By Christopher Helman in Forbes
There are a few societal costs to the development of shale gas. Potential contamination of groundwater, complications in treating and recycling water used in fracking. Then there’s air pollution from leaking methane (a potent greenhouse gas) and from the diesel-powered rigs and trucks involved in drilling.
But all things considered the benefits of shale gas appear to outweigh the costs. Many utilities are finding that burning natural gas to generate electricity is cheaper (and cleaner) than coal. Cheaper supplies of fuel and feedstocks benefits U.S. industry, especially manufacturers and chemicals makers which have been reinvesting in the U.S. Homeowners benefit from cheaper heating and cooling and electricity. Drilling for gas has created hundreds of thousands of jobs during this economic malaise and it’s generated billions of dollars of lease payments and royalties to landowners.
A group of Yale economics graduates, many of them energy industry executives, led by Yale Professor Emeritus Paul W. MacAvoy, were curious about whether they could quantify the economic benefit that shale gas has on America. So they recently set out to do a cost-benefit analysis, valuing and balancing the pros against the cons.
They’ve released their findings in a paper called “The Arithmetic of Shale Gas.”
I’ve parsed all the complicated academic equations so you don’t have to. Their conclusion: the benefits of continued shale gas development are enormous and dramatically outweigh even worst-case scenario costs of pollution and clean-up.
Some specifics. Consider that back in 2008, before the shale boom really took off, the nominal price of natural gas (that is, the price at the Henry Hub in Louisiana) averaged $7.97 per mcf. In 2011, the price averaged $3.95 per mcf. Multiply that price drop of $4.02 per mcf by the 25.6 trillion cubic feet the country consumed in 2008 and you find that thanks to the shale boom, America is paying $103 billion a year less for natural gas. (With gas prices falling even further since 2011, in 2012 the benefit will be even greater.)
Had drillers not cracked the code on shale gas, the United States would instead have been forced to do what the experts expected five years ago: import massive quantities of gas, in the form of LNG from countries like Qatar, Australia, even Russia. Import-dependent nations like Japan and Korea pay upwards of $14 per mcf for LNG — more than triple U.S. prices. If the U.S. had to supplement domestic supplies with imports, the extra costs could have easily added $50 billion a year to the national natgas bill.
As the report’s authors write: “It is startling to acknowledge that consumer benefits from the technology of shale gas drilling and new gas production can be expected to exceed $100 billion per year, year in and year out, as long as present production rates are maintained.”
But it’s not enough to just look at the benefits. What about the costs?
The authors collected as many reports as they could find describing “accidents, misuse of technology and poor well design and installation.” A 2011 report for the Secretary of Energy counted 19 times that water from fracking operations spilled out of thousands of wells drilled. None of these instances included groundwater contamination. The Oklahoma Corporations Commission, which regulates the 100,000 oil and gas wells that have been hydraulically fractured in Oklahoma had zero documented instances of groundwater contamination. The EPA has reported two instances of groundwater contamination from fracking in Wyoming, though the agency has been roundly criticized for its methods.
Despite any evidence showing that drilling and fracking cause spills or pollution with any frequency, the authors decided to calculate the costs for a scenario that assumes 100 spills a year out of 10,000 new wells drilled each year. They figure that if 5,000 gallons of polluted frack water were to spill into a field, the cost to scrape up a hypothetical 5,000 cubic yards of contaminated soil and dispose of it at an offsite landfill would be on the order of $2.5 million. Furthermore, if a potable water well were polluted by fracking, the cost to haul in a potable water supply and drill a new water well would be about $5,000. Given 100 incidents in a year, the clean-up costs associated with fracking accidents would be roughly $250 million.
Comparing this $250 million a year in damages against the $100 billion in savings, and “economic benefits, as estimated in as limited methodology as is reasonable, exceed costs to the community by 400-to-1.”
(The study authors don’t attempt to quantify the costs of gas leaking into the atmosphere and don’t factor in any legal costs incurred in settling with landowners whose water is polluted. I would have hypothesized a worse worst-case scenario that would tack on an additional $2.5 million per incident in legal settlements and/or fines, to bring the total to $500 million a year. In that case, the benefits outweigh the costs by only 200-to-1.)
The study group also looked at the potential benefit to consumers of replacing oil consumption with gas — most likely via cars that run on compressed gas or LNG. It takes 6 mcf of gas to get the energy equivalent of one barrel of oil. The authors assume an average natgas price of $5 per mcf (nearly double today’s price) and an average oil price of $100 per barrel (about $20 more than today). Thus, you need $30 worth of natgas to replace $100 of oil, a savings of $70 per barrel. Replacing just 1 million barrels per day of oil demand with natural gas would save $70 million a day, or nearly $26 billion a year.
Their conclusion, of course: not even inflated costs associated with unrealistically high incidences of pollution can come close to balancing the societal benefits of the shale gas boom.
In addition to Prof. MacAvoy, the other members of the Yale Graduates in Energy Study Group include Robert Ames, Solazyme Corporation; Anthony Corridore, Lafarge North America; Joel N. Ephross, Duane Morris LLP; Edward A. Hirs III, Hillhouse Resources, LLC and University of Houston; and Richard Tavelli, private energy consultant.