What are the economic prospects of developing natural gas from shale in New Brunswick?

7/28/2019 What are the economic prospects of developing natural gas from shale in New Brunswick?

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What are the economic prospects of developingnatural gas from shale in New Brunswick?

Marc Duhamel

CIRPPPAand

Department of Economics

Universit de Moncton

June 2013


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The economic context is very important Global forces from emerging countries are reshaping NAs economy

Minerals, Oil & Gas are creating have and have not provinces NA perspective on the economic potential is large but

very wide

Industry development scenarios for NB are sketchyat best

Most important to address all policy issues to establishconversation on evidence-based research and facts

What are the economic prospects inthe development of natural gas from

shale in New Brunswick?


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The Context

The economic forces that will shape the NBeconomy over the next decades are not domestic


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0

200

400

600

800

1990 2000 2008 2015 2020 2025 2030 2035

World Energy Consumption

x10

exp

15

BTU

OECD Non-OECD

Source: U.S. Energy Information Administration, International Energy Outlook 20114


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0

75

150

225

300

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

World Iron Ore Production and China Real GDP

2002=

100

World Iron Ore Production China Real GDP

Source: World Bank, USDOI

5


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0%

15%

30%

45%

60%

Wood&Paper

Energy&M

inerals

Machinery&Equipment

Finance&Insurance

Services&R

etailing

Other

2011 Industry Share of Foreign Direct Investment, Canada

6


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0

13

25

38

50

NL NB QC SK AB

Mining, Oil & Gas Extraction GDP Share

Percent

0%

5%

10%

15%

20%

NL NB QC SK AB

Manufacturing Employment Share

0%

2%

3%

5%

6%

NL NB QC SK AB

Mining, Oil & Gas Extraction Empl. Share

0

8

15

23

30

NL NB QC SK AB

Manufacturing GDP Share

Perce

nt

Source: Statistics Canada8

20022011


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0

100

200

Newfoundland and Labrador, 2011

Chained(2002)dollarsperhou

r

0

100

200

New Brunswick, 2011

Chained(2002)dollarsperho

ur

0

100

200

Goods

Secto

r

Minin

g,Oil&

Gas

Serv

icesS

ector

Saskatchewan, 2011

Chained(2002)do

llarsperhour

0

100

200

Goods

Secto

r

Mining

,Oil&

Gas

Serv

icesS

ector

Alberta, 2011

Chained(2002)dollarsperhour

$ 363.10

Source: Statistics Canada

Weak labour productivity in NB doesnt promotecompetitiveness and prosperity

??


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75

100

125

150

175

200

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unemployment, 2003-2012 (2008=100)

CanadaNewfoundland and LabradorNew BrunswickSaskatchewanAlberta

Source: Statistics Canada

Low productivity and competitiveness weakens jobs outlook


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Stubbornly high unemployment and weak labor productivity in NB poseserious threats to health, education and social programs

Structural demographic trends in NB raise important concerns about the

capacity of NB businesses to meet the competitiveness challenge on a globalstage (in particular, see Michael Haans Can New Brunswicks Population TimeBomb be Defused?).

Prosperity, employment and economic growth comes from reallocation ofresources towards higher value-added activities and highly productive businesses

The development of natural gas from shale industry can contribute to raiseproductivity, generate jobs and stimulate economic growth in NB if managedresponsibly and efficiently

Why should we care?
http://www.youtube.com/watch?v=bSuWD-5cPiA&feature=player_embeddedhttp://www.youtube.com/watch?v=bSuWD-5cPiA&feature=player_embeddedhttp://www.youtube.com/watch?v=bSuWD-5cPiA&feature=player_embeddedhttp://www.youtube.com/watch?v=bSuWD-5cPiA&feature=player_embeddedhttp://www.youtube.com/watch?v=bSuWD-5cPiA&feature=player_embedded


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More seriously

Like it or not, growth in government revenues will come directly, or indirectly (e.g.

through equalization), from the development of energy and natural resources.


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Much emphasis in media, public discussionsand policy dialogues on environmental and

public health risks

Responsible Environmental Management of Oil

and Natural Gas Activities in New Brunswick

Rules for Industry

February15, 2013


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What about theeconomic prospects?


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Is it has good as it is said to be?

Former Liberal premier Frank McKenna says developing the shale gas industry could generatemore than $7 billion in royalties and tax revenues for New Brunswick(emphasis added),bringing an end to the province's debt and deficit problems. cbc.ca (February 11, 2013)

Source: The Daily Telegraph (2013)
http://www.cbc.ca/news/canada/new-brunswick/story/2013/02/11/nb-frank-mckenna-shale-gas-pipeline.htmlhttp://www.cbc.ca/news/canada/new-brunswick/story/2013/02/11/nb-frank-mckenna-shale-gas-pipeline.htmlhttp://www.cbc.ca/news/canada/new-brunswick/story/2013/02/11/nb-frank-mckenna-shale-gas-pipeline.htmlhttp://www.cbc.ca/news/canada/new-brunswick/story/2013/02/11/nb-frank-mckenna-shale-gas-pipeline.htmlhttp://www.cbc.ca/news/canada/new-brunswick/story/2013/02/11/nb-frank-mckenna-shale-gas-pipeline.htmlhttp://www.cbc.ca/news/canada/new-brunswick/story/2013/02/11/nb-frank-mckenna-shale-gas-pipeline.htmlhttp://www.cbc.ca/news/canada/new-brunswick/story/2013/02/11/nb-frank-mckenna-shale-gas-pipeline.html


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No two shales are alike

NB


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Range of possible economic

impact is substantial Completion and production expenditures per well vary

greatly across plays, producers and within a production area

Various studies report direct economic impacts per well inthe $3M-$15M depending on shale experience,technology, number of fracs, pad density and architecture,scale, etc.

