Exploring Viable Upstream Fiscal Policy Options for Developing Unconventional Natural Gas: The Case of the UK’s Shale Gas

Abstract

The work contained in this research is an extension of the work by Acquah-Andoh et al. (2020) and explores viable fiscal strategies to attract investments and realise both government and industry objectives of developing UK unconventional natural gas from shale. Based on discounted cash flow (DCF) analysis and parameter sensitivity analysis (PSA), the research argues a fair share proposition of UK fiscal regime, premised on a pragmatic attainment of national objectives for the resource while ensuring attractive investment climate through an equitable balance between risk and reward for hard-to-attract early investments in an uncertain operational environment that characterises unconventional natural gas exploitation. Two fiscal policies were simulated and evaluated: the existing 30% Ring Fence Corporate Tax Policy and an Open-Door Policy with a 20% tax rate. The empirical evidence reveals that an open-door policy is most suitable for new unconventional natural gas development projects. In particular, the evidence shows that redefining capital allowance to include replacement well costs, implementing a tax rate of no more than 20%, is most likely to instil early investor confidence as risks and rewards are best balanced within this framework for investment in UK natural gas from shale. This fiscal strategy removes the potential administrative burden associated with the existing ring fence corporate tax regime and renders the tax policy simple to implement. The policy is recommended for developing unconventional natural gas worldwide. The study argues for policymakers to discontinue the application of fiscal regimes for conventional natural gas to unconventional natural gas. “Priority”, “resource virginity” and “resource type categorization” are novel principles and contributions from this research, for the design of fiscal regimes for unconventional natural gas.