Chancellor pledges "most generous" shale gas tax regime in the world

Out-Law News | 22 Jul 2013 | 9:21 am | 3 min. read

Allowing investors in new shale gas projects to use proposed new tax breaks quickly against other taxable projects will encourage the success of the fledgling industry, an expert has said.

Tom Cartwright of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the Treasury launched  a consultation on what Chancellor of the Exchequer George Osborne said would be the "most generous" tax regime for shale in the world. The Department for Communities and Local Government (DCLG) has also published new guidance on how applications for shale gas developments should proceed through the planning system.

Allowing developers to quickly use the proposed tax reliefs against other taxable profits, particularly North Sea oil and gas, would "incentivise the major companies to invest in shale gas at an earlier stage", Cartwright said.

"In view of the high upfront costs, this is expected to be vital to the success of a UK shale gas industry," he said.

The Chancellor announced the creation of a generous tax regime to "promote early investment" in shale as part of this year's Budget. The consultation, which is open until 13 September, sets out the details of a new shale 'pad' allowance, based on the existing field allowances for oil and gas production. As proposed, tax on a proportion of the income generated from producing shale gas would be reduced from 62% to 30%. If approved, legislative measures would be introduced as part of next year's Finance Bill.

The consultation also proposes extending the current ring-fence expenditure supplement from six to ten years specifically for shale gas projects, and is seeking views on whether this new tax regime should apply to other onshore unconventional hydrocarbons, as well as shale. In addition, the Government plans to create a "robust" community benefit scheme under which developers would have to provide at least £100,000 of benefits per 'fracked' well site during the exploration phase, and no less than 1% of overall revenues, to local communities.

The DCLG's new planning guidance gives local councils responsibility for determining shale gas planning applications and sets out the environmental, health and safety issues that need to be taken into consideration. Decisions will be made by councils as part of a locally-led planning process. The guidance follows last month's announcement that the fast-tracked nationally significant infrastructure (NSI) planning regime would not be extended to onshore oil and gas developments at present.

Planning Minister Nick Boles said that the Government was "minded" to amend legal requirements in relation to application requirements and fees for onshore oil and gas development, to provide certainty to councils and encourage investment. A consultation setting out proposed changes to the secondary legislation in this area would follow shortly, he said.

"There is a huge potential to boost local economies and create thousands of jobs if we tap into benefits of shale gas," he said.

"Our new planning practice guidance will provide certainty for councils, for residents and for business. A locally-led planning process will be complemented by robust regulatory checks and controls to safeguard the environment and provide reassurance to residents," he said.

However, planning and infrastructure expert Richard Griffiths of Pinsent Masons said that the guidance was "disappointing" and did not "tackle the thorny questions that need to be addressed for fracking applications".

"The new guidance does not tackle some key questions, such as how planning boundaries should be drawn for directional drilling and the horizontal drilling once the appropriate rock formation is reached," he said. "Instead, it tells us some rather basic information such as all plans having an identified scale and being based on an up-to-date map."

"In addition, it states that the mineral planning authority in determining fracking applications does not need to consider demand for, or alternatives to, oil and gas resources. This could be a risky approach if an applicant simply ignored these issues as alternatives are, for example, required to be considered under various legislative requirements. As fracking has not been brought into the remit of the Nationally Significant Infrastructure Planning  regime, where Parliament-approved National Policy Statements tackle the demand and need cases thereby removing them from the application determination process, such issues cannot simply be ignored when a planning application is made to a minerals planning authority," he said.

Shale gas is natural gas trapped within shale formations at significant depths below ground. It has become an increasingly important source of natural gas in the United States, in particular over the past decade. A combination of drilling and hydraulic fracturing, or 'fracking', has facilitated access to large volumes of shale gas that were previously uneconomical to exploit. In the US, increased shale gas production has resulted in a sharp reduction in gas prices.

Shale gas has not yet been produced in the UK, but exploratory drilling is underway. A recent report by the British Geological Survey showed that there was more than twice as much shale gas in the north of England alone than there was previously thought to be in the entire UK. The British Geological Survey is now carrying out further work to establish the amount of shale gas in another proposed site, in the south east of England.