UK Government consultation on proposed Shale Wealth Fund

This article provides insight into the Shale Wealth Fund and the UK government's consultation paper.

12 August 2016

In last year's autumn statement, the Chancellor announced that the government would create a Shale Wealth Fund to support the creation of a shale gas industry in the UK, initially comprising up to 10% of the tax revenues received from shale gas production.  The purpose of the fund is to benefit communities where shale gas sites are located, helping to procure community engagement and ensuring that the industry leaves a positive legacy.

It is estimated that the Shale Wealth Fund could provide up to £1 billion of funding in total, a proportion of which would be paid to each community over 25 years.

On 8 August 2016, the UK Government published a consultation paper on the Shale Wealth Fund, with a greater focus on control for local communities than was originally proposed last year.  The consultation aims to seek views from stakeholders on the priorities of the Shale Wealth Fund and the most appropriate delivery method, in particular looking at how funds should be allocated – at both a local and a regional level - and whether delivery models used successfully in other industries can be adapted to suit the unconventional oil and gas industry.

A stated aim of the consultation is to determine the extent to which the Shale Wealth Fund should be aligned with existing standards and benefits offered, with a clear drive to ensure that the various benefits offered to communities can form one coherent package.  

Method of delivery
The consultation recognises that there are a variety of ways that local communities can share in the benefits derived from energy and infrastructure projects in their area, and aims to determine whether some of these tested methods used by other industries could also work for the unconventional oil and gas industry.

Renewable energy developments are highlighted as just one example, with a number of projects making voluntary commitments to provide benefit to the local communities they operate in of £5,000 per mW of installed capacity.

While local communities are a strong focus of the consultation, it takes a two-tiered approach by looking at how the Shale Wealth Fund can operate on a local community basis, but also on a wider regional basis.  

Defining the 'community'
At a local level, the key question is how best to define the 'local community', which will clearly impact upon who will ultimately benefit from the fund.  As unconventional oil and gas is a new industry in the UK, and will likely have a very different footprint in terms of the site it operates compared to other onshore energy developments, the consultation paper recognises that this will need to be done either on a case-by-case basis or using a general set of principles, rather than seeking to put in place specific criteria before relevant experience of how the sites will operate and develop is gained.

On a regional basis, how to define each 'region' needs to be determined, with possible approaches including defining them by reference to existing county boundaries, or alternatively by creating a new 'shale region' encompassing the north of England and the midlands where the majority of the UK’s shale gas is located and which is already an area of focus for development under the Government’s “Northern Powerhouse” imitative.

Spending the Shale Wealth Fund
A framework within which funding can be delivered to the local communities will need to be developed to determine how those funds should be allocated, and who can decide how they are spent.  There is a general drive to ensure that residents of the local communities have a direct say on how the Shale Wealth Fund is delivered and what it is spent on, although the consultation suggests that some expenditure could be ring-fenced for specific purposes, either on a local or central basis, as is currently the case for the Landfill Communities Fund.  

The consultation recognises that there may be a wider range of investments that could be made on a regional basis than on a local level from the Shale Wealth Fund - particularly given that at a regional level there will be a larger resource pool to utilise, with funds aggregated from across several sites – with examples given of investment in road and rail infrastructure and the development of business enterprise zones given.

Managing the Shale Wealth Fund
Closely linked to the question of how the Shale Wealth Fund should be spent is how the decision-making process and administrative side of the fund should be dealt with, both with regards to the local levels and the regional level.  Options include using existing bodies such as district councils or body's already administering an industry community benefits scheme, or alternatively establish a new and independent decision-making body solely for the purpose of administering the Shale Wealth Fund at a local level.  

At a regional level, the consultation envisages that grants could either be made directly to local authorities or partnerships between local authorities and local businesses, or alternatively any organisation could be allowed to make bids to the fund for specific projects being undertaking.  

Existing community benefit commitments
Community benefits is an area which has already had significant attention from onshore operators, with United Kingdom Onshore Oil and Gas (UKOOG) publishing a "Community Engagement Charter" setting out industry minimums for community benefit initiatives (on which please see our earlier Unconventional Oil and Gas briefing note).  

INEOS has taken the decision to go one step further however, announcing plans to give 6% of its shale gas revenues to homeowners, landowners and communities close to its wells.  It is anticipated that operators will also seek to provide financial incentives to owners of land directly above any horizontal drills and hydraulically fractured wells as part of their community engagement plans.

The Infrastructure Act 2015 gives the Secretary of State the power to impose a compulsory community payment on onshore oil and gas operators if the industry, or an individual licence holder, fails to contribute to community benefit schemes voluntarily.  It was suggested as part of the consultation to the Infrastructure Act that this payment should be £20,000 for every horizontal drill that extends more than 200 metres laterally from a well.  The secondary legislation that would impose this obligation has not yet been laid before Parliament.  

Any community benefit payments by operators would be in addition to any payments out of the Shale Wealth Fund (which will be funded through tax revenues).

The consultation paper itself can be found here, and views are invited from all interested parties by 25 October 2016 when the consultation will close. The government plans to publish its response to the consultation later this year.