In this guest post, researcher and anti-fracking campaigner Ben Dean argues there should be a change to the law which currently could allow the Chinese to influence shale gas exploration in England.
On the 5 February 2020, AJ Lucas Group Ltd, a specialist Australian energy and mining company, announced it had completed the purchase of an extra 45% stake in the fracking firm, Cuadrilla Resources.
Under the deal, AJ Lucas bought for a nominal fee the shares held by Riverstone, a New York-based private equity fund manager.
The acquisition increased AJ Lucas’s shareholding in Cuadrilla from just over 47% to about 93%. It gave AJ Lucas total control of decision making for Cuadrilla’s business, licensing and fracking operations onshore in England.
The deal also increased the role of another private equity fund manager, Kerogen Capital, in England’s shale gas industry.
Kerogen Capital is based in Hong Kong and specialises in the international oil and gas sector. It holds 65.36% of shares in AJ Lucas. So, while the acquisition gave AJ Lucas control of Cuadrilla, it also made Kerogen Capital the leading player in the fracking company.
Ivor Orchard, a co-founder of Kerogen, has been on the board of Cuadrilla since 2014.
I argue that Kerogen now controls all the decision-making in both AJ Lucas and Cuadrilla. The chief executive of Cuadrilla, Francis Egan, is now a mouthpiece for Kerogen.
If you dig a bit deeper, you also find that the deal opened up Cuadrilla to China.
Kerogen Capital manages more than $2 billion across multiple funds. These include the Kerogen Energy Fund LP.
The 2019 annual report for the Chinese-owned company, CNOOC Limited, lists the Kerogen Energy Fund in its equity investments.
CNOOC Ltd is a a subsidiary of the China National Offshore Oil Corporation or CNOOC Group, one of the largest national oil companies in China and supported by the Chinese government.
The AJ Lucas acquisition in February 2020 was challenged by Bob Dennett, a Lancashire resident and anti-fracking campaigner.
He argued that the deal was unlawful because the UK industry regulator, the Oil & Gas Authority (OGA), had not granted consent for the deal.
Mr Dennett’s legal team served a pre-application protocol letter on the OGA. The OGA responded and Mr Dennett decided not to proceed with his claim.
The OGA is required to consider “change of control” of a licence. But the rules define that a change of control happens when a shareholder acquires a 25% interest in a company.
AJ Lucas already had 47% and was considered “a person of significant interest” before the deal. The Australian company may have taken control of decision-making on all Cuadrilla’s petroleum licences in the UK but the OGA argued that it did not have to intervene. Mr Dennett’s case did not get off the ground.
I maintain that this is clearly a flaw in the so-called gold standard regulation of onshore hydrocarbons. It cannot be remedied in the courts and therefore requires legislative intervention and changes to the law.
IGas and China
Cuadrilla is not the only UK shale gas company with links to China.
In 2011, IGas bought up Nexen’s UK onshore exploration. In return, Nexen took a stake in IGas.
In 2013, CNOOC bought Nexen and that year an investor presentation reported that CNOOC held 21% of IGas shares. This fell to 13% in 2016 and the latest information on IGas major shareholders does not mention CNOOC.
But it does confirm that Kerogen Capital, with its links back to China, is the largest shareholder, with a 28% stake in IGas.
Kerogen’s interest in IGas dates from April 2017 following a refinancing agreement. This involved the injection of US$35m and a debt-for-equity swap.
Tushar Kumar, a partner in Kerogen Capital, has been on the board of IGas plc since 2017.
IGas said earlier this year it was focussing on shale gas interests in the East Midlands. It has drilled an exploration well at Springs Road, Misson, in Nottinghamshire and local people have been waiting for an announcement of plans to frack the well.
Since then, the government imposed a moratorium on high volume hydraulic fracking in England because of concerns about earth tremors.
Fracking at Cuadrilla’s Preston New Road site, near Blackpool, in Lancashire, had induced tremors in autumn 2018 and summer 2019. The company caused the UK’s largest ever fracking-induced earth tremor on August bank holiday 2019.
The moratorium is still in force and the energy minister, Kwasi Kwarteng, said last week that fracking was over and the government had “moved on”. “It is not something that we’re looking to do”, he said.
But Cuadrilla and IGas have said repeatedly they are working with regulators to demonstrate they can frack safely and in an environmentally-responsible way.
This morning, AJ Lucas issued a statement to the Australian stock exchange in which it predicted that the moratorium would be lifted, but not before 2021.
If Kerogen and its Chinese backers can persuade the UK authorities to lift the moratorium, Cuadrilla has the potential to resume fracking at Preston New Road and IGas to start in the East Midlands.
It is possible that the Chinese government may even include relaxing the regulations on fracking-induced seismicity as a condition in trade negotiations.
The UK government should stand firm on fracking in response to pressure from China. UK ministers should understand that any benefits from onshore fracking would be for the Chinese government, as well as the UK treasury. I argue that the environmental impacts would be too great to justify this position.
- Another legal challenge over company change of ownership involving Third Energy is different from Bob Dennett’s case with AJ Lucas and Cuadrilla. 100% of Third Energy’s shares were purchased by a newly-incorporated company, York Energy (UK) Limited. This case has a two-day Judicial Review hearing on the 14 and 15 July 2020.
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