Shale we dance an unconventional tango?

Journal of World Energy Law and Business

Volumn 6, Issue 3, 2013, Pages 179-209

  De Hoz, José Martínez ^a   Lanardonne, Tomás ^a   Máculus, Alex ^a  

^a NONE

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[No Author keywords available]

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EID: 84882776207     PISSN: 17549957     EISSN: 17549965     Source Type: Journal    
DOI: 10.1093/jwelb/jwt009     Document Type: Article

References (161)

1. See Jerry Taylor and Peter Van Doren, 'Mitt Romney's Energy Plan', accessed October 2012.
2. According to the US Energy Information Administration (EIA), Argentina stands 2nd and 4th in terms of shale gas and oil endowment, respectively
3. See "Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States", accessed June 2013.
4. See, for example, 'Argentina Hopes for a Big Payoff in Its Shale Oil Field Discovery' The New York Times (4 July 2011) accessed 29 June 2013.
5. Argentina has a mature natural gas domestic market, which has evolved over more than 60 years, with a well-developed network. In average terms (2011), Argentina's gas demand is of 41.9 bcm (33 per cent power, 32 per cent industry and 24 per cent residential), indigenous production is of 34.9 bcm (83 per cent of gas needs), marginal exports to Chile (0.5 bcm) and Uruguay (0.07 bcm), and pipeline imports are of 5 bcm (Bolivia) and LNG of 1 bcm.
6. See Anouk Honore and David Ledesma, 'The Pricing of Pipeline Gas and LNG in Latin America and the Caribbean' in Jonathan P Stern (ed), The Pricing of Internationally Traded Gas (OUP 2012).
7. During the 1990s, Argentina constructed pipeline export capacity of 5.3 bcm to Chile, 1.5 bcm to Brazil and 1.5 bcm to Uruguay [See International Energy Agency (IEA), 'South American Gas, Daring to Tap the Bounty', 2003].
8. The permeability of shale is about a million times lower than that of conventional reservoir rock. See Vikram Rao, Shale Gas: The Promise and the Peril (RTI Press 2012) 6.
9. Conventional hydrocarbons have migrated over the centuries from the source rock up to the known reservoirs
10. See Michael R King and Peter B Hays, 'Issues to Consider in Shale Gas Joint Ventures' Chapter 6 of the Institute on Oil and Gas Law 62nd Annual Conference (The Center for American and International Law, February 2011).
11. Estimates in most cases do not exceed 15 per cent of the original oil and gas in place, compared to a 35 per cent in conventional reservoirs (See IEA, 'Golden Rules for a Golden Age of Gas - Special Report on Unconventional Gas' 635www.iea.org4 accessed May 2012).
12. See Paul Stevens, 'The Shale Gas Revolution: Hype and Reality', 23 September 2010 (the 'Stevens first report').
13. However, in such report the economist already warned readers that 'shale gas technology continues to evolve and this may slow depletion rates in the future'. Indeed, the economist already highlights progress in this regard in its second report, 'The Shale Gas Revolution: Developments and Changes', 5 accessed August 2012 (the 'Stevens second report').
14. See Jeffrey C King, 'Selected Re-Emerging and Emerging Trends in Oil and Gas Law As a Result of Production From Shale Formations' Texas Wesleyan Law Review, accessed August 2011.
15. For the 'revolution' to take-off high prices were of the essence, but for its sustainability, it appears that in USA shale gas is proving to be cheaper than conventional natural gas [See Daniel Yergin, The Quest (New York, The Penguin Press, 2011), 329].
16. Further, the liquids content (eg propane, butane) from shale gas operations has improved the project economics in view of the current level of oil prices [See Stevens second report (n 9) 4]
17. The 'Marcellus Shale' in the USA covers more than 250,000 km2 (extending across six different States), which is about 10 times larger than the Hugoton Natural Gas Area in Kansas-USA's largest conventional gas producing zone [See IEA (n 8) 20].
18. Whereas onshore conventional fields might require less than 1 well per 10 km2, unconventional fields might need more than 1 well per 1 km2, significantly intensifying the impact of drilling and completion activities on the environment and local residents. See IEA (n 8) 27.
