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As Shale Drilling Heads Abroad The U.S. Still Holds Advantages

Significant shale production overseas may be only a handful of years away, potentially accelerating a global transformation in energy and politics, but other countries may not be able to create the conditions that gave the U.S. its first-mover advantage.

The first wells are being drilled in promising locations such as western Siberia, North Africa and the Vaca Muerta formation in Argentina, says Daniel Yergin, vice chairman of business-information company IHS and a Pulitzer Prize winner, in an exclusive interview with IBD.

"It's just early days, I think — at least three to five years before we start to get the sense of having a buildup elsewhere," he said. "But the one thing about the oil and gas field is that technologies don't stay bottled up.

Seeding The World U.S. companies are helping. On Thursday, Baker Hughes (BHI) said that it's in the early stages of global shale development as it reported strong second-quarter earnings.

"Products and services we recently introduced to improve the economics of North America shale production are now finding new homes in the Middle East, Argentina, North Africa, Russia and China," CEO Martin Craighead said in a statement.

Last week, Halliburton (HAL) announced a joint venture with an SPT Energy affiliate for hydraulic fracturing services in China.

In 2013, Exxon Mobil (XOM) and Russia's OAO Rosneft partnered to drill for shale oil in Siberia. Exxon is also busy in Vaca Muerta, and Chevron (CVX) teamed up with Argentine state-run oil company YPF (YPF) to develop the area.

The most promising shale plays have rock formations similar to those found in North America, but the U.S. also has other features that facilitated the current energy boom, Yergin said.

They include private ownership of mineral rights, an ecosystem of transportation companies, regulatory systems already in place, an abundance of service companies and an independent energy sector with a "strong entrepreneurial tradition.

"Not too many places have all of the above," Yergin said.

Indeed, while China is committed to developing shale gas to reduce air pollution from coal-powered electric plants, it still faces issues with water, geology and access to markets, he noted.

Yergin, who authored the 2011 book "The Quest: Energy, Security and the Remaking of the Modern World," thinks China still has five to 10 years before it sees significant shale gas resources.

But a political backlash is mounting in some countries even before drilling can start.

Britain appears to have significant gas resources, and the government favors drilling there. But it faces opposition from local planning councils.

In February, BP (BP) said that it wouldn't drill for shale gas in the U.K. over worries that its 2010 spill in the Gulf of Mexico would make it a target for protesters.

Oil exploration companies also entered Poland with high hopes for shale gas. But government regulations quelled the excitement, and drillers left for less restrictive environments.

Regulations Vs. Technology The trend also extends to the U.S. In New York, local communities have the authority to issue bans on fracking, and the whole state is under a temporary moratorium on the process.

Fracking opponents in California are pushing for a statewide moratorium. Even towns in Texas are considering fracking bans.

Despite regulatory challenges, drilling technology is evolving as companies seek to increase productivity and address environmental issues, including ways to reduce water usage, Yergin said.

General Electric (GE) has been focusing on the oil and gas sector, raising hopes that the industrial giant will further innovation. It formed an alliance with Chevron earlier this year to improve well technology. GE is also building an oil and gas technology center in Oklahoma City.

"There are a lot of research and innovation efforts from the community going into improving these processes," Yergin said. "And even drilling these wells today is quite different than it was four years ago because there is that much more experience."