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UK Releases Impressive Shale Estimates, Relaxes Tax Regime

Bottom Line: As the UK doubles its shale reserve estimates, plans are in the works for lowering the proposed shale production tax rate by half.

Analysis: The UK is aiming to make its shale production tax regime the most favorable in the world with the announcement that it may reduce the initial production tax rate to 30% from the current maximum of 62% on oil and gas extraction.

The UK lifted its moratorium on fracking in 2012. In April, the UK released the findings of a 2-year investigation, saying the shale gas potential was very high. In late June, the British Geological Survey released its long-awaited findings: The Bowland shale formation in Northern England is estimated to hold around 1,300 trillion cubic feet of natural gas, though only 10-15% of this is recoverable. (Previous estimates had put the reserves at about 5.3 trillion cubic feet.) This is only the BGS’s lower estimate: the upper estimate is 2,281 tcf--almost the total estimated American shale reserve of 2,500 tcf—and it does not include other potential shale areas in South of England or the Central Basin in Scotland.

Those who have gotten in on the exploration game early enough here are promising local communities a 1% share of output revenues to quell dissent. Shale operators will also be exempted from an additional tax charge of 32% at the onset of operations. The biggest player on this scene right now is Cuadrilla Resources Ltd. (not traded), followed by iGas Energy Plc (IGAS) and Dart Energy Ltd (DTE). These stocks have risen on the London Stock Exchange since the UK announced its findings, and along with news that the tax regime will be relaxed.

Recommendation: The UK is hitting the shale scene full throttle, and its new proposed tax regime should be one of the most attractive to investors. But it’s also making up for the fact that it will be a lot more expensive to produce from the Bowland shale formation than it will from the US due to geological difference, the need for carbon capture and storage infrastructure and public dissent. The 10-15% recovery rate, however, is comparable to US fields.




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