Continued shale gas development can be a win for consumers and the economy if industry and policymakers more aggressively address the negative externalities of the production boom, according to a University of Wyoming (UW) economic research paper to be published later this year.
"We conclude that the likely scope of economic benefits is extraordinarily large, and that continued research on the magnitude of negative externalities is necessary to inform risk-mitigating policies," said the co-authors of the report ("The Economics of Shale Gas Development”), researchers Charles Mason, Lucija Muehlenbachs and Sheila Olmstead.
Mason, head of UW's petroleum and natural gas economic section, told NGI's Shale Daily the report has been accepted for publication in November in the Annual Review of Resources Economics. The review of existing scientific literature shows "there are pretty clear benefits" to the shale gas revolution, but "we need to be mindful of the potential downside -- not because it undercuts the argument for hydraulic fracturing [fracking] but because there are things that can be improved upon," Mason said.
If these negative externalities (water, land and air impacts) can be more fully addressed, Mason said he thinks the case for fracking and further shale development goes "from good to strong." He said the biggest issues revolve around potential groundwater contamination.
Through reviewing existing literature and research of their own, Mason and his co-authors calculated that between 2007 and 2012, U.S. gas reserves increased nearly 30% from 248 Tcf to 323 Tcf. At a base price of $6.39/Mcf that added value of reserves totals about $475 million, they said.
The report concludes that the widespread adoption of fracking "has had profound impact at the national, state and local levels," noting that the significant increase in what it called "economically viable reserves" has led to lower natural gas prices, broader penetration of gas in the electric generation market, and wider industrial use of gas.
"A back-of-the-envelope estimate of gains in consumer surplus, alone, when comparing the months of January 2007 and January 2014, is $4.36 billion. Producers have seen the value of reserves skyrocket, and have enjoyed increases in producer surplus as well.
Mason said the oil price crash will not likely be long-lasting. He thinks prices will begin recovering this year, and there should be modest recovery. "Maybe what happens in all this is that communities experiencing great bursts of activity will take steps to smooth out the wrinkles," he said, adding that states like Wyoming, Alaska and North Dakota have oil trust funds that help smooth out commodity price volatility.
Shale's golden goose, however, will not be fully realized on a macro basis without the negative aspects of the development being more thoroughly addressed, the report also concluded. "There are significant benefits, and in some instances the costs may outweigh the benefits, but the onus is on the people worried about the costs to come up with convincing evidence," Mason said. "The burden of proof is on them."
In surveying all of the existing body of research, Mason said it became clear that there is a dearth of studies on these perceived negative externalities, and if there is a takeaway from the report it is that this needs to be addressed by policymakers and the industry. "If oil prices recover to $80/bbl, I think we're going to see fracking and shale development going on for a long time," Mason said.
What literature there is does strongly support the cost-benefits of fracking, Mason said, and it supports the argument that shale gas development is sustainable for the long term. Although this research did not look at shale oil, Mason and his co-authors said U.S. oil production "has similar benefits and costs to those we have explored for natural gas."