19. Shale gas wells use up to 6 million gallons (ie 27,000 m3) of fresh water per well in fracturing operations [See Rao (n 5) 45]. The number is truly amazing ('perception is reality', some say), though commentators try to diminish this number by saying that 'this is no more than a golf course in Florida consumes in three weeks'.
20. See 'Sorting frack from fiction' The Economist (14 July 2012) 10.
21. For instance, the States of Texas and Louisiana where the 'Barnett' and the 'Haynesville' plays have been under exploitation for the past decade
22. For instance, fracking was suspended in the UK on May 2011 after two small earthquakes were reported near the country's only fracking operation in northern England. On December 2012, the UK Government lifted the suspension.
23. See 'Fracking for Shale Gas Gets Green Light in UK' The Guardian (13 December 2012) accessed 29 June 2013.
24. For example, in the USA, the States of New York, New Jersey and Maryland enacted bans on hydraulic fracturing pending further review of its environmental impacts and the need for changes in regulations. In Europe, this policy has been adopted in France, Switzerland and Bulgaria. Some authors comment that these Governments are adopting the principle of 'Making a Virtue of Being Late' or 'fast follower', in that they could take the experience of areas where shale gas has been exploited under a 'trial and error' approach (such as the 'Barnett' play) [See Rao (n 5) 118].
25. Of course, this will depend on the terms of the drilling permit and if any stabilization clause encompassing environmental standards is included [See Peter D Cameron, 'Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil & Gas Investors' 93, Research Paper, Association of International Petroleum Negotiators (AIPN) July 2006, ].
26. For instance, oil and gas exploration company Lone Pine sued the Canadian Government in an arbitration alleging that it had invested millions of dollars on developing Quebec's shale resources before the government suspended shale exploitation [See 'Canada's Energy Policies Spark NAFTA Claims' (2012) GAR Journal].
27. Such as the 'Marcellus Shale' comprising the states of New York, Pennsylvania, Maryland, West Virginia, Virginia and Ohio, or the 'Pannonian-Transylvanian Basin' comprising Austria, Hungary, Romania, Bulgaria and Croatia.
28. In environmental matters, there are two main situations that justify federal regulation: the 'race to the bottom' theory and the 'transboundary pollution' principle. The former arises whenever jurisdictions compete to attract industry by lowering their environmental standards, while the latter triggers where a state that sends pollution to another state obtains the labour and fiscal benefits of the economic activity that generates the pollution but does not suffer the full costs of the activity.
29. See Jedrzej Gorski, 'Could the EU Impose a Ban on Shale-Gas Extraction and Would This Prevent Exploitation of the Fossil Fuel in Poland?' 10(5) The Oil, Gas & Energy Law Intelligence. The author concludes that the 'EU legislator has the competence to adopt a Europe-wide legal measure prohibiting hydraulic fracturing, but each Member State would retain a right to veto it.'
30. See 'Beyond Natural Gas (Protecting our Air, Water and Communities)', Natural Gas Campaign of The Sierra Club accessed June 2013.
31. See 'Gasland' documentary (2010) accessed June 2013.
32. The '2005 Energy Policy Act' of the USA explicitly excluded fracking from the Environmental Protection Agency's (EPA) control, a clause that has become known as the 'Cheney-Halliburton Loophole' in honour of Vice President Dick Cheney, former CEO of Halliburton
33. See Rao (n 5) 161.
34. See Stevens second report (n 9) 5.
35. See IEA (n 8) 13.
36. See Executive Decree of the Province of Neuquén No 1483/13, dated 13 August 2012, Arts 4 and 14.
37. Less than 10 per cent of the chemicals injected return to the surface. Between 16 per cent and 35 per cent of the water comes back to the surface. The flowback water carries with it some of the mineral content from the reservoir (sodium, magnesium, calcium), thus increasing the salinity of the water that was injected [See Rao (n 5) 41].
