Trends and developments in shale gas



FW moderates discussion on trends and developments in the shale gas industry between Josh Becker, a partner at Alston & Bird LLP, Dale Nijoka, Global Oil and Gas leader at Ernst & Young LLP, and Raoul Nowitz, a director at Navigant Capital Advisors.

FW: What are some of the major trends you have seen in the shale gas space over the last 12-18 months? How would you describe general activity and development in this sector?

Becker: From a legal perspective, several trends stand out. First, the filing rate for private lawsuits targeting shale gas has dropped fairly significantly, while there also were key victories for the industry, including some that showed a lack of scientific support for the plaintiffs’ claims. At the same time, though, we saw a lot of activity in the public interest litigation space, with suits targeting gas-related legislation, regulation, and environmental reviews. I expect that trend to continue, particularly as development increases in new regions that do not have a history of resource extraction. We also saw a number of states revise their regulatory schemes governing oil and gas development, suggesting that they are going to continue to assert primacy over an area of traditional state control. It remains unclear what role the federal government will seek to play outside of federal lands, enforcing existing federal law, and funding research.

Nijoka: In the US we have seen a dramatic shift away from gas-directed drilling towards oil and liquids-directed drilling as relatively low prices for natural gas have made the economics challenging. While some producers have shut-in some production, US gas production has continued to increase as a result of increased drilling and production efficiencies, and growing volumes of ‘associated gas’ with the oil and liquids production. In addition, the lagged infrastructure build-out continues to connect new gas production. US gas prices bottomed last spring below $2 per million BTUs − levels that were generally seen as below operating costs for many, if not most, producers and well below full-cycle costs for just about every producer. Prices have recovered somewhat from their lows − they got back to about $3.60, before dropping back again, now around $3.25 − but are still challenging, particularly so with the worst of winter behind us now.

Nowitz: On a global basis, shale gas activity remains primarily a North American phenomenon where the continuing trend has been for still-increasing gas shale production to drive total gas production increases despite the sluggish state of the economy that has limited natural gas demand. As a result, there has been downward pressure on natural gas prices, with lower gas prices – in the face of much higher oil prices – resulting in a dramatic decline in natural gas directed drilling, in favour of increased oil-directed drilling. Even though a sharp decline in horizontal drilling, essentially the only form of drilling that accounts for shale gas, has been observed, natural gas production has continued to increase. This is seen as somewhat remarkable in itself, and highly supportive of the sheer magnitude of the natural gas resources in North America.

FW: How have developments in the shale gas space impacted upon the conventional energy market in your region? 

Nijoka: The low natural gas prices have spurred substantial substitution away from coal in US power generation – gas used in US power generation was up by about 25 percent in 2012, with most of the gains coming at the expense of coal. The low gas prices have further enhanced the prospects of increasing the use of natural gas as a transportation fuel − particularly in heavy vehicles and fleet use − threatening to further dampen the longer-term prospects for oil demand growth in the US.

Nowitz: While shale gas activity is brisk in the country’s major shale producing regions – particularly the Marcellus basin – shale gas development is also emerging in California, and in British Columbia and Alberta in Western Canada. In British Columbia, large resources in the Montney, Horn River and Laird shale basins came into focus two to three years after the major US shale basins, and continue to lag behind US shale basin activity partially as a result of their remote location. Geographically remote shale basins require a different level of infrastructure to develop the supply. One major impediment in British Columbia – and the rest of Western Canada – has been the practical loss of their largest sales outlet as the US shale gas industry has been able to provide abundant and relatively more competitive domestic gas supply to the US market. In California, as the extent of resource base continues to become known, regulatory bodies have signalled the need for informed policy-making to guide the development of the shale gas industry. Like other jurisdictions facing the same situation, California is grappling with the best way forward as the incredible economic potential of shale gas development intersects with the realities of unprecedented large scale transformational change. Given the situation, California could experience similar ‘transformations’ as have been seen in Pennsylvania, Ohio and West Virginia.

