Made in America: why the shale revolution in America is not replicable in China and Argentina.

• Author: Gagliardi, Danelle

1. INTRODUCTION

   The "shale boom," (1) as many inside and outside the industry call it, has been sweeping the United States since 2011, specifically in Texas, Ohio, West Virginia, and Pennsylvania. (2) Technology such as hydraulic fracturing, known as "fracking," (3) has given energy producers a new reason to tap into the rock formation known as shale and extract its oil and gas. (4) Although many outside of the energy industry have heard an increasing amount of discussion about shale and fracking in the United States, few within that group--and arguably a small number of people involved in the industry itself--have heard much discussion concerning shale development in other countries. Big economic powers, such as China, Brazil, Argentina, and Australia, have recently begun drilling shale reserves domestically like the United States. (5) Unfortunately, the similarities between the United States and these other countries mentioned both begin and end with drilling domestically, despite the United States' efforts to serve as a model in drilling shale. (6) The economic prosperity the United States has experienced as a result of the shale revolution has yet to occur in the aforementioned countries, especially China and Argentina.

   In this Note, I argue that the economic prosperity and apparent success the United States has experienced ("the boom") in drilling shale will not be replicated in China, where the shale reserves are estimated to be significantly larger than in the United States. (7) Many have claimed the shale boom in the United States is unique, but none have articulated specifically why China will not be able to generate the immediate and continuous prosperity the United States has had. (8) Legal factors distinctive to the United States, such as private ownership of mineral rights; well-established environmental and regulatory mechanisms; contract law principles; and a free market system demonstrate that China--which has recently commenced exploration and production of shale domestically--will not be able to replicate the economic boom the United States has seen with shale development in the past two years. There is a glimmer of hope, however, for the country of Argentina, (9) which has a hybrid of regulatory, contract, and property laws between those of China and the United States, possibly opening the door for a successful shale revolution in the future. (10)

   Part II will offer a brief technical overview of shale drilling and the historical background of the development of oil and gas laws in the United States, China, and Argentina. This section will set out the general laws on the books and the regulatory framework the three countries have concerning oil and gas, which will likely be the same laws and regulations that apply to shale exploration and production.

   Part III will divulge the legal and policy implications of having a free-market system versus a state-run economic system in the context of ease of production, innovation and technology, and corporate attraction. I will also discuss the way in which Argentina has recently changed its laws as a way to accommodate oil and gas companies seeking to extract oil from shale. (11)

   Part IV will establish the regulatory framework in the context of oil and gas law. The focus will mainly be directed to environmental laws and oversight.

   Parts V and VI will reveal the skeletal property and contract laws in China and Argentina, while contrasting them with the fleshed out version in the United States. The argument here circles back to the fact that the United States' freedom of contract laws facilitate production and economic prosperity, whereas China's do not.

2. HISTORICAL AND TECHNICAL BACKGROUND ON SHALE OIL AND GAS

   This Part will offer a quick review of what shale is and how the oil and gas within it is extracted, followed by an overview of the history and basic laws of energy development in the United States, China, and Argentina.

   In simple terms, shale is a rock, (12) but it is a very valuable (13) one if tapped into properly. (14) The reason why shale has been on the energy industry's radar is not because engineers and geologists recently discovered this type of formation, but because they recently developed the technology to stimulate the formation in a cost-effective way. (15) In fact, shale was first tapped into in the (1930) s, less than one hundred years after the first oil and gas well was drilled at Drake's Well in Pennsylvania. (16) In the 1930s, oil and gas producers threw nitroglycerin down the well and cracked the rock formation to exploit the resource. (17) Now, safer and more cost-effective technology exists with hydraulic fracturing, changing the way we exploit resources. (18) The process of fracking involves the opening of space or cracks within shale through the high pressure application of water, chemicals, and sand. (19) The cracks open up and the oil or gas seeps up through the drill rig. (20)

   With these large-scale operations involving dozens of chemicals and drilling hundreds of feet below the surface (and below aquifers), however, comes regulation. (21) And all regulations are not created the same. In the United States, regulations surrounding drilling for oil and gas evolved from failures in the pure free market system, which created economic waste rather than economic prosperity.

   One example is the oil and gas boom in Morrow County, Ohio in the 1960s, where drill rigs were set up within inches of each other with some overlapping with one another in a small area. (22) This massive oil frenzy was due to the lack of regulations on setting up wells and rigs, which eventually led to the development of spacing regulations and a duty to not interfere with one's neighbor unreasonably. (23) The original lack of spacing requirements added to the original framework of drilling helped bolster the common law property doctrine of the rule of capture. The famous property law case of Pierson v. Post (24) is an example of "catching" oil and gas. (25) This common law concept does still apply, but with severe limitations, such as spacing restrictions, environmental concerns, and regulatory framework. (26) By reducing the number of rigs that could be in a certain space, states like Ohio reduced problems of waste, resulting in a good balance between the free market system and regulation. Texas will be another example analyzed later in the context of property laws. (27)

   The history of oil and gas development in China is encapsulated within its state-run economic system and cultural beliefs, having changed little over the course of its history with drilling, save for the allowance of private oil companies recently. (28) Oil was discovered in China in 1959 (29) and the state was self-sufficient up until 1993. (30) After transitioning through the Mao Revolution, which led to some changes in regulatory models, (31) China ventured out to import oil and gas, using its cultural partnership tactic of "soft power" in making cooperative partnerships with other countries in order to import oil and gas. (32) Soft power is still highly emphasized in China, and has been used to develop its own drilling and hydraulic fracturing technologies. (33) Despite the apparent strength of the government in China, however, there is a huge gap in environmental laws (34) and laws overseeing the safety of drilling. This gap will be discussed in more depth later. (35)

   Argentina, unlike China and the United States, has a very different history of oscillating between heavy government oversight and complete privatization within the energy sector. In the 1980s, the Argentinean government controlled the gas and oil industry in its entirety until the election of Carlos Menem in 1989, when he took measures to privatize industry and increase the value of the peso after a severe spike in inflation that swept most of Latin America. (36) In 2001, the energy industry took another turn due to new leadership and a recession, only this time the laws (37) were heavy in regulation. (38) Then, in 2004, the pendulum swung back once again, but not completely.

   The current Argentinian legal framework, known as the Second Generation Reforms, developed a happy medium of privatization with cautious government oversight in conducting business. (39) These involved incentives for foreign investment (40) and renewable energy technologies, (41) along with some government regulation. (42) More recently, in 2012, Argentina passed a series of laws pertaining to shale called the National Plan, (43) which set the resource's development as a goal for public policy. (44) It also has these same incentives, (45) but control over market prices remains. (46)

   All three countries have a very diverse history, representing both extremes and the middle ground with free markets systems and state-run dictatorships. This survey leads me to my first contention: The differences in economic systems from the United States are differences which will hinder a shale boom in China and Argentina.

3. ECONOMIC SYSTEMS IN THE CONTEXT OF INVESTMENT AND RISK ASSESSMENT

   As this Note is not a review of the current economic system in the United States, (47) I will simply contrast that system with China's and Argentina's systems.

   China's economic system is indeed an interesting and complex combination of authoritarian leadership with heavy oversight in the markets and prolific subsidies to businesses, (48) but it is not one that is conducive to drilling shale domestically. China's economic system and its global influence have been coined the "Beijing Consensus" (49) by Joshua Cooper Ramo, (50) and that designation has been adopted by many economists, historians, and political scientists. (51) In response to an article entitled the "A Short History of the Washington Consensus," (52) Ramo argues that developing countries are not adopting the United States economic system; rather, these countries prefer the Chinese model of heavy state...