George Osborne pledged on Friday to create the world’s most generous tax regime for shale gas as he attempted to galvanise the revolutionary industry in Britain.
The UK chancellor proposes to cut the tax on shale production to 30 per cent compared with the 62 per cent paid by most of the oil and gas industry in a move that will be warmly greeted by operators.
At the same time, the Treasury will insist energy companies must provide at least £100,000 of community benefits for each well drilled by the industry.
Ministers are keen to replicate the success of the US, where “fracking” has produced a glut of natural gas and pushed down the price to the benefit of households and industry. David Cameron said recently that he was “pretty jealous” of the US industry.
Yet there is growing concern from environmentalists about the consequences of fracking – or hydraulic fracturing – which involves pumping water, sand and chemicals underground to split the rock and release the gas or oil inside.
Green groups fear that the process can pollute groundwater and release the greenhouse gas methane into the atmosphere.
Mr Osborne said on Friday that shale gas has “huge potential” to broaden Britain’s energy mix, create thousands of jobs and keep energy bills low.
“Shale gas is a resource with huge potential to broaden the UK’s energy mix,” he said. “We want to create the right conditions for industry to explore and unlock that potential in a way that allows communities to share in the benefits.”
Michael Fallon, energy minister, told parliament on Thursday that Britain still required oil and gas for three-quarters of its energy needs. “It is a vital part of our economy, and it is going to remain so for decades to come, even as we move to a low-carbon economy,” he said.
Mr Fallon said that onshore oil and gas had been extracted successfully in the UK for a century without any chemical spills or gas leakages “comparable to the experience in the US”.
The minister said gas prices had halved in the US as a result of fracking, which was now being explored by India and China.
But Tom Greatrex, shadow energy minister, said there was no proof that there would be the same impact on energy prices in Britain. While expressing cautious support for shale gas, he said: “Suggestions there is going to be cheap gas to extrapolate the US experience doesn’t stand up to much scrutiny, given the way gas is traded.”
Responding to the government’s announcement on Friday, Mr Greatex also urged the government to “get its priorities right”.
“Announcing tax breaks before we know how much shale gas is actually recoverable, before anyone even has a licence to extract it, and before anyone even knows whether fracking needs tax incentives, makes no sense at all.
“Only by fully addressing legitimate environmental and safety concerns about fracking with robust regulation and comprehensive monitoring, will people have confidence that the exploration and possible extraction of shale gas is a safe and reliable source that can contribute to the UK’s energy mix.”
Ministers will set out a system of regulatory oversight for shale gas with the Environment Agency, responsible for groundwater, and the Health and Safety Executive, in charge of wells.
The coalition faces a potential backlash from MPs of all parties amid some public hostility to fracking. Tessa Munt, Liberal Democrat MP for Wells, cited “pollution incidents in the US and Australia” as she welcomed the unanimous cross-party opposition to fracking from councillors in Bath and northeast Somerset.