Indy Rock: What Mexico Can Learn from the U.S. Shale Revolution

The U.S. shale revolution has not only had an impact on the global economy, but it has also become a model for resource development that other countries want to – and are now beginning to — follow.

Recently, while reflecting on the hundreds of thousands of jobs that shale development has created, the improvement of the U.S. trade balance, and the significant reduction of greenhouse gas emissions —all attributable to U.S. oil and gas development— the Secretary of Energy of Mexico declared that to oppose the use of technologies such as hydraulic fracturing is to oppose the creation of jobs, revenue and opportunity for the Mexican economy. And he meant business: one of the explicit goals of the country’s recent energy reforms is to expand its capability to safely and responsible harvest oil and gas from tight formations such as shale.

This view is hardly limited to North America. Whether it is to boost energy security or increase economic growth, countries from  Poland to Argentina are looking to the United States to understand how America’s experience in the broader shale space can be applied in ways that allow these countries to maximize the opportunities that exist right beneath their feet.

As we know, there is not a single factor that explains why shale took off in the United States. Some point to policy, whether it was the Section 29 tax credit or the unique aspect (relative to international law) of American policy that allows landowners to claim ownership over mineral rights. Others claim that the development of 3-D and 4-D seismic technology proved to be the crucial element.

Both of them are true to varying degrees, as they reflect key factors that allowed for the innovation and growth in U.S. oil and gas production. But they also miss the bigger picture, because they fail to capture adequately the actual driving force of the shale revolution.

The fact is, it was the ingenuity of independent oil and gas producers that was at the forefront of the shale-driven technological revolution. For example, in the 1990s, the prospects for an oil and gas renaissance in the United States looked bleak. As larger companies set their sights on colossal foreign deposits, such as the gigantic Kashagan field in Kazakhstan, independent companies like Mitchell Energy decided to take the risk, going into the unknown and making onshore resource development in the United States a priority.

It was out of this pioneering mindset that an old technique known as hydraulic fracturing was first adapted successfully to the Barnett Shale in Texas. It was also out of it that hydraulic fracturing techniques and horizontal drilling, also spearheaded by independents, merged successfully to spark what is now known as the shale revolution.

The same is true for tight oil development in North Dakota. By the late 1990s, most people had given up on the Bakken, writing it off as an “economically unattractive resource.” But as the impact of the technologies for liberating shale became evident, it was independent energy companies such as Continental, Hess and EOG Resources that began to analyze the possibilities of applying them to tight oil. As a result of their trailblazing efforts, production in the region has risen from 2,850 barrels per day in 2005 to more than a million barrels per day today.

As the Financial Times put it just one year ago, it has been North American independents, “from the midsized companies valued in the tens of billions of dollars down to tiny start-ups” that are responsible for “the energy industry’s equivalent of the dotcom revolution, with Texas and Oklahoma standing in for Silicon Valley.”

Equally important, independents have remained the dominant force throughout the entire shale revolution. Even now that integrated companies have been developing shale projects for several years, smaller players still outweigh the majors 5-to-1 in terms of acreage in the three biggest shale-oil plays.

While the majors depend on multiyear planning frameworks that make them capable of executing the biggest, most complex energy projects in the world – which are amazing technological feats in and of themselves, and which have materially benefited the United States  –  independents have retained their entrepreneurial, pioneering background. This characteristic—the capacity of to continuously adapt to new information about the reservoirs and new market signals — has proven to be crucial for shale development, which has actually outpaced initial expectations.

Countries like Mexico and Argentina that urgently want to be a part of the shale revolution would be well advised to learn the moral of this story.

Whatever specific policy terms their governments ultimately decide upon—from operational and environmental regulations to fiscal terms and bidding block sizes—they should know that, without the smaller, more nimble independent oil and gas companies at the forefront, it is unlikely that their shale experience will be as successful as quickly as it has been in the United States.

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