UPDATE 2-Britain plans tax breaks for shale gas investment
* Proposes lower tax on income from shale production
* After consultation, likely to enter finance bill next year
* Amount of potential UK shale production uncertain
(Updates throughout, adds links)
LONDON, July 19 (Reuters) - The British government unveiled what it described as the world's most generous incentives for shale gas on Friday, offering tax breaks to drive investment in a sector that has already transformed the U.S. energy market.
Finance minister George Osborne said the government wanted to create the right conditions in Britain for industry to unlock the potential of shale gas.
"This new tax regime, which I want to make the most generous for shale in the world, will contribute to that," he said.
The government is looking to shale gas to reduce Britain's reliance on natural gas imports and hopes it will also lower consumers' energy bills.
The British shale industry is still in its infancy, however.
Experts say it is difficult to estimate how much shale could be developed commercially, and their estimates vary widely.
Utilities analyst Peter Atherton at Liberum Capital said the new tax allowance could attract more companies.
"It (shale exploration and production) is a tough thing for industry to do, costing from tens to hundreds of millions of pounds, and with a fair amount of technical risk and reputational aggravation in the early years," he said.
The proposed allowance for shale gas, subject to consultation for three months, would reduce the tax payable on income from shale production to 30 from 62 percent for oil and gas.
The tax break is based on existing allowances for oil and gas production aimed at supporting almost 14 billion pounds ($21 billion) of investment next year.
Called the shale gas "pad" allowance, it would likely go into the finance bill next year and last for the lifetime of the shale well, a UK Treasury spokeswoman said.
British exploration firms IGas and Cuadrilla are at the exploration stage in shale gas, while other energy firms such as France's Total are watching developments with interest.
Shares in Alkane Energy PLC, which has extraction licences in the Bowland area, were up 4.6 percent at 40.4 pence at 1142 GMT, while IGas was 5.58 percent higher at 123 pence.
Shares in Centrica, which has a stake in one of Cuadrilla's exploration licences, was down 0.2 pence to 380.9 pence.
Shale gas is natural gas trapped in dense rock formations. The process of fracking, in which water and chemicals are pumped deep underground to break open the rocks, has led to fears it could cause earthquakes and contaminate drinking water.
Last month, the British Geological Survey estimated the rocks of the Bowland shale area in northern England held 1,300 trillion cubic feet of gas, double the amount previously forecast.
However, it is still uncertain how much gas can be extracted and how many shale wells developed.
A report by the House of Commons' Energy and Climate Change Committee said this week: "It is impossible to determine reliable estimates of shale gas in the UK unless and until we have practical production experience."
Experts say there should be a period of at least two years of exploratory drilling to see whether UK shale is a viable business.
Jenny Banks, energy and climate change specialist at WWF-UK, said encouraging more fossil fuel investment was at odds with tackling climate change.
To help placate local opposition to shale, the industry will have to provide communities near exploratory wells with 100,000 pounds sterling ($152,000) in benefits and 1 percent of the revenue from each production site, the government said last month.
($1 = 0.6579 British pounds)
(Editing by Jason Neely and Jane Baird)