SHALL WE DANCE AN UNCONVENTIONAL TANGO?

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2013)
CHAPTER 13A
SHALL WE DANCE AN UNCONVENTIONAL TANGO?
José Martínez de Hoz (h) ¹
Tomás Lanardonne ²
Alex Máculus
Partner, Pérez Alati, Grondona, Benites, Arntsen & Martinez de Hoz (h)
Buenos Aires

JOSÉ A. MARTÍNEZ DE HOZ, JR. is a founding partner of Pérez Alati, Grondona, Benites, Arntsen & Martinez de Hoz, one of the leading law firms in Argentina and the first law firm selected by Chambers and Partners as the Latin American Firm of the year. Mr. Martinez de Hoz directs the energy and arbitration departments of the firm. He is actively involved in the fields of oil and gas, electricity, and international arbitration. He is listed as a leading practitioner in these fields of law in Argentina by Chambers Global, Chambers Latin America, and other international and domestic publications. The firm has been distinguished by the Legal Media Group in its annual publication, "Expert Guides to the World's Leading Lawyers," amongst the 25 top energy experts in the world. The firm is also listed in GAR 100: the 100 leading firms worldwide in international arbitration prepared by the International Journal of Public and Private Arbitration. In the area of oil and gas, Mr. Martinez de Hoz has participated in the largest projects, transactions, contract negotiations, and acquisitions that have taken place in Argentina, representing several of the major international oil and gas companies and financial institutions. He advises these clients and other companies on a regular basis on regulatory and contract matters and acts as legal adviser of the two Chambers of the oil industry in Argentina. Mr. Martinez de Hoz also has a strong practice in both investment and commercial arbitration. He is currently handling a large number of ICSID cases involving Argentina arising from the measures taken since 2002 that abrogated several investment regulatory frameworks. He is very active in ICC and other types of commercial arbitration. Mr. Martinez de Hoz is listed as an arbitrator in several institutions, including the Energy Arbitrator's List of The International Centre for Dispute Resolution of the American Arbitration Association. Mr. Martinez de Hoz graduated at the top of his class from the Argentine Catholic University in 1980. He also obtained a Master of Comparative Law at the University of Illinois in 1982 with top grades in all courses. He is a professor of oil and gas law at the University of Buenos Aires and has also been a professor in graduate courses at the Argentine Catholic University. He also lectures in seminars on energy and arbitration. Mr. Martínez de Hoz is a former director of the Buenos Aires Bar Association (2003-2007, 2009), one of the founders of the Pro Bono Program of the Buenos Aires Bar Association, a former Vice Chairman of the Pro Bono Committee of the Buenos Aires Bar Association, a current member of said Committee, and director of the law review of said bar association. He is also member of the Latin American Association of Arbitration, the ICC Latin American Group of Arbitration, and the Spanish Club of Arbitration. Mr. Martinez de Hoz is also a member of the Argentine Committee for National and Transnational Arbitration (CARAT), of the Buenos Aires Center of Mediation and Arbitration (Centro Empresarial de Mediación y Arbitraje) (CEMA), and of the Centre of Mediation and Commercial Arbitration (Centro de Mediación y Arbitraje de la Cámara Argentina de Comercio)(CEMARC). He is also listed as an arbitrator in CEMARC and CEMA.

1. Introduction.

Unconventional hydrocarbons are today's trending topic in the oil and gas business. The U.S. shale boom, which is boosting the country's economy and may lead it to become energy independent,³ is making us wonder if the U.S. experience with unconventional hydrocarbons can be replicated elsewhere.

Significant shale formations, still unexploited, exist in several countries, among which Argentina is said to rank third.⁴ The "Vaca Muerta" (Dead Cow) shale formation, located in the Argentine Province of Neuquén, became globally known during 2011/2012, as it is seen by many as the country's salvation in terms of crude oil and natural gas supply⁵ and even as a "revival" of a Southern Cone energy integrated market with Argentina as an energy hub.⁶

This paper analyses the legal/regulatory challenges that unconventional hydrocarbons pose, and whether or not Argentina is ready -from that standpoint- for a shale oil and gas revolution similar to the one that is taking place in the U.S.

