Re-elected UK government pledges support for domestic energy production

By Emma Hughes
Published: Thursday, 28 May 2015

The UK's Convervative party has pledged to support fracking in a bid to boost domestic energy production. Emma Hughes explores what this means for industrial minerals.

Following the UK’s general election result on 8 May, the re-elected Conservative party has vowed to support the shale gas and hydraulic fracturing (fracking) industry, especially in the north of England.

After securing an unexpected overall majority, the party will be able to implement its manifesto, which pledges to support the UK’s shale industry in a bid to boost domestic energy production and decrease dependency on imports.

"We will continue to support the safe development of shale gas, and ensure that local communities share the proceeds through generous community benefit packages," the Conservatives’ 2015 manifesto outlined.

Measures to support fracking, which has struggled to take off since restrictions were lifted in 2012, as well as the North Sea oil and gas industry, were outlined by the UK’s Chancellor of the Exchequer, George Osborne, in March, as part of the Budget 2015.

The Chancellor threw a lifeline to those working to develop domestic energy sources, promising to cut oil taxes and create an investment allowance that could kick-start new development.

Following a drop in oil prices and record-high costs, investment in the North Sea oil and gas sector has stalled, with oil output from North Sea fields falling to its lowest level since production began in the mid-1970s.

Since rig counts are often used to assess general demand for drilling mud minerals, the measures announced are also likely to increase the call for minerals such as barite (barytes) and bentonite.

"It is clear to me that the fall in the oil price poses a pressing danger to the future of our North Sea industry unless we take bold and immediate action," Osborne announced when presenting the UK’s 2015 Budget.

As part of a set of measures to stimulate oil and gas production, the UK government will introduce a single tax allowance to encourage investment in all stages of the industry and invest in new seismic surveys in under-explored areas of the UK Continental Shelf.

From 2016, the petroleum revenue tax will be cut from 50% to 35% to support continued production from older fields and the supplementary charge will also be cut from 30% to 20%. This latter move will be backdated to the beginning of January, amounting to £1.3bn ($2.05bn*) of support.

"The Office for Budget Responsibility expects [these measures] will boost production by 15% by the end of the decade," Osborne said.

The UK’s North Sea oil and gas sector is thought to be worth around £5bn a year to the government.

Pg 34  

The UK’s Chancellor of the Exchequer, George Osborne,
announced a raft of measures to kick-start North Sea oil
investment.  
Lee Davy/Flickr 

Oil price plunge

Osborne’s measures respond to calls from the industry, which has experienced a 60% drop in oil prices since June last year. Brent crude prices stood at around $58/barrel (bbl) in May, having fallen from $115/bbl just nine months ago.

This huge drop in oil prices occurred after the Organization of Petroleum Exporting Countries (OPEC), which controls nearly 40% of the world market, failed to reach agreement on production curbs in June 2014.

Since then, the impact has been felt by more than just those exploring and extracting oil and gas. Those supplying the industry with drilling mud minerals, such as barite, bentonite, calcium carbonate and graphite, or proppants, such as frac sand or ceramic-based versions, have also been affected by reduced demand.

The government’s announcement is therefore likely to be welcomed by those hoping to supply North Sea projects, such as Schlumberger subsidiary M-ISWACO, which announced plans for a new Scotland-based barite mine earlier this year.

M-I SWACO is hoping to produce 120,000 tpa barite to replace increasingly expensive mining from its nearby Foss mine, which has been in operation since 1985 at a rate of around 42,000 tpa.

Budget 2015 reaction

The response to the Chancellor’s pledge to support North Sea developments was, for the most part, positive, with many welcoming the renewed investment and job creation the measures should bring.

A group known as CBI, which speaks on behalf of 190,000 UK businesses, said that while the move is helpful for promoting new investment, concerns surrounding low oil prices remain.

"The oil and gas industry, which supports 450,000 UK jobs and is a major contributor to GDP, has been given a much-needed boost with the reduction to the supplementary charge and other incentives," commented John Cridland, CBI director general.

"This will help address concerns over job losses and investment freezes, but pressures remain due to low oil prices," he added.

Industry body Oil & Gas UK also welcomed the news, stating that the UK will "continue to rely on oil and gas for the majority of its energy supply for many decades to come so this action, which will help to maximise recovery of that resource, is both sensible and far-sighted."

Meanwhile Pat Rafferty, Scottish secretary for the UK’s largest offshore trade union, Unite, said, "We are clear that economic reform of the North Sea must go hand-in-hand with sustaining jobs and strengthening employment and workplace health safety rights".

"It is a great shame, however, that the tax increases previously announced by the Chancellor, and the punitive tax burden it placed on the sector, had such a major impact, exacerbating the issue of global low oil prices and leading to the loss of thousands of jobs," he added.

Environmental campaign group Greenpeace was not so welcoming of the news, stating that "there’s no point fooling ourselves that North Sea oil has a long-term future".

"The move towards a low-carbon economy has to be handled carefully so that workers in obsolete industries are not abandoned to the mercy of the markets (…)," said Greenpeace UK executive director, John Sauven.

To learn more about how plummeting oil prices are affecting industrial minerals supply and demand around the world, contact Emma Hughes, Special Projects Editor (ehughes@indmin.com). IM Research has released a series of reports focusing on oilfield minerals including proppants and drilling-grade barite.

*Conversion made May 2015