Academic journal article Energy Law Journal

How Can Governments Accelerate International Shale Development?

Academic journal article Energy Law Journal

How Can Governments Accelerate International Shale Development?

Article excerpt

Synopsis: While American shale production has surged in recent years, international shale development has languished. The author describes the principal factors influencing the pace of international shale projects: (1) political risk; (2) absence of private mineral rights; (3) fiscal regimes; (4) services and infrastructure; (5) natural gas and oil markets; and (6) access to acreage. As the best shale in the United States is developed, or at least becomes more expensive, other nations will have the opportunity to compete for investment. In addition to luring developers with inexpensive acreage, nations wishing to accelerate their own shale development should consider energy policy reforms, such as tax incentives and private mineral rights.

I. INTRODUCTION

Shale formations are hardly unique to the United States. They span across every continent, offering their bounty to dozens of nations. The U.S. Energy Information Administration (EIA) estimates that shale petroleum resources outside the United States total as much as 287 billion barrels of oil and 6,634 trillion cubic feet of natural gas.1 This equals more than 80% of global shale resources.2 Figure 1 below illustrates the extent of these international shale deposits.

Notwithstanding the productive potential of these formations, other nations have not kept pace with the United States. Over the last five years, American shale gas production has more than tripled, from about ten billion cubic feet per day (bcf/d) to more than thirty bcf/d, with tight oil registering similar gains-from a few hundred thousand barrels to more than three million barrels a day.4 In contrast to the "thousands of shale wells in the US, there are only a handful producing commercial quantities of gas in . . . the rest of the world."5

A variety of factors explain this development disparity. The international regulatory and fiscal landscape generally has been adverse, with restrictions on hydraulic fracturing and tax regimes that are incompatible with the higher costs of shale. Political opposition has been magnified by the absence of private mineral rights, which leads landowners to organize "not in my backyard" protests. Many international locations also trail the United States in shale infrastructure, including pipelines, drilling rigs, hydraulic fracturing crews, and natural gas markets.6

Other nations are beginning to recognize the need for energy policy reforms as a prerequisite to development. Governments can protect developers' investments from subsequent changes in law, such as a moratorium on hydraulic fracturing. Local opposition to shale can be mitigated by compensating landowners with a share of the production. Higher costs associated with lack of infrastructure can be offset with tax incentives, accelerated depreciation, and low cost acreage grants.

International shale will advance more quickly in those nations where policy reforms create a favorable economic-and lower risk-environment for shale development. Even if other governments are slow to incentivize shale plays, the fast pace of U.S. development will likely make the choicest domestic shale both scarcer and more expensive. As international profits gradually increase and domestic profits fall, the shale "bounty will in due course spread to other nations."7

II. POLITICAL RISK

The rates of return required for international projects are typically higher than those expected in the United States, and for good reason. Our industry's history is replete with examples of energy projects that have been expropriated or otherwise thrown into force majeure by conflict-often resulting in losses that were not readily recoverable through any legal process. International shale development carries with it the usual political risks of any given nation plus the new risk of opposition to hydraulic fracturing. Whereas the largest conventional petroleum fields are often offshore, shale developments may impact densely populated countryside. …

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