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!!!!!The impact of the US oil and gas fracking revolution on the US
and global energy markets
!!!!!!!
!!!
Lukas Lins Vilar de Carvalho - 1318968
BSM 179: Oil and Gas Economics
Charles Madison
Robert Gordon University
24/11/2014
Word Count:
!2
Turnitin similarity:
List of Contents
!INTRODUCTION 3
BENEFITS OF THE SHALE GAS REVOLUTION 3
Social 4
Political 5
Economic 5
IMPLICATIONS OF SHALE GAS DEVELOPMENT 6
Environmental 7
Legal 7
SHALE GAS IN THE GLOBAL SCALE 8
ECONOMIC SUCCESS 9
Technology 9
CONCLUSION 10
REFERENCE LIST 11
!!List of Figures
1. Oil and gas employment change 4
2. Change in current account balance as per GDP 6
3. Water contamination incidents 7
!3
4. Break-even prices 10
The ‘shale gas revolution’ is the most important topic in the
American energy industry at the moment. The quest for a new
source of power found deep underneath the earth is reshaping the
American energy portfolio with gas that is cheap and plentiful.
Shale gas is also named unconventional gas because the drilling
activity is not enough to extract gas in commercial quantities, and
there is a need for a stimulus to recover the gas located in deeper
rock formations.
The main technologies used to obtain unconventional gas are
hydraulic fracturing (fracking) and horizontal drilling. These
technologies were developed in the first half of the 20th century, but
more recent developments were fundamental to boost the shale gas
production in the past 5 years.
According to the United States Geological survey (2011), fracking
consists of a mix of water, sand, and chemicals that are injected into
the horizontal borehole of the well. Because of the pressure, the
rocks underground are forced to open space for the gas.
The advantages of exploring shale gas are very attractive, as it
can be a driver for energy security and increase employment
opportunities. However, there are many environmental concerns that
have to be carefully analyzed in order to avoid an irreversible
environmental footprint.
The impact of the fracking revolution in the United States
economy is clear, as the employment rates in the producing regions
increased exponentially, bringing new opportunities to a country that
suffered an economic crisis and high unemployment rates for the
past 7 years. Between 2007 and 2012, the U.S. experienced a
!4
decrease of 3.7 million (-2.7%) in the total annual average
employment (Cruz, Smith & Stanley, 2014). However, the oil and gas
sector during the same period had an increase in employment of
135,084 jobs, that is, 31.6% of the jobs in the United States during
this period (Ferree & Mith, 2013). The figure below illustrates the
states that benefited the most:
!
In states like Texas, Pennsylvania, North Dakota, Oklahoma,
Louisiana and Colorado, large shale gas fields are being developed,
leading to an increase in oil and gas employment. Pennsylvania in
particular has experienced higher employment growth within the oil
and gas industry than its traditional coal mining industry, surpassing
in 2012 the total number of people employed in coal mining, not to
mention that jobs created in the oil and gas industry are higher paid
(IHS, 2013).
However, employment figures increased not only within the oil
and gas industry, but also other industries greatly benefitted from
being around shale gas extraction sites. During the drilling
!5
campaign, small communities experienced an economic “boom”, as
local expenditure increased on food, beer, accommodation, and
household goods, creating jobs in retail and hotels. Not to mention
landowners that receive extra money through payment of royalties,
increasing overall supply chain economic activity. In fact,
landowners’ minerals rights is one of the main reasons for the fast
growth of shale gas exploration, as landowners can earn a
substantial amount of money from companies by allowing
exploration in their land.
Another beneficial impact of the fracking revolution is the
move toward a more independent energy supply that will decrease
the dependence on imported oil from countries that are contrary to
the American international policy. Such independency would also
positively impact the U.S. balance of payments.
According to President Barack Obama (2014), “today, the
number one oil and gas producer in the world is no longer Russia or
Saudi Arabia; it’s America. Meanwhile, our 100-year supply of oil and
gas is a big factor in drawing back jobs to our shores”. President
Obama’s statement expresses the positive environment for the shale
gas revolution. This is already seen as an important achievement of
his administration, especially as energy security is a game changer
for the American international policy. This enables the United States
to reshape its strategy regarding the Middle East and countries like
Venezuela, where political climate is unstable.
