BALANCING ECONOMIC BENEFITS WITH THE ENVIRONMENTAL IMPACTS OF THE SHALE GAS Timothy J. Considine School of Energy Resources Dept. of Economics & Finance.

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BALANCING ECONOMIC BENEFITS WITH THE ENVIRONMENTAL IMPACTS OF THE SHALE GAS Timothy J. Considine School of Energy Resources Dept. of Economics & Finance The University of Wyoming Slide 2 OUTLINE OF TALK What is the nature of shale energy production? How important is this for the U.S. Economy? What is the shale energy supply chain? What are the economic impacts? What are the observable economic impacts of shale energy development? What are environmental impacts & costs? What are costs & benefits of shale energy? Implications & strategies for economic development 2 Slide 3 1. NATURE OF SHALE ENERGY PRODUCTION 3 Slide 4 GEOLOGY & TECHNOLOGY OF SHALE Conventional oil & gas fields Porous formations Pressurized by either gas or water Unconventional oil & gas production Tight formations either tight sands or shale Viewed as the source rock for oil & gas Must use technology to liberate the oil & gas Major technological innovations Horizontal drilling Hydraulic fracturing 4 Slide 5 TECHNOLOGY USED FOR UNCONVENTIONAL OIL & GAS 5 Slide 6 PA MARCELLUS DRILLING & PRODUCTION 6 Intensive drilling Increased from 97 wells in late 2009 to 405 in late 2010 Production increased 152 mmcf per day in late 2009 0ver 2 bcf per day in late 2010 In three years PA becomes an exporter of natural gas Industry is getting very proficient at drilling Production is increasing faster than anticipated Slide 7 THE PRODUCTION DECLINE CURVE 7 Why is drilling so intensive? The steep production decline curve First example to right Year 1: 511.9 mmcf Year 2: 257 mmcf Year 10: 88 mmcf Year 30: 32 mmcf To keep increasing output, need to keep drilling a treadmill effect Multi-stage fracturing is increasing well productivity More gas with fewer wells Slide 8 RETURNS FROM SHALE WELLS NPV & IRR on Marcellus shale gas wells under following assumptions 4% of output is natural gas liquids Henry Hub price of $2.30 for 2012, $3.00 2022, $4.20 2032, $5.30 2042 Operating costs of $1.00 per mcf Calculate returns for three different size wells: 8 Estimated Utilmate Recovery (EUR) in BCF 2.03.04.6 Net Present Value (thousand 2010$)$281$1,004$3,224 Internal Rate of Return3.7%4.9%8.0% Slide 9 RISING USA SHALE GAS PRODUCTION State / Category2007200820092010 Arkansas94279527778 Louisiana123293239 Michigan148122132124 North Dakota332564 Oklahoma40168249286 Pennsylvania52081494 West Virginia51767112 Other18171920 Texas9881,5031,7891,847 Total shale gas production1,3032,1523,1823,965 Total U.S. dry gas production19,26620,15920,62321,332 Shale share6.8%10.7%15.4%18.6% 9 Slide 10 RISING USA LIQUIDS PRODUCTION 10 Slide 11 OIL IMPORT VOLUMES ARE DOWN 11 Slide 12 2. THE SHALE ENERGY SUPPLY CHAIN 12 Slide 13 LEASING ACTIVITY Goal is to obtain access to prospective properties for exploration Must define land and mineral rights & ownership People & businesses involved in leasing Land men Clerks & legal assistants Real estate brokers Lawyers 13 Slide 14 EXPLORATION ACTIVITIES Objective is to locate and define oil and gas deposits Exploration activities Very advanced technology Seismic survey crews Affected businesses Local hotels Restaurants Coffee shops Convenience stores 14 Slide 15 SITE PREPARATION Clearing land and building roads Providing access to water and utilities 5,000 tons of aggregate per well Businesses involved Excavation equipment manufacturers Contractors and dealers Painters and haulers Mulch and fertilizer suppliers Safety equipment manufacturers and suppliers Electrical equipment supplies & contractors Surveying equipment suppliers and contractors Surveying engineering companies Aerial mapping services 15 Slide 16 WELL CONSTRUCTION Starts with a well spudded when the bit hits the ground Drilling to total depth may take anywhere from 2-4 weeks Businesses involved: Crane manufacturers and leasing companies Drill bit manufacturers Steel manufacturers Cement and concrete companies Chemical manufacturers Safety equipment companies Many companies contract out drilling operations 125 tons of concrete per well 16 Slide 17 WELL STIMULATION Hydraulic fracturing Businesses involved: Hydraulic fracturing contractors Trucking companies Diesel fuel companies Water management companies Water and material intensive 25 rail cars of sand Millions of gallons of water 17 Slide 18 WELL SITE AFTER DRILLING Companies try to restore land to original condition Footprint is rather small Grass is replanted An access road remains Forest fragmentation occurs some benefits for wildlife 18 Slide 19 MIDSTREAM DEVELOPMENT Construction of compressor stations Lower pressure gathering lines High pressure steel pipelines Businesses involved: Pipeline construction companies Heavy equipment contractors Steel pipe producers Value and compressor manufacturers 19 Slide 20 NATURAL GAS PROCESSING Strip out valuable liquids Some products Propane, butane, ethane, etc. Valuable feed stocks for petrochemical production Businesses Pipe fitters Steel pipe manufacturers Equipment producers Contractors 20 Slide 21 EXPANSION OF DOWNSTREAM INDUSTRIES Abundant, low cost shale energy attracts additional industry Possible sectors: Petro-chemical manufacturing Fertilizer production Metal and glass industries Electric power generation CNG use in transportation These industries have their own supply chains