Expansive Growth or International Bet Hedging?: The Immediate Future of Shale Oil and Gas

Ian Murray, Associate Editor, Michigan Journal of International Law

Regulation surrounding recent shale oil and gas development and extraction in the United States is largely in the hands of individual states, but it remains to be seen if this regulatory approach will be readily replicated in the international energy landscape as shale markets start to emerge in Europe, Asia, Africa, and South America.[1]

The United States and Canada are often thought of as the major players in the shale oil and gas commercial markets, but nonconventional oil and gas extraction is becoming increasingly popular worldwide.[2]  Gas and oil, when extracted from shale, offer an opportunity for nations to dramatically lower the cost of natural gas, an opportunity borne by the mechanism of vastly increasing domestic energy self-sufficiency.[3] However, a decision to push towards shale exploration (and more broadly shifting from domestic oil and gas import to domestic oil and gas export) comes with significant costs, namely environmental concerns and the issue of cutting ties with traditional oil powers in the Middle East.[4] As a result, international political agendas and the push towards regional or continent-specific regulatory schemes in several geographic areas of the world will likely be major factors included in the balancing test employed by state governments in the near future when determining whether or not to pursue shale oil and gas.

European Union politics have already had significant impact on regulatory schemes for shale development in Europe, a trend that could potentially model the decisions of other shale-rich states looking to develop necessary infrastructure in the coming years.  Concern over the environmental impact of shale development has led to political backlash from some states within the European Union, with France going as far as completely suspending or banning the hydraulic fracturing techniques used to remove oil and gas from shale.[5]

Environmental concerns cited by constituent groups within European Union member states include the risk of releasing high levels of methane into the atmosphere, chemical contamination of groundwater, and the possibility of dangerous seismic activity directly stemming from hydraulic fracturing.[6] These concerns are not viewed in isolation, but rather they have an effect on the political climate of the entire European region. Political concerns noted by one European nation certainly influence the way that other states in the region view potential domestic energy expansion insofar as it makes states think more substantially about the political ramifications of behavior not in line with perceived European norms.

Political pressure from within individual European states in regards to shale exploration and development has also impacted the European Union in the form of stricter regulation for nonconventional oil and gas extraction. The European Commission (the executive body of the European Union) has made safe shale oil and gas extraction a priority, with the pattern of regulation in the past five years pointing towards stricter shale regulations for the European region as a whole.[7]  This trend of strict regulation can be traced largely to the direct political pressures from within the states of the European Union, which effectively fleshed out many of the holes in current European Union legislation. These holes include the lack of Environmental Impact Statements for many of the proposed shale projects in Europe,[8] a problem that is currently being considered by the European Union with an eye on enacting legislation in the near future to make sure that environmental impacts are fully calculated before project implementation.[9]

These patterns in European regulation will likely influence the way that other countries will begin to look at the future of shale exploration. The 28 states within the European Union are currently still able to regulate most parts of policy and regulation for hydraulic fracturing, but the looming harmonization legislation by the European Commission has caused many states to reconsider whether shale exploration is going to be a good investment for the long term.[10] States in other parts of the world will likely give great weight to the stricter regulatory trends in Europe because shale investment today might not be profitable if new, strict legislation emerges in other regions. China, South America, and Africa have great potential for shale oil and gas extraction, but poor infrastructure within these states means that actual extraction is still years away.[11]  This uncertainty in regional or continent-based regulation makes shale exploration a big gamble for many countries and the risk can certainly impede large scale shale exploration in these countries for the foreseeable future.

Regulatory uncertainty, while potentially extremely disruptive, is only still looming in the background as a potential roadblock for many shale developing countries. Relations with current oil producing powers already exist in the present and have tangible effects on the decision making process for countries considering entry into shale oil and gas markets. Consider the following hypothetical: a full-scale shale revolution with several participatory states would mean serious reductions in oil importation by the United States, Western Europe, and China.[12] It is not difficult to hypothesize that traditional oil monarchies would have a lot to lose in this scenario as they would be forced to reconsider current geopolitical distribution schemes.[13]  Breakdown of these customary energy relations would have myriad trickledown effects for wealthy countries and developing countries alike as traditional powerhouse energy exporters and importers begin to focus on a more regional foreign relations platform.[14]

Yet, a mid to high level of shale oil and gas expansion over the next decade could also have the potential for new coalition building and strengthening between states. For example, if the United States remains a major player in shale energy production, then Asian states without immediate shale production potential like Japan, China, South Korea, and India would likely find great benefit in improving or creating new cooperative relations with the United States.[15] These Asian nations are huge energy consumers, and the United States would be moving towards a domestic energy export infrastructure, which could benefit all countries involved.[16] The scale of future global shale exploration likely depends on these types of perceived benefits weighed against the speculative regulatory regimes and corresponding political backlash operating in the background.

[1] See Arthur Max, More Regulation, Tempered Expectations on Shale’s Global Horizon, E&E Publishing, LLC (Oct. 23, 2013), http://www.eenews.net/stories/1059989223.

[2] See Brian Greenert, Shale Free for All? Trends in International Shale Regulations, Geo. Int’l Envtl. L. Rev. Blog (Oct. 15, 2013), http://gielr.wordpress.com/2013/10/15/shale-free-for-all-trends-in-international-shale-regulations/.

[3] See Régis Genté, Shale Gas Changes Geopolitics, Middle East Online (Aug. 6, 2013), http://www.middle-east-online.com/english/?id=60586.

[4] See id.

[5] KPMG Global Energy Institute, Shale Gas – A Global Perspective 2 (2011), available at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/shale-gas-global-perspective.pdf.

[6] Greenert, supra note 2.

[7] Id.

[8] Id.

[9] Press Release, European Parliament, Shale Gas: New Fracking Projects Must Pass Environmental Test (Sept. 10, 2013), available at http://www.europarl.europa.eu/news/en/news-room/content/20131004IPR21541/html/Shale-gas-new-fracking-projects-must-pass-environmental-test.

[10] See Max, supra note 1.

[11] See id.

[12] Alexey Pilko, Shale Gas and Oil Revolution Reshaping World Economy and Politics, The Voice of Russia (Oct. 5, 2012), http://voiceofrussia.com/2012_10_05/Shale-gas-and-oil-revolution-reshaping-world-economy-and-politics/.

[13] Id.

[14] See id.

[15] Feng Zhaokui, The Impact of the Changing Global Energy Map on Geopolitics of the World, China-US Focus (Jan. 24, 2013), http://www.chinausfocus.com/energy-environment/the-impact-of-the-changing-global-energy-map-on-geopolitics-of-the-world/.

[16] See id.