Economic analysts have been very positive about the overall
impact of the shale gas revolution in the American economy. Many
claim that this can lead the US to a reindustrialization, as companies
that were looking to set up plants in developing markets or in Europe
are now finding the American oil and gas industry very attractive.
!6
An example of such is BASF, the giant German chemical
company, which is now directing investments to build a new plant in
Louisiana instead of Germany. Also, Dow Chemical, after investing
for many years in their international expansion, is returning to the
US to take advantage of the cheaper oil price that is the feedstock
for plastics, fertilizers, fuels, and petrochemicals (Moneynews 2012).
The chart below demonstrates how cheaper oil prices can
affect a country’s GDP. It is clear that countries highly dependent on
imports would have an increase in GDP, as they have to pay less per
barrel of oil. On the other hand, countries dependent on exports
would have a shortfall in revenue.
!
According to a report from the Financial Times (2014),
“manufacturers are planning more than $90 billion worth of
investments in the U.S. to take advantage of the country's cheap
natural gas”. For instance, if the American Federal Government
allowed the shale gas production to increase, it could reduce
dependency on oil coming from Middle East by 4.5 million barrels a
!7
day. In other words, it is “$450 million a day less negative balance of
payments for the U.S” (Moneynews, 2012).
However, there are strong arguments objecting the fracking
revolution. These need to be analyzed and evaluated so we can have
a better picture of the footprint that this technology could leave in
our society.
Groundwater contamination is the main environmental concern
associated with the fracking revolution. To obtain shale gas, it is
necessary to use HVHF (High Volume Hydro-Fracking) technology,
which uses millions of liters of water during the drilling process and
affects water supplies and water quality.
To better understand how the water contamination takes effect,
we have to look at the chemical components contained in the
fracking process. That is, a combination of citric acids, boric acids,
formaldehyde, acetic acids and other toxic chemicals. It is also
important to mention that some companies illegally mix diesel fuel
into their fracking fluids, resulting in a combination that is even more
harmful for the environment. Fifteen to nineteen million liters of
fresh water are used to dilute fracking fluids (Soeting et al, 2011).
Almost half of that water returns to the surface and is stored in
special containers either for reuse, or to be injected when the well
ceases. However, the other half a million liters of water goes to a
location authorities and companies cannot not explain.
Environmentalists have criticized fracking because the
contaminated water eventually returns to the local water reservoir.
Because of this, some people living in areas where fracking takes
place have complained about the taste of the water.
!8
!
According to Texas Fracking Investment (2014), there have been
reports of contamination of drinking water in at least eight states
throughout the U.S.; just in Pennsylvania alone, there have been
over 1,400 environmental violations that are directly related to
fracking practices.
Furthermore, a strong opposition to the fracking revolution is that
during the drilling phase, employment rates are high in regions
where fracking takes place, creating a “boom”. But this “boom” only
lasts for about a year. However, after drilling is complete, the
number of workers required decreases, experiencing a “bust”. It is
also important to mention that most of the high paid jobs are given
to people from other states, and only low paid jobs are left for the
local community.
Another drawback is that despite the oil and gas companies have
indicated that a large portion of their expenditures in Marcellus Shale
regions wil l take the form of payments to landowners
(Christopherson & Rightor, 2011), we currently have no information
!9
to tell us where landowner leasing bonuses or royalty payments will
be spent.
Outside the U.S. there are mixed views regarding the use of
fracking. Particularly in Western Europe where an environmentally
based opposition became vicious and biased, and there is very little
will to replicate the shale revolution. In Europe, the land mineral
rights belong to the government rather than to the local landowners.
The local landowners only own surface rights, thus there is no
incentive for them to cooperate with minerals prospection.
Another factor is that Europe’s high demographic density draws
more environmental risks on water safety. Therefore, operators will
go through more hurdles to obtain licenses and local acceptance.
A third factor to take into account is that Europe has an efficient
and well-developed infrastructure of conventional gas pipelines,
which is served primarily from Russia, and also of regasification
plants for imported Liquid Natural Gas (LNG).
