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UK offers shale gas tax boost as economy stalls

A new shale-gas field allowance and lower corporate tax rates could get the shale-gas industry get off the ground

The UK government will offer tax breaks, a new shale-gas field allowance and lower corporate tax rates as it tries to help the nascent shale-gas industry get off the ground, chancellor George Osborne said in London. "I want to send a message to anyone who wants to invest here, to create jobs. Britain is open for business," Osborne said. "Shale gas is part of the future and we will make it happen." 

Osborne's 2013 Autumn statement, which outlines the government's spending policy, included a raft of measures aimed at spurring new investment in shale gas.

The government will extend the ring fence expenditure supplement, the amount by which companies can offset expenditure against losses, from six to 10 years for shale-gas projects. Osborne also announced plans for further cuts to the corporation tax rate, from 22% now to 21% in April next year and 20% in 2015. New shale-gas projects could also be eligible for funding of up to €3 billion ($4.5bn) from the major infrastructure regime starting in 2015.

In addition to new financial incentives, the government aims to provide potential investors greater regulatory clarity and an improved operating environment. It will produce guidance on technical planning, mainly related to health, safety and environmental protection, for shale-gas development by July 2013.

The government will also develop proposals by summer 2013 to ensure that local communities benefit from shale-gas projects in their area. It will also provide details of the proposed Office of Unconventional Gas and Oil's objectives, remit and responsibilities.

Industry group UK Onshore Oil and Gas (UKOOG) welcomed the measures. "The industry believes there is a very meaningful amount of gas in place in the UK and the public deserves to know and understand the potential of these natural resources to deliver energy security, jobs and growth," Ken Cronin, chief executive of UKOOG said. "The announcements in the budget today will help the industry to take the next steps in assessing this resource."

Cronin added that tax breaks would provide a catalyst for UK drilling activity and attract new investment.

Robert Hamill, partner at Mayer Brown law firm, said the measures were essential for encouraging investment in the UK's shale-gas sector. "More support for the industry by the government will give interested players the confidence to invest the large amounts of money required to develop fields and to deal with the potential environmental and other impacts of shale-gas exploration in the UK," Hamill said. "Increased investment could prove lucrative for the UK in providing more jobs and increased energy independence."

The government is hoping investment in shale-gas development will provide much-needed economic growth and new jobs.

The UK's GDP contracted by 0.3% in the fourth quarter of 2012, compared with the same period the year before, according to the country's Office of National Statistics (ONS). And growth is not expected to recover any time soon. Osborne announced the UK's estimated economic growth for 2013 will be 0.6%, half the 1.2% previously estimated, but Osborne added that the country will avoid a "triple-dip" recession.

Ratings agency Moody's stripped the UK of its triple A credit rating in February on concerns over the sluggish economy.

Osborne has faced withering criticism from the opposition over his handling of the economy. Speaking in parliament the leader of the opposition Labour party, Ed Miliband, said Osborne was "the wrong man, in the wrong job at the worst possible time for the country".

Graham Dean, managing director of UK independent Reach Exploration, told Petroleum Economist, that developing the UK's shale-gas reserves could be as significant for the country as the US shale revolution was to Pennsylvania and could add 0.5% to GDP. "They (the government) would be dancing in the street with a 0.5% revision to GDP. Half a percent is very significant," Dean said. "It would be (almost) as significant as the North Sea. Even if it was a quarter of the size of the North Sea (economic contribution) it would be spectacular."

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