Shale development and environmental policy lessons for Latin America

by Jed Bailey  and Lisa Viscidi | March 9, 2016   

 

This report, commissioned by the Inter-American Dialogue and supported by CAF-Development Bank to Latin America, seeks to shed light on the policy debate in Latin America by clarifying current understanding from the US experience about the potential environmental risks of shale development and strategies for mitigating those risks.

As the world’s top – and only significant – producer of shale oil and gas, the United States has the greatest experience in designing and implementing environmental regulations for the industry. Although the basic technologies used for shale development – such as horizontal drilling and hydraulic fracturing – have been in use for decades, only recently have technological advances allowed for profitable development of this resource. As a result, shale development is still a relatively young industry, with rapidly changing technologies and processes as companies seek to reduce costs and improve the productivity of each well drilled. Pressure to cut costs and boost productivity is particularly acute in the current low oil price environment, further accelerating the pace of innovation. As the industry evolves, so too must the regulatory regime that governs it. This is particularly true of environmental regulations, as changing practices may create new environmental risks or mitigate old ones.

The US experience demonstrates that with adequate resources and flexibility for federal and local regulators to set and enforce regulations the risks from shale development can be mitigated. Robust data collection, proactive communication between industry players and with the public and timely disclosure of information such as the contents of fracking fluids are also crucial. Indeed, the United States has already implemented regulations that address many of the potential environmental impacts of shale development, such as water contamination and air pollution. Other possible risks, such as earthquakes resulting from wastewater disposal, are still being studied. While our understanding of the environmental impacts and best practices for regulation continues to evolve, the US experience to date offers many lessons to other countries looking to develop shale reserves.

Latin America is one of the regions with the greatest potential for shale development outside of the United States, according to US government estimates of global shale reserves. Argentina is the only Latin American country currently producing commercial quantities of oil from shale deposits, with output of over 50,000 barrels of oil equivalent per day. Colombia awarded its first contracts for drilling in blocks with potential shale deposits in 2012 and established regulations for exploration using hydraulic fracturing in 2014. Mexico’s state oil company Pemex produced its first shale gas in early 2011 from an exploratory well and plans to auction unconventional fields as part of its first competitive bid round since the oil sector was opened to private investment.

All three countries are undergoing seismic shifts in energy policy – Argentina recently elected its first market-oriented government in years, Mexico is enacting a sweeping energy reform and Colombia is overhauling its oil sector incentives to attract investment amid lower oil prices. As these countries reassess their shale development policies and incentives in light of lower oil prices, there is an opportunity to apply lessons learned from the US experience to enact regulations that mitigate environmental risks and strengthen public support while attracting investment.

This report analyzes the key environmental risks of shale production, lessons learned from the US experience and how they apply to the critical challenges currently facing regulators in Argentina, Mexico and Colombia.

 

 

The original report, including a Spanish translation, can also be downloaded from the Inter-American Dialogue website here.

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