Becker: It’s clear that shale gas has led energy producers and consumers, particularly industrial consumers, to shift their behaviour, which always leads to some apparent winners and losers. However, the changing regulatory atmosphere and economic factors make it somewhat difficult to predict where those trends will lead to over the next few years. Liquefied natural gas (LNG) exports, for example, will have a big impact.

FW: In what ways are shale gas operators addressing general criticisms, environmental issues and safety concerns? Are technological advances and processes changing the field?

Nowitz: As the entire natural gas industry transforms, it continues to make progress in developing better hydrocarbon extraction processes. Although the key technological ‘breakthrough’ to shale gas extraction is the combination of hydraulic fracturing and horizontal drilling, other technological advances have also occurred recently. These include the practice of drilling multiple wells from a single drill platform and advances in lengthening horizontal drilling and completion of laterals – both of which reduce the extraction activity ‘footprint’ while improving drilling economics, with, for instance, lower per-unit costs. At the same time, as more shale gas wells are drilled, the industry is grappling with the issue of use and re-use of water in the hydraulic drilling process. Although the water quantities used in hydraulic fracturing are comparatively small relative to other industries – such as in agriculture – considerable attention is being given to alternatives to fresh water use such as using already contaminated acid mine drainage water, especially for those areas that are relatively short on water supply and close to where old mines exist. A key environmental benefit of shale gas should be emphasised. The US has made substantial progress in reducing greenhouse gas emissions, reaching nearly 20-year lows, because natural gas generation replaces coal generation in the production of electricity. 

Becker: Innovation is a defining feature of the industry, and operators have worked hard to lessen the environmental footprint. The increased use of recycled frac water is a good example. As public interest in the process has grown, the industry has responded by explaining the science and reality behind hydraulic fracturing. And there is an increasing trend toward transparency. There are a number of websites where operators – often voluntarily – disclose the substances used in particular operations.

Nijoka: While the debate continues as to the proper ‘nexus’ of regulation for shale gas development – federally by the EPA or by the individual states − gas production technology development continues to exceed expectations in terms of drilling and production efficiency and environmental safety and sustainability. These advances include single pad drilling − as many as 12-16 wells per pad, reducing the surface footprint and the ecological impact − and closed-loop drilling systems that essentially eliminate the need for drilling ‘pits’ that contain hazardous wastes and sharply reduce water needs. Drilling fluid disclosure also continues to become more widespread and concerted efforts are being directed at ways to recycle and re-use drilling wastewater, and we are also starting to see increased use of natural gas as a fuel in drilling operations, displacing some diesel fuel with significant economic and emissions benefits.

FW: What legal issues face companies looking to enter in the shale gas industry? With particular regard to hydraulic fracturing, what steps have authorities recently taken to regulate this process?

Becker: A number of states have revised their regulatory schemes to ensure that drilling continues to occur in a safe and responsible manner. In so doing, I think they are asserting their primacy over an area of traditional state regulation, as compared to the US federal government. It remains unclear what role the federal government will seek to play outside of federal lands, other than funding research and enforcing existing federal law. Those looking to enter the space should take a particularly close look at the regulations in specific states where they intend to operate, since the regulations vary in some important respects.

Nijoka: As noted, the debate continues in the US as to the proper ‘nexus’ of regulation for shale gas development – federally by the EPA or by the individual states. At present, hydraulic fracturing activities are generally exempt from regulation under the federal Clean Water Act, and regulation is under individual state jurisdiction. A bill has been introduced in both houses of Congress − the Fracturing Responsibility and Awareness of Chemicals Act or ‘Frac Act’ − that would give the federal EPA more wide-ranging control over fracturing. The Frac Act is, however, coming under intense debate. The prospect of pan-European regulation of shale gas drilling by the EC is a worry for some and considered a must by others. No proposals have been released yet but consultation on the issue continues. Countries with a ban on hydraulic fracturing include France, the Czech Republic, the Netherlands, Luxembourg, and the German region of North Rhine-Westphalia. Some of the bans are indefinite, while others have an expiry date. However, most have been put in place pending the results of studies into the risks involved. Therefore, the regulatory environment is uncertain.

