UPDATE 1-UK flirts with shale industry but keeps fracking ban

Wed Dec 5, 2012 10:46am EST

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By Karolin Schaps

LONDON, Dec 5 (Reuters) - Britain gave a boost to its shale gas industry on Wednesday by creating a dedicated government office to simplify regulation and by confirming tax breaks, but stopped short of lifting a ban on exploration imposed over a year ago.

The government will form an Office for Unconventional Gas and Oil to create one point of contact and to streamline rules relating to shale exploration, finance minister George Osborne said.

He also said, confirming comments two months ago, that the department would hold a consultation with industry on tax breaks for shale gas exploration, details of which will be revealed in the 2013 budget statement.

"We are consulting on new tax incentives for shale gas and announcing the creation of a single office so that regulation is safe but simple," Osborne said in his half-yearly budget statement.

Britain, Europe's largest gas consumer, in summer 2011 put a temporary halt on hydraulic fracturing or "fracking" for shale gas, a process in which water and chemicals are injected at high pressure into rock formations to retrieve trapped gas, after earth tremors were measured near a fracking site close to Blackpool.

Britain's energy secretary has not lifted the ban, but Wednesday's confirmation of shale gas tax breaks implied it would allow fracking to resume. He previously hinted that he hoped to give it the green light.

The energy ministry said an announcement on the ban would be made shortly.

A government report into Britain's gas generation strategy published on Wednesday showed shale gas could make a significant economic contribution in Britain.

"If it can be shown to be economic and safe, domestic shale gas production could offer a significant economic opportunity for the UK, with the prospect of new sources of indigenous supply, new industrial activity and skilled jobs," the report said.

"Large areas of the UK are underlain by shale rocks, some of which are likely to contain substantial quantities of shale gas."

Shale gas firm Cuadrilla estimated that some 6 trillion cubic metres of gas lie beneath its sites in Lancashire, enough to cover Britain's gas needs for 75 years.

"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," said Francis Egan, chief executive of Cuadrilla, which is waiting for the government to lift the fracking ban on its sites near Blackpool, which triggered last year's tremors.

Shale gas exploration has revolutionised the U.S. energy market, where an oversupply of gas has depressed prices and headed the United States toward energy independence.

In Europe, most governments have been cautious about allowing shale gas exploration due to environmental concerns and worries about its impact on seismic activity.

A European Commission study published in September said shale gas could help offset the decline in conventional production but would do nothing to reduce the continent's dependence on imports.

Britain's gas production last year slipped below gas imports for the first time since records began in 1960.

GAS IN POWER PLANTS

Gas will also continue to play an important role in Britain's future electricity mix, with the government expecting gas-fired power plants to fill gaps left by intermittent renewable production and the phase-out of ageing coal plants.

In its report, the government increased its forecast for new gas-fired power plant capacity needed by 2030 by 30 percent to 26 gigawatts.

Around 21 GW of current power plant capacity will be phased out by 2030 due to age and stricter pollution rules, putting the 2030 available gas plant capacity at 37 GW, around 5 GW higher than today.

"Government has now made it clear that it sees gas as having an important role today and in the future," said Angela Knight, chief executive of energy industry lobby EnergyUK.

"This greater certainty on energy policy should also be a real confidence booster for establishing supply chains for all types of electricity generation."

As part of its plans to reform the electricity market, Britain proposed last week to create a system whereby back-up power plants, mainly gas-fired, would be paid through an auction system to fill supply gaps left by volatile renewable energy production.

Even though broad proposals have been put forward, the industry has asked for exact details of the mechanism to be published to clarify how generators will earn money.

"If independent players and new entrants are to be able to create more competition across the gas-to-power chain and help provide security of energy supply, there is an urgent need now for clarification on the operation of the proposed capacity market to support independent investment in new gas generation," said George Grant, chairman of Stag Energy, an energy company that has invested in numerous gas plants in Britain. (Additional reporting by Oleg Vukmanovic; Editing by Anthony Barker and Jane Baird)

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