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



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2. Costs

Carbon Cost


Although shale gas is comparatively cleaner than coal, burning shale gas still generates a significant amount of carbon emission that is harmful to the environment. Using the previous shale gas production data as in economic benefit, and the $43 social cost of carbon with annual growth rate 3%, the carbon cost of shale gas is:

Table

The social costs of carbon from shale gas in 2015-2040 for bear, base, and bull cases are $106.7 billion, $161.4 billion, and 189.2 billion, respectively.


Costs Associated with Shale Gas Wells: Costs of Greenhouse Gas Emission from Upstream Production, Air Impact from Diesel Use during Hydraulic Fracturing, Forest Disruption, Road Disruption, and Worker Mortality


The model estimates the number of shale gas wells and newly constructed wells in the U.S. each year, and calculates the costs associated with them. These major costs include the greenhouse gas emission from upstream production, air impact from diesel use during hydraulic fracturing, forest disruption, road disruption, and worker mortality.

To estimate the number of shale gas wells in the U.S., a ratio between well numbers and shale gas production volume is applied. In 2007, the U.S. had 25,145 shale gas wells, and shale gas production was 1.52 trillion cubic feet, which gives a ratio of approximately 16,543 wells for 1 trillion cubic feet of shale gas produced [126][126]. Applying this ratio to every year’s production volume, we estimate the number of shale gas wells each year. This model assumes that each shale gas well has a life of production of 8 years, and also that the relative increase in wells from year t-8 to year t is the number of wells constructed in year t (e.g. the difference between well numbers in 2015 and 2007 are the number of wells constructed in 2015) [127]. Therefore, we have a method of estimating the number of new wells constructed each year and also the associated environmental costs. Again, we use scenarios of bear, base, and bull cases for the shale gas production volume to demonstrate different well numbers and their costs.

Manhattan Institute estimates that on a per well basis throughout the well’s functional life, the cost of greenhouse gas emission from upstream production is $2,796, the cost of air impact from diesel use during hydraulic fracturing is $7,245, and the cost of forest disruption is $3,943 [129]. Manhattan Institute is a conservative think tank, so its estimates might be biased, but the estimates are nonetheless used in the model because there lacks these kinds of estimates from more reliable sources, and these are important variables that need to be incorporated.

This model also assumes that the road disruption and re-construction costs are $18,000 per well, taking the average of the estimate of $13,000 to $23,000 per well [129]. As for worker fatality costs, the model takes the assumptions that U.S. Bureau of Labor Statistics Census of Fatal Occupational Injuries estimate that there are averagely 6.7 fatalities per 100 oil and gas wells per year, and that U.S. Environmental Protection Agency (EPA) sets the value of a human life at $9.1 million [130][131]. The results of the costs associated with shale gas wells are:



Table

Compared to the base case of $1277.6 billion of economic benefits from shale gas, the costs of greenhouse gas emission from upstream production, air impact from diesel use during hydraulic fracturing, forest disruption, and road disruption are comparatively small, together amounting to $32.5 billion in present value in the base case. Meanwhile, worker mortalities alone amount to $307.2 billion in the base case, which is quite significant.


Cost of Construction of Shale Gas Wells


Based on the estimated number of new wells each year, the model calculates the cost of constructing new shale gas wells each year, assuming a low cost bull case of $3 million per well, a base case of $6.5 million per well, and a high cost bear case of $10 million per well [127]:

Table

It is assumed here that the cost of constructing each well does not change over time, as the price increase due to inflation and the price decrease due to technological advancement will cancel each other’s effect. The cost of constructing new wells turn out to be very significant, with a low cost bull case of 3,051.3Bn, a base case of 6,611.2Bn, and a high cost bear case of 10,171.1Bn.


3. Sensitivity Analysis


Here two of the most uncertain and important factors in the model—natural gas price and social cost of carbon—are manipulated in a sensitivity analysis:

Table . Sensitivity analysis of social utility ($bn) under different scenarios of natural gas price and social cost of carbon

For the EIA projection of nominal natural gas price from 2015 to 2040, the price has a compounded annual growth rate (CAGR) of 3.8%, so the same annual growth rate is also assigned to the assumed natural gas price of $4 in 2015 and $10 in 2015. As for the social cost of carbon, Yohe et al (2007) describes the many estimates as highly uncertain, ranging from less than $1 per ton of carbon to over $1,500 per ton of carbon. From the sensitivity it is evident that maintaining the EIA projection of natural gas price the overall social utility becomes negative when the social cost of carbon exceeds $300 per ton of carbon.


V. Conclusion


Overall, in the base case of the model, the social utility is:

Combining the fourth to eighth terms into other costs associated with wells, the overall social utility becomes (in present value of base case):





The final outcome is a negative number of $-5,177.5Bn, with the costs significantly outweighing the benefits due to the large cost of new wells construction. It appears that expansion of shale gas should not be pursued, but in fact it still may be logical to pursue shale gas expansion for several reasons. First, the current cost-benefit analysis turns out to be negative because the cost of constructing new wells is very large. The magnitude of this cost of constructing new wells may be biased right now because the cost of constructing new wells will vary by region. Some regions will have higher costs near $10 million per well, where developing shale gas will not be economical, but other regions may have lower cost. If the cost per well is as low as $1.5 million, it will be beneficial to develop shale gas. Since the federal government cannot produce a solve-all solution for all regions in the country at a national level, this is actually a good decision for individual companies in the private sector to decide for their own specific cases whether drilling a well is profitable for the company given its particular well construction cost in the region. If calculated without the construction cost of new wells, the social utility outcome for the cost-benefit analysis will be a positive number of $1,433.7Bn, with the benefits outweighing the costs; then, expansion of shale gas should be pursued. So given individual companies’ own profitability, if some of the companies can generate profit given their lower cost of well construction, shale gas expansion should be allowed.

Also, the high construction cost of wells is based on the estimate of the new wells constructed each year. The estimates of the new wells constructed each year may be biased because the numbers of new wells constructed are predicted very aggressively, so the numbers may be overstated. If the numbers of new wells are overstated and can be brought down with more research, or technological advancement, this can lead to lower construction cost per well or boost the production for each well so fewer new wells are needed each year. Then, the overall cost of constructing new wells will decrease and may turn the cost-benefit analysis’ outcome from negative to positive, therefore making it logical to expand shale gas.

Lastly, if shale gas is expanded in a very limited scale, in the long-term, there will be less energy available for consumption in the market, which will drive up the energy price. When the energy price becomes high enough, it will be rational again to develop shale gas despite the high cost of new wells construction, because in this case the economic benefits will become big enough to outweigh the high costs.


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