Fracking profits to be diverted into sovereign wealth fund in plan to drive growth

Fracking Profits Jacob Rees-Mogg - John Sibley/Reuters
Fracking Profits Jacob Rees-Mogg - John Sibley/Reuters

A UK sovereign wealth fund partly bankrolled by the proceeds of fracking is being considered by ministers as part of plans to invest in businesses and drive economic growth.

Officials have drawn up plans for a Norway-style state-backed fund that would also accept investments from pension schemes and would focus on backing long-term projects.

It could be used for national infrastructure investment and to drive growth in the Government’s new “investment zones”, while also providing the Treasury with access to cheaper credit as interest rates rise.

A source close to discussions about the fund said it may be partly funded with royalties collected from fracking and oil and gas extraction in the North Sea.

The Treasury is hoping for significant tax revenues from shale gas extraction after the moratorium on fracking was lifted by Jacob Rees-Mogg, the Business Secretary, this week.

Under plans proposed by then-Prime Minister Theresa May in 2016, royalties would be partly diverted into a “Shale Wealth Fund” that would spend money in the areas around fracking wells, reducing local opposition.

The Telegraph understands the new fund is expected to operate more widely in an attempt to boost economic growth across the UK.

Norway, the UAE, Saudi Arabia and Kuwait already power their sovereign wealth funds with oil and gas profits, although many other funds work with foreign currency reserves or balance of payment surpluses.

The UK has never run a sovereign wealth fund but does own the British Business Bank, established in 2014 to offer credit to small and medium companies, which could be incorporated into the fund.

On Friday Kwasi Kwarteng, the Chancellor of the Exchequer, announced changes to the charge cap on defined contribution (DC) pension funds to incentivise more investment in long-term illiquid asset classes.

Last year the FCA authorised a new fund, the Long-Term Asset Fund, with the same intention.

One individual familiar with the plans for a sovereign wealth fund said the economic effect of state investment would be like the existing Long-Term Asset Fund (LTAF) “on steroids”.

A second source said a sovereign wealth fund would be an “investment vehicle of much greater clout” than the LTAF and would be a “better way to raise money than just by issuing debt”.

UK gilt yields have surged following the announcement of Mr Kwarteng’s Growth Plan on Friday, as the pound dropped to a 37-year low against the dollar.