38. See Rao (n 5) 41.
39. See Susan L Sakmar, 'The Global Shale Gas Initiative: Will the United States be the Role Model for the Development of Shale Gas around the World?' (2011) 33(2) Houston Journal of International Law 402
40. See Rao (n 5) 41, 42.
41. See IEA (n 8) 13.
42. See Rao (n 5) 29.
43. Flaring is the controlled 'burning' of natural gas, while venting is the controlled 'release' of gases into the atmosphere [See 'Flaring & Venting in the Oil & Gas Exploration & Production Industry' (2000) of the International Association of Oil and Gas Producers5www.ogp.org.uk/pubs/288.pdf4accessed 29 June 2013].
44. See Rao (n 5) 29.
45. Unwanted gas (in shale oil operations) has been increasing significantly in the USA over the last years causing growing conscience about the waste of resources and damage to the environment. The volume of gas flared off in North Dakota raised 50 per cent in 2012, and the Texas state regulator issued in 2012 six times more permits to flare than in 2011. Flaring is the result in part of the low price of natural gas in the USA which can make uneconomic to build pipelines to handle gas.
46. See 'Shale Gas Boom Now Visible From Space' Financial Times (28 January 2013) accessed 29 June 2013.
47. See 'Carbon Tax here to Stay: Alberta Energy Minister' (7 September 2011), accessed 29 June 2013.
48. See 'Written Ministerial Statement by UK's Secretary of State for Energy and Climate Change on Exploration for Shale Gas', 13 December 2012, accessed 29 June 2013.
49. See IEA (n 8) 26.
50. See Rao (n 5) 57.
51. See IEA (n 8) 26.
52. See 'Written Ministerial Statement by UK's Secretary of State for Energy and Climate Change on Exploration for Shale Gas' (n 40).
53. See Rao (n 5) Glossary. In 2011, according to industry sources, around 30 per cent of all new shale and tight gas wells in the USA and Canada were multiple wells drilled from pads [See IEA (n 8) 23].
54. See Robert Baldwin and Martin Cave, Understanding Regulation (OUP 1999) 37.
55. See IEA (n 8) 9.
56. See 'Shale Gas & Hydraulic Fracturing: Ensuring a Safe, Clean, Secure & Competitive Energy Source for Europe', International Association of Oil & Gas Producers, accessed June 2013.
57. See Stevens second report (n 9) 9.
58. The provinces of Alberta and British Columbia in Canada have established different legal regimes which create two types of mineral rights (deep rights and shallow rights) to foster the reversion to the State of any portion of the strata which is not being explored or produced by producers.
59. See Allan Ingelson and Will Randall, 'Shallow Rights Reversion: Uncertainty and Disputes' (2010-2011) 48 Alberta Law Review 397.
60. The 'shallow rights reversion' (SRR) regime adopted by the Province of Alberta establishes that the petroleum and natural gas rights above the top of the shallowest production zone in an agreement will be severed from existing exploitation contracts and therefore, some investors have alleged expropriation of their mineral rights and sued Canada [See Ingelson and Randall (n 49)].
61. For instance, in Argentina, exploration permits and exploitation concessions do not limit the rights arising therefrom based on depth.
62. To reduce the incentive to switch from gas to oil products when oil prices fell, a decline in oil price was matched by an increase in the tax credit.
63. Intangible Drilling Costs (IDC) include the costs that are necessary for drilling and initiating production including but not limited to wages, supplies, contractor services and other similar expenses for which there is no salvage value
64. See Stevens second report (n 9) 2. See also Daniel Yergin (n 10), 326.
65. See 'The New Royalty Framework' (25 October 2007), .
66. At least during the developing stage, 'as when supply increases and skills are developed, costs come down, and shale gas may be even cheaper to produce than conventional natural gas' (See Daniel Yergin (n 10), 329).
67. Between 2000 and 2008, the natural gas price at Henry Hub averaged US$ 6.73 per MMBTU in constant 2010 dollars. But as shale production started to increase in significant volumes in 2009 and 2010, the price dropped to an average of US$ 4.17 per MMBTU (in constant 2010 dollars). By October 2011, it had declined further to US$ 3.50 per MMBTU (constant 2010 dollars). According to the EIA, the average price of natural gas in the USA further declined to US$ 2.66 per MMBTU in 2012.
68. See 'The Economic and Employment Contributions of Shale Gas in the United States' (December 2011), report prepared by IHS Global Insight, .
