4/2/14

The economic affairs committee of the House of Lords could be forgiven for being more confused after hearing from the Chancellor, George Osborne, this afternoon (4/2/14) than they were before he arrived.

The committee has been investigating the likely impact of a shale gas industry on the UK economy. Members asked Mr Osborne about two key issues, the effect of shale on energy prices and the attractiveness of the onshore oil and gas industry to investors. In the course of 20 minutes, Mr Osborne gave a range of responses to these questions.

Impact of shale gas on UK energy prices

Asked by a former Chancellor, Lord Lawson, about what effect shale gas would have on UK energy prices, Mr Osborne said: “I think it will have an impact and I hope it will have a significant impact.”

Then he became more cautious, particularly about comparisons with the US, which he said had seen a 50 per cent drop in prices: “There are some differences from the United States. We are not a closed an energy economic as the US is. We are part of a European gas market. They don’t have LNG export facilities in the same way we have import terminals. We more closely track the world gas price than the United States does and we have less ability to detach ourselves from the world gas price.”

Then he became optimistic again: “That said if you saw significant shale activity in the US, if you saw it in China and a number of European countries, that would clearly have an impact on the world gas price and we would be the beneficiaries of that as well as the direct beneficiary of producing gas and selling it on the world market.”

Then he went back to caution: “I think it does have the potential to bring gas prices down in the UK. I just don’t want to overpromise. I don’t want to go out and say it is the solution to all this country’s economic problems.”

His final comment, though, was unequivocal: “Once people start to see the benefits of this [shale gas] to the UK economy, the jobs that will be created, the lower energy costs and once communities start to see the money flowing I think they will all see the merits of this area of economic activity.”

Established industry or newcomer?

Answering a question from Lord Shipley about why the onshore oil and gas needed tax incentives, Mr Osborne stressed that it was an established industry: “I should have mentioned this earlier. Of course, there has been onshore oil and gas extraction for 100 years in this country. And there are substantial onshore fields that don’t attract a huge amount of local controversy just because they’ve been there for some time.”

Then he implied the industry needed help because it was new: “You can use tax incentives in the oil and gas tax regime to encourage particular investment that either won’t happen without those tax incentives or it may be reluctant to come forward because it is a brand new form of activity and an area where there just hasn’t been any substantial activity for many decades.”

Then he said tax incentives were needed to encourage investment in the UK, rather than in other countries: “I wanted to give this industry a big boost and to get this activity going in the United Kingdom, and I thought the incentives …would encourage some upfront capital investment that otherwise might not be forthcoming because people would be concerned that this wasn’t happening on a large scale and was the UK the place to go and put your money?”.

Consistent support

The Chancellor was unswerving on one point: his backing for shale gas in the UK. “I am a huge supporter of shale gas and I think it has the potential to transform the energy debate in the western world.” He said: “It is a very good answer to those who want to see affordable energy whilst at the same time the UK making a commitment to the reduction of global carbon emissions.”