specialist chemicals and liquids which are pumped at high pressure into the well.

F&C's UK Mid-Cap Fund holds significant positions in Elementis and Weir, both of which look set to benefit from their involvement in the extraction of shale gas.

"Speciality chemicals group Elementis produces a highly effective chemical used in these horizontal wells, which require up to 10x the volume of chemicals compared to a standard well. The third quarter saw shale gas drilling drive the company's oil and gas related volumes up by 84%. Meanwhile, Weir provides pressure pumping equipment that drives the fracturing process and so far this year their upstream oil and gas order book has increased by 232%. Whilst both have been strong performers this year, I believe they both remain attractively priced relative to their strong prospects," Ulrich concluded.