By Mahinaz El Baz
Unconventional oil and gas activities worldwide are reshaping energy futures and bringing significant benefits to the economies in terms of jobs, government revenues, and GDP. Yet, concerns about the economic viability of unconventional oil and gas have been on a rise since the initial pursuit of these resources.
Nonetheless, a new era of affordable and abundant energy from the unconventional sources may tilt the balance promising to create significant competitive advantages for both energy intensive industries and industries that rely on unconventional oil and natural gas derivatives as a critical production feedstock. The new unconventional supply of energy has led to a reduction of hydrocarbon imports in some countries.
Over the past decade, the US and Canada have experienced spectacular growth in the production of unconventional sources of energy, notably shale gas and tight oil, thanks to technological innovations such as horizontal drilling and hydraulic fracturing, according to European Parliamentary Research Service’s (EPRS) in-depth analysis – Unconventional Gas and Oil in North America, published in June2014.
Canada actively promotes the development of the energy sector as a component of its broader economic development goals, and unconventional oil and gas is seen as both important sources of energy for domestic industrial and residential needs, and for potential exports.
The US views natural gas from shale deposits, which was unavailable prior to the development of hydraulic fracturing technology, as a transition fuel from conventional fossil fuels to alternative energy. Accordingly, from 2008 to 2014, the US unconventional oil resources have increased the country’s total oil output by 25%, while annual shale gas production in the US grew from about 1tcf in 2006 to 9.7tcf in 2012; and it is expected increase further to approximately 19.8tcf by 2040.
The Cost of Development
With the recent rise in well drilling and stimulation costs related to the unconventional hydrocarbons, some are concerned that much of these resources are uneconomic. Accordingly, the cost of drilling and constructing a well and putting it into operation is a critical component of the economic viability of developing any unconventional oil and gas resources.
The costs associated with unconventionals vary. The cost of a well depends on several factors such as the vertical depth of the well bore, its lateral length, reservoir pressure, rock characteristics, and the number of fracture stages, as well as commercial factors such as the access to materials, supplies of water and proppant, and drilling and completion services. Capital expenditures are undertaken for land, drilling, completion, facilities, gathering, processing, and compression. The development also requires additional pipeline capacity to ship the gas to the markets.
“In the US an unconventional gas well in a shale or tight sands target may cost anywhere between $3.5 million and $12 million, while a well targeting CBM may cost between $500,000 and $1.5 million,” stated EPRS’ analysis.
Yet, the drilling costs are merely one segment of a total financial calculus. In fact, unconventionals pledge high financial contributions.
The US and Canada have seen a rise in their hydrocarbon revenues since they have introduced unconventional exploration and production activities. The most visibly has this positive trend reflected on the two countries’ GDP.
“Unconventional energy contributed $284 billion in 2012 to the US GDP and it is expected to add as much as $533 billion in total in 2025,” IHS, an energy consultancy group stated in its February 2014 report on America’s New Energy Future. Similarly, McKinsey Global Institute’s Trends survey in 2013 estimated that unconventional oil and gas production in the US could raise the country’s GDP by 2-4% by 2020.
In similar veins, the share of Canada’s energy sector in the country’s GDP has remained around 10% over the last decade, while unconventional oil and gas output recorded the highest growth among all the industries, some 60% between 2007 and 2013, according to the International Monetary Fund’s Country Report No. 14/28.
Furthermore, the unconventional oil and gas revenues contributed considerably to the state budgets. “In the US, the unconventionals have added $62 billion to the federal coffers in 2012 through federal, state, and local taxes,” noted Brigham A. McCown in his October 2012 article for Forbes. By 2020, the US expects to add extra $111million through various taxes and royalties to the state income, as confirmed by The American Oil&Gas Reporter from April 2013.
