UK officials block key shale gas project in blow to industry

(Adds David Cameron spokesman comment, background)

By Karolin Schaps and Susanna Twidale

LONDON, June 29 (Reuters) - British local government officials rejected a fracking project in northwest England on Monday, dealing a blow to Britain's shale gas sector that is supported by Prime Minister David Cameron's government.

Officials at Lancashire County Council spurned a planning application lodged by Cuadrilla Resources, saying the project would have an unacceptable visual and noise impact.

The unexpected refusal came four days after the same officials rejected another Cuadrilla shale gas application, showing the strength of local opposition to unconventional gas production.

"We are surprised and disappointed," Cuadrilla said in a statement, adding it was considering whether to appeal.

The application had largely been expected to go through after the council's advisors had recommended approval.

"This decision is a serious setback for shale gas in the UK and many must be wondering if it can ever reach production phase," said John Williams, senior principal consultant at Poyry Management Consulting (LSE: MMC.L - news) .

The refusal is a direct rebuff to Cameron's pledge to go "all out" for shale in a bid to replicate some of the success the Unites States have had in tapping shale gas resources to bring down energy prices.

"We respect the planning process," Cameron's official spokeswoman told reporters on Monday. "We will keep looking at how we can continue to develop this industry in the UK."

The government has already promised 100,000 pounds in compensation funding for local communities as well as a share of revenue raised from shale gas sales.

Only one shale gas well in Britain has been hydraulically fractured. The Cuadrilla project near Blackpool, northwest England, was abandoned after it triggered an earth tremor that resulted in an 18-month ban on fracking, lifted in 2012.

Since then, only three shale gas fracking applications have been made, two by Cuadrilla, which have now been refused, and one by energy company Third Energy.

Britain is estimated to have substantial amounts of shale gas trapped in underground rocks and the national government has supported developing these reserves to counter declining North Sea oil and gas output.

The country is seen as Europe's main driver for shale gas development after other countries with large resources, such as France and Germany, have banned the technology.

Environmental campaigners, who are concerned about hydraulic fracturing, or fracking, contaminating groundwater resources and triggering earth tremors, welcomed the decision.

"This decision is a Waterloo for the fracking industry and a triumph for local democracy," said Daisy Sands, Greenpeace UK energy and climate campaigner.

The decision weighed on shares of rival IGas which saw its stock trade down 9 percent at 1120 GMT. Shares (Berlin: DI6.BE - news) in Egdon Resources, which has growing shale gas ambitions, were down 4 percent. (Additional reporting by William James; Editing by Mark Heinrich and David Evans)