The Natural Gas Revolution:Critical Questions for a

Sustainable Energy FutureAlan Krupnick

Co-Director, Center for Energy and Climate Economics

SERC Shale Energy and Environment Leadership workshop

OSU, Columbus

September 7, 2016

Critical questions

• What are the key market economics questions?• What are the health and environmental

consequences of shale gas development?• What are the net costs and benefits to

communities?• How should regulations be changed (if at all)?

What is the best mix of regulatory, best practice (voluntary) and liability approaches to reducing risk?

• How (if at all) should federal-state and state-local power allocations be changed?

• How can public trust be gained?

Key Market Questions

Demand• Electricity: How much will natural gas displace coal

and renewables?• Manufacturing: Will natural gas cause a renaissance in

manufacturing in the U.S.?• Residential/commercial: Will New England’s gas

shortage be relieved?• Transportation: How much will natural gas vehicles or

gas used as feedstock displace oil?Supply• Will price volatility be lower (is the supply curve

flatter) than historically?

Newell, et al. 2016. Trophy Hunting vs. Manufacturing Energy: The Price Responsiveness of Shale Gas. RFF DP-16-32 (August).

Texas

Health and Environmental Consequences

• Effects on critters and humans

• Water quantity and quality

• Induced seismicity

• Legacy

• Fugitive methane

• Habitat fragmentation

Low Birth Weight Incidence Near Shale Gas Wells

Source: Elaine Hill. “Shale Gas Development and Infant Health: Evidence from Pennsylvania.” Charles H. Dyson School of Applied Economics and Management, Cornell University, 2012. Working Paper 2012-12.

Wastewater destination time trends for PA

USGS

Induced Seismicity

• Seismicity from fracking NOT a problem?• Deep well injection: 40,000 wells taking oil and gas

liquid wastes. Growth in earthquakes > 3.0 since 2009, “coincident with” oil and gas waste injections.” In CO, TX, OH, ARK, OK. A few “caused by.”

• 1/5th of all quakes in Oklahoma linked to four DIWs that are most relied on

• Better than pits, which leak; better/cheaper than CWTs which can’t treat produced water

• Can it be managed?• Industry cutting water flows through recycling, using

less liquids

Community Costs and Benefits

Local Public Finance (Newell and Raimi)

• Property taxes are effective for raising local revenues commensurate with shale gas development, but not all states give locals the authority. If not, they rely on revenue sharing (and in-kind contributions)

• Major costs are for road repair, sewer and water, police, fire, government wage increases

15

Source: Raimi and Newell, 2016. Map source: Drilling Info 2.0. Heat map data represents drilling permits issued in the 90 days leading up to Feb. 20, 2015. Permit data not available for Alaska.

Summary of net local government fiscal effects: 2013-2015

Marcellus

Fayetteville

Haynesville

Eagle Ford

Permian

Barnett

Green

River

Denver-

Julesburg

San Juan

Uintah

North Slope

Kenai

Peninsula

Kern County

Woodford

Hugoton

Uniformly net positive

Mixed positive/neutral

Mixed positive/negative

Mostly net negative

Utica

Piceance

Los Angeles

Anadarko

Miss. Lime

Bakken

16

Truck Traffic Accidents in Pennsylvania by Well Activity

05

00

100

01

50

02

00

0

No. W

ell

Pad

s

.00

06

.00

07

.00

08

.00

09

.00

1

Avg

. N

o. of A

ccid

ents

/Po

pu

lation

1997 2000 2003 2006 2009 2012Year

Accidents in counties with more than 20 wells

Accidents in counties with less than 20 wells

Well pads drilled

Sample State - Colorado

Dropout Rate – A short-lived spike occurred in top producing counties, but ultimately disappeared.

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

-

0.01

0.02

0.03

0.04

0.05

0.06

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013C

om

ple

tio

ns

Dro

po

ut

Rat

e

Top Producing Counties

Control Counties

Completions in Prod. Co.

Initial Musings from Garfield County Case Study

• Broaden study to consider local and county government interactions

• Development of several hypotheses and evidence e.g.:

– Are bigger companies “better behaved” than smaller companies?

– Are direct negotiations better than indirect?

– Does hiring local by companies for their community liaison matter?

– How important is information provision from the companies to communities?

Gaining the public trust

Latest news on banning “fracking”

• Banning initiatives in CO fail to get enough signatures for the ballot amid charges of forgeries.

