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How Governments Are Killing Shale

Walter Russell Mead, Via Meadia

Lithuania’s big bet on shale gas to rid itself from the clutches of Russia’s Gazprom is looking more and more like a bust.

The eastern European country is, like the rest of Europe, frustrated with high Russian gas prices and the long-term contracts Gazprom requires that tie the price of its gas to oil. As with its neighbor Poland, Lithuania has recoverable reserves of natural gas trapped in shale formations—an estimated 400 billion cubic feet’s worth. Last month the Lithuanian government awarded a contract to drill exploratory shale gas wells to Chevron, the only company that bid. The oil company, however, announced it is pulling out, citing Lithuania’s opaque regulatory environment. Reuters reports:

“Significant changes to the fiscal, legislative and regulatory climate in Lithuania have substantially impacted the operational and commercial basis of the investment decision since the company submitted its bid in January 2013,” [Chevron said in a statement].

Lithuania’s Prime Minister Algirdas Butkevicius said in a statement he regretted Chevron’s decision, but admitted there was a lack of regulatory clarity.

“The parliament still debates various amendments, which could affect the use of hydrocarbons in our country. That means, that first of all we need to have a legal framework in place,” he said in a statement.

Poland’s shale gas dreams are withering on the vine for similar reasons, and Mexico’s own shale hopes might never be realized if it doesn’t clearly delineate the ownership rights and tax levels for foreign oil companies.

Lithuania, Poland, and Mexico’s troubles define the contours of an all too often overlooked ingredient to the American success story: a comprehensible, consistent and, for the most part, transparent regulatory environment. Countries that lack this ingredient find it immensely difficult to attract foreign companies interested in taking on the high-risk/high-reward task of drilling for shale oil and gas.

Via Meadia, 10 October 2013