Shale Gas: The Next Big Thing?

by Michael Diaz Jr. - Diaz Reus International Law Firm
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[author: Paola Sanchez]

Heat, electricity and transportation all have something in common: they can be powered by natural gas. Across the globe, historically, natural gas has been extracted from natural gas fields through the drilling of wells. However, with the development of new technologies, natural gas can now be extracted from different resources, more specifically, the next big thing: shale. Shale gas is an increasingly important and inexpensive source of natural gas for the U.S. and several countries around the world.

Shale, a common sedimentary rock, is found in formations that contain significant natural gas deposits. For decades, the high cost of extracting shale gas prevented its commercialization. However, in the last decade, a technique using hydraulic fracturing, or fracking, has opened the door to a cost-effective extraction method. The fracking process involves the underground pumping of water, sand, and chemicals at a high pressure, which causes the release of natural gas trapped in shale. The natural gas is then pushed into large wells for extraction. When used with horizontal drilling, fracking allows for commercial quantities of shale gas to be produced; making it a feasible source of natural gas, and a good investment for many.

The impact that shale gas and fracking have had on the United States energy industry is astounding. Over the last five years the United States has seen a steep increase in natural gas production causing natural gas imports to steadily decrease while natural gas exports have skyrocketed. The growth of natural gas supply from fracking has led to a 70 percent fall in natural gas prices since 2008 and the near collapse of the natural gas import business in the United States. The Energy Information Administration (EIA) stated that the net imports, defined as import minus exports, were about five billion cubic feet per day in 2011–the lowest level since 1992. Due to its low cost, the use of natural gas in the United States is growing at every level. Entire fleets of public transportation vehicles now run on natural gas in several municipalities across the United States and global companies like United Parcel Service (UPS) run fleets of trucks and cars powered by natural gas.  

Not surprisingly, shale gas extraction is not limited to the United States. A study of thirty-two countries conducted by the EIA found that shale gas could increase the world’s recoverable gas sources by 40 percent. In fact, countries such as Argentina, China, Mexico, Poland, and Ukraine have started to award exploration licenses to companies interested in extracting shale gas. Studies show that China may have the largest shale gas reserves and the country has already drilled several shale testing wells. However, these studies also suggest that geological conditions and the lack of an extensive pipeline network to transport the gas may make shale gas harder to extract in China. Nonetheless, efforts to tap into China’s shale gas deposits continue. Argentina is believed to have the world’s third largest reserves of shale hydrocarbons. And, while the recent nationalization of Argentina’s energy company has deterred several international companies from investing in Argentina, the country is aggressively lobbying foreign corporations to invest in this abundant resource.  

National and international success notwithstanding, shale gas growth has plateaued in several countries due to concerns that fracking has a negative impact on the environment. Both France and South Africa have imposed a moratorium due to pressures from environmental organizations over the possible environmental repercussions of fracking.  Among the environmental concerns is the fear that fracking may contaminate groundwater, leak methane or cause earth tremors. In the United States the Fracturing Responsibility and Awareness of Chemicals Act (FRAC Act) was introduced to Congress in 2009. The FRAC Act seeks to regulate fracking by requiring the disclosure of the chemicals that are used in the fracking process.  As of March 2012, the U.S. Congress has not passed the FRAC Act bill. In addition to the regulations proposed by the FRAC Act, there are several groups promoting their concerns that as shale gas extraction becomes less expensive and easier to acquire, alternative energy sources like solar and wind power will become less cost-competitive and therefore such renewable sources will not be aggressively developed.

What this means for investors in shale gas operations.

For investors, the environmental concerns over shale gas and fracking should send up red flags, as there are significant implications that require caution. There are also currently several high profile legal disputes, mainly in the U.S., related to alleged violations of environmental laws related to fracking. It is only a matter of time before the worldwide expansion of fracking causes further legal disputes in other countries. Legislations in the U.S. and beyond should be closely watched prior to investment.  

Overall, shale gas has proven to be a valuable source of energy for the United States, and countries around the world are eager to access their own supplies of this less expensive domestic energy. Developing nations like Mexico and Argentina have taken significant steps towards the extraction of shale gas despite the environmental concerns that have impeded shale gas extraction in other countries such as South Africa and France. While the expansion of shale gas extraction presents significant opportunities for global investors, it is in their best interest to stay on top of the developing legal issues and environmental legislations. The international attorneys of Diaz Reus & Targ can help. We offer global legal counsel to investors and others who are interested in the developments related to shale gas extraction. Please contact Michael Diaz, Jr. for more information.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Diaz Jr. - Diaz Reus International Law Firm | Attorney Advertising

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