69. See also, the US Energy Information Administration, at .
70. Despite current low prices, 'many of the shale gas operators hedged their prices on paper markets and therefore are receiving prices well above current spot prices. Furthermore, the liquids content from shale gas operations have increasingly made the project economics look very much more favorable in view of current levels of high prices' [See Stevens second report (n 9) 4].
71. In the late 1980s and early 1990s, NYMEX included natural gas on its exchange. Henry Hub, Louisiana, is a major natural gas transmission and transaction point and it is the location that NYMEX relies upon for the selling of futures contracts on its exchange.
72. See IEA (n 8) 118.
73. See Resolution No 1/2013 of the Argentine Commission for Strategic Planning and Coordination of the National Plan of Hydrocarbons Investments. Typically, 'dual market systems' operate under the premise that 'new' gas (extracted from wells drilled since a certain date) enjoys a deregulated price and 'old' gas (from wells drilled up to a certain date) is still subject to price controls. This regulatory approach could be useful to attract investments in new drilling and new production, but could backfire with increasing amount of litigation over the 'old' gas contracts (ie the 'take or pay wars' arising from the Natural Gas Policy Act of 1978) and increasing transactional costs and monitoring costs of 'old' and 'new' investments [See King (n 10) 5].
74. See Claude Duval and others, International Petroleum Exploration and Exploitaition Agreements: Legal, Economic & Policy Aspects (2nd edn, Barrows Company 2009) 184.
75. See IEA (n 8) 53.
76. See IEA (n 8) 22. 'There is no real exploration of shale gas. However, the amount of gas present and particularly the amount of gas that can be recovered technically and economically cannot be known until a number of wells have been drilled and tested'.
77. See IEA (n 8) 53. See also Stevens first report (n 9) 14, where the economist emphasizes that 'because of the enormous geological differences, not just between plays but between wells in the same play, extrapolation from one play or well to another needs to be treated with extreme care'.
78. See Duval and others (n 61) 135.
79. See IEA (n 8) 53.
80. See also, Kenneth B Medlock and others, Shale Gas and US National Security, James A Baker III (ed) (Institute for Public Policy, Rice University 2011) 14, accessed June 29 2013.
81. See Robert Means and Deborah Cohn, 'Common Carriage of Natural Gas' (1984-1985) 59 Tulane Law Review 529, 553.
82. See IEA (n 8) 91.
83. For example, in terms of costs, drilling a shale gas well in Poland costs three times as much as in the USA (12 US$ Million v 4 US$ Million) [See Stevens second report (n 9) 9].
84. See Duval and others (n 61) 128
85. In countries like Argentina there is an increasing amount of 'Secondment Agreements' being signed with companies from the USA in order to gain the necessary know-how to develop shale resources.
86. Source: Honore and Ledesma (n 4). We are thankful to the authors for authorizing us to use this map.
87. See Art 1 of Law No 17,319 (the 'Federal Hydrocarbons Law') as amended by Art 1 second paragraph of Law No 26,197 (the 'Re-Provincialization Law').
88. See Art 3 of the Federal Hydrocarbons and Art 2 fourth paragraph of the Re-Provincialization Law.
89. See Art 2 first paragraph of the Re-Provincialization Law.
90. Law No 17,319
91. See ss 2, 3 and 6 of Title II of the Federal Hydrocarbons Law.
92. See Law No 2,615 of the Province of Neuquén and Decree No 3,089 of the Province of Mendoza, which fix the terms and conditions for the extension and renegotiation of hydrocarbon concessions in each of those provinces.
93. See Art 11 of the Federal Hydrocarbons Law.
94. See Arts 11 and 118 of Provincial Law No 2,453 (the 'Hydrocarbons Law of the Province of Neuquén'); Art 8 of Provincial Decree No 436/09, and the Terms and Conditions for the Public Tenders No 001/2009 and 002/2009 called by Gas y Petróleo Neuquén
95. See Art 75 sub-s 12 of the Argentine Constitution. The Federal Supreme Court, interpreting this constitutional provision, held that the power delegated to the Federal Government to legislate on mining refers to all types of mines, among which hydrocarbon fields are included (see Rulings 301:341 and 311:1265).
