Chancellor George Osborne’s proposal for generous tax breaks for shale gas production signals unambiguously that the government has warmed to the idea of exploiting unconventional gas reserves and is actively encouraging energy companies to turn to shale.
This bodes well for producers and consumers alike. Supporters of shale gas argue that increasing the UK’s domestic gas production will not only widen the variety of UK energy resources, but will also reduce the country’s increasing reliance on imports, thereby improving security of supply. According to the Institute of Directors, the fuel could satisfy up to 10 per cent of our energy needs for the next 100 years.
It could also push the price of gas down, helping to address long-standing fuel poverty issues, and create huge opportunities for new businesses and jobs. The UK certainly has good infrastructure for processing and transporting shale gas to the market and a skilled workforce to man new projects.
However, hydraulic fracturing (fracking) faces fierce opposition, particularly from environmentalists who argue that injecting high-pressure water, chemicals and sand into the underground formations could be damaging, and that the amount of water used in the process could reduce security of water supply. So despite top-line government support for shale as demonstrated by the tax breaks proposals, there could be opposition in Parliament driven by MPs’ constituency concerns.
There is already strict legislation in the UK to ensure safe exploration and production, and a host of consents and approvals need to be secured before fracking can begin. These include but are not limited to: planning permissions, environmental permits, notification of well construction and well examination schemes.
But the current legislative and regulatory framework could be tailored more to the shale gas industry to enable it to tap into this new and unconventional resource. For instance, there is no single regulatory shale gas body – government is understood to be considering this. Other hurdles lie with the planning, health and safety and environmental authorities.
Moreover, the public needs to be convinced that shale gas extraction is safe and can be a valuable and economic energy resource for the country. Early, regular and clear communication with the affected communities might help here, including updates on developments and the potential impacts of exploration and production in their area. The government could also introduce a scheme to compensate communities for any adverse affects caused by drilling and fracking.
At a time when the future of energy is uncertain and renewable resources cannot make up the gap alone, shale gas is important and exciting. It is very encouraging that this has been recognised by George Osborne.
Bob Palmer is a partner in the energy team at international law firm CMS Cameron McKenna
Give us a break: boosting shale
According to Michael Wilkins, an analyst with Standard and Poor’s: “The government believes its tax proposals will assist the industry through the early (and expensive) stages of its development and ensure that the UK’s shale gas reserves are properly exploited.” The exact form of any new regime is as yet undecided. There has been speculation that some form of relief from “supplementary charge” is under consideration. Wilkins explains: “Supplementary charge is currently levied at the rate of 32 per cent and is charged in addition to the 30 per cent rate of ring-fenced corporation tax. Any relief could take the form of a full exemption from supplementary charge – a move that industry would doubtless fully support. Alternatively, the relief could be more limited – as in the case of field allowances in the North Sea, only a specified level of gas production may be fully or partly exempted from supplementary charge.”
This article first appeared in Utility Week’s print edition of 19th October 2012.
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