A major collaborative project was undertaken to develop novel environmentally acceptable water-based drilling fluids with high membrane efficiency to meet the future requirements of the petroleum industry. This paper describes various geomechanical considerations in the development and performance verification of the drilling fluids. Specialised test equipment, including a membrane efficiency screening equipment, an autonomous triaxial cell and a high pressure triaxial test equipment and associated test procedures, were either developed or modified for simulation of key drilling fluid-shale interaction mechanisms. More than 300 pressure transmission-chemical potential tests were performed on Pierre II shale samples to screen a wide range of novel chemical compounds for their membrane generation capacity in shales. Three of the compounds, which are capable of generating high membrane efficiency in the shale, were subsequently used to develop new generation water-based drilling fluids. Typical examples of the membrane efficiency screening tests conducted with novel compounds that generated highly and moderately efficient membranes are presented. The reasons for the difference in the membrane generation capacity of the compounds are discussed. The results demonstrate that the new generation water-based drilling fluids are capable of generating membrane efficiencies of between 55% and 85%. The shale stabilising capacity of the new generation drilling fluids developed was demonstrated and verified through a series of borehole collapse tests. Results of the borehole collapse tests are presented and discussed. The results clearly demonstrate the shale stabilising capacity of the new drilling fluids in comparison with the reference test which was not subjected to the mud pressure penetration and chemical potential stages with the drilling fluids.