Will Total's Bold Move Into U.K. Shale Gas Pay Off?

French multinational Totalannounced that it has acquired a 40% stake in two shale gas exploration licenses in eastern Britain, making it the first integrated oil major to invest in the nation's untested shale resources. Will the company's move pay off?

Total's bold move into U.K. shale
Total's acquired interests are in two exploration and development licenses in the U.K.'s East Midlands region and cover more than 90 square miles. Total will develop the licenses with partners including GP Energy, which holds a 17.5% stake, Egdon Resources U.K. (14.5%), Island Gas, or IGas, (14.5%), and eCorp Oil & Gas U.K. (13.5%). IGas will serve as the project's initial operator, but Total will take over as the project moves closer to development mode.

Total, which is also pursuing shale gas projects in the U.S., Argentina, China, Australia, Poland, and Denmark, is expected to become the largest oil and gas producer in the United Kingdom by 2015. The company is already developing the West Franklin Phase II and Laggan-Tormore projects, which are slated to start up this year and will have a combined capacity of 130,000 barrels per day.

Other European oil majors, meanwhile, have noticeably shied away from shale drilling in the U.K. BP , for instance, has thus far avoided this resource due to concerns about geology and uncertainty about whether commercial quantities of gas can be recovered economically. Shell has also held back from U.K. shale for similar reasons, as well as concerns that anti-fracking protests such as those that hampered Cuadrilla Resources last summer could attract unwelcome attention.

The U.K.'s shale gas potential
Total's decision to invest in shale gas drilling in the U.K. is shaped by encouraging estimates of the nation's shale gas potential. The British Geological Survey says the Bowland Shale, a formation underlying 11 counties in northern and central England, alone contains 1,300 trillion cubic feet of shale gas. Even if just one-tenth of this quantity can be recovered commercially, it would be enough to meet the U.K.'s gas needs for 50 years.

Policymakers there hope to replicate the success of the U.S. shale boom, which has boosted this nation's oil and gas production to multidecade highs and spurred a renaissance among its manufacturers, by offering tax breaks and other benefits to shale drilling companies.

Chancellor of the Exchequer George Osborne has cited numerous benefits that large-scale shale development could provide the U.K., including a more diversified energy mix, thousands of jobs, and lower energy bills for consumers and businesses.

Not everyone agrees. Many protesters are vehemently opposed to the process of fracking, which is necessary to exploit the U.K.'s shale resources, arguing that it can contaminate groundwater, cause air pollution, and even trigger earthquakes.

Potential challenges for Total
Given the untested nature of the U.K.'s shale gas reserves, the eventual outcome of Total's exploration efforts appears highly uncertain. If the recent experience of Poland -- another European country initially believed to have tremendous shale potential -- is any indication, shale gas development in the United Kingdom could be much more challenging than expected.

Though Poland was initially hailed as one of the most promising European countries for shale gas development, the combination of difficult geology, unclear regulations, and frequently unsuccessful drilling results forced several major companies to pack up their equipment and call it quits. ExxonMobil and Marathon Oil , for instance, both retrenched from the Eastern European nation after test wells failed to produce commercial quantities of gas.

Total looking strong
While Total's foray into U.K. shale is a highly uncertain proposition, the company has a wave of new oil and gas projects slated to come online over the next few years that should significantly boost production even if this ambition doesn't pan out. Furthermore, with the company's high level of investment finally nearing a peak, cash flow should increase substantially over the next few years, allowing it to grow its dividend at a modest rate.

While Total and its integrated oil peers are turning to riskier exploration projects to help offset declining production from their mature fields, one energy company continues to mint profits. Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

The article Will Total's Bold Move Into U.K. Shale Gas Pay Off? originally appeared on Fool.com.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.