22 Feb 2017

What are the real costs of shale gas production?

Jan writes*

After the inauguration of Donald Trump the White House announced the new administration’s America First Energy Plan to foster the exploitation of shale oil and gas. The embracement of this ‘revolution’ would ‘bring jobs and prosperity to millions of Americans.’ The revenues from this cheap energy would then be used to increase public investment and boost the economy.

It is often argued that shale gas has not only contributed to low US gas prices but that its environmental footprint is also much cleaner compared to traditional fossil fuels. The problem with these assertions is that they either ignore or understate the environmental impact of methane emissions which escape to the atmosphere in the course of extracting and delivering shale gas. According to a recent study US methane emissions have increased by roughly 30 percent over the past 15 years. Although the authors are reluctant to link this increase directly to a particular source they do note that it coincides with the rise of shale gas production and other studies seem to confirm this notion.

These estimates are much higher compared to the official numbers reported by the U.S. Environmental Protection Agency (EPA). One reason for this disparity is the fact that the EPA relies mostly on numbers reported by the gas industry and is not allowed on most sites in order to conduct its own measurements. This selection bias might explain why official numbers on methane emissions are much lower than those published by researchers who rely on measurements taken in the atmosphere.

The problem with methane is that its environmental impact is much more drastic in the short-term compared to carbon dioxide. According to a report [pdf] published by the IPCC in 2013, the global warming potential of methane is 86 over a 20-year period and 34 over a century. In other words, methane traps 86 times more heat in its first 20 years after having escaped to the atmosphere compared to carbon dioxide. That means that even if comparatively little amounts of methane are leaked its immediate impact on climate change is relatively large.

It therefore needs to be assumed, that any potential environmental benefits that shale gas might have since it partly replaces traditional fossil fuels are offset by the devastating short-term impact of methane on climate change. In order to determine the exact methane leakage percentage in the shale gas production, independent inspectors need to be allowed to access any operator’s site. Further, politicians and society have to understand that current gas prices do not reflect the true costs of shale gas production since the gas industry is allowed to dump part of its production costs on the whole society - for free!

Trump might be right that shale gas production keeps gas prices low and creates new jobs but if costs outweigh benefits, then the whole undertaking is inefficient and you are doing more harm than good. This is basic economics. He should understand that, especially as a businessman.

Bottom Line Methane, which is leaked in the course of producing shale gas, has a much bigger environmental footprint compared to carbon dioxide. This externality needs to be taken into account when politicians favour shale gas over conventional gas due to the supposedly low production costs of shale gas.

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, alternative perspectives, better data, etc.

3 comments:

  1. Hi Jan,

    Politicians often propose shale gas to be the bridge in moving from a fossil fuels based energy system to a renewable energy system. Perhaps you could include this in a costs benefits analysis. Howarth (2014) investigates the impact of different uses of uncoventional natural gas, maybe this can help you. Howarth is highly skeptical of this bridge idea, partly because of the by you mentioned effect of methane on the climate system. However he provides some numbers that might be useful.

    Furthermore you might want to looking into the costs of fracking. I can imagine these will be very high as well making it even less interesting to use shale gas.

    Joeri

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  2. There are several problems with this analysis.

    1. The strongest correlation with natural gas production and methane emissions is well counts and the extent of the processing, gathering and transportation network. While each side can cherry-pick study statistics on fracking vs. conventional wells this is generally accepted by those most familiar with on-the-ground oil and gas operations/transportation.
    a. Therefore since the productivity of fracked wells is higher than conventional wells (1st figure) there will be greater methane emissions with production from natural gas conventional wells vs fracked wells. This could be offset partially or fully due to the longer life of fracked wells.
    b. Because of the hub-spoke nature of fracking pads there are additional efficiencies for gathering and processing natural gas from fracked wells.
    c. If methane emissions are the problem it is not an issue of frack vs conventional gas.

    2. U.S. (state or federal) regulators have inspectors that inspect oil and gas operations including fracking operations. There is no probation on any inspection efforts. While staffing levels may be questioned authority is not an issue.

    3. Trump’s America First Energy Plan is a framework of general proposals and platitudes. It is doubtful the trajectory of U.S. shale gas production will be materially impacted either way by Trump Administration policies.

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  3. Hi Jan,

    I very much like your topic and your approach to it. If I have understood your post correctly, you believe that with Trump's new administration’s America First Energy Plan, we are heading towards an environment in which we are worse off than without this plan, because the negative externalities of shale oil and gas are not taken into account by the government. You clearly describe where you think the gap between stated costs and actual costs comes from, but I miss a few crucial elements in your analysis.

    Firstly, you might want to consider the benefits too. As Joeri previously mentioned, shale oil and gas might be a move towards a more renewable energy system which could lead to greater benefits in the long run compared to the costs in the short run. Even if that is not the case, you could still try to compare the decrease in prices and reduced reliance on foreign resource suppliers to the costs. It might be that those benefits are greater than the costs, which would change your conclusion.

    Secondly, if you look at those costs and benefits, try to bear in mind what players are in the game and what the distribution looks like. Who bears the benefits and who bears the costs? Maybe the benefits indeed outweigh the costs, but the costs will be borne by people who do not benefit from it. In this case, you could make recommendations in order to rebalance the costs and benefits.

    Overall, I absolutely think your on the right track of your cost-benefit analysis and wish you much luck and fun with your essay!

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