Six Reasons Fracking Has Flopped Overseas

Shale gas deposits have been found in Poland, Argentina, China, Great Britain and other countries, but only the United States has fracked its shale gas into a national energy boom.
That's not for lack of will abroad, according to energy experts gathered Friday at the University of Chicago: it's because of political and economic circumstances that fostered hydraulic fracturing here while dampening its spread overseas.
"We know that there are massive reserves in other parts of the world, but we haven't seen them come down the learning curve nearly as quickly as we have in the U.S.," said John Norton of Bain & Company, a Dallas management consulting firm. "We haven't seen significant production from other nations yet."
Norton and about 20 other experts in energy development and finance gathered at the University of Chicago's Gleacher Center Friday for the Energy Forward conference organized by students of the Booth School of Business. Hydraulic fracturing, or fracking, of shale gas dominated the conversation, just as it has dominated the energy outlook in the United States in recent years.
China is planning a fracking revolution of its own and has invested in U.S. shale gas drillers, but other countries are not expected to catch up to the U.S. for ten to 15 years, according to the experts. Meanwhile U.S. fracking gas is repositioning the U.S. in the world energy market.
"We are now, or we will be shortly I would like to say, the Saudi Arabia of natural gas and oil byproducts," said William Von Hoene, who oversees corporate strategy for Exelon.
Why has the rest of the world lagged behind the U.S. boom? For six main reasons, according to the experts:
1. Price
Natural gas prices had peaked above $12 per million BTUs in the U.S. in 2008, making gas an attractive commodity for drillers looking to make a buck. At the same time, those drillers were adopting the hydraulic fracturing technology perfected by George Mitchell outside Fort Worth, Texas in the mid-1990s.
Economics fed the boom, and then the boom changed the economics. The gas price dropped close to $2 per MBTU last year (It's currently just under $4).
"We weren't just good at finding natural gas, we were great at finding natural gas, and so we've got a glut," said Dan Pickering of the Houston-based energy investment firm Tudor, Pickering, Holt & Co.
Thanks to the glut, drilling for gas is no longer profitable in the U.S. or overseas. The U.S. has stopped importing gas and started exporting gas and the coal it no longer needs, which has crushed prices worldwide, making unconventional drilling practices less attractive to wildcatters abroad.
"When we look at unconventional new ventures, Argentina is very sexy," said Laurent Poncet of Statoil. "But when you go and look at the economic framework and the uncertainty, the political risk and this kind of thing, the best investment play is still in North America."
2. Regulatory Framework
The United States has a regulatory framework that allowed drillers to experiment with lateral drilling and hydraulic fracturing.
"Most of the fiscal terms that the other countries have in place are totally incompatible with unconventional development," said Robert Beck of Anadarko. "Outside of North America and the United States in particular, the hydrocarbon pricing is all governed by petroleum contracts, and the governments will tell you what costs are allowed for you to recover."
"It's just set up for conventional oil and gas production. There's no way in the traditional production sharing contract that we as an industry can come in and make money," Beck said. "There's no way."
3. Property and Mineral Rights
Individual landowners in the United States can lease mineral rights to their property, a right landowners do not possess in some other nations.
"Here in the states one of things that draws people to invest is that we have basic contract rights around our mineral interests," said James Kipp of Wells Fargo Securities. "That's, you know, kind of a foreign concept in many of the lesser developed and even some of the more developed countries around the globe."
Private property can slow development, other experts said, because energy companies have to negotiate with so many property owners, but it also keeps them honest and it fosters competition: "I look at a field, and I see 300 stakeholders and each of them with views and things like that," said Poncet of Statoil. "In a sense it's a pain because you have to negotiate rights with so many stakeholders and sign so many checks at the end of the month, but at the same time we are under scrutiny all the time, so you have to go in and do a good job."
The U.S. fracking boom has involved tens of thousands of landowners, hundreds of operators, and dozens of drilling companies, said Beck of Anadarko, and the competition between all those entities fostered lateral drilling and hydraulic fracturing technologies. But reduced property rights overseas are not necessarily a hindrance:
"The bad news is I can't go out and let our landmen loose on the landowners of the world," Beck said. "The good news is, I don't have to do that, I can just find an energy minister and hopefully get a change to the PSC (production sharing contract) terms."
4. Infrastructure
In the United States, shale gas plays have been located near the pipelines and terminals needed to bring the gas to market.
"The U.S. has a very vast and well-built midstream infrastructure," Said Andrew Walberer of the management consulting firm A.T. Kearney. "So wherever you find the stuff you can get it to where it needs to go, and a lot of other countries don't have the midstream infrastructure already in place that we have."
China has the world's largest reserves of shale gas, according to Scientific American, but China is expected to develop them slowly because it lacks the infrastructure to deliver the gas.
5. Water
Drillers fracture shale by penetrating it horizontally, then injecting water, laced with solvents chemicals, under high pressure. The shale shatters, and the gas escapes up the well.
The water acquires additional pollutants, including radioactive elements, and much of the polluted water remains underground.
"A lot of these unconventional resources—pick a place, maybe China—are in populated areas where water is at a premium," said Beck, "and that is one of the things that you need a lot of to do hydraulic fracturing: water. So you've got to think about where you're going to get the water."
6. Expertise
Hydraulic fracturing developed in the United States in the 1990s, and experts in fracturing technology and shale geology developed with it. Flying those experts to Romania or Poland increases the cost of shale development in a world market where gas development is no longer so profitable, said Statoil's Poncet.
Expertise is so concentrated in the United States, Poncet and Walberer said, that experts would have to be taken off of jobs in the U.S. for resources to be developed abroad.
"To put a geologist in China you've got to take him or her off of some other project somewhere else which may have a low risk profile, like in the U.S." Walberer said.
And geologists are in high demand because each shale formation presents drillers with unique challenges.
"There was a huge concern when the Chinese became very active here in the states around the issue of technology transfer," said Kipp of Wells Fargo. But "the ability to transfer that from Eagle Ford to a shale formation in China is pretty difficult to do."
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