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Osborne shoots for energy security, but shale gas is no silver bullet

Last week, Chancellor George Osborne announced a 30% tax rate on shale gas production. Representing a 32% reduction on the standard rate for oil and gas companies, the move is the latest in a series of…

Serious about capitalising on shale gas. HM Treasury

Last week, Chancellor George Osborne announced a 30% tax rate on shale gas production. Representing a 32% reduction on the standard rate for oil and gas companies, the move is the latest in a series of attempts to secure Britain’s energy future.

Unrest in the Arab world and a fragile political relationship with Russia have made it difficult for the UK to ensure energy security, particularly as the North Sea oil and gas fields reach maturity and we witness a material reduction in outputs.

Recent statistics presented by the British Geological Survey show that about 40 trillion cubic metres of shale gas lie buried underneath Northern England. Although it’s not certain that these resources will all be extractable, the sheer quantity holds the potential to answer the nation’s prayers regarding energy supplies.

In order to gain access to as much of this resource as possible the chancellor, George Osborne, has offered the significant tax cut on shale gas production: from 62% to 30%. This makes the UK’s shale gas tax rate the lowest in the world. It’s a clear attempt to incentivise investment in the UK’s shale gas resources, thereby increasing gas production to meet consumer demand.

If all goes according to plan, the move could bring significant benefits to the country: investments in shale gas will provide job opportunities, reduce imports of energy resources and may reduce household energy bills. Above all, it will generate a new tax stream from resources in situ.

It is well known that oil and gas companies have to pay extra taxes above the normal corporation tax, because they deplete the country’s non-renewable resources. Shale gas is also a non-renewable resource, so it’s shocking to see that shale gas extractors will only pay the normal corporation tax rate of 30%, while the supplementary charge of 32% is waived. This seems an excessively generous break; companies would still make a profit on extracting shale gas, even with the higher tax rate.

There is also no guarantee that the 30% rate will have the desired effect of reducing gas prices for consumers. It’s likely to ease the burden of financing new infrastructure to extract the shale gas, but this would only increase the profit for oil and gas companies at the expense of the taxpayer. A better strategy would be for the government to keep the 62% rate and use the extra revenue generated as a subsidy to reduce costs for the consumer. This approach would address concerns about both availability and affordability.

A further worry for many is that the “dash for gas” will undermine the government’s objectives to increase investments in clean energy. But these actually represent two parallel agendas. Producing shale gas will mean more emission taxes going into government coffers, which should press industrial energy users into seeking renewable energy supply options.

If emission taxes are set appropriately, the UK will be able to strike a balance between the production and consumption of both gas and renewable energy. Industrial energy consumers will make cost-benefit calculations to see which sources of energy will save them money. So, if the emissions price is right, we needn’t be too worried about the impact of the tax on renewable energy investments.

It will also remain profitable for the UK government to continue supporting investments in renewable energy options, while treating shale gas as a short-term fix. Shale gas will eventually peak and decline as resources grow scarcer. There’s no way of telling when this peak will come; we don’t yet know how much shale gas will actually be commercially viable and the extraction rate will be driven by prices and fiscal terms which are yet to be decided. Whatever the time scale, renewables will still be the way forward in the long run.

But if this tax is really to pack a punch, Osborne will need to provide more assurances. The oil and gas industry is well-versed in the instability of the UK’s petroleum fiscal regime. Since the 1960s, the UK’s petroleum fiscal regime has fluctuated significantly: upward first until 1983, then downward till 2002 and back up since then.

This instability could hold the oil and gas industry back from heavy investments in shale gas, since there’s no telling how high the rate could rise in the future. If the UK government is serious about being a world leader in terms of shale gas, they must offer more fiscal assurance to the industry.

And this still leaves the issues of reducing fuel bills and tackling fuel poverty unresolved: there’s no telling what impact this tax break will have on the cost of energy bills. Will the government embed conditions on gas producing companies to sell all or part of it at a reduced price to the national grid? Or will it be left to these companies to market the produced gas as they see fit? Much depends on questions that Osborne has so far left unanswered.

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