Nowitz: As highlighted in Navigant’s January 2013 ‘Litigation Trends Report’, royalty disputes are dominating the shale gas and oil litigation landscape, followed by disputes involving breach of contract; land and lease rights; environmental and product liability; and zoning and regulatory issues. The volume of litigation facing the shale gas and oil industry increased dramatically during the middle of 2012 in comparison to the prior year. Federal regulatory bodies –notably the Department of Justice and the Federal Energy Regulatory Commission – have stepped up their efforts to track and enforce manipulation of oil and gas prices, collusion, fraud and other violations of state and federal laws, by forming special task forces or proposing new mandates to disclose operations and trading data. State regulators are primarily focused on environmental regulation and the pursuit of increased tax revenue.

FW: What factors have driven M&A activity in the shale gas sector over the past 12 months? What developments do you expect to see in 2013? 

Nijoka: Unconventional resources continue to be a major transactions driver, featuring in about a quarter of all transactions announced in 2012. There was continuing sustained investment in US shale plays, including a shift toward plays with more oil and liquids exposure because of the weak outlook for US gas prices. North American unconventional assets continue to attract investment from the Asian NOCs and we expect NOCs to be active acquirers again in 2013, as they look to gain knowledge of the underlying technology in order to export expertise to other areas of the globe.

Nowitz: Shale-led transactions have represented a majority of total upstream M&A transaction value over the past two years, and have contributed a significant percentage of aggregate energy transactions over the past year. However, unconventional gas plays are plateauing and entering a decline phase, which will be difficult to curb without new drilling activity – as approximately 75 percent of shale rigs are now deployed to NGL and oil production. Shale M&A activity in 2013 is expected to remain robust, recognising a greater concentration towards NGL and oil, with many domestic majors divesting upstream and midstream businesses, as well as selling non-core acreages in plays to reduce debt and to raise capital to fund NGL and oil drilling activities. Aided by accommodating capital markets, opportunistic financial buyers are snapping up these assets, while strategic buyers with strong balance sheets are acquiring weaker producers and service providers at a more attractive valuation. Risks to greater gas shale M&A activity in 2013 include persistently low natural gas prices, environmental concerns, and heightened governmental regulation.

Becker: In the US, one large trend stands out in particular. After a period of rapid acquisition of leases, the industry’s success and unusually mild temperatures led to lower-than-expected prices. That, in turn, led operators to offload properties. We’ll have to see how things play out when prices rebound, particularly if LNG exports take off. 

FW: Has the success of shale gas in the US been replicated in other regions? Which regions are poised to provide lucrative returns for firms and investors? 

Nowitz: As the result of the shale gas and oil revolution, the US market is seeing unprecedented opportunity. Other nations with abundant shale gas and oil supply include China, Mexico, Argentina, India, Russia, Canada, Poland, and Australia. While these countries also have the potential to realise opportunities similar to what US market participants have experienced, many currently lack the resources, technology and infrastructure necessary to safely, effectively, and efficiently extract and bring their supply to market. Additionally, as US shale gas production ramps up and the country shifts from being a net importer of natural gas to a net exporter, US LNG export facilities are likely to form a crucial component of volumes delivered to other regions, thus altering global market dynamics. The nature of competition will create both winners and losers in the global shale gas markets. While opportunities are substantial and enticement levels are high, there will be fallout resulting from the highly competitive nature of the market.

Becker: From my perspective, a number of regions, internationally, have not seen the same level of success in developing shale gas. The individual US states have a long history of practical oil and gas regulation that allows the industry to thrive while protecting the environment, which I would contrast with some of the top-down, more restrictive regimes you see abroad. That level of sensible regulation, along with developed infrastructure, efficient capital markets, and the American norm of constant innovation, has enabled the US to stay at the head of the shale gas curve. This is not to say, though, that other regions may not catch up in the future. China, for example, has large reserves and is paying close attention to what we’re doing in the US. 

Nijoka: Our analysis suggests that the pace of shale gas development in other regions will be more gradual. No other country is yet producing meaningful volumes of shale gas, and estimates of gas in place need to be treated with caution. The petro-physical properties of the shale vary from one rock formation to another across regions. Many more wells will need to be drilled before the resource potential can be gauged more accurately. Drilling results so far have been mixed. Other challenges include a lack of oilfield service sector capacity, limited supply infrastructure, an uncertain regulatory environment and public acceptance of hydraulic fracturing, and, in some places like China, substantial water supply issues.