Hence, as IHS Chief Economist, Nariman Behravesh, told the magazine, “state governments already are taking advantage of the revenue and economic progress the unconventional revolution brings.” In the US’ Texas, unconventional gas activity generated state and local revenues of $5 billion, which in overall national budget represents 6% of the education and 13% of the healthcare systems expenditure. In comparison, in Colorado, the unconventional gas industry generated $1.6 billion of the state and local revenues, which equal 13% of its education budget, stated IHS research paper – The Economic and Employment Contributions of Unconventional Gas Development in State Economies from June 2012.
As a result of these positive contributions, the US states have started implementing industry-favorable policies and legislation to encourage more development of the unconventional exploration, drilling, and production. This came also in line with employability targets in the country.
Unconventional oil and gas are already driving major benefits in the Northern American job generation and employment opportunities. “The direct, indirect, and induced effects of the unconventional revolution in the US have added 1.7 million jobs, with 3.3million jobs total expected by 2020 and 3.9 million jobs in 2025,” IHS’ research from June 2012 informed.
The US Bureau of Labor Statistics data on its website shows that a majority of top unconventional oil producing states has shown lower unemployment rates than the overall national average. In 2010, the top five producing states’ unemployment rates were 6.9-8.9%, compared with the national average of 9.6%. “Between 2010 and 2015, the top ten producing states, as ranked by employment generated through their unconventional gas activity, [was to] experience a compound annual employment growth rate of nearly 8%.” Pennsylvania and Colorado are expected to lead in employment contribution growth, experiencing compound annual growth rates of roughly 14% and 10% respectively.
The sector has proven its resilience despite job losses elsewhere due to the Great Recession in the first two years of the period between 2009 and 2013. Total average annual employment across all industries in the US saw an increase of 4.17% from 128.6m to 134m jobs in the given period, while, in comparison, total employment in the nation’s oil and gas industry increased by 39.02%.
North America’s Unconventional
Both the US and Canada have been determined to continue in exploration and production activities in the unconventional resources. In the US, a large portion of shale gas production growth has occurred in the Appalachian Basin’s Marcellus Shale. In the Marcellus region, dry natural gas production has more than tripled in the past three years, from an average of 4.8bcf/d in 2011 to an average of 14.6bcf/d in 2014. Tight oil accounts for more than a third of US crude oil total production. A large portion of tight oil production has come from Western Gulf Basin’s Eagle Ford and from the Williston Basin’s Bakken Shale. In the Bakken region, oil production in 2014 averaged 1.1mb/d more than 2.5 times greater than the 2011 average of 0.4mb/d. In addition, Center for Strategic and International Studies’ report on unconventionals from 2014 proved that US natural gas reserves increased between 2007 and 2012 by 30%, from about 248tcf to about 323tcf.
On the other hand, “Canada has 174 billion barrels of oil reserves, of which 169 billion barrels are unconventional, and the country also has an estimated 573tcf of unproved technically recoverable shale gas resources,” according to an assessment prepared by the US Energy Information Administration (EIA). Tight oil production in the country doubled between 2011 and 2014 from 0.2mb/d to 0.4mb/d. Most Canadian tight oil production comes from Alberta and Saskatchewan. The same is true of Canadian shale gas production, which increased from 1.9bcf/d in 2011 to 3.9bcf/d as of May 2014, when including output from the Montney formation. In addition to, tight oil, which is 10% of Canadian oil production, 56% of the country’s oil production comes from oil sand, which amounts to roughly 2mb/d.
The unconventional revolution that had occurred in the US and Canada can thus as an example for the development of unconventional energy resources on a commercial scale in other regions. IHS Chief Economist, Nariman Behravesh, said: “The unconventional oil and gas revolution is all about the free market. It is all about private entrepreneurs and the entrepreneurial spirit. It really is a testament to the US system and the modern-day free market.”
Yet, developing new rules for unconventional oil and gas will be critical to effectively manage the transformation from conventional ways not only in North America, but globally. This is a key moment to determine the future energy balance between the potential positive economic impacts of unconventional oil and gas and other low-carbon alternative fuels.Download