How Latin America Can Maximize Its Shale Gas Potential

Shale gas is revolutionizing the world’s energy landscape. Seemingly overnight, supplies have increased dramatically due to technological advances, including hydraulic fracturing—known as fracking—and horizontal drilling. A world accustomed to energy scarcity and declining supplies is rapidly readjusting to abundance, at just the time when concerns about global climate change and the desire to identify cleaner, relatively inexpensive fuel sources intensify. These conditions and the impressive size of proven reserves within the Western Hemisphere in particular provide the Americas with an enviable opportunity for leadership in global shale gas.

The United States, Argentina, Canada, Mexico and Brazil all rank within the top 10 countries in terms of technically recoverable shale gas reserves, making up approximately 40 percent of the world’s total supply. With the possible exception of Colombia, which also has significant shale gas potential—but whose government is actively engaged in peace negotiations to end some 50 years of guerrilla conflict—the Americas also offer a stronger security environment for exploration and production compared to other gas-producing regions like North Africa and the Middle East.

But Latin America still has work to do to maximize its energy potential. Shale gas development is capital intensive. The economics of exploration and production, including the costs of equipment, talent, and volumes, along with wellhead prices, drive initial investor interest. A variety of other factors, from the regulatory framework and the quality of infrastructure to environmental and other political considerations, also play a critical role, particularly given the relatively long timeframe it takes for energy investments to mature. Anything that complicates the business climate will discourage investors, who will seek opportunities elsewhere—locking up equipment, capital and talent. In an environment of energy scarcity, resource-rich nations hold the cards; investments will necessarily materialize. With abundance, investors will go where opportunities are the most promising.

The primary point of comparison is the United States, where the shale gas revolution was born and where investor interest remains highest. In 2014 alone, more than 20,000 horizontal wells will be drilled, compared to 250 unconventional wells in Argentina and 10 in Colombia. Investors spent $90 billion in the U.S. on developing shale gas in 2012; in contrast, foreign direct investment in every sector in Latin America last year totaled $180 billion.

Driving much of that U.S. investment is the participation of smaller- and medium-sized energy companies, which are more nimble and willing to take risks that larger ones might not consider. Such companies face a somewhat more difficult value proposition in Latin America, however, given the challenge of accessing capital, land-use issues and working within sometimes complicated and restrictive political environments.

Nonetheless, demand for Latin American shale gas will only continue to grow, particularly from Asia; leaders from China and Japan have recently traveled to the region to discuss greater energy cooperation. Asian countries are also actively pursuing supplies from the U.S., Canada, Australia and elsewhere and continuing to prioritize global supplier relationships based on costs and certainty. By making a number of policy reforms, as Mexico, for example, has just done—opening up its energy market to foreign investment for the first time—Latin American countries could reap significant oil and gas rewards in Asia.

via How Latin America Can Maximize Its Shale Gas Potential.