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Carbon Brief Staff

Carbon Brief Staff

19.07.2013 | 2:15pm
ScienceOsborne’s tax breaks unlikely to lead to shale gas bonanza
SCIENCE | July 19. 2013. 14:15
Osborne’s tax breaks unlikely to lead to shale gas bonanza

The Chancellor is set to outline plans later today to create the most generous shale gas tax regime in the world, according to reports. But could the tax breaks kickstart a UK shale gas industry?

The Treasury is set to offer energy companies a financial sweetener to build test wells across the UK. The Daily Mail said the plan could catalyse an “energy revolution to boost the economy and put an end to sky-high bills”.

But on closer inspection, it seems the media debate may be running ahead of events. George Osborne’s proposal is still a long way from being legislation, and is unlikely to have an immediate impact on the UK’s energy sector.

Shale gas tax break

The Treasury is proposing to halve the amount of tax shale gas companies have to pay on their production income. Osborne’s plan would allow shale gas developers to pay 30 per cent tax on their profits, while the standard rate is nearer 60 per cent. Osborne hopes this will encourage £14 billion of UK shale gas investment, the Mail says.

But despite the media’s enthusiasm, the tax breaks aren’t finalised. The government will discuss the plan over the summer, with a consultation period ending in mid-September. If it’s agreed, the new tax regime could be part of the 2014 Finance Bill.

It’s not unusual for the energy industry to get support from the government. Renewable energy companies receive subsidies to boost their market share as the industry develops – with that cost passed on to the consumer. But the International Energy Agency estimates that global fossil fuel subsidies amounted to $523 billion in 2011. That’s around six times the level of support renewable energy receives, it says.

Osborne’s plan is intended to recognise the particularly high up-front costs of shale gas exploration. The Treasury says “greater support is offered to the industry during its early stages when costs per pad are likely to be highest”.

But not everyone believes shale gas needs the help. Environmental groups say the Treasury should focus on encouraging companies to invest in renewable energy instead of pursuing another fossil fuel as the government seeks to decarbonise the energy sector. Government advisor and Energy and Climate Change Committee member, Peter Lilley, told the Guardian:

“I think tax breaks are unnecessary for fracking, based on my knowledge of the oil and gas industry”.

So Osborne’s plans are proving contentious before they even get near the statute books.

Commercially viable

Osborne hopes the tax breaks could lead to a shale gas revolution comparable to that experienced in the US, where gas prices have plummeted. But the tax breaks are only a small piece of the puzzle, and they are unlikely to change much in the short-term.

Osborne says he wants “Britain to be a leader of the shale gas revolution – because it has the potential to create thousands of jobs and keep energy bills low for millions of people.”

But the commercial viability of a UK shale gas industry is unclear until more exploration wells are drilled, according to University of Leicester Professor of Human Geography, Mike Bradshaw.

Osborne’s tax breaks are intended to incentivise the construction of 20 to 40 new exploration wells over the next two years, Bradshaw says. But he adds that this is small fry compared to onshore operations already underway, with over 2,000 wells opened since onshore drilling began.

Bradshaw argues that the industry is too immature at the moment to know whether or not it will have a significant impact on the UK’s energy sector. He says:

“The national government is wanting to promote the exploration phase, through streamlining regulation, through tax incentives and so forth.  And it’s only through having that exploration phase that we’ll know how commercially viable shale gas is in the UK”.

And there are plenty of other obstacles to the development of the industry.

British geology is more complex than US shale rock, and the UK is a long way from developing the infrastructure – such as roads and pipelines – needed to support the industry. It is also unclear how popular shale gas is with the public. The government’s new community benefits package – where local groups are offered 1 per cent of revenues and £100,000 per well – is designed to bring people around to fracking in their neighbourhood.

So if the UK is going to have a shale gas revolution, it’s certainly not imminent – and Osborne’s proposed tax breaks don’t change that.

Getting ahead of ourselves

The impact of the Treasury’s proposal ultimately depends on whether energy companies see shale gas as a profitable pursuit. The only way to find that out is by drilling more exploration wells – which the tax breaks could encourage – but the industry is urging caution. Bradshaw says company representatives he’s spoken to are concerned the shale gas debate is “getting way ahead” of industry development.

So even though media reports say this could be the start of a whole industry, declarations of a UK shale gas revolution look premature. It’s too early to say whether Osborne’s plans – if approved – are as significant as he hopes.

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