• Local governments have been barred from banning or limiting shale development activities: Broadview Heights, OH; Denton, TX; Longmont and Fort Collins, CO; Fayette County, WV

20

How Do Messages Affect Support?

14%21%

14%8%

29% 21%25% 41%

56% 58% 60%51%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All Industry Neutral NGO

Same

More Opposed

More Supportive

Research Priorities for the Future

• Net benefits to communities of SGD

• Best protocols for industry-local interactions

• Mental health effects of SGD; Low Birth Weight effect

• Habitat fragmentation modeling

• Wastewater handling policies/incentives

• Fugitive Methane: emissions quantification, monitoring issues, regulatory issues

• All kinds of regulatory issues: federalism; more harmonized regulations across states; use of non-regulatory instruments

THANK YOU KRUPNICK@RFF.ORG

WWW.RFF.ORG

Sample State - ColoradoInstructional Expenditures - Despite an oil and gas boom, top producing counties lag control counties and have experienced a net decline since 2000.

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

$5,000

$5,200

$5,400

$5,600

$5,800

$6,000

$6,200

$6,400

$6,600

$6,800

$7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013M

illio

n M

CF

20

14

Re

al D

olla

rs

Top Producing Counties

Control Counties

Gas in Top Counties

USGS map of earthquake swarm in Oklahoma

25

Does the Public Support Shale Gas Development?

9

6

7

11

21

18

17

10

4 4

7

12

19

2120

12

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 No opinion

PA TX

1=not supportive, 7=extremely supportive

26

How Much Are People WTP for Risk Reductions? ($/household/year)

31

4 43

15

25

19

4 4

$0

$5

$10

$15

$20

$25

$30

$35

Groundwater(1,000 wells w/

problems)

Surface Water (%water bodies w/

problems)

Air Quality (days ofstandard violation)

Traffic Congestion(% time loss)

Wildlife Habitat (%habitat

fragmented)

PA TX

New Developments GET FROM ISABEL

• CA: Requiring a GW monitoring plan

• ND: Enforcing the recent flaring reduction plan (74%) – curtailment of oil production

• NY: Towns can ban O&G activities

• In PA, EQT giving $50K to landowners who agree not to sue companies for damages

New Regulatory Developments

• Banning initiatives in CO fail to get enough signatures for the ballot amid charges of forgeries.

• MD: Will begin issuing permits in Oct. 2017; Hogan administration weakening some regulations (wells can be closer to homes, less environmental testing needed). Guidelines will be adopted by Oct. 1.

• Local governments have been barred from banning or limiting shale development activities: Broadview Heights, OH; Denton, TX; Longmont and Fort Collins, CO; Fayette County, WV

• ND regulators finalized and adopted new spill prevention rules, though they can still be blocked.

• CA ARB released a proposed rule that would require almost all oil and gas facilities to test for and control methane leaks

• EPA: banned disposal of fracking wastewater at public treatment plants.

• BLM: Recent battle over whether BLM can regulate fracking on federal and Native American lands after Wyoming federal judge struck down Obama’s fracking regulations

• Critical Questions

• What are the net costs and benefits to communities?

• What are the national economic benefits?

• What will future trade patterns look like?

Revenue flows from oil and gas production to local governments vary by state

31

FY 2013 Local government revenue from oil and gas production in North Dakota ($ millions)

Source: Raimi and Newell 2016, Local government revenue from oil and gas production

32

FY 2013 Local government revenue from oil and gas production in 16 states ($ millions)

Source: Raimi and Newell 2016, Local government revenue from oil and gas production

Revenue source

Revenue

recipient Total

Share of

production value

478

293

640

2,380

2,393

5,206

0.2%

0.1%

0.2%

0.9%

0.9%

1.9%

Federal lands

State lands

Property

Severance/

PA Impact Fee

Other local gov’t

Local grants

Municipalities

Counties

School trust fund

School districts

11,610 4.3%Total local gov’t

Regulations: The state of state shale gas regulation

• Researchers: N. Richardson, M. Gottlieb, A. Krupnick, H. Wiseman

• 25 regulatory elements common to shale gas development across 31 states with current or potential development.

Water Management Plan required

Economic impacts: National and Local

- Issues regarding measurement of economic benefits:-Input-Output versus ex-post-Local benefits difficult to parse out

- Examples:- Considine (2010), using IMPLAN, found the 2009 PA employment impact to be above 43,000.-Kelsey et al. (2011), using IMPLAN with supplemented info, this impact to be below 24,000.- Weber (2012), using ex-post data, found this impact to be closer to 2,200.

