Tax incentives to encourage UK fracking

By Emma Hughes
Published: Thursday, 06 December 2012

Government scheme opens new market; proppant demand expected to rise


Cuadrilla are using silica sand proppant material,
supplied by Sibelco  
The UK government yesterday confirmed its support for shale gas exploration by launching a Gas Generation Strategy that will incentivise investigations on the UK coastal shelf.

Among other measures to be launched next year, including an Office for Unconventional Gas and Oil, a targeted tax regime for the shale gas industry is now under consultation, the Chancellor of the Exchequer, George Osborne, said.

Hydraulic fracturing, or fracking, is the process used to extract natural oil and gas, including shale gas, from the earth by pumping a mixture of water, silica frac (frac sand) and chemicals under high pressure into drilled wells.

By offering unique tax breaks for the shale gas industry, the UK follows other similar schemes in countries including Poland and Russia, where government incentives have kick-started natural gas exploration.

According to an article published in IM’s November issue, written by Vasili Nicoletopoulos who owns Natural Resources GP, there is no shale gas production and no published estimate for unconventional reserves in Russia, however, it is the largest natural gas supplier in Europe.

The government hopes to unlock what may be the world’s richest shale gas plays in western Siberia by using tax incentives to coax international companies to invest in the new energy.

In Poland, the potential for shale gas and oil is seen as a promising alternative to Russian energy imports.

A new tax was proposed on hydrocarbon production to ensure that there is a fair return for Poland but without discouraging investment from foreign companies who have the means and knowledge to help take projects forward.

The country’s Finance Minister Mikolaj Budzanowski said on 13 October that Poland will invest 50bn zlotys ($16bn) in the exploration of shale gas by 2020.

Shale gas exploration is also taking place in Hungary, which saw the first major milestone of shale gas development in 2007 with a joint venture between Hungarian gas and oil company MOL and ExxonMobil to evaluate the unconventional potential of the Makó and Békés basins.

Proppants

While the incentive scheme in the UK will boost the unconventional gas sector, it is also expected to increase the country’s demand for proppant material, which is used in the fracking process.

There are two main types proppant used in fracking – frac sand and ceramic proppants. Ceramic proppants are made up of sintered (burnt) bauxite or kaolin.

Cuadrilla Resources confirmed to IM that it will be using silica sand proppant material, supplied by Cheshire-based Sibelco. It remains to be seen, however, whether new fracking players will enter the market and therefore increase proppant demand.

Fracking in the UK

Controversy has been historically linked to the fracking process in the UK after operations run by Cuadrilla, were put on hold last year following two earth tremors.

Due to the newly-announced government incentive scheme, it now appears fracking activity could be up-and-running as early as next year.

“A successful UK shale gas industry has the potential to create jobs and support UK energy security, benefiting the economy and taxpayers,” a government release stated.

“We welcome the government's initiative to help the emerging shale gas industry get established," Francis Egan, Cuadrilla’s CEO, told IM.

The Office for Unconventional Gas and Oil is expected to join up responsibilities across government and provide a single point of contact for investors and streamline the regulatory process.

“In the UK, our activities fully comply with one of the world’s tightest regulatory systems for oil and gas,” Egan told IM.

“We welcome any initiative that streamlines decision-making processes while ensuring that all shale gas extraction conforms to the highest environmental and health and safety standards,” he added.

Further measures to encourage gas storage in the UK are expected to be published in spring 2013.

 





More like this