Regulation of Unconventional Resources – How are Countries Handling the Challenge?

The increase in unconventional exploration and production activity around the world has brought about important changes to the energy sector in general and the petroleum industry in particular. A question that I am asked regularly is:

"What will countries do to ensure that their legislation keeps up with the latest developments?"

Based on my experience tracking legislative developments around the world, I am of the opinion that most framework petroleum legislation tends to be wide enough to cover unconventional E&P activity as much as they do conventional. In general, these laws set the "rules of the game", the main principles that govern the industry in a particular country, leaving the finer detail to be regulated in subsidiary legislation (drilling regulations, standards, etc).

Big changes afoot in unconventional subsidiary legislation It's at this lower level of regulation that we find most of the changes at the moment. In order to address the new challenges associated with unconventional activity (hydraulic fracturing, land access, water issues, high cost levels, etc.) many countries are resorting to different options, which can go from issuing new contractual/licensing terms (tied to a specific round offering unconventional acreage), to introducing variations to the tax regime applicable to unconventional resources or passing stricter environmental standards. The possibilities are many and varied.

In order to better illustrate this, below is a quick snapshot of how some of the countries at the top of EIA's list of countries with the highest technically-recoverable shale gas resources outside of North America are dealing with the challenge:

Source: IHS Petroleum Economics and Policy Solutions (PEPS)

So far mostly fiscal and environmental unconventional legislation As we can see from the examples above, many countries have yet to introduce changes to their legislation. Of those that already have, the focus has been on addressing fiscal and/or environmental concerns. Countries wishing to develop their unconventional resources find that they need to offer beneficial fiscal terms (e.g. lower royalty, higher cost recovery ceilings, improved pricing, etc.) due to the larger risk that unconventional activities present to the investor and at the same time, they have to acknowledge the raising environmental concerns associated with horizontal drilling and hydraulic fracturing.

How each country addresses these two issues largely depends on its culture and priorities. In Europe, for example, environmental fears seem to be stronger than in other regions, whereas in Asia, Africa and Latin America, governments are more focused on offering the right level of fiscal incentives

Future Changes: more of the same? Given that the majority of unconventional resources outside North America tend to be offered through licensing rounds, we should expect to see an increase in unconventional-focused rounds with distinctive licensing and contractual terms for shale gas/oil, CBM, etc. These special terms are likely to depart from conventional ones in areas such as duration of the exploration period, commitments and fiscal terms.

It wouldn't be surprising to see more temporary bans on activities as governments seek to buy time while they get to grips with the environmental risks commonly linked to unconventional exploration and production. Reviews of permitting processes and extensive re-evaluation of associated legislation are also to be expected, mainly in areas such as land, water and civil liability. However, and as discussed earlier in this article, changes are not likely to amount to a substantial redesign of the overall legislative framework for hydrocarbon activity.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.