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The UK’s shale carrot

Will paying people to like fracking change the outlook for UK gas?

PRIME minister Theresa May's new government wants to make fracking more palatable for the public by offering up to £1bn ($1.3bn) in payments to them over the next 25 years.

The Shale Wealth Fund (SWF), announced on 8 August, would use up to 10% of tax revenues from future shale gas production and give the funds to the public.

The crucial difference between the SWF and previous government pledges to compensate for shale gas development is that now the money will go straight to individual households - not handed out to local authorities.

The SWF even betters a previous shale gas compensation pledge from petrochemical giant Ineos - which wants to drill for shale gas - to pay local communities 6% of revenues from future production.

For a government evidently keen on getting shale moving, the SWF is a sensible move, which might erode some suspicious of fracking. Opposition to the practice is easier for activists to sustain before it begins than once it is underway and seen to be less disruptive and more benign than thought.

Notions of cultivating a new domestic supply source of energy might also tap into the mood of a public that voted to leave the EU this summer.

But don't expect a rush of public support or new investment in the UK's shale gas sector any time soon.

Despite a looming supply-side shortage from the North Sea and persistent concerns about how the UK will generate its electricity in the future, the public remains confused about whether shale gas development is worth bothering with.

The move isn't going to quell opposition from environmental activists either. Greenpeace promises the SWF " won't silence people's concerns" about fracking. "The government has tried to sweeten the fracking pill with cash payments before, and it didn't work."

It's still not even clear the UK's shale gas resources can be commercially extracted. Only the results of test wells will decide that.

In May, UK independent Third Energy was awarded the first UK license for hydraulic fracturing since 2011. The firm plans to carry out fracking at a site in Yorkshire, northern England, by the end of the year.

Ineos, which won 21 licenses to explore for shale across northern and central England in 2015, also plans to drill a handful of test wells this year. The firm won't know for certain if the resources can be developed on a commercial scale for around two years.

The government's new shale gas push comes at a time when the UK's largest gas-storage facility is closed, which will increase the country's dependence on imports this winter and may lift prices.

Centrica closed its Rough facility, which accounts for around 70% of the country's total gas storage capacity, in June for unplanned maintenance. Rough was expected to come back on line in the first week of August, but it will now remain shut until April 2017.

The facility, which lies around 2,700 metres below the North Sea bed, is used to withdraw and re-inject gas into the UK's grid system. Gas stocks at Rough stocks stood at 1.3bn cubic metres on 18 July, according to Energy Aspects, a consultancy. That means UK stocks will start the winter with around 1.2bn cm less gas in storage than last year, pushing up prices.

At the beginning of August, day-ahead contracts for the UK gas benchmark National Balancing Point (NBP) were trading around 34.15 pence per therm ($3.30 per 1,000 cubic feet), according to pricing agency Platts.

NBP prices for delivery in December were trading on Ice at around 44p/therm at the beginning of August.

While Rough's outage will increase the risk of supply outages during times of peak demand, the UK will still receive gas through an interconnector from continental Europe.

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