Article from: OGEL 3 (2014), in Editorial
The "shale gas revolution" in the US has led to an explosion of interest around the world in shale gas and, to a lesser extent, in tight gas and coal-bed methane. Recent estimates point to the large potential for unconventional gas development in a growing list of countries, including South Africa, Botswana, Mexico, Brazil, China, Algeria and the Ukraine. Some governments, such as in Poland and the UK, have championed active exploration while others still debate the potential impacts of this relatively new area of exploitation. Though unconventional gas is seen as a relatively clean source of energy and as presenting an opportunity for enhanced security and diversity of supply, it also presents its own set of risks that need to be weighed against economic opportunity.
Within this context, good governance is essential to ensuring positive long-term outcomes from unconventional gas development. As has been demonstrated all too often for conventional petroleum extraction, it is more often the non-technical than technical risks that bedevil a project and lead to delays from an investor view point or adverse outcomes locally. Early experiences with unconventionals reinforce this same trend. Yet, what constitutes good governance practice for unconventional gas?
In tandem with this special issue, in June, 2014, Oil, Gas and Energy Law Intelligence (OGEL) and the World Bank Institute (WBI) organized a Learning Symposium to explore that question. Just as governments are exploring the issues that make good for good decision making around unconventional gas, so are technical assistance providers that have a track record of supporting extractives more broadly. Convening a number of the authors represented in this issue together with additional policy and industry experts, the Symposium was a chance to explore key governance considerations relating to potential and established shale gas and coal-bed methane development. Attention to good governance has come late to many policy discussions and practice in the history of traditional oil, gas and mining extraction. The shift to unconventionals offers a chance to embed good governance approaches upfront.
Points of convergence from the wide ranging discussion are detailed below. In many respects, the framing issues raised were common to conventional extractive industries discussions (mining as well as oil and gas), many tied to broader policy agendas and international developments on today's front pages. These included considerations of impacts related to:
- energy security,
- climate change,
- the adequacy of legislative and regulatory frameworks,
- securing the social license to operate,
- access to land and water, and
- institutional capacity.
However, to each there were important nuances delineated specific to unconventional gas development, which clearly merit careful consideration.
Recognize that Unconventional Gas is Different, Treat it as Such. Given the different financial and operating models for unconventional gas, simply relying on existing governance structures from more traditional extractive industries is unlikely to be effective. While it is easier to develop shale gas in contexts with a legacy of conventional exploitation (skills, knowledge, legislation and regulations) there are still aspects that will require careful revision. Some issues that are important to consider, for example, include: whether the cost recovery model is applicable; what constitutes "commercially viable" discoveries in the case of unconventionals; effective approaches for balancing 'enabling' regulations versus 'protective' regulations; and a clear need to secure a social license to operate given prominence of debate, most notably around shale gas, not just local to exploration and production, but at the national level. Furthermore, given that shale gas development is a relatively new area there are still elements around contract negotiation-such as the development of joint operating agreements-that need to be better clarified.
Context Matters. There is no cookie cutter approach. It is important to understand the political economy in each region, country and locale. This is true whether for appreciating the risks of bureaucratic in-fighting, coordinating the roles and responsibilities for managing unconventional gas between departments, identifying champions, generating confidence in the rule of law, or overriding political imperatives. For example, in some emerging countries, shale gas production will often have to be considered within the context of poverty reduction. In this context while the United States presents some important lessons and visits to shale plays have been highly information, it is unlikely to represent an appropriate 'model' for duplication or replication. Governance frameworks have to reflect domestic realities and capacities. That said, the participants at the Symposium did identify some value to regional considerations in terms of unconventional gas development - spotting some patterns to approaches in Latin America and South East Asia, for example, reflective of shared contextual elements.
Take the Time to Get it Right. Ideally, governments will take the time to clarify objectives and make a careful assessment of the potential merits and downsides before committing to development. In Australia, Western Australia certainly appears to benefiting from a "go slow" approach in getting the right frameworks in place, compared to other states which have hit roadblocks. Particular care needs to be taken when making the decision to explore/exploit unconventional gas, since alternative sources of energy may have a lower long-term cost.
Once a company loses its social license to operate, it is very difficult to regain. Governments, too, can quickly find themselves locked into limited policy options. Global experience illustrates that projects which lack a shared vision (combining both investor and community interests) are less likely to succeed. For this reason, it is imperative that companies and governments always complete their due diligence before production. This will involve not only thorough feasibility and impact assessment studies, but also well-planned strategic engagement activities intended to gain the confidence and buy-in of the local community. Within this context, companies and governments both need to be transparent and open to dialogue and consultation.
All these considerations, assessments and engagements also have to be balanced with a fairly aggressive timeline-from exploration to launch-necessary to remain competitive. Ultimately, a well-thought out and systematic process would help maximize potential gains from development, minimize environmental risk and impact, as well as promote social benefit and energy security.
Information Access and Integrity. Whilepublic awareness of hydraulic fracturing has increased significantly in the past few years, much has focused on environmental risks and there typically remains a lack of clarity around strategic opportunities, risks, and impacts overall. Central to the effective governance of the industry is the free flow of information and transparency in decision-making processes. Such openness will help address asymmetries of information between governments, the industry, and civil society. If unchecked, information asymmetries have the potential to lead to confusion as well as to hinder constructive dialogue and consensus building. Lack of trust in information sources is a further challenge given frequently polarized positions. Comprehensive reports and fact based assessments can be a platform to address public concerns - recent UK investment in such information will be a test case. However, it is important to consider the full range of information channels - those expressing concerns over hydraulic fracturing, for example, have frequently made very effective use of social media. This suggests a need to consider both traditional and new media to help educate and sensitize citizens on the risks and rewards of unconventional gas development, as well the implications for the effective governance of the sector. In this regard, there are potential learnings from other sectors that have elicited citizen concerns, such as around the risks of radiation from cellular telephone towers.
Explore the Potential for Consolidated Guidance on the 'How To.' There exists little knowledge of or established consensus on best practice around the governance of unconventional gas development. For this reason, it would be necessary and useful to develop a practical roadmap that guides governments and stakeholders through a step-by-step process for potential development and the various 'good governance' interventions needed at each stage of the value chain. These would include, for instance: how to effectively develop a state narrative on the 'business case' for shale development; how to manage public expectations; the development of a realistic timeline, (based on guidance on what constitutes a good timeframe from exploration to launch); how to design and deliver multistakeholder dialogues; how to assess and address capacity gaps; how to develop and clarify fiscal rules. The core features of such a generic roadmap would be useful to all, although, as already noted, such guidance would need to be adaptable to different political, economic and social contexts.
Facilitate Ongoing Knowledge Exchange. As global interest in shale gas increases, there is a clear value to exchange of country experiences and shared learning to help fill gaps in common understanding around what is effective in terms of governance of unconventional gas. The articles in this special issue are one highly useful step to fill that gap, but as the Learning Symposium exposed, much more can be done through platforms for shared learning. The participants expressed the hope that the Symposium marked the beginning not end of discussions and could form a kernel for an ongoing community of practice. The resulting insights need to be as relevant and digestible for government officials, for industry, and for civil society, as for researchers, analysts and advisers.