FW: Overall, what key issues should investors consider before committing to the shale gas space? 

Becker: I recommend keeping a close eye on regulation and, more importantly, the science – and quasi-science – that is likely to influence that regulation. It’s no secret that there are a number of well-funded groups opposed to shale gas for one reason or another, and that they are maintaining a steady drumbeat of questionable claims about shale gas and hydraulic fracturing more particularly. The continuing delay in opening New York State for development, while neighboring Pennsylvania is experiencing a renaissance, is an example of how that strategy can be effective. The risk for investors is that shale gas opponents have success on a wider scale.

Nijoka: We recommend a cautious approach to North American shale gas, with continuing medium-term price weakness due to supply pressures. In addition, there still is regulatory uncertainty around hydraulic fracturing, and the export and domestic pricing issue. That said, the disparity in gas prices between regions and projected growth in gas demand globally will likely provide opportunities for investors. Companies will, however, want more certainty on the regulatory and fiscal regime relating to shale gas before committing to invest in a particular country, and the rules governing foreign investment may restrict companies’ ability to invest in shale plays. Additionally, the high capital requirements of shale gas projects mean that we are likely to see more partnerships between local firms and companies that can provide funding and those that have experience of developing shale gas or possess a technological advantage.

Nowitz: Investors need to have a fundamental view that natural gas prices will recover sufficiently enough to restore supply and demand equilibrium, and will sustain a level of profitability over the longer-term to justify valuation levels worthy of investment. One key factor will be meaningfully improved pricing levels over a reasonable investment horizon as the supply overhang is worked off. Part of this rebalancing will be driven by shifts in upstream producers’ exploration and production strategies – from maximising dry gas production to a greater focus on oil and wet gas plays. Increased natural gas consumption will be critical to rebalancing supply and demand, including substantially higher levels of natural gas usage in the power generation sector – and potentially the transportation sector – as well as sustained industrial consumption and material increases in LNG exports. Another key issue is the availability of sufficient pipeline and other infrastructure to get the abundant natural gas, LNG, and crude oil supplies to market. Finally, investors will need to assess regulatory and environmental limitations on drilling as additional risks imposed by state and federal agencies have the potential to curtail activity, and adversely impact investment returns.


Josh Becker is a partner at Alston & Bird LLP. Mr Becker co-leads the firm’s shale gas extraction and hydraulic fracturing practice. He is a litigator with public relations, crisis management, and due diligence experience, and has represented companies across the industry – including field services companies, technology developers, and trade associations. He has extensive experience speaking and writing on issues related to this industry. Mr Becker can be contacted on +1 404 881 4732 or by email:

Dale Nijoka is Global Oil & Gas leader at Ernst & Young LLP. Prior to joining Ernst & Young 28 years ago, he spent four years working as an operator in a major US refinery. Since joining the firm he has worked with a wide range of international energy clients and has particular experience in coordinating large multinational internal and external audit functions, advising on merger and acquisition accounting, SEC reporting matters, and assisting in debt restructuring and corporate reorganisations. He can be contacted on +1 713 750 1551 or by email:

Raoul Nowitz is a director with Navigant Capital Advisors, Navigant’s corporate finance arm, serving as  part of the firms Unconventional Oil & Gas service team. Mr Nowitz focuses on providing financial and operating restructuring advisory services and solutions, mergers and acquisitions advisory services, and capital raisings to companies in a variety of industries including the energy sector. Mr Nowitz is a Chartered Accountant (South Africa), is FINRA Series 7 and 63 licensed, is a Certified Insolvency and Restructuring Advisor and has a Certification in Distressed Business Valuation. He can be contacted on +1 404 504 2071 or by email:

© Financier Worldwide



Josh Becker

Alston & Bird LLP


Dale Nijoka 

Ernst & Young LLP


Raoul Nowitz

Navigant Capital Advisors

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