96. See Art 124 of the Argentine Constitution.
97. See Art 2 of the Re-Provincialization Law.
98. See Art 2 first and third paragraphs and Article 6 of the Re-Provincialization Law.
99. See Art 1 of Federal Hydrocarbons Law as amended by Art 1 second paragraph of the Re-Provincialization Law.
100. See Art 3 of the Federal Hydrocarbons and Art 2 fourth paragraph of the Re-Provincialization Law.
101. See Decree No 1055/89, Decree No 1212/89, and Decree No 1589/89.
102. See Decree No 1055/89, Ninth and Tenth Recitals.
103. See Decree No 2731/93, Annex I, Art 1: 'As from January 1, 1994, the price of natural gas is deregulated and, as from that date, gas supply and demand operations shall be freely agreed upon, pursuant to the provisions in this Decree and the supplementary rules issued by the Energy Secretariat.' See also Arts 13 and 83 of Law No 24,076 (the 'Gas Law').
104. Gas exports were allowed subject to obtaining a prior export authorization pursuant to the 1992 Gas Law No 24,076.
105. See Decree No 1443/85, Decree No 2178/91 and Decree No 2411/91.
106. Law No 26,741.
107. See Art 16 of the Federal Hydrocarbons Law.
108. See Art 23 of the Federal Hydrocarbons Law.
109. See Art 26 of the Federal Hydrocarbons Law.
110. See Art 17 of the Federal Hydrocarbons Law.
111. See Art 35 of the Federal Hydrocarbons Law.
112. See Article 28 of the Federal Hydrocarbons Law.
113. See Art 37 of the Federal Hydrocarbons Law.
114. For example: the Provinces of Neuquén and Mendoza.
115. This is the case of the hydrocarbons law recently enacted by the Province of Chubut, XVII No 102 promulgated on 28 December 2012.
116. See Art 39 of the Federal Hydrocarbons Law.
117. See Arts 25-32 and 37-49 of the Gas Law.
118. Income Tax Law, Art 1. The 35 per cent tax rate applies to legal entities and Argentine branches of foreign entities (Income Tax Law, Art 69). Individuals are subject to progressive rates, the top one being 35 per cent (Income Tax Law, Art 90).
119. Mendoza Law No 8523, Annex to Art 3; Neuquén Law No 2837, Art 4 inc. m); Río Negro Law No 4816, Art 6 inc. g); Santa Cruz Law No 3252, Annex to Art 5; and Tierra del Fuego Law No 440, Annex to Art 13. Chubut Law No XXIV-62, Art 7, establishes a higher rate (3.5 per cent).
120. Neuquén Provincial Decree No 786/98 provides the following stamp tax exemptions for oil companies that meet certain requirements: (i) 100 per cent exemption on associated and transport services agreements for the hydrocarbon activity carried out during the 'exploration' phase; (ii) 64.286 per cent exemption on contracts for the 'sale' of crude oil and natural gas, methane, ethane, propane, butane, gasoline and condensate gas; and (iii) 50 per cent exemption on complementary and transport services agreements for the hydrocarbon activity carried out at the 'exploitation' phase Provincial Decrees No 786/98 and No 1748/10, Art 1.
121. Presumptive Minimum Income Tax Law, Art 13.
122. VAT Law, Art 1. The 21 per cent tax rate is the general one. A reduced 10.5 per cent tax rate applies to sales of capital assets listed in an annex to the law (VAT Law, Art 28). The "ring-fencing"restriction applicable to Joint Ventures expands the tax base by limiting the use that can be made of losses.
123. See Art 59 of the Federal Hydrocarbons Law.
124. See Art 56 (c) VII of the Federal Hydrocarbons Law.
125. This is the case, for example, of the concession extensions agreed with the Provinces of Neuquén, Mendoza, Santa Cruz and Salta.
126. See Arts 57 and 58 of the Federal Hydrocarbons Law.
127. The exporters will receive US$ 70 per barrel only if the international price is equal or higher to US$ 80 per barrel. If it is lower, the applicable withholding rate will be 45 per cent.
128. We are thankful to Mr. Daniel Johnston for allowing us to use his chart on "Government Take".
129. See Art 2 of Annex I of Resolution No 5/96.
130. See Art 4 of Annex I of Resolution No 5/96.
131. See Art 72 of the Federal Hydrocarbons Law.
132. However, certain provincial regulations require that a change of control be reported. See, for example, the Hydrocarbons Law of the Province of Chubut, XVII No 102, promulgated on 28 December 2012, Art 45.
