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UK Aims To Kick-Start British Shale Revolution

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Michael Thompson and Nick Connell, Oil & Gas Journal

Rising domestic energy prices, a flat-lining economy, diminishing production from the North Sea, and encouraging reports of reserves (and a few jealous glances across the Atlantic) have persuaded the UK government finally to embrace shale.

What a difference a year makes. In the summer of 2012 shale gas exploration in the United Kingdom was subject to a moratorium following earth tremors allegedly linked to drilling in Lancashire, North-West England. Prior to that, shale exploration had been met with caution from the UK government and strong opposition from environmental and local action groups.

Now, a year later, not only has the UK government brought the moratorium to an end, but has taken active steps to kick-start a British shale revolution. Rising domestic energy prices, a flat-lining economy, diminishing production from the North Sea, and encouraging reports of reserves (and a few jealous glances across the Atlantic) have persuaded the UK government finally to embrace shale.

How will the UK encourage investment in this fledgling industry? How does it plan to handle the competing dynamics of encouraging investment, generating tax revenue, and addressing the still active concerns of local communities?

The main measures currently being considered by the government can be divided into three categories:

  • A tailored tax regime;
  • Planning and regulatory reform; and
  • Local community benefits.

A tailored tax regime

Oil and gas tax in the UK

There is already a well-developed tax regime for oil and gas activities in the UK and on the UK Continental Shelf (UKCS). The regime, which has historically focused on the North Sea, has three principal elements: (i) Ring Fence Corporation Tax (RFCT); (ii) the Supplementary Charge (SC); and (iii) Petroleum Revenue Tax (which is being phased out and will not be relevant for the purposes of new shale gas exploration).

RFCT is similar to standard corporation tax, but is at a higher rate (currently 30% as opposed to 23%) and applies to “ring fence” activities, namely oil and gas extraction in the UK and UKCS. It is ring fenced because the tax liability cannot be reduced by losses from other non-UK oil and gas activities. SC (currently 32%) is calculated in the same way, but with no allowance for financing costs. Together, they create a combined tax rate of 62%.

Since the unexpected tax raid on the North Sea in 2011 by George Osborne, the UK Chancellor of the Exchequer, which increased SC from 20% to 32%, companies have been wary about the government’s long-term commitment to encouraging investment in the energy sector. However, the government has since worked quite hard to reassure the industry of its commitment to a stable and attractive regime.

Approach to shale gas

In relation to the tax regime for shale gas production, there have been calls within the industry for the UK government to avoid cashing in too early. Francis Egan, CEO of Cuadrilla Resources Ltd. (one of only two companies to have drilled shale wells in the UK so far) has said that: “If allowed to grow up into a tax-paying adult, [the UK shale gas industry] will pay a lot of tax, but it is in its infancy and there is a concern that that infant could be strangled at birth.”

Perhaps with this in mind, Osborne, in his 2013 budget, announced two shale-specific innovations: a new field allowance for shale gas and the extension of the Ring Fence Expenditure Supplement.

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