!!!!!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:

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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

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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

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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:

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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

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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.

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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.

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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

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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.

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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

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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

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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.:

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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.

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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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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.