FRACK! local policy : new role.

A new role for local policy

Our industry is fond of distinguishing “above ground” from “below ground” factors when debating resource access. Below ground is geology, circumstances inherited from nature; above ground lure man-made conditions, such as the political, legal or economic framework.

The role of “above ground” political discussions is likely to reach new heights in determining whether, where and when shale resources will be accessed. These debates will evolve around local, as opposed to big geopolitical, concerns - simply as a corollary of the widespread geographic distribution of shale resources.

The flukes of nature that distributed sizeable ‘conventional’ oil resources millions of years ago have distributed them in a highly concentrated fashion. Traditional politics of oil and gas are consequently, more often than not, reduced to the simple issue of who effectively controls these sweet spots, few and far between as they are.

In the matter of tight oil and shale gas, in contrast, local debates will come to the fore, dominated by local attitudes toward energy, competition and environmental policies – all this in turn reflecting the interplay between the relatively even spatial distribution of shale resources and the role of free entry, competition and – and not least - environmental concerns in accessing them.

The signs are everywhere already.

In Europe, Poland and the Ukraine are aggressively competing for investment whereas France and Bulgaria have put moratoria on fracking in place, removing shale prospects for the time being. Germany and the UK are debating.

China’s lack of success to date in accessing shale gas as planned is largely due to the preferential allocation of prospective areas to national monopolists, with high barriers to entry for everyone else - including companies with better technologies or less risk aversion, be they domestic or foreign. Russia faces an interesting trade-off between pursuing entirely new and high cost technologies to shift production into the concentrated resources of the Arctic, or of allowing a little more of the trial and error necessary to explore technology to access it’s well known shale plays. Albeit hesitantly, it is reforming its tax sector in pursuit of the second option.

Even in the US, production from shale formations so far has remained concentrated in the middle of the country, leaving large known fields in the coastal areas of California and New York State untapped, in this case because of environmental concerns.

All these examples reflect above ground, political discussions. They mirror local attitudes towards free access, competitive energy markets, and the environment. We should expect more of the same.

Increasingly, decisions determining whether and how these resources are brought to market will be made in consumer’s own town halls and parliaments - not by ‘big’ geopolitics mirroring the capricious design of nature in allocating conventional oil endowments in faraway places.