Political risk is a factor that energy companies everywhere have to take into account in their business strategy. For instance, before doing business in Venezuela, Russia, or Iraq, you must carefully weigh the upside potential against the considerable downside in those countries.

Political risk for energy businesses operating in the US, Canada, the UK, and most Western nations is usually less of a concern than in developing nations and those with non-democratic governments. Typically, the type of risk that has to be managed in the West is regulatory risk. Will government regulation on any level harm your business or prevent you from achieving your goals? An example would be environmental regulations over oil and gas drilling and production.

Ben & Jerry's might be an exception, but most businesses tend to view regulation in a negative light. It's an obstacle that has to be dealt with. However, polls show the public generally sees regulation as protection against unscrupulous people or businesses that would sell them tainted food or phony pharmaceuticals. The public also wants clean air, clean water, and they want to know the money they deposit in banks and other institutions is safe.

That said, the public also wants inexpensive food, low-cost prescription medications, and cheap gasoline. In short, we want it all.

The questions we must ask are:

What is the legitimate role of government in regulating business?
Should federal, state, or local officials do the regulating?
When does government regulation go too far, and who decides this?
What happens when excessive government regulation stifles business development and job creation?

There are several areas right now in which the oil and gas industry is particularly concerned about government regulation:

Hydraulic fracturing
Offshore development
Drilling on federal lands
Keystone XL Pipeline
LNG export applications

For the sake of brevity, we'll focus on only two of these – hydraulic fracturing and LNG exports – in this column. We'll take up the other issues later.

The US is endowed with a wealth of natural gas due to recent development of unconventional resources, mainly shale gas. This is significant enough to change the energy equation because it makes the US self-sufficient in natural gas with enough left over to allow the US (and Canada) to export natural gas in the form of LNG, significantly cutting the balance of payments and the national debt in both countries.

However, for this to come to fruition, we must allow continued development of these shale plays, which means no egregious regulation of hydraulic fracturing. Directional (horizontal) drilling and hydraulic fracturing techniques are required to make exploitation of shale resources economic. If the Environmental Protection Agency or some other government agency were to ban fracing, we can kiss shale development and LNG exports good-bye.

It's not as if hydraulic fracturing is something new. Companies have been using this method of enhanced recovery for the past 60 years. The various states have regulated this activity successfully for all these decades, so there is no valid reason for the federal government to get involved at this point in the game.

The past few years we have seen natural gas prices fall to around $3 to $4 per million British thermal units (MMBtu), and the US Energy Information Administration expects the annual wellhead natural gas price trend to remain at around $5 per MMBtu until 2025. By contrast, LNG prices in Asia are three times higher, suggesting a highly lucrative export market for North American gas.

The Center for LNG has praised the efforts of a bipartisan group of 16 House Members who have called for an expedited review process for applications to export LNG. The legislators – all representing districts in the western US – recently sent a letter to Steven Chu, Secretary of the US Department of Energy, where all LNG export license applications must be reviewed.

The lawmakers noted, "Creating more opportunities to sell natural gas into global markets and access overseas customers could help the goals of increasing natural gas use and smooth out historical boom-bust cycles. Realizing sustainable natural gas prices will continue to stimulate the resurgence of US manufacturing, power generation, chemical and agriculture sectors, as well as continue to keep costs low to heat our homes and fuel our nation's transportation needs."

The Center for LNG agreed with the lawmakers.

"Restarting the permitting process for LNG facilities would give the US a unique opportunity to generate more public revenues, increase investment in the US economy, create new jobs, and reduce our trade deficit," said the organization's president, Bill Cooper. "Promoting exports is a longstanding policy in the US, including the President's National Export Initiative, which is designed to create jobs by doubling US exports by 2015."

Continued shale development and the acceleration of LNG export permits seem like a no-brainer. For the good of the country, let's hope that bipartisanship prevails and regulators understand the importance of fracing and LNG exports to the national economy.

Dealing with regulatory risk

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