The UK’s shale gas reserves have featured prominently in the news in recent weeks following several important announcements which have sought to illustrate and, ultimately, unlock the potential of this energy source locked deep beneath our feet.
In June, a report by the British Geological Survey (BGS) for the UK Government estimated that the Bowland Basin region, stretching from Cheshire to Yorkshire, may contain far bigger reserves than was previously thought. The report’s publication was followed earlier this month with the announcement by the Treasury that tax breaks are to be offered to encourage companies to exploit the UK’s deposits of shale gas through fracking.
The BGS report indicates that there is a total of 1,300 trillion cubic feet of gas locked underground in the north of England. Given previous estimates that 10% of this resource could be recoverable, it has been claimed that these reserves could meet the UK’s gas needs for four decades. There are also plans for local communities to benefit directly from shale gas exploitation – it is proposed that local communities would receive at least £100,000 of benefits per well site and also no less than 1% of overall revenues.
Recent commercial activity, the lifting of the moratorium on fracking in December 2012 along with the UK Government’s positive stance on unconventional hydrocarbons tends to suggest that serious consideration of shale gas is likely to continue for the long term.
Moreover, the proposed new tax relief for onshore shale gas production set out by the Treasury on July 19 is expected to encourage exploration and extraction.
Briefly, the aim of the proposal is to ensure that a certain proportion of the profits generated from shale gas production will be subject to an effective tax rate of 30% rather than 62%.
In order to achieve this, it has been suggested that the relief will be applied in a similar way to existing tax breaks for offshore marginal fields (i.e. those in deep water) and so a certain portion of production income will be exempt from the Supplementary Charge.
Some further details still need to be ironed out, however. It is unclear what proportion of income will be exempt from the Supplementary Charge and also the pace at which the tax relief can be claimed – current field allowances permit up to 20% to be claimed each year, which means the shortest period of time in which the full allowance can be used is five years.
The North American experience tends to show that shale gas production wells experience a very high decline rate which necessitates a higher level of drilling activity than would be contemplated with a ‘conventional’ development. Consequently, the project economics differ greatly between conventional and unconventional developments.
As part of its consultation, the Treasury has requested views on whether the existing process for claiming exemptions (including the associated timing) is appropriate when applied to shale gas developments.
Further details are eagerly awaited by all those involved in this emerging sector, which has huge potential.
Clare Munro is head of oil & gas at Brodies LLP
