* Ban was triggered after work set off tremors
* Can resume but under tighter rules, gov't says
* Test production expected around March
* More firms expected to apply for permits
* Shale could help lower UK gas prices
By Oleg Vukmanovic
LONDON, Dec 13 (Reuters) - Britain will allow shale gas exploration to resume but under tighter rules, the government announced on Thursday, a year and a half after tremors set off by the hydraulic fracturing used triggered a ban on the work.
Shale gas has helped transform the U.S. energy market, lowering gas and coal prices, and offers Britain, Europe's biggest gas user, a means of switching to greener energy while bolstering its falling natural gas production.
"I am in principle prepared to consent to new fracking proposals for shale gas, where all other necessary permissions and consents are in place," Energy and Climate Change Secretary Edward Davey said in a ministerial statement.
America is reaping the benefits of surging shale gas production through lower gas prices as well as the prospect of gas-intensive industries such as petrochemicals returning to home soil due to the abundance of low-cost energy.
Britain in May 2011 suspended 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 it caused two small earthquakes near Blackpool.
The work can now resume subject to closer scrutiny for seismic risk and installation of a so-called traffic light system where operations will be automatically stopped in certain conditions.
Currently only shale gas firm Cuadrilla Resources has an exploration licence for shale gas in Britain and it says that production testing in Lancashire is unlikely before March.
"I think with this announcement that there are other companies who will apply for exploration licences," Simon Toole, DECC's head of licensing, exploration and development, said.
Approval to resume shale gas exploration had been widely expected before the end of the year as Davey said in October that he hoped to lift the ban.
Cuadrilla Resources Chief Executive Francis Egan said the decision to allow it to explore a belt of gas-filled shale one mile thick at its Lancashire site was a "turning point for the country's energy future", adding it could create jobs, generate tax revenues and enhance Britain's energy security.
"Today's decision will allow continued exploration and testing of the UK's very significant shale resources in a way that fulfils the highest environmental and community standards," Egan said.
Industry group Shale Gas Europe said that development will also make UK manufacturing more competitive as additional supply will help lower gas prices.
Cuadrilla's expected shale gas production in Lancashire could cut wholesale gas prices in Britain by 2-4 percent from 2021, a recent study by consultancy Poyry found.
The government announced this month that it would create a dedicated government office to simplify regulation and to offer tax breaks to the shale gas industry.
Britain is increasingly dependent on gas imports as domestic supply dwindles, with gas output last year slipping below imports for the first time since records began in 1960.
The British Geological Survey (BGS) estimates Britain's onshore shale reserves at 5.3 trillion cubic feet (150 billion cubic metres), which would be enough to meet Britain's gas consumption for one and a half years, although Cuadrilla Resources has put its figure as high as 200 trillion cubic feet.
BGS is expected to upgrade its estimate of UK shale gas resources early next year.
At the time of the ban in May 2011, no other company had applied for a UK shale gas exploration licence.
Helped by its shale reserves, the United States is expected to become almost self-sufficient in oil and gas by 2035 and will overtake Russia in gas production by 2015 and Saudi Arabia in oil production by 2017, the International Energy Agency said in November.
Shale has made far slower progress in Europe, where it has met with environmental concerns that have triggered bans on fracking in France and Bulgaria although coal-reliant Poland remains a strong proponent.
Legal differences also help explain the U.S. lead in shale as underground mineral rights concerning fossil fuels there are considered the property of individual landowners who earn royalties from shale gas production whereas in Britain, for example, these belong to the crown.
The European Parliament rejected a ban on shale gas on Nov. 21 and asked for a robust regulatory regime to address environmental concerns. The European Commission is expected to deliver this next year.
Davey, who heads Britain's energy ministry, said concerns raised by environmental groups regarding fracking chemicals contaminating drinking water were unfounded, based on the latest available evidence.
The Oscar-nominated documentary Gasland highlighted environmental concerns over fracking by showing people setting fire to water from their taps in parts of the United States, yet no case has yet come to light in which fracking chemicals have contaminated drinking water aquifers.
Environmental group Greenpeace blamed UK finance minister George Osborne, whose Conservative Party favours gas as a long-term energy source, for moves to rescind the fracking ban.
"George Osborne's dream of building Dallas in Lancashire is dangerous fantasy," Greenpeace campaigner Leila Deen said, citing threats to drinking water.
"If you look at what the UK's been able to do with the North Sea (oil and gas exploration and production) and managed the environmental risk on that I don't see (shale gas) being a greater risk than the environmental risk of the North Sea," said Melissa Stark, executive director for clean energy at consultancy Accenture.