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Global Shale Gas Push Stalls

Russell Gold and Marynia Kruk, The Wall Street Journal

Exporting the U.S. shale energy revolution overseas turns out to be far tougher than anyone expected—giving the U.S. a significant competitive advantage.

Shale oil and natural gas have rejuvenated the North American energy industry and boosted the economy by supplying companies and consumers with cheap fuel. There are huge shale deposits outside of North America that global energy companies and governments are eager to tap.

But oil companies are running into obstacles as they try to replicate the U.S. experience on other continents. The result is that significant overseas shale energy production could be a decade away.

Among the reasons for the glacial pace abroad are government ownership of mineral rights, environmental concerns and a lack of infrastructure to drill and transport gas and oil. In addition, much less is known about the geology in most foreign countries than in the U.S., where drilling activity has been going on for more than a century.

The upshot: the U.S. and Canada could remain the main countries to reap the economic advantages of shale development for some time. In both countries, a glut of natural gas and ethane is luring petrochemical companies and fertilizer manufacturers to build new plants—a huge change after years of shifting production abroad. Meanwhile, states like Texas and North Dakota that actually have the shale deposits are getting additional boosts to their local economies from drilling activity.

Poland was once regarded as one of the more promising plays, but early wells have hit less gas than expected. In addition, community wariness of drilling and changes to the government’s tax and royalty rules have dampened industry enthusiasm. Exxon Mobil Corp., XOM -0.23% an early proponent of Polish shale, decided to throw in the towel after drilling just two wells, saying it didn’t find enough oil or gas to justify additional drilling.

China is believed to have more shale oil and gas than the U.S. The problem is that most of it is in arid or heavily populated areas; oil companies worry they won’t be able to obtain enough water to hydraulically fracture the rock—the process needed to free hydrocarbons from shale. “To create a flat drilling pad, we almost always have to take out some part of a hillside and basically someone’s rice paddy,” says Simon Henry, Royal Dutch Shell RDSB.LN 0.00% PLC’s executive director for the Asia Pacific region.

Argentina recently nationalized the assets of a Spanish company that discovered an enormous shale deposit there that is estimated to hold nearly one billion barrels of oil. This has chilled outside investment, which already suffered from rules that made it difficult to import needed technology and export potential profits. Houston-based Apache Corp., APA +0.12% which holds rights to drill in 450,000 acres of Argentine shale, says it can cost twice as much to drill a well there as the U.S., and then two to four times as much to frack the well so it can begin producing.

Other countries, like France and Bulgaria, have gone further and banned hydraulic fracking altogether because of environmental concerns, essentially stopping development in its tracks.

“There was enormous irrational exuberance for global shale development,” says Joseph Stanislaw, an independent senior energy adviser to Deloitte LLP. “Then the industry ran into reality. Global shale will happen and when it does begin, it will take off with the same force we’ve seen in the U.S. But the timeline will take longer than people think.”

The shale revolution began in the late 1990s when the first modern shale well was drilled a few miles north of Fort Worth, Texas. The technology was pioneered by small, independent companies willing to take enormous financial risks, and helped along by landowners who owned their mineral rights and were ready to sell for a share of the profits. Wall Street eagerly financed shale exploration efforts. The industry also benefited from a large existing pipeline network and ample number of drilling rigs.

This combination doesn’t exist elsewhere in the world. “The mineral rights, the availability of small players to enter the market, the availability of geological data, these things are all part of an entrepreneurial model that is unique to the United States,” says Julio Friedmann, the chief energy technologist at Lawrence Livermore National Laboratory in California.

A key, but often overlooked, ingredient to the success of shale development in the U.S. is private ownership of much of the underground gas. That means that environmental concerns about drilling are countered by a built-in constituency of landowners looking to profit.

It is a “marvelously elegant system that ensures that all natural resources are fully developed,” says Rex Tillerson, chief executive of Exxon Mobil, which produces more gas in North American than any other company. Outside the U.S., mineral rights are typically owned by governments, leaving locals with little reward for putting up with large-scale industrial drilling.

Another difficulty is that little is known about shale deposits around the world—unlike in the U.S. where tens of thousands of wells have been drilled and geologic data is usually made public by state regulators. Geologists know where shale deposits are overseas, but not if the rocks have particular characteristics that make fracking technology work.

Still, the prize could be significant and there are many formations around the world that industry experts believe could be as large, or larger, than the prolific Marcellus in Pennsylvania or the Bakken in North Dakota. Last year, a U.S.-government contracted study of 32 countries estimated they held 6.6 quadrillion cubic feet of shale gas, more than 50 years worth of current global consumption. The U.S. held 862 trillion cubic feet, or just 13% of the estimated resource.

The study didn’t offer an estimate of either the volume of oil in global shales or the size of massive shale deposits in Russia and the Middle East. Other estimators have suggested this figure could be high, but nonetheless expect there is vast untapped energy in shales world-wide.

Companies that are investing in global shale are trying to damp down enthusiasm. Asked this summer about his expectation for shale gas development in Europe, Chevron’s CVX -0.52% Vice Chairman George Kirkland said “You are really talking next decade before you get significant volumes.”

Chevron and other companies still hope to create a shale-gas extraction industry in Poland. Chevron has acquired drilling rights there and hopes there is enough gas to make drilling economical. But the government is facing suspicion and resentment from citizens and has been slow to issue drilling permits. “Investors are right to complain, since our civil service hasn’t yet adjusted to the emergence of this sector,” says Deputy Environment Minister Piotr Wozniak.

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