Kemp: Shale Plays Reduce Political Risk
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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