As noted by Delloite (2011), a number of pipeline projects
running from the Caspian Sea, North Africa and the Middle East have
been planned while LNG terminal capacity, coming in at over 14.5
billion ft³/d as of mid-2010, is projected to exceed 17 billion ft³/d by
2012.
An important point to consider is that Europe experienced a drop
in gas prices, as demand lowered during the recession, along with
increased Russian gas supply and LNG imports. In the U.S., gas
prices rose significantly since the 1990’s, generating a better
environment for unconventional gas exploration. Elsewhere in the
world, we can see developments in China being undermined because
of water scarcity, but if waterless fracking technology takes place, we
will be able to have even cheaper gas prices as China starts to
!10
produce its own gas, decreasing the imports volume. Another
country that made increased developments is Argentina, where the
government has given licenses to foreign companies to explore and
develop unconventional gas infrastructure. Therefore, Argentina
comes in second place after the U.S. in shale gas production.
The shale revolution is rapidly growing throughout the world and
it is easy to real ize that there is no way back. Even
environmentalists admitted that they lost the war against fracking
and all they have to fight at the moment is for regulations and
quality control to curb greater environmental threats. An important
side of the increased volume of unconventional gas available
prompted an increased use of power plants to use natural gas
instead of coal, contributing to lower carbon monoxide emissions.
Moreover, we are experiencing a large decline in air pollutants in
the U.S. This is a point that has gained momentum as companies
start labeling shale gas as clean energy (EPA, 2014).
Is important to mention that the current fall in oil prices can
affect shale production, as cheaper imported liquefied natural gas
will become a better choice. However, the good news is that
advances in fracking techniques are lowering the break-even prices
for oil and gas. “The U.S. is producing unconventional oil with
acceptable returns in the range of $70 a barrel for oil, less than most
OPEC nations can sustain” (Randall, 2014). The figure below
presents the break-even cost to produce shale oil in different regions
basins in the U.S.:
!11
!
In conclusion, more countries will try to replicate the fracking
revolution, but may not enjoy the same success rate of the United
States. Americans have advantageous Mineral Rights legislation that
contributes to speed up projects and local acceptance. In addition,
the funds available to finance shale projects are abundant.
Therefore, is very unlikely that it can be replicated with the same
success rate, but the advance of new technologies and improved
engineering solutions will minimize costs and eventually take shale
production outside of the U.S. to a similar cost-benefit scenario as
seen in the U.S.
!
!!
!12
List of References
CHRISTOPHERSON, S. and RIGHTOR, N. (2011). How Should We Think About the Economic Consequence of Shale Gas Drilling?. Available: http://www.greenchoices.cornell.edu/downloads/development/shale/Thinking_about_Economic_Consequences.pdf. Last accessed 11th Nov 2014.
CRUZ, J., SMITH, P., and STANLEY, S. (2014). The Marcellus Shale gas boom in Pennsylvania: employment and wage trends. Available: http://www.bls.gov/opub/mlr/2014/article/the-marcellus-shale-gas-boom-in-pennsylvania-1.htm. Last accessed 10th Nov 2014. !EPA. (2014). Climate Change Indicators in the United States. Available: Climate Change Indicators in the United States. Last accessed 20th Nov 2014. FERREE, P. and MITH, P. (2013). Employment and wage changes in oil-producing counties, 2007–2011. Available: http://www.bls.gov/opub/btn/volume-2/employment-wages-bakken-shale-region.htm. Last accessed 19th Nov 2014. !HAGGERTY, J. (2011). Fossil Fuel Extraction and Western Economics. Available:http://headwaterseconomics.org/energy/western/maximizing-benefits. Last accessed 5th Nov 2014.