5-to-1 spread of direct economic impact is important

Cost per well are subject to substantial learning-by-doing,scale and scope economies ranging from 5%-40% How that will play out in NB is pretty much unknown at

the present time


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Range of possible economic

impact is substantial (cont.) The variance in the evolution of the number of well ismost important across studies

Deloitte (2013) relies on a 8/25/55 new wells per year(low/medium/high) scenario

GNB (2012) relies on 100 new wells per year(conservative) scenario

The total number of wells depends on assumptionsregarding the Estimated Ultimate Recovery (EUR) for NB

Kennedy (2010) typical industry scenario is 200-250 wells required perTcf (i.e. 3000-3750 wells for 15 Tcf in NB or 100-125 new wells peryear over 30 years) or an EUR of 4-5 Bcf of natural gas per well.


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Decline curves on existing shale plays display largerange of EUR (1.39-5.9 Bcf) over 30 years (Baihly et

al., 2011)

Source: Kennedy (2010)


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... where Initial Production (IP) rates are of first-orderimportance with assumed typical hyperbolic production

decline curves

0

100

200

300

400

2006 2007 2008 2009 2010 2011

Initial Production Rate (MMcf/m)

Montney* Horn River* Fayetteville**

Source: Conrad (2010) and Mason (2010, 2012)


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Initial production rate vary greatly across shaleplays ...

ShalePlay No.ofHorizontal ells Ini6alProduc6on ate(MMcfpermo nth)

Mean Median 1stquin-le 4thquin-le

Barne' 1785 64.20267 55.197345 32.41917 90.582975

Faye'eville 870 69.605865 67.16913 39.305595 96.19806

Haynesville 509 277.046175 260.83659 177.457875 359.78922

Woodford 208 114.526545 97.151565 54.24384 161.354235

Marcellus 576 95.3505 80.624145 45.874185 134.97393

NB(*) 1 G-41 351 351

Source: from Table A1, OSullivan and Paltsev (2012) and HPDI (2012); (*) Annual Report (2012), Corridor Resources


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Economic impacts vary greatlyacross plays and studies

Source Sage (2012) Considine et al. Considine (2010CBER (2006) CBER (2008) US DOE (2010) CCBR (2011) SECOR (2010) Deloitte (2013)

ShalePlay Marcellus Marcellus Marcellus Faye'eville Faye'eville Marcellus EagleFord ULca Elginsub-bassi

State MD PA PA AR AR WV TX QC NB

I-OModel IMPAN IMPAN IMPAN IMPAN IMPAN IMPAN IMPAN ISQI-O STATCANI-O

Year 2009 2010 2009 2005 2007 2008 2010 2015 2012

Directoutput(%GDP) 0.02% 1.86% 0.70% 0.19% 0.96%

Totaloutput(%GDP) 0.03% 3.66% 1.33% 0.59% 2.67% 0.64% 0.23%

Directemployment(%Employmen t) 1.15% 0.11% 1.55%

Totalemployment(%Employment ) 0.01% 2.38% 0.76% 0.17% 0.74% 0.31% 0.11% 0.15%

AuthorscalculaLon,varioussourc esan dyears

As a reference, an annual impact of 0.1% of GDP is $32M (2011) and 0.5% ofemployment is 1,757 (2012) jobs in NB


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Economic impacts in NB

can be large Deloitte (2013): Total economic impact of (medium) 25 new

wells per year

$310M in direct revenues per year

$110M in GDP per year 500 full-time jobs per year

Other studies, including ours co-authored with Pierre-MarcelDesjardins (to be released in the fall), will likely add to the range

ofpossible economic impacts.

Will need regular monitoring of all related activities to formulateprobable impacts -- requires some minimal level of activity.


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Economic and Fiscal Impacts

Exclude the full cost of environmental and public health impacts

Exclude impact of policies that could address related concerns (e.g. carbon tax)

Exclude the benefits on the development oftechnological and human capitalopportunities

Legal and regulatory frameworks that are effective and efficient mitigate risks -- WILL NOTELIMINATE THEM!Cost-effectiveness analysis of laws and regulations take into accountimpacts on allsocial cost of activities (e.g. health and environment).

Important not to underestimate the legal incentives created by industrys voluntary codeof conduct (Industry Canada, 2012) and recent litigation trends in U.S. and Canada(Braul, 2012)

Need to resolve major governance, social and First Nations policy issues to securenecessary support and social acceptance ofevidence and facts.

... but thats not all folks !
http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca00963.htmlhttps://docs.google.com/file/d/0B4QxNG-MNzEsZkQ3c0s2c2tNUlk/edit?pli=1https://docs.google.com/file/d/0B4QxNG-MNzEsZkQ3c0s2c2tNUlk/edit?pli=1https://docs.google.com/file/d/0B4QxNG-MNzEsZkQ3c0s2c2tNUlk/edit?pli=1https://docs.google.com/file/d/0B4QxNG-MNzEsZkQ3c0s2c2tNUlk/edit?pli=1http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca00963.htmlhttp://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca00963.htmlhttp://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca00963.htmlhttp://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca00963.html

What are the economic prospects of developing natural gas from shale in New Brunswick?

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