and would generate additional economic impacts Its underway: Bloomberg, Cheap Shale Gas Means Record U.S. Chemical Industry Growth, August 10, 2011 21 Slide 22 3. ECONOMIC IMPACTS 22 Slide 23 PENN STATE STUDIES ON MARCELLUS Collected accounting data on what drilling companies spending and where they spent their dollars Conducted two subsequent surveys of Marcellus industry spending Estimated impacts of this spending on Pennsylvania economy Jobs Valued added Tax Revenues 23 Slide 24 PENNSYLVANIA MARCELLUS SPENDING IN MILLIONS OF CURRENT DOLLARS 24 200820092010 Total Spending3,224.65,283.911,477.1 Lease & Bonus1,837.72,172.42,068.5 Exploration121.9117.1208.4 Upstream: Drilling & Completion857.82,151.07,377.0 Midstream: Pipeline & Processing329.4698.61,303.9 Royalties22.253.4346.0 Other55.591.4173.3 Slide 25 COMPOSITION OF FIRST ROUND OF SUPPLY CHAIN SPENDING 25 Slide 26 JOBS & VALUE ADDED (MILLIONS) 2010 26 SectorJobs Value AddedSectorJobs Value Added Ag, etc78022.2Real estate & rental5,3601,192.30 Mining14,8861,411.00 Scientific & tech services 11,0421,058.10 Utilities478194 Management of companies 1,318195.2 Construction23,7301,431.80 Administrative & waste services 6,387268.2 Manufacturing2,936370.7Educational services3,405152.1 Wholesale Trade9,9741,338.80 Health & social services 12,815736.1 Retail trade16,581839.3 Entertainment & recreation 2,64191.6 Transportation4,864354Hotel & food services7,767229.9 Information1,729274.6Other services6,634254.5 Finance & Insurance 4,986664.7Government & Misc.1,57781.9 Total139,88911,160.80 Slide 27 SUMMARY OF ECONOMIC IMPACTS Additional natural gas will open more markets than replacing old ones Replacement of high sulfur coal will coal be exported? CNG use in transportation Industrial use of natural gas ammonia, ethylene, steel, etc. LNP exports Developing new markets will take time as consumers become convinced that an era of low cost natural gas is a realistic prospect. 27 Economic Impacts DirectIndirectInducedTotal Valued Added (Thousand $ / well)3,7961,6912,4577,944 Jobs per well481933100 Slide 28 BENEFITS OF LOWER NG PRICES Used an econometric model of PA energy demand Higher Marcellus production reduced US natural gas prices by 12% in 2010 These lower NG prices reduced bills for natural gas and electricity in PA by $633 million Additional economic impacts occur - similar to a tax cut for households and businesses Impacts associated with industry relocation yet to be determined 28 Slide 29 4. SHALE ENERGY, JOBS, AND TAX REVENUES 29 Slide 30 SHALE ENERGY STATES 30 Slide 31 UNEMPLOYMENT RATE DIFFERENCES FROM STATE AVERAGE, 2007-2011 31 Slide 32 CUMULATIVE DRILLING & UNEMPLOYMENT BY COUNTY 2011 32 Slide 33 DRILLING & SALES TAX REVENUES 33 Slide 34 5. ENVIRONMENTAL IMPACTS 34 Slide 35 ENVIRONMENTAL IMPACTS Unavoidable impacts during drilling Clearing of land for well pads and pipelines Local congestion, noise, dust in rural communities Emissions during drilling Environmental hazards Stray gas failures in casing & contamination of water Containment pond breaches Spills from petroleum liquids handling Well blow-outs & resulting spills Environmental risk perceptions There have been problems What is there proper context? Can these problems result in widespread contamination? 35 Slide 36 CASING IS IMPORTANT 36 Slide 37 MOST EVENTS ARE MINOR 37 Slide 38 ENVIRONMENTAL EVENTS 38 Slide 39 WELLS DRILLED & POLLUTING EVENTS 39 Slide 40 6. BENEFIT COST ANALYSIS 40 Slide 41 ECONOMIC BENEFITS & ENVIRONMENTAL COSTS Benefits Gains in real output, jobs, and tax revenues Environmental avoided emissions from coal Costs Air emissions from shale energy production Water pollution Forest disruption Noise, traffic externalities, etc. What level of benefits are necessary to accept environmental risks? 41 Slide 42 BENEFITS & COSTS IN DOLLARS PER WELL 42 Economic & Environmental Benefits Environmental costs: Net Present Value (3 BCF well, see slide 8) 1,003,563 Air impacts from upstream life- cycle emissions 2,796 Avoided air pollution17,132 Air impacts from diesel use during hydraulic fracturing 7,245 Avoided community health impacts from coal 29,111 Water pollution using household values 193 Subtotal46,243Forest disruption3,943 Total Benefits1,048,806Total Costs14,178 Slide 43 ENVIRONMENTAL BEST PRACTICES Considerable learning by regulators & industry Must protect subsurface water keys are casing design & cement Tighter well safety and construction standards Blow out preventer stacks Well control emergency teams Recycling water and using pipelines to move fresh and produced water reduces traffic & may reduce spills from traffic accidents Avoiding erosion problems - closed system drilling all water and materials are tracked tarpaulins are used at well sites to capture spills 43 Slide 44 7. CONCLUSIONS 44 Slide 45 CONCLUSIONS Trend of higher oil, natural gas, and natural gas liquids production is likely to continue as long as oil prices stay relatively high Implications for U.S. industrial sector are significant Environmental impacts infrequent, localized but highly publicized Producing shale energy in close proximity to densely populated areas is feasible but problematic Risk of the unknown is very important risk assessment is crucial Economic benefits are significant and the the environmental risks appear manageable Regulation should be based upon sound science Rigorous and transparent regulations are required, but Flexible to encourage innovation 45 Slide 46 THANK YOU !!! 46