HEALEY, S. (2013). WHAT EFFECT DOES FRACKING HAVE ON THE WATER SUPPLY? Available: http://texasfrackinginvestments.com/what-effect-does-fracking-have-on-the-water-supply/. Last accessed 19th Nov 2014. !HYERCZYK, J. (2014). Crude Oil And Energy Stocks Suffer As Natural Gas Futures Brighten. Available: http://oilprice.com/Energy/Energy-General/Crude-Oil-And-Energy-Stocks-Suffer-As-Natural-Gas-Futures-Brighten.html. Last accessed 20th Nov 2014. !IHS . (2013). The Economic Contributions of Shale Gas in the United States. Available: http://www.ihs.com/products/cera/energy-report.aspx?ID= 1065931940 . Last accessed 19th Nov 2014. !JAFFE, A. and O`sullivan, M. (2012). The Geopolitics of Natural Gas. Belfer Center For Science and International Affairs. 1 (1), p5-26. !JONES, F. and WALTER, K. (2014). Wilbur Ross: Shale Gas Could Transform US Economy. Available: http://www.moneynews.com/StreetTalk/ross-shale-economy-transform/2012/12/27/id/469253/. Last accessed 18th Nov 2014.
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KAUFMAN, P., ATWOOD, K., FORREST, G., WALKER, K., WUTRERICH, K., DELOZIER, D., PERAKIS, A., BORCHARDT, S. and HAUSER, K. (2013). Marcellus Shale Gas Asset Optimization Driven by Technology Integration. Society of Petroleum Engineers. SPE-164345-MS (1), p1-10. !KIGER, P. (2014). Green Fracking? 5 Technologies for Cleaner Shale Energy. Available: http://news.nationalgeographic.com/news/energy/2014/03/140319-5-technologies-for-greener-fracking/. Last accessed 20th Nov 2014. !LYONS, A., HURLEY, M., HAWKSWORTH, J., and ZIMMERN, W. (2013). Shale oil: the next energy revolution. Available: http://www.pwc.com/en_GX/gx/oil-gas-energy/publications/pdfs/pwc-shale-oil.pdf. Last accessed 12th Nov 2014. !MARTIN, A., MADDOCK, J., KUZMIN, I., SOROKIN, P., CALIO, E., SLORER, O., LONGSON, A., VENKER,, D., MENG, A. and MONTARINI, B. (2014). Global Insight: Is the US shale revolut ion replicable?. Morgan Stanley Research. 1 (1), p5-55. !NEWTON, C., DEMIRORS, M., and LEE, D. (2011). Revolution or devolution?. Available: http://www.deloitte.com/assets/Dcom-u n i t e d s t a t e s / l o c a l % 2 0 A s s e t s / D o c u m e n t s /us_consulting_RevolutionorEvolution_Oilfield_Technology052511.pdf. Last accessed 18th Nov 2014. !O’KEEFE, B. (2012). Exxon's big bet on shale gas. Available: http://fortune.com/2012/04/16/exxons-big-bet-on-shale-gas/. Last accessed 20th Nov 2014. !O B A M A , B . ( 2 0 1 4 ) . T h e N e w F o u n d a t i o n , O b a m a speech. Northwestern University. 1 (1), p1. !OLSTEAD, S., MUEHLENBACHS, L., SHIH, J., KRUPNIK, A. and CHU, Z. (2013). Shale gas development impacts on surface water quality in Pennsylvania. Working Paper Series. 110 (13), p4. !RANDALL, T. (2014). Break-Even Points for U.S. Shale Oil . Available: http://www.bloomberg.com/news/2014-10-17/oil-is-cheap-but-not-so-cheap-that-americans-won-t-profit-from-it.html. Last accessed 20th Nov 2014. !REGENERY, C. (2011). Economic Impact of Shale Gas Exploration & Production in Lancashire and the UK . Available: http://www.cuadril laresources.com/wp-content/uploads/2012/02/
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Full_Report_Economic_Impact_of_Shale_Gas_14_Sept.pdf. Last accessed 13th Nov 2014. !S H E P S TO N E , T. ( 2 0 1 4 ) . P e n n s y l v a n i a S h a l e b y t h e Numbers. Available: http://naturalgasnow.org/pennsylvania-shale-numbers/. Last accessed 20th Nov 2014. !SOETING, M., CHODIZHICK, W., ESTES, S., GARCIA, N., RUDNICKI, M., STEEDMAN, B. and BLUE, K. (2011). Shale Gas – A Global Perspective. KPMG GLOBAL ENERGY INSTITUTE. 1 (1), p06-18. !US Geological Survey. (2011). ‘Shale Gas Production Sub-Committee – Second Ninety Day Report’, US Department of Energy, Washington, DC, 18 November.