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The State of Global Shale

The American Interest

While the United States gears up for what is expected to be a record-breaking production year in 2018, the rest of the world remains far away from catching up to America’s runaway shale success.

But while the U.S. may be the only country producing commercially significant volumes of shale today, it’s not the only one with sizable shale reserves—according to the U.S. Energy Information Administration, Argentina, Algeria, and China all have more shale gas than the United States, and Russia has nearly as much tight oil. Given the American example of the transformative power of this recently “unlocked” resource, there’s plenty of motivation for these countries to get the hydrocarbons flowing, and there has been for many years. So where are they now?

Let’s start in Argentina, which contains the Vaca Muerta shale formation, one of the world’s largest. Argentina has more shale gas than the United States, and is second only to China, but thus far has yet to ramp up commercial production. But companies are spending more money on exploratory drilling in the region (to the tune of $1 billion per year), and according to Argentinian Energy Minister Juan José Aranguren, the Vaca Muerta will attract $15 billion annually in investment by 2020. That influx of foreign capital will be in many ways dependent on further market reforms—price controls, labor unions, and extensive subsidies have all been barriers to entry into Argentina’s fledgling shale industry. Meanwhile, production costs are, according to the country’s state-owned oil and gas company YPF, falling far enough to allow certain shale plays to turn a profit in today’s bargain crude market. Still, YPF’s shale chief admitted that the Vaca Muerta formation requires a lot more infrastructure to become competitive. With more strident market reforms, more foreign investment, and more developed oil and gas field infrastructure, Argentina can kick off its own shale success story.

Those same problems crop up elsewhere in the world, though other countries have their own unique challenges. In Algeria, there’s not yet enough demand for shale gas to kickstart the industry there. Algeria’s Energy Minister Noureddine Boutarfa said earlier this year that the country “doesn’t need, in the short term, to use its shale gas, because it has other natural resources, including [conventional] gas.” Algeria also has a state-owned oil company that controls the country’s hydrocarbon reserves, which makes it difficult to secure the foreign involvement so necessary to succeed in the technologically difficult shale space.

Russia has a similar demand problem, as the country already produces huge quantities of oil and gas in its conventional fields. But as these fields mature, production is slowing, and eyes are turning toward unconventional (read: shale) reserves for the future. No Russian shale formation is more promising than the Bazhenov, which the EIA estimates contains 74.6 billion barrels of tight oil, just shy of America’s estimated reserves. Moscow was slow to embrace the shale boom, initially dismissing it as a fringe phenomenon, but thanks to the current price of oil (in large part a result of surging American output from fracking), it now recognizes the importance of these unconventional reserves. But U.S. sanctions have prevented Western companies from plumbing the Bazhenov shale, and without the expertise, equipment, and technology that those firms have developed in America’s various shale formations, Russia has been unable to unlock its own. That may be changing, though, as Gazprom Neft—the oil division of the state-owned gas company Gazprom—has begun trying to frack without American assistance. As Gazprom Neft’s director of exploration Alexei Vashkevich put it, “it’s not a question of will we do it or not: it’s a question of time. It might take a little bit longer but we will get there.” That seems to be something of a theme for shale development outside of the United States—it’s a question of when, not if.

In the UK, shale progress has been stymied more by public opposition than by a lack of private investment, but there are green shoots in the country that contains some 1.3 quadrillion cubic feet of shale gas. Just this past month, the British company Cuadrilla began drilling the first shale well in the country since 2011, after the industry was shut down following a series of small earthquakes near exploratory shale operations. The British public is still deeply skeptical of fracking, though, and lacking any mineral rights, landowners have little reason to go along with the extraordinary disruptions that accompany major oil and gas projects. Theresa May’s government is setting up a Shale Wealth Fund, supported by taxes levied on shale firms, that will compensate affected communities, but it will still be an uphill battle to bring people around in a country with a higher average population density than those regions of the United States where shale is being drilled most vigorously.

Australia has seen political support wane for fracking, and just this week the state of Western Australia, led by the recently elected Left-leaning Labor Party, moved to ban the drilling process. It’s the fifth Australian state to place limits on hydraulic fracturing, leaving only two states—South Australia and Queensland—where the practice is permitted. That’s a big blow for a country which is estimated to contain 429 trillion cubic feet of shale gas, roughly two-thirds of America’s shale gas resource base.

But we’ve saved the best for last, and China may be the closest to replicating the American shale experience.

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