Study Employment

Multiplier

Methodology

Deck et al. (2008) 2.5-2.64 Input-Output model predicts Arkansas shale employment, 2008-12.

Considine et al. (2010) 2.02 Input-Output model estimates 2009 Marcellus impacts for Pennsylvania.

Considine et al. (2011) 2.07 Input-Output model estimates 2010 Marcellus impacts for Pennsylvania.

IHS (2012) 5 Input-Output model predicts US employment from oil and gas 2012-35.

Weber (2014) 1.4 Analyzes non-metropolitan counties in AR, LA, OK, TX from 1995-2010.

Weinstein (2014) 1.3 County-level analysis of shale boom in lower 28 states from 2001-11.

Brown (2014) 1.7 County-level analysis of natural gas boom in 9 Central US states, 2001-11.

Tsvetkova & Partridge (2015) 1.26 Examines oil and gas specialization in 6 Western states, 1980-2011.

Munasib & Rickman (2015) 1.77 in AR;

3.37 in ND

Estimates impact of shale in North Dakota, Arkansas, and Pennsylvania,

2000-11.

38

Major gas trade movements 2012 Trade flows worldwide (billion cubic metres)

39

Purpose and contents

• Motivation: Rapid development of shale gas plays has been great for the U.S., but many economic, environmental geological, engineering, political questions remain to be answered if this growth is to be sustainable.

• Purpose: Conflicting studies, unavailable data, evolving regulatory landscape, public concerns, challenging economics requires comprehensive stock taking of the literature and development of critical research needs to keep the ball rolling

• Approach: Convening; extensive literature review in seven areas; review by experts; identification of 24 critical research questions and a top question in each area (based on our assessment of its value of information).

• Social science focus, but not exclusively

40

Moving Forward

• Plan to raise money to follow through on critical questions

• Series of discussions (NY, DC, Houston) to take new/modified ideas; greater granularity. Not just for us.

• Thanks to those in audience who helped us already

• We plan to continue to capture literature

41

• Areas

1. supply; demand

2. environmental (and public health) impacts; climate interactions and impacts; regulation and other approaches to reduce risks

3. economic impacts; international implications

• Expert reviews

• David Goldwyn (President)

• Jeff Burleson (Southern)

• Francis O’Sullivan (MIT)

• Rod Nelson (Schlumberger)

• GS

43

RFF project focuses on environmental risks from shale gas developmentComparison of Naturally Occuring Radioactive Materials

(NORM) in Brine and Fracking Fluid Waste

• Supply and Demand

Supply

• Supply curves and elasticities

• Shifters

45

Natural Gas Consumption by Sector (tcf)

• Critical Questions

• What are the short, medium and long-term supply elasticities?

• How will government regulation and technology shift these curves?

• What effect will the shale gas revolution have on the electricity sector?

• How will the Phase II truck CO2 standards affect the demand for natural gas?

• Is there a future for natural gas in the light-duty sector?

• Will the residential/commercial sector remain flat?

0

200

400

600

800

1000

1200

1400

Global Energy Use (exajoules)Business as Usual

Biofuels Coal Gas

Hydroelectric Nuclear Oil

Traditional Biomass Wind & Solar

0

200

400

600

800

1000

1200

Global Energy Use (exajoules)535 ppm Concentration Goal

Backstop Biofuels Coal

Gas Hydroelectric Nuclear

Oil Traditional Biomass Wind & Solar

• Federal Multi-Agency Research Strategy

• Mandate: timely policy-relevant science; produce results that support sound policy decisions and prudent development

• Seven areas for research on unconventional oil and gas development to increase understanding and mitigate risks- Supply- Water quality- Water quantity- Air quality and GHGs- Human health- Ecological effects- Induced Seismicity

• Priorities

• 31 priorities. Covers obvious research strategies, e.g., review literature, data sources to evaluate impacts of UOG on habitats, endangered species, etc., to toxicity assessment and vulnerability assessments, and lifecycle impact assessments

• Some highlights- Investigate link between reservoirs and geology and impact on human

health and environment- Investigate link between development and CCS- Develop AOR for horizontal wells- Collect water flow information before, during and after UOG operations

water budgets- Identify sources of lower quality water to be used instead of fresh- Develop predictive tool for water used and produced- Costs of control strategies (curiously only mentioned for air emissions!)- Conduct health studies in the vicinity of UOG sites- Develop models for assessing the likelihood of induced seismic events

