Attractive Incentives Boost UK Shale Development Interest, but Planning Regulation an Issue Amid Environmental Opposition

Incentives promoting UK shale oil and gas exploration and production (E&P) activities are contributing to a significantly more attractive fiscal regime; however, in the face of strong opposition, particularly from environmental campaigners, regulation and planning are now the main issues surrounding unconventional resource development, according to new report on United Kingdom Upstream Fiscal and Regulatory Report from Reportstack. The company’s latest report  states that the introduction of a new onshore allowance (the pad allowance) is a significant attraction for E&P companies, and will massively improve the economics of costly unconventional developments in the UK. The allowance is due to be passed in the 2014 Finance Bill and will be retroactive from 5 December 2013.

Will Scargill, Upstream Fiscal Analyst for GlobalData, says: “Since 17 April 2002, the supplementary charge has been levied on adjusted ring fence profits. The current rate of 32% means that the total tax burden for upstream projects is 62%. “The new allowance, which reduces this tax burden, is the first to be targeted at onshore developments. It decreases taxable income for the supplementary charge by 75% of capital expenditure. As it is calculated per drilling site for resource plays, the allowance will mostly benefit unconventional developments.” The 2014 Finance Bill will also extend the time during which interest can accrue on tax losses for onshore projects. GlobalData believes that the attractiveness of these changes, along with promising shale gas resource estimates, are demonstrated by the recent entry of Total S.A. into two UK shale exploration licenses, making it the first “oil major” to operate within the country’s shale sector. Despite these positive signs, shale exploration in the UK is at an early stage and, should unexpectedly high extraction costs occur, further revisions may be required to incentivize development. However, GlobalData does not expect such changes to occur in the medium-term.

Matthew Ingham, GlobalData’s Lead Analyst for North Sea and Western European Upstream Research, says: “The more relevant issue is local planning regulation, as many communities have displayed significant opposition to exploration activities. Financial incentives have therefore been offered to local councils and communities in locations where hydraulic fracturing receives approval. “However, additional incentives may be needed to prevent the planning process from hindering exploration activity. While the current government has strongly backed shale incentives, the Labour Party, which is leading in most polls, has not expressed such support. Therefore, if Labour is elected in May 2015, then further inducements may not be as forthcoming and environmental regulations may be more stringent,” the analyst concludes.  


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