UK Shale Gas Green-Lighted With Tax Breaks

UK Shale Gas Green-Lighted With Tax Breaks

By Peter C Glover

Brussels is still under the delusion that Europe can be run on green energy, so they won’t like it. And the Greenpeacers maxim is Groucho Marx’s “Whatever it is … I’m against it!” so neither will they. For those of us living in Real World UK and grasp the central role of fossil fuels in keeping the lights on, George Osborne’s March Budget provided one major fillip. It fired the gun that finally kick starts the UK’s domestic dash-for-(shale) gas.

While there’s still the tricky matter of government (over?) regulation and the negotiating of planning permissions to come, the fact is that development of potentially massive shale gas reserves holds out one of the UK’s few economy-turning prospects: no less than a new source of natural gas on a par with that delivered by the North Sea.[i]

Chancellor George Osborne told Parliament “Shale gas is part of our future and we can make it happen.” Going on to introduce tax breaks in the form of a shale gas field allowance Osborne also extended the ring-fence expenditure supplement from six to ten years to attract early investment. Ken Cronin of the trade body the UK Onshore Oil and Gas Operators welcomed the move saying, “The proposed taxation measure will be a catalyst for increasing UK drilling activity and thereby attracting new investment. This increased activity will reduce future capital costs in addition to improving the economic threshold for exploitation.” Cronin confirmed, “The UK is entering an important phase of the exploration of shale and other forms of unconventional oil and gas.”

For all the caveats over industry regulations and local planning, investment may not be long in coming. The British Geological Survey’s study official assessment of UK shale gas reserves is due very soon, perhaps before the end of March. Already the buzz is that previous figures will be “increased dramatically” with The Times reporting a probable stratospheric rise in assessment “200 times greater than previously believed”. That would pitch UK shale gas reserves at a world class 1,300 to 1,700 trillion cubic feet. Or “enough shale gas to heat every home in Britain for 1,500 years.” More than that, it could well have the power to impact gas prices in Europe too.

While the post-Budget talk is all about the country’s debt increasing and the deficit reduction stalling, the ramifications of the Chancellor’s decision has almost been entirely lost on the TV pundits. First of all, a significant source of domestic gas that could help reverse the trend of rising levels of expensive imported gas from Russia, Qatar and Norway is no small matter. But add to that the creation of thousands of jobs and the impact lower gas prices would have, as it has in the US, on UK manufacturing costs, particularly in the steel, chemical and energy-heavy industries, and the benefits just look better and better. And there will be ‘sweeteners’ for local communities too as compensation for drilling rights.

Even before the Chancellor’s announcement of major tax breaks, Cuadrilla, the only company currently with UK frack drilling rights, were said to be “dotting the i’s and crossing the t’s on an agreement with an energy major”. And the majors sniffing around Cuadrilla reportedly include Centrica’s parent company BG, the UK’s leading supplier of gas. It has the cash too, having pulled out of its US green energy ventures intending to invest instead in the US shale gas phenomenon – or perhaps now, one even closer to home. Exxon-Mobil, Statoil and Shell are also reportedly showing interest.

With the rest of Europe in danger of being left behind if the UK becomes a European leader in shale gas production, the opportunities for investors have never been better. Cuadrilla’s CEO Francis Egan responded to the March Budget announcement saying, “The tax reforms for shale gas will greatly incentivise companies undertaking and investing in exploration work.” Cuadrilla’s chairman, Lord Browne, went further confirming the company would do “whatever it takes” to explore UK shale gas.

Needless to say, Greenpeace was concerned that “Bungs to the gas industry make it harder for Britain to meet its climate growth targets and stifle the low-carbon sector.”  But that’s something of a bizarre argument given the blatantly clear experience of the US shale gas revolution which is singularly credited with reducing gas prices to half those currently being experience across Europe. The consequence has been to rejuvenate the country’s manufacturing base. And, just for good measure, the switch from coal to gas has had one other benefit: reducing US carbon emissions to an eighteen-year low.  While that may offend anti-fossil fuel sensibilities, European style regulations haven’t had anything like the same success in the drive for decarbonisation. In an irony of ironies, Europe is actually witnessing the renaissance of a new golden age of coal. The amount of electricity currently generated by coal in Europe is rising at an annualised rate of 50 percent. Germany alone is building a raft of new coal-fired power stations in the wake of its knee-jerk reaction to close its nuclear power plants. The fact is, the high price of gas for European industry simply leaves no affordable alternative to coal. The Law of Unintended Consequences can be so cruel for Greenpeacers.

The fact is, buying into rich domestic energy reserves able to reduce prices, cut manufacturing costs, reduce soaring domestic energy bills, diminish energy imports, drag millions out of fuel poverty while achieving national energy security, ought to be a no brainer. If the US shale revolution hasn’t already proved it, George Osborne’s green-lighting of the UK version is about to confirm it.

[i] Though, even there, new technology is pro-longing the life of formerly abandoned gas and oil fields

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