The Potentials and Problems of Expanding Use of Shale Gas in the Continental U. S



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IV. Cost-Benefit Analysis


Accounting the relevant variables, the following formula is constructed as a model of cost-benefit analysis for expansion of use of shale gas:


= economic benefit at year t

= benefit of carbon emission from burning shale gas at year t

= cost of carbon emission from burning shale gas at year t

= cost of greenhouse gas emission from upstream production at year t

= cost of air impact from disel use during hydraulic fracturing at year t

= cost of forest disruption at year t

= cost of road disruption at year t

= cost of well worker mortalities at year t

= cost of constructing new shale gas wells at year t

= discount rate for economic benefit

= discount rate for carbon benefit and cost

= discount rate for cost of greenhouse gas emission from upstream production

= discount rate for cost of air impact from disel use during hydraulic fracturing

= discount rate for cost of forest disruption

= discount rate for cost of road disruption

= discount rate for cost of well worker mortalities

= discount rate for cost of constructing new shale gas wells

The formula captures the major benefits and costs from expanded use of shale gas. The time range of the formula is from 2015-2040. As this paper is exploring the effect of expanded use of shale gas in the future and currently it is at the end of 2014, 2015 is used as the first year in the model. 2040 is used as the final year because many U.S. Energy Information Administration (EIA) projections used for this model, such as shale gas production and gas price, are projected until 2040. Beyond 2040 there is a lack of important projections from reliable source for the model. 2040 is a reasonable end year also because it will be more than 25 years from now and we cannot foresee what kind technological advancement will be achieved then. Any projections and predictions beyond 2040 will become increasingly uncertain and unreliable.

Since there are no better suitable discount rates for each specific discount rate, it is thus assumed that. 7% is approximately the average return of all investments in the economy, so it is a reasonable discount rate for the 25-year period of 2015-2040.

1. Benefits

Economic Benefit


The economic benefit is represented by the economic revenue generated from shale gas, which is calculated by the projected volume of shale gas production times the projected weighted average gas price for years 2015-2040 [120][121]. This economic revenue does capture all of the economic benefits associated with shale gas because the projected weighted average gas price used for the calculation is nominal end-user price. As the final end-user price, it takes into account all the costs and profits for upstream production, midstream refinery and distribution, and downstream sales and retail. In this case, costs also contribute to the economy because costs for certain companies are actually incomes for other companies, such as the equipment costs for oil companies are incomes for equipment companies. So all of the costs accumulated will be paid with the final price by the end-user. The final end-user price will also capture the all of the employment benefits in different stages of the shale gas production to consumption process, represented by salaries paid by companies to employees, which is integrated into the overall cost and price for end-user. So for this model it is assumed that all of the economic benefits associated with shale gas are reflected by the unit weighted-average nominal end-user price times the projected volume of shale gas production.

The results are:



Table

Here the conversion rate used is 1,025 Btu per cubic feet [122]. There are three scenarios—bear, base, and bull. The base scenario uses EIA’s projection of shale gas production for 2015-2040. The bear case assumes that shale gas production maintains the 2015 level, and the bull case assumes that shale gas production grows at an annual rate of 5%, whereas the base case grows at approximately 2.8%. Clearly, the economic upside is quite significant. The discounted economic revenue from shale gas is $1,234.4.8 billion, $1,883.1 billion, and $2,229.5 billion for bear, base, and bull cases, respectively.


Carbon Benefit


The economic benefit of carbon emission from burning shale gas lies in that shale gas is a substitute to coal. Burning more shale gas means that there will be less coal burned, and that natural gas emits less carbon dioxide than coal. Here the data comes from EIA’s projection of carbon dioxide emissions from coal until 2040 [123]. The results are:

Table

Carbon dioxide emission peaked in 2011, and becomes less in every year thereafter. So it is assumed that compared to 2011, the reduced amount of carbon dioxide emission from coal in each future year is due to the expanded use of shale gas and less coal. Thus this becomes an environmental benefit for burning shale gas. The carbon cost in dollar amount used in the model is $43 per ton of carbon, which is the average value of Yohe et al (2007) peer-reviewed over 100 estimates of social cost of carbon [124]. Yohe et al (2007) also predicted that “it is very likely that the rate of increase will be 2% to 4% per year,” so starting in the model’s second year 2016 an annual growth rate of 3% is applied to the $43 per ton social cost of carbon. Eventually the sum of present value of carbon benefits in 2015-2040 will accumulatively be around $19.2 billion.


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