Mining News

Uncertainty deters investment in oil and gas development

Posted by Alana Wilson on 4/1/2014 3:23:45 PM

By Dr. Kenneth P. Green

Lawrence Solomon has a great piece in the Financial Post, pointing out that U.S. exports of Liquefied Natural Gas (LNG) would not break Russia’s hold on the natural gas market in Europe. Better, Solomon argues, the U.S. should sell natural gas to Asia, where natural gas prices are high enough to make it all worthwhile:

Liquefying natural gas to transport it by ship is expensive — after the UK replaced its declining North Sea gas with LNG a decade ago, its gas costs more than doubled. Because Russia with its vast amounts of natural gas will always be able to undercut U.S. LNG gas shipments to Europe, the U.S. or European governments would need to massively subsidize U.S. exporters to get them to ship to Europe, creating an inherently unstable trading relationship. Much better to let U.S. LNG flow to Asia, where prices are higher because of Japan’s enormous post-Fukushima energy needs. Those exports to Asia, which would compete with Russian LNG sales, would in any case serve a geopolitical interest by lowering Russia’s revenues.

It’s a very interesting article, and I recommend reading it in its entirety. But the most interesting part, at least to me as a researcher at the Fraser Institute, is the stories Solomon tells of random changes in the regulatory regime on the part of several former Soviet republics that has prevented multinational corporations from coming in to break Russia’s stranglehold on their energy economies.

For example, Lawrence relates a story about Lithuania, which scared off multinational investment with arbitrary (and massive) changes to its tax regime, which shot up by 250% after Chevron was awarded a tender to drill for gas. Not surprisingly, Chevron pulled out. He also tells the tale of Poland, which has managed to scare off three multinationals (ExxonMobil, Marathon, and Talisman) with a randomly changing regulatory environment.

None of this is a surprise to those who read Fraser Institute’s annual Global Petroleum Survey. Year after year, survey after survey, respondents tell us that regulatory instability and unfavorable tax regimes are important deterrents to investment in upstream oil and gas exploration and development. As with many types of resource extraction, oil and gas development have long lead times: money flows into preparing for a project and executing it long before profits flow from the sale of the resources produced. Changing the rules in the middle of the game – or being known as a jurisdiction inclined to do so – rightly raises a red flag in the thoughts of anyone pondering investment in that jurisdiction.

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