LONDON (REUTERS) - Shale resources in the north of England could be much larger than previously thought, raising the prospect of new domestic gas supplies to replace dwindling North Sea reserves, a government source said on Thursday.

A report by the British Geological Survey (BGS) due to be published later on Thursday will estimate there is 1,300 trillion cubic feet (tcf) of gas in rocks in the so-called Bowland shale area, which could transform the country's energy market.

Previous estimates have suggested a total of some 5.3 tcf could be recoverable in Britain as a whole, implying a resource of 53 tcf assuming a 10 per cent recovery rate.

Britain, Europe's largest gas consuming nation, hopes to follow the United States into energy independence by exploiting shale gas, but the country's industry is at an early stage and it is not yet known whether shale gas can be produced economically.

The government is keen to reduce the country's dependence on gas imports from countries like Norway and Qatar, as imports are due to surpass gas from domestic North Sea production by 2015.

Britain's energy secretary Ed Davey is due to announce the estimated size of the shale resources later on Thursday. He will also outline policies aimed at stimulating investment in shale and the electricity market.

Finance minister George Osborne has promised generous tax breaks for shale gas developers and there are plans to help improve the industry's public image by passing on some of its financial benefits to local communities.

Typically in shale only 10 to 15 per cent of the gas in place is recoverable, and that recovery depends on the type of rocks and their response to the controversial fracking technique used in extracting the gas.

Britain's annual gas consumption is about 3 tcf, meaning the country could look forward to decades of energy independence should 10 per cent of the 1,300 tcf estimated resource be extracted.

Big resources, however, do not always translate into new energy supplies.

Initial excitement about Poland's shale resources, for example, has been tempered after early drilling suggested extraction would be tough and downgrades to initial estimates of volumes of gas in place, prompting US major Exxon Mobil Corp to quit the country.

Companies already exploring for shale in the Bowland area in northwest England, the country's most prospective area, include IGas, which has estimated it has between 15.1 and 172.3 tcf of gas in place on its licence alone, while Cuadrilla, which is partnered with utility Centrica Plc, has said it believes there is 200 tcf of gas in place in the area.

Drilling to test the shale over the next few years will prove critical for the country's infant industry, which must also reassure a sceptical public and vocal environmental lobby.

Shale gas is ordinary natural gas trapped in dense rock formations.

The process of hydraulic fracturing, or fracking, in which water and chemicals are pumped deep underground to break open the rocks, has lead to fears it could cause earthquakes and contaminate drinking water.

A year-long ban on drilling was recently lifted after the government imposed more stringent rules on fracking to reduce any earthquake risks.

Shares in IGas were up 9 per cent in early trading on Thursday.