The Shale Revolution Will Be Replicated

Ana Swanson and Jesse Rogers’ manifesto for shale in emerging markets  

Everyone relax. President Kirchner is on the case...

Everyone relax. President Kirchner is on the case…

Clad in shiny white helmets bearing the insignia of Argentine state oil company YPF, the tidily dressed workers at Argentina’s Loma Campana shale field bear little resemblance to the hardy American wildcatter, protagonist of the US shale revolution.

Indeed, it has become something of a mantra in the energy industry that the shale revolution would never be replicated outside of the US.

The sentiment that the “shale revolution could have happened only in America” has even reached the pinnacle of the US foreign policy establishment, as witnessed by a recent article in Foreign Affairs.

A lack of property rights, clear regulations, and proper entrepreneurial spirit, the story goes, would prevent other countries from developing some of the world’s largest shale deposits, divvied among Argentina, China, Russia, and Eastern Europe.

In many ways, energy experts should be right. The race to expand hydraulic fracturing, or “fracking,” of shale deposits, has lifted US crude oil production to its highest level in 25 years, due in no small part to the right of prospectors to freely sell what they drill up.

So what explains multibillion dollar investments by major oil and gas companies in China and Argentina?

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Contrary to conventional wisdom, state ownership of natural resources makes shale an attractive proposition.

The self-made nature of the US shale revolution, driven by thousands of small, independent companies drilling wildly from Pennsylvania on down to Texas, completing over 4 million wells along the way, caught oil majors by surprise.

By the time major oil companies like Shell and BP got in on the game in 2011 and 2012, the most productive acreage had already been claimed by smaller independents like Antero Resources, which has fewer than 200 employees. Since 2013, Shell, BP, and the BG group have written down over US$5 billion in shale-related losses.

Yet in Argentina, where Chevron has invested over US$2 billion along with state oil company YPF, there is little chance of competition from local upstarts, who would need to bid first for a concession from the Argentine state.

In China, where Shell has committed over US$1 billion to the development of shale gas, a challenge from independent oil prospectors is unlikely, since excavating China’s relatively deep shale deposits will require foreign technology that only well connected state-owned oil companies have acquired.

Second, the two countries have taken steps, albeit small ones, to improve the business climate and strengthen property rights in the oil and gas sector.

When the government of Cristina Fernandez expropriated the assets of Spanish oil major Repsol – parent company of YPF –  in 2012 without compensation, Argentina’s already poor business climate seemed to take an irreversible turn for the worse.

Yet a new hydrocarbons law unifying taxes and royalties has re-opened the door to foreign investment, with Exxon Mobil set to join the roll call of US companies, including Dow Chemical and Chevron, that have big stakes in Argentine shale.

In China, President Xi Jinping’s push to open the energy sector to private investment led Shell to choose Shanghai for its first overseas research center in Asia this past March. China’s need for the technological know-how to exploit its shale reserves, far deeper in the ground than those in the US, has pushed  state oil companies to offer a greater share of profits in exchange for technological transfer agreements.

 Source: Wall Street Journal, Comunicación Popular

Source: Wall Street Journal, Comunicación Popular

Finally, what the two countries may lack in entrepreneurial spirit is more than made up for by officials’ desperation to overcome a gaping energy deficit.

According to the IEA, China’s demand for gas will double by 2019, and leaders are calling for half of new supply to come from domestic sources. China has vast unconventional gas reserves, a booming energy-hungry economy, and serious pollution problems from the coal that it currently burns to generate 70 percent of its energy.

One challenge for China is that most of its shale reserves are located in the country’s arid west, setting up a potential conflict with rural populations.  Fracking requires huge amounts of water, as a vehicle for the slurry of water, sand, and chemicals that are shot into a well to splinter the shale and free up tiny gas bubbles trapped in the rock formations. But even so, the country is likely to prioritize national development needs over local concerns.

In Argentina, water constraints are less of an issue than the country’s macroeconomic health, hanging in the balance after the country’s technical default and a recession beginning in the last quarter of 2013.

However, with fuel imports costing the country over 3 percent of GDP – or about half of the Central Bank’s US$28 billion in foreign currency reserves, the production of shale oil and gas has become a national strategic priority, with tight gas – a close cousin of shale – now accounting for over 10 percent of domestic production.

Though the shale revolution may be a product of American ingenuity, it has not been kind to international oil and gas majors, now turning to frontier deposits in Argentina and China for future growth.

While the development of shale is still in the early stage, we believe that the very factors propelling the rise of shale in the US, or rather, a lack of them, will secure shale’s place in the energy mix of emerging markets.

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Jesse Rogers is an energy analyst focusing on natural gas markets in Latin America. He previously worked as a finance and politics reporter for Impremedia and as a research assistant for Mexico City’s Centro de Investigación y Docencia Económicas (CIDE). 

Ana Swanson is a Washington, DC-based freelance writer, editor and analyst specializing in China and economics. She edits the Washington Post’s Know More blog and was previously the editor-in-chief of China Economic Review magazine in Shanghai.

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