2. Regulatory challenges posed by unconventional hydrocarbons.

2.1. What are unconventional hydrocarbons?

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Shale oil/gas is found in the source rock, the "kitchen" where the hydrocarbons were created. While the source rock has high organic material ("oil or gas-rich"), it has low porosity and very poor permeability, hence there is no flow of the hydrocarbons present in the shale source rock.⁷ That is why they are called "unconventional hydrocarbons".⁸

Operators typically viewed the shale formations as an indicator that hydrocarbons may be located in nearby formations of higher permeability (named "reservoir rock").⁹ Reservoir rocks and shale rocks may be found underlying the same tract of land surface. The former may be at 1,500 meters of depth, while the latter may be at 3,000 meters of depth. This is why conventional and unconventional gas exploitation may "coexist and overlap".

The only current way to economically exploit the shale rock is with a dual technique: horizontal drilling and hydraulic fracturing. This is why shale plays are a "product of technology".

Recovery factors for shale oil/gas are lower than conventional reservoirs,¹⁰ and shale plays have a much faster depletion rate than conventional fields.¹¹ This requires a larger number of wells (higher costs), and this is why many argue that shale gas is a "price driven" revolution.¹²

Shale plays tend to extend across much larger geographic areas, than conventional gas fields.¹³ This is why shale exploitation is more prone to affect "high-density areas".

The scale of the operation required for a given volume of shale output is much larger than for conventional production. This means that drilling and production activities can be considerably more invasive, involving a larger "environmental footprint".¹⁴

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Finally, "hydraulic fracturing" creates a multi-side challenge: (i) it uses large quantities of fresh water,¹⁵ (ii) the injection of chemicals creates the possibility of underground water contamination, (iii) the partial underground explosions made during fracking may allegedly trigger earthquakes, and (iv) the large quantity of water injected flows-back and creates the problem of sustainable disposal.

2.2. Environmental regulatory challenges.

2.2.1. "To ban or not to ban", an energy policy.

Policy-adoption is about making choices. Within countries endowed with shale oil/gas resources, the fundamental choice that governments have in their hands is whether to allow or not its development.

Some have authorized shale gas exploitation (including the use of the "hydraulic fracturing" technique) from scratch,¹⁶ others imposed a temporary moratorium which was lifted after tests confirmed the possibility of sustainable development and changes to regulations were established,¹⁷ and others banned the activity.¹⁸

Regulators must consider if any contracts or drilling permits have been issued before any banning decision and if such investors are already carrying out fracking activities in their contract areas. In this case, regulators will also have to consider whether grandfathering or not such contracts, and if not, be exposed to legal claims brought by investors.¹⁹

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Furthermore, the fact that shale plays extend across large geographic areas comprising several States/Provinces and even countries²⁰ creates the possibility of "inter-jurisdictional conflicts" between States sharing shale resources but with opposite positions as regards to hydraulic fracturing (for instance, in the "Marcellus play", Pennsylvania allows tracking while New York does not). This situation could potentially call for federal government intervention in federal countries such as the USA, or Australia or Argentina.²¹ This contingency could be extrapolated to the European Union where countries such as Poland develop shale gas, while others such as France ban its exploitation.²²

2.2.2. "License to operate", a socio-environmental policy.

Militant action against hydraulic fracturing engaged by NGOs such as The Sierra Club²³ or by the general public reflected in the "Gasland" documentary released in 2010 in the USA,²⁴ has been gathering momentum. Adequate socio-environmental regulation of shale gas development and its full enforcement by authorities, as well as a proper compliance by industry players, is of the essence if shale gas activity is to stay.

2.2.3. Full disclosure of fracturing chemicals.

An issue raised by stakeholders concerns the potential for contamination of groundwater as a result of the chemicals used in hydraulic fracturing. So far, on grounds of "commercial confidentiality" rights alleged by producers and service companies, shale gas operations in the USA have not been requested to disclose the chemicals used in the fracturing fluid.²⁵ But this may be already changing.

Regulators must decide whether to maintain the secrecy of the products used during the tracking, or to mandate full disclosure.²⁶

The growing pressure on operators to divulge the chemicals they are using has resulted in many companies now openly declaring them. Besides, the "Fracturing Responsibility and Awareness Chemicals (FRAC) Act" introduced in 2009 is currently being treated in Congress and if successful will force all operators to divulge all chemicals.²⁷ Also, the IEA suggests regulators to impose "full...