Kemp: Shale Plays Reduce Political Risk

Article title
Shale plays are ideal for oil and gas companies that need to limit risk in countries with a history of political and economic instability.

John Kemp is a Reuters market analyst. The views expressed are his own


LONDON, July 22 (Reuters) – Shale plays are ideal for oil and gas companies that need to limit risk in countries with a history of political and economic instability and poor respect for private property.

The ability to manage political risk, coupled with a world class resource, explains why international oil firms are showing strong interest in the shale resources of Argentina's Neuquen basin, despite the country's record of political and economic unrest, serial default, and expropriation of foreign property.

The cash flow profile of a shale play like Neuquen makes it far less dangerous than a megaproject like Kashagan in the Caspian Sea or a deep water play off the coast of Brazil, Russia or Mozambique.

In general, political and economic risks are maximised when there is a long timeline between the commitment of capital to the project, recovering the costs from production revenues, and finally securing an appropriate return for investors.

The longer the delay between capital commitment and payback, the more time there is for the external political and economic environment to change in ways which are unfavourable to the project.

For a complex megaproject, like Kashagan, investors can be forced to wait years, even decades, before seeing a positive return. But for a shale project, the breakeven period on a well is shorter, and can be as little as 12-18 months.


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Philippe | Jul. 23, 2014
Excellent article that truly show the benefits of a shale play. We need more article like this that show the positive aspect of shale play and fracking.

David Tkachuk | Jul. 23, 2014
Johns inference to shale plays equating to lower geopolitical risk in countries that have a record of instability bears some commentary. Using his own example of Argentinas Neuqen Basin shale resources, the first company that would probably vehemently disagree with his stance is Repsol. Argentinas Kirchner led federal government plucked the asset they value at ~$10 billion and years of effort from them. Kirchners finally offered some compensation for the nationalization but its about half the value. Additional insights on the ripple effect that transpired from that can readily be gleaned by reading the quarterlies of other foreign oil & gas companies with oil & gas interests in Argentina. YPF having dibs on rigs that causes a shortage for others, increased taxes, increased approval requirements, and harder line provincial government stances are some of the issues increasing risk for shale players in Argentina, not reduce it. Faster payback periods are only correct if wells produce long enough and and at at high enough volumes to rapidly overcome the drilling and completion costs. There is much debate and discussion surrounding profitability of shale plays. Many can just be an exercise in circulating dollars where net revenue dont exceed net expenditure, or worse, never equate to it. Many investors who have embraced this natural resource play may not like the "long term" outcomes. Speaking of which there is precious little that can be stated in a long term capacity when it comes to shale plays. No real long term history of production from shale plays exist on the planet. Shale plays tend to have little advantage over conventional oilfields in terms of being able to stop or slow drilling down if political environments become less favorable. Drilling contractors just dont differentiate between non conventional and conventional plays where their livelihood is concerned, and that is evidenced in drilling contracts. In countries with documented histories of political instability the contractor ensures against loss to an even far greater degree. Loss of equipment being nationalized. Loss against a drilling campaign being stopped or slowed down, thereby affecting revenues expected. In the latter,penalty clauses may apply that are so stiff that the end user is financially better off to keep drilling.


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