Britain plans tax breaks for shale gas investment

The British government unveiled what it described as the world’s most generous incentives for shale gas today, offering tax breaks to drive investment in a sector that has already transformed the US energy market.

Finance minister George Osborne said the government wanted to create the right conditions in Britain for industry to unlock the potential of shale gas.

“This new tax regime, which I want to make the most generous for shale in the world, will contribute to that,” he said.

The proposed tax allowance for shale gas, subject to consultation for three months, would reduce the tax payable on income from shale production to 30 from 62 per cent for oil and gas.

The tax break is based on existing allowances for oil and gas production aimed at supporting almost £14 billion of investment next year.

Called the shale gas “pad” allowance, it would likely go into the finance bill next year and last for the lifetime of the shale well, a UK Treasury spokeswoman said.

The government is looking to shale gas to reduce the country’s reliance on costly natural gas imports, with the hope of lowering energy bills.

Last month, the British Geological Survey estimated the rocks of the Bowland shale area in northern England held 1,300 trillion cubic feet of gas, double the amount previously forecast.

The British shale industry is still in its infancy, however.

IGas and Cuadrilla are at the exploration stage while other energy firms, such as France’s Total are watching developments with interest.

Cuadrilla welcomed the proposed tax allowance, saying shale gas could make a “considerable contribution” to energy supply and security and create thousands of jobs.

Utilities analyst Peter Atherton at Liberum Capital said the new tax allowance could attract more companies.

“It is a tough thing for industry to do, costing from tens to hundreds of millions of pounds, and with a fair amount of technical risk and reputational aggravation in the early years,” he told Reuters.

Shares in Alkane Energy PLC, which has extraction licences in the Bowland area, were up 5.6 percent at 40.95 pence at 0931 GMT while IGas was up 3.4 percent higher at 120.33 pence.

Shares in Centrica, which has a stake in one of Cuadrilla’s exploration licences, edged up 0.315 pence to 382.5 pence.

However, it is still uncertain how much gas can be extracted and how many shale wells developed.

A report by the House of Commons’ Energy and Climate Change Committee said this week: “It is impossible to determine reliable estimates of shale gas in the UK unless and until we have practical production experience.”

Experts say there should be a period of at least two years of exploratory drilling to see whether UK shale is a viable business.

Shale gas is natural gas trapped in dense rock formations. The process of fracking, in which water and chemicals are pumped deep underground to break open the rocks, has led to fears it could cause earthquakes and contaminate drinking water.

Jenny Banks, energy and climate change specialist at WWF-UK said there was no justification for giving tax breaks for shale gas.

“It’s quite clear that opening up a whole new source of fossil fuels is entirely at odds with tackling climate change,” she said.

To help placate local opposition to shale, the industry will have to provide communities near exploratory wells with £100,000 in benefits and 1 per cent of the revenue from each production site, the government said last month.

Reuters