On 19 July 2013, George Osborne, the Chancellor of the Exchequer, pledged to make the UK’s tax regime the “most generous for shale in the world.”

Hydraulic fracturing (“fracking”) was suspended in the UK for around 18 months after two seismic tremors were detected near the country’s only fracking operations in Lancashire (north-west England).

However, in December 2012, the Secretary of State for Energy and Climate Change announced that exploration for shale gas in the UK could resume, subject to new controls being introduced to mitigate the risk of seismic activity.

Currently, only relatively small energy companies, such as IGas and Cuadrilla, hold licences to explore shale gas resources. However, Centrica recently announced its intention to buy a stake in a licence owned by Cuadrilla.

Significant Reserves

On 27 June 2013, the Government announced the findings from a report prepared by the British Geological Survey. The report estimates that the Bowland Basin area (in the North of England) is likely to contain around 1,300 trillion cubic feet of shale gas, which is double what was previously estimated. It is thought that drilling companies may be able to extract around 10% of this gas, i.e. around 130 trillion cubic feet – more than enough to meet the UK’s current level of gas consumption for the next 40 years

DECC stated: “Though it is early days for shale in the UK, it has the potential to contribute to the UK’s energy security, increase inward investment and growth.”

Stimulating Investment

Consistent with this view, the Government announced its intention to unveil a package of reforms to facilitate shale gas exploration and encourage development. These reforms include: tax incentives for exploration companies, new planning guidelines to streamline the approval process and a number of benefits for local communities. 

As regards tax incentives, George Osborne has said that tax allowances will be introduced, similar to those already available for certain technically challenging or small oil and gas fields, reducing the effective rate of tax on shale gas production to 30%, rather than the 62% paid on most oil and gas production in the UK. In return, however, energy companies will be expected to provide benefits to the local community of at least £100,000 per well site where fracking takes place and 1% of any production revenue.

On 19 July, the Government also published its “Planning practice guidance for onshore oil and gas.” The guidance provides advice to local minerals planning authorities (which are local government entities) on the planning (i.e. permitting) issues associated with exploration for, and extraction of, oil and gas.

Any onshore drilling in the UK requires permission from the relevant local minerals planning authority as well as consent from DECC (and, in some cases, other regulatory agencies). The guidance lists the principal environmental issues which should be addressed by minerals planning authorities and, equally importantly, which issues should be left to DECC and other regulatory authorities. In essence, the local minerals planning authority should focus on whether the proposed development is an acceptable use of the land, and the environmental and other impacts of that use, leaving broader policy, environmental and health and safety issues to DECC and other relevant regulatory bodies. The guidance states, in particular, that “mineral planning authorities should not consider demand for, or consider alternatives to, oil and gas resources when determining planning applications.”

Notwithstanding the guidelines, the permitting process for shale gas exploration in the UK remains complex and difficult but the guidelines provide greater clarity as to how the system is intended to work. We will now have to see how well the regulatory system works in practice.

The Government’s aim is to increase the UK’s national energy resources, with the hope of replicating the shale gas boom in North America. The intention is to “kick-start this industry in a way that protects the environment and supports local communities.”1