133. See Art 74 of the Federal Hydrocarbons Law.
134. See Art 35 of the Federal Hydrocarbons Law.
135. See Law No 2,615 of the Province of Neuquén and Decree No 3,089 of the Province of Mendoza.
136. See Art 3.7 of the Model Agreement for the Extension of Hydrocarbon Concessions approved by Law No 2,615 of the Province of Neuquén.
137. See Terms and Conditions for the Public Tenders No 001/2009 and 002/2009 called by Gas y Petróleo Neuquén.
138. Decree No 1483/2012 of the Province of Neuquén supplements Neuquén's Environmental Law No 1,875.
139. See Decree No 1483/2012, Annex I, Art 3.
140. See Decree No 1483/2012, Annex I, Art 4.
141. See Decree No 1483/2012, Annex I, Art 10.
142. See Decree No 1483/2012, Annex I, Art 14.
143. See Decree No 1483/2012, Annex I, Art 18.
144. Decree No 1447/2012 abrogated Decree No 1703/2010 that established a similar regime.
145. See Sections 'State involvement in the oil and gas sector' and 'The concessionary system'.
146. See Sections 'Business regulatory challenges' and 'The concessionary system'.
147. See Section State involvement in the oil and gas sector'.
148. The major features of these price agreements include the following: (i) the Argentine Commission for Strategic Planning and Coordination of the National Plan of Hydrocarbons Investments (the 'Commission'), created by Decree No 1277/2012, guarantees the producer a minimum price of US$ 7.5 per MMBTU for any incremental sales to the domestic market, above an adjusted base supply quantity (compared to an average price of approximately US$ 2.80); (ii) the Commission guarantees the producer a minimum price of US$ 2.3 MMBTU for any supplies to the domestic market within the adjusted base supply quantity; (iii) the producer guarantees quarterly incremental minimum supply quantities to the domestic market, which progressively increase from 2013 to 2017. If in any relevant quarter, the supplied quantities to the domestic market are below the minimum supply quantities applied to such period, the producer is subject to the following penalties: (a) Producer to supply LNG or imported natural gas in energy equivalent quantities equal to the shortage quantities at a price of US$ 7.5 per MMBTU; or (b) the producer to pay a penalty equivalent to the LNG import price paid by the Argentine Government less the price of US$ 7.5 per MMBTU, times the quantity shortfall. The Government plans to fund the payment of the guaranteed price through the savings it expects to achieve by reducing LNG imports as a result of the incremental domestic natural gas production it expects to obtain with this measure.
149. See Section 'Taxation of oil and gas producers' and Section 'Extension and renegotiation of hydrocarbon concessions'.
150. Law No 24,196, Chapter IV, Title I, (Arts 8f).
151. Joint Ventures are treated for VAT purposes as if they were separate entities, thus ring fencing use of VAT credits.
152. It is currently 5 years (Income Tax Law, Art 19).
153. There are such exemptions in the Law of Biofuels Promotion No 26,093 (Art 15 inc 2]), the Law of Hydrogen Energy Promotion No 26,123 (Art 17 inc 2]), the Law of Hydrocarbon Promotion No 26,154 (Art 11), and the Law of Modern Biotechnology Promotion No 26,270 (Arts 6 inc d] and 7 inc d]).
154. Law No 26,154, Art 4.
155. See Section 'Taxation'.
156. See Sakmar (n 30).
157. According to the EIA, US crude oil production exceeded an average of 7 MBD in November and December 2012, the highest volume since 1992. The IEA projects that the USA could leapfrog Saudi Arabia and Russia to become the world's largest oil producer in 2020. The USA will thus become potentially a net energy exporter by 2030 and self sufficient in energy by 2035 according to the IEA.
158. See Matt Clinch, 'How the US Shale Boom Could Derail China' .
159. See text to n 5.
160. See text to n 7.
161. See Sections 'Is Argentina ready, from a legal/regulatory standpoint, for a shale revolution?' and 'Executive summary'.