• Six Flagship projects

• New tools to assess future water availability with future UOG activity

• Follow-on to EPA drinking water study• Tools, assessments, etc. for understanding effects on

water quality more broadly• Use source and remote emissions measurement

methods to qualify air emissions and control technology effectiveness

• Tools, assessments, etc. for understanding effects on ecosystems

• Understand key relationships leading to seismic events at deep injection sites

• Critique

• A year and a half late• Did not “analyze and synthesize state of knowledge”• Many important gaps. • Entirely natural and physical science-based Virtually no social science research was

mandate met?• Too broad and non-specific. Not “research questions”• Are interagency processes capable of doing any better?• Mea culpa: We were not on the webinar (we were not invited) and did not seek out the

group (but our visibility on these topics is apparent.• Nothing on:

- developing databases for disclosure/transparency/outside use purposes- fracking fluid disclosure- siting- fugitive methane, per se- solid waste disposal- community impacts (congestion, accidents, property values, crime)- regulation (even at the state level)- local-industry protocols

• Finally, will the agencies set aside funds to support research? Develop a new interagency funding program? Give targeted funds to NSF? No word on this important action item.

Change in Electricity Price,

High Shale Gas Case vs. Low Shale Gas Case

Source: Author calculations based on EMF 26 Report. 2013. Changing the Game?: Emissions Markets and Implications of New Natural Gas Supplies.

-20.0%

-18.0%

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

2010 2015 2020 2025 2030 2035

LIFT

US-REGEN

NEMS

MRN-NEEM

ADAGE

CIMS-US

ENERGY2020

EPA-IPM

53

US LNG Export Terminals

Source: API. Red are federally approved LNG sites (7)

Pre-Well Bonding Requirements($1,000s)

55

57

RFF project focuses on environmental risks from shale gas development

Compare Concentrations to Standards/Criteria

Primary environmental public health concerns:

Parameter NOB MedianStandard

(mg/L) Note

Barium 180 431 2 EPA MCL

Barium 180 431 10 PA wastewater effluent standards

monthly average

Bromide 164 491 0.1 General agreed level in fresh water sources

Strontium 175 1080 4EPA recommended limit for finished

municipal drinking water

Strontium 175 1080 10PA wastewater effluent standards

monthly average

Benzene 61 0.03 0.005 EPA MCL

Ecological and secondary drinking water concerns:

Chlorides 175 46500 250EPA SMCL, PA wastewater effluent

standards

Magnesium 172 526.5 0.05 EPA SMCL

TDS 175 82600 500EPA SMCL, PA wastewater effluent

standards

Sulfate 90 61.05 250 EPA SMCL

Residential property sales in Washington County, PA

300-1,500

0.28

0.28

100

600

500

Supply Uncertainty

Full Cycle Breakeven Price

For 17 Unconventional Gas Plays in North America

Source: Multiple model runs of RFF-NEMS, AEO 2009 and modified for PGC resources

Demand and Supply of Natural Gas in 2030

Economic impacts: National and Local

69

Change in Real GDP, High Shale Gas Case vs. Low Shale Gas Case

Source: Author calculations based on EMF 26 Report. 2013. Changing the Game?: Emissions Markets and Implications of New Natural Gas Supplies.

2009 2013

Sales Tax $4,388,670 $16,428,510

Hospitality Tax $554,009 $1,060,639

Occupancy Tax $256,331 $597,266

Property Tax (Net) $2,886,383 $3,462,321

Enterprise $6,676,027 $11,373,655

Debt $2,630,497 $65,000,000

City Operating Budget $7,522,143 $13,550,120

Capital Budget $1,677,974 $132,000,000

State Support $12,300,000

Dickinson, ND Financial Statistics

Source: Shawn Kessel, City Administrator, 2014

Barnett Shale

Fu et al. (AAPG Bulletin, 2014) Ikonnikova et al. (SPE-RE)

OGIPfree Productivity

72

Natural Gas Supply Elasticities

Source: EMF 26 Report. 2013. Changing the Game?: Emissions Markets and Implications of New Natural Gas Supplies.

Source: Multiple model runs of RFF-NEMS, AEO 2009 and modified for PGC resources

S2 reg cost

S2 tech change

Demand and Supply of Natural Gas in 2030