The UK Government’s push to develop the UK’s unconventional oil and gas resources continues. In December 2013, a draft environmental report in relation to the strategic environmental assessment (SEA) for the 14th onshore licensing round was published for consultation along with regulatory road maps for those seeking to understand the permitting and consenting process for exploration activities in the UK.
In addition, HM Treasury has published its summary of responses to its consultation on the fiscal regime for unconventional oil and gas. The summary sets out the Government's final thinking on the details of the regime.
Strategic Environmental Assessment
The Department for Energy and Climate Change (DECC) is proposing to undertake the 14th onshore licensing round this year. Its draft licensing plan for the round sets out the areas in respect of which it is considering granting licences.
Under the SEA Directive, an SEA is required in relation to the plan. The purpose of the SEA is to identify and evaluate significant effects of the plan to the environment for those environmental considerations to be considered in the preparation and adoption of the plan. An initial draft report in connection with the SEA was published in July 2010. The revised report published in December follows on from DECC’s decision to remove the moratorium on unconventional oil and gas exploration activities which had been imposed following the seismic tremors caused by Cuadrilla's drilling in north west England.
The revised report considers the impact of high and low activity scenarios over the next 20 years for conventional oil and gas exploration and production, unconventional oil and gas exploration and production and natural gas storage.
Significant positive effects of the increased activity in unconventional exploration and production are identified in terms of population (added employment and community benefits flowing from increased production of oil and gas) and use of resources (in the identification and use of hydrocarbon resources).
At a national level, no likely negative significant effects are identified. However, the report considers that there are likely to be significant negative effects (as compared to the, relatively limited, existing onshore oil and gas activities) at a local level in two areas:
- The likely increase in greenhouse gas emissions as a result of undertaking exploration and production activities themselves (rather than the use of the oil and gas produced). However the report notes that under the high scenario any likely increase will only equate to approximately 0.3% of the UK’s total greenhouse gas emissions. It also notes that it is unlikely that greenhouse gas emissions will increase as a result of the use of the oil and gas produced, as that production is likely to displace imports (in particular of liquefied natural gas).
- Challenges relating to the disposal of flow-back fluids, especially where this has to be undertaken off-site. While under the high activity scenario, 108 million cubic metres of fluids would require treatment (equating to about 3% of the UK’s total annual waste water treatment), this could place a burden on local infrastructure. However these challenges are only likely to arrive in the 2020s and controls under the planning/environmental regulatory regime and the recent memorandum of understanding between the Water Industry and the UK onshore operators group (on which please see our November 2013 update) should mitigate potential negative effects.
Two further potentially significant negative effects are also identified:
- General disruption during construction and drilling and associated HGV movements may result in community disturbance and have negative health effects for some people living close to well pads and/or HGV routes. However the report notes that Public Health England has recently published a review on the potential public health impacts of shale gas extraction and that that review concluded that (based on the evidence available) the potential public health impacts are low if activities are properly operated. Furthermore, in the authors of the report consider that the impacts can be mitigated through the planning system.
- The volume of water required for fracturing for the high activity scenario is likely to be 9 million cubic metres annually. Although this may put pressure on local supplies, the report considers that the planning/environmental controls in place should be capable of mitigating the effects at a local level. It also notes that even under the high activity scenario, the annual usage is less than 1% of the UK’s annual non-domestic water use.
Overall, the report broadly concludes that while there may be negative effects as a result of an increase in unconventional oil and gas exploration and production activities at a local level, these should be capable of being mitigated to a very great extent through planning system and environmental regulation.
The consultation on the report is open until 28 March 2014. A copy of the report is available here.
Regulatory road maps
The Office for Unconventional Gas and Oil (which is a part of DECC) has published regulatory road maps explaining the permits and consents required and the process for obtaining them in relation to exploration activities onshore in the UK. There are separate road maps for each jurisdiction in UK (England, Scotland, Wales and Northern Ireland). The road maps are available here.
Amendments to the fiscal regime
The UK Government undertook a consultation in relation to the fiscal regime for unconventional oil and gas in the summer of 2013. It published its response to the consultation in December 2013. In its response, the Government has set out more detail on the various proposals which it consulted on. It intends to implement the proposals in the 2014 Finance Bill.
- New onshore allowance
Under the current regime, a company's profits from oil and gas exploration and production activities in the UK are ring fenced from its other activities and subject to corporation tax (at the rate of 30%) and the supplementary charge (at the rate of 32%).
A new allowance for conventional and unconventional onshore oil and gas projects is to be introduced. This will allow E&P companies to deduct 75% of their qualifying capital expenditure in relation to a well pad from their profits for the purposes of calculating the supplementary charge.
The Government consulted on whether there should be a minimum activation period for the new allowance and has decided that there should not be one.
The allowance will be available to joint venture participants on the basis of actual spend (as opposed to their equity shares, which may be different).
The allowance will not be available for large projects with reserves in excess of 7 million tonnes of oil equivalent. The Government regards these projects as being financially viable without the need for fiscal support.
Onshore oil and gas projects will be removed from the scope of the existing field allowances (which are largely targeted at offshore developments).
- Extension of the ring fence expenditure supplement
Under the current regime, the ring fence expenditure supplement allows a company to increase its qualifying/unused expenditure/losses by 10% per annum in order to maintain their time value. This is only permitted for the six years following the year the relevant expenditure/losses were incurred. For onshore projects this period will be extended to ten years
- Reinvestment relief/substantial shareholding exemption
Under the current regime, the ring fence expenditure supplement allows a company to increase its qualifying/unused expenditure/losses by 10% per annum in order to maintain their time value. This is only permitted for the six years following the year the relevant expenditure/losses were incurred. For onshore projects this period will be extended to ten years.
In addition, in certain circumstances the substantial shareholding exemption exempts chargeable gains from tax on the sale of shares in companies that have been held for more than 12 months in the 2 years prior to the sale.
Where an asset is used by a member of the group other than the target company for the purposes of its trade and is transferred to the target company 12 months or less prior to the sale, the period in which the transferee held the asset is counted towards the 12 month holding period. This allows assets to be transferred to newly incorporated SPV companies in the same group and the shares in the SPV to be sold without the group having to have held those shares for 12 months.
For the purposes of both reinvestment relief and the substantial shareholding exemption, oil and gas exploration and appraisal (E&A) activities in relation to licences prior to the approval of a field development plan are not currently regarded as trading. However, both reinvestment relief and the substantial shareholding exemption will be extended to assets in respect of which E&A activities are being undertaken. Importantly, these changes will apply to both onshore and offshore assets.