UK Shale Gas Policy Directions

In a study conducted for the UK's Department of Energy and Climate Change (DECC), the British Geological Survey (BGS) estimated in June that the Bowland Shale in the north of England could hold in-place resources of 37.6 trillion cubic metres (Tcm; 1,329 trillion cubic feet). This estimate has created great optimism about potential UK shale gas development on the part of the oil and gas industry as well as the UK government. But there is also controversy between policy makers on how real the positive impacts of energy from shale may be. A closer look at UK shale gas policy developments reveals that desires by some government members to reap the economic benefits of gas production have met with more skepticism by others at a time when UK shale gas is still very nascent with production costs and recovery rates unclear.

The Conservative Push

Conservative Prime Minister David Cameron has repeatedly spoken out in favour of shale gas drilling, saying "I think we would be making a big mistake as a nation if we did not think hard about how to encourage fracking and cheaper prices right here in the UK." He has compared the potential of UK shale gas providing new jobs and bringing down energy prices to such developments in the US, saying they could "very quickly" unfold in the UK as well. As hundreds of protesters have been seeking to block companies from drilling for hydrocarbons in the English countryside, Cameron underlined that his government has put stringent regulations in place that will minimize any potential development risks. A recent government-commissioned study found that environmental risks from shale gas drilling in the UK are low "if shale gas extraction is properly operated and regulated".

This push has resulted in a generous fiscal regime currently being drawn up for UK shale gas explorers. Conservative UK chancellor George Osborne has stated that he wants to create the "most generous" tax regime for shale gas production "in the world". The proposed rate of tax on income from shale gas production is 30%, significantly below rates of up to 62% paid by other parts of the oil and gas industry, including North Sea operators. The tax break would be based on existing oil and gas production allowances, would probably go into the 2014 finance bill, and would last for a shale well's full productive life. However, the longer timelines over which these allowances are usually spread might not be suitable for the shale gas industry given the possibly steep production decline rates from shale gas (as evidenced by projects in the US). It remains to be seen whether UK lawmakers will consider this particularity of shale gas development in their excitement over the (still uncertain) resource potential.

Coalition Partner On Board?

The Conservative party's coalition partner, the Liberal Democrats, has not been as enthusiastic about shale gas in the UK. In a paper released earlier this year, the team around party leader Nick Clegg argues that there is merit in promoting domestic gas production in the UK, rather than relying on imports from abroad. Despite many of his fellow party members feeling less confident about the potential environmental and health implications of hydraulic fracturing to unlock significant reserves of shale gas, the paper suggests that Clegg is prepared to endorse the coalition partner's push for a "new dash for gas," but in a much more contained manner. In contrast to the Conservatives, the Liberal Democrats draw a less direct parallel to the shale gas revolution and its economic benefits in the United States.

Earlier this year, Liberal Democratic UK Energy Secretary Ed Davey said shale gas could serve as a "bridge in our transition to a green future" that would be relatively neutral in terms of reaching the UK climate targets, but would help the country boost its energy security position. However, Davey somewhat rejected a notion widely propagated by Cameron, which claims that shale gas development in the UK could bring energy bills down the way it has done in the United States. Davey said that it is too early to assess a possible gas price effect.

Rising Tensions

Emerging differences on shale gas in the UK between the coalition partners is a result of the government picking a number of options in its quest to ensure future energy security, but with seemingly little regard for the potential impact on other forms of energy. The wider low-carbon energy mix that the UK is still aspiring to achieve in order to reduce greenhouse gas emissions by 80% over 1990-levels by 2050 is part of the debate over shale gas. Investors in renewable energy have been wary of the government's discussions surrounding the future of green levies and fear that shale gas development on a large scale could attract capital away from the renewable energy sector. It appears though that in the run-up to 2015 general elections in the UK, cost cutting pressure, especially with regards to energy bills, has become a central campaign issue and has gained the upper hand over conflicting priorities with regards to greening the UK economy. It remains to be seen whether proposed generous fiscal incentives for shale development can be sustained over time - a condition that would be crucial to companies with a longer investment horizon and an understanding of the scale and investments required to shape an emerging UK shale gas industry.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.