The UK is trying to replicate the US gas boom. It will fail
Tax incentives won’t help.
Chancellor George Osborne’s announcement last week that the UK will offer what he is calling the world's "most generous" tax relief regime, of 30 per cent, down from a typical 62 per cent, to hydraulic fracturing companies, has sent a clear signal that it’s not a case of if we should frack in the UK, but when.
In the US the hydraulic fracturing revolution has seen gas prices tumble from around $14 per million BTU in 2008 to around $3 in December 2012 ( a fall of around 90 per cent) and according to the International Energy Agency, the US could be independent in oil and gas by 2035.
This is something Osborne says he wants to replicate; however, his enthusiasm may be premature.
The British Geological Survey estimates there may be 1,300 trillion cubic feet of shale gas present in the north of England– but it is important to remember this is as yet unproven and we don’t know how much of it is actually accessible. As yet, companies have only "fracked", as it is commonly known, a few wells; a process which involves removing natural gas trapped in shale formation deep underground by mixing gallons of water with a cocktail of chemicals and injecting them into the earth.
With a 50 per cent tax break Osborne seeks "to create the right conditions for industry to explore and unlock that potential [of shale gas]," as he says. However, though a bonus for shale gas companies if they do succeed in extracting gas, it isn’t going to make production come any quicker or current conditions for the industry any better.
Companies have already said it is not taxation that is putting them off investment but planning permissions and public resistance.
This is because unlike the US, which is a vast sprawling country, the UK is relatively small and compact meaning fracking will inevitably take place much closer to communities, resulting in a high possibility of public opposition. The strong aversion to wind farms in the UK’s countryside gives you a clue as to the opposition fracking companies are likely to encounter. In 2012 approvals for onshore wind farms were down to 35 per cent – in the same year a Guardian poll said opposition had tripled – from 70 per cent in 2008.
Fracking wells won’t only be an eyesore for communities but there are other issues, such as a small risk of earth quake tremors, water contamination and methane leaks – in Pennsylvania, USA, residents complained of finding methane in their water, along with up to 27 other chemicals.
The government has said fracking will boost local communities with jobs and that they will give them £100,000 per well and up to 1 per cent of all revenues from production, but will this be enough to temper possible widespread resistance?
In the US, farmers, in often economically repressed areas, can directly lease their land to fracking companies agreeing a fee and often a royalty payment on top, meaning they have much more of an incentive to accept fracking.
If the government is hell bent on Fracking, engaging with communities and getting them onside with rock solid incentives and reassurance of strict regulation is likely to speed things along and be more beneficial for everyone in the longer run than slapping a tax break on profit not yet earned.
Also, as the UK’s shale gas reserves are as yet unproven, offering a deal similar to what Norway offers to oil and gas exploration companies – a promise of a 78 per cent refund of cost if a company drills a dry well – might show more confidence and incentive to fracking companies, if the government is so sure the UK can replicate the US’s success. But as it stands fracking is still a long way from fruition, and, if it ever does get off the ground, it is still uncertain it will match the shale gas boom the US have seen.
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