Download FFAN Economic Evaluation LEGR Conference

Cost: Benefit of fracking in Fermanagh:
Is there really a net economic gain?
Dr Brenna O’Roarty
Questioning potential of economic gain
Evaluate top and bottom line economic assumptions of the model
BENEFITS
COSTS
Economics Benefits?
1. High risk and uncertainty to productivity projection
•
Tamboran forecast 1.3 to 2.6 tcf of recoverable gas, equivalent to one
year’s gas supply for the UK
•
Project a value to public realm of £6.6 bn in terms of expected royalties,
VAT and tax revenues
•
Evaluation of inputs to their business model against US experience
suggest that projections may be grossly over-stated
•
Recovery rates and absolute production are highly variable and
unpredictable between, within and over the lifecycle of shale plays
•
In the US, top 10% of all shale plays account for 65.6% of gas production
and top 20% account for some 88%.
Long tail for productivity range across plays– size matters
Figure 1 Average well production and size of shale play
Average Well Production (mcf / day) (LHS)
No. Wells in operation (RHS)
3,000
16000
14000
2,500
12000
2,000
10000
1,500
8000
6000
1,000
4000
500
2000
Chattanooga
Mulky
Mowry
Pierre
Antrim
Cody
Manning
Niobrara
Spraberry
Permina Del. Midland
New Albany
Miss. Lime
Bend
Tuscaloosa
Lewis
Bakken
Austin Chalk
Mancos Hilliard Baxter
Source: Hughes, D.J. (2013) Post Carbon Institute, Feb
Hermosa
Borie Spring
Granite Wash
Pearsall
Barnett
Utica
Woodford
Eagle Ford
Fayetteville
Bossier
Marcellus
0
Haynesville
0
A long tail is present within shale plays too- and size still matters
Figure 2 Mean and median IP rates by shale play productivity
Mean IP (mcf / day)
Median IP (mcf / day)
% of Total Shale Gas production
10000
30
9000
25
8000
7000
20
6000
5000
15
4000
10
3000
2000
5
•
•
Cody
Chattanooga
New Albany
Mulky
Manning
Tuscaloosa
Pierre
Hermosa
Utica
Pearsall
Bend
Miss. Lime
0
Spraberry
Lewis
Austin Chalk
Borie Spring
Bossier
Antrim
Mancos Hilliard…
Source: Hughes, D.J. (2013) Post Carbon Institute, Feb
Niobrara
Bakken
Granite Wash
Woodford
Eagle Ford
Fayetteville
Marcellus
Barnett
Haynesville
0
Permina Del.…
1000
In the US, analysis of all shale plays indicate that on average:
- A mere 20% of wells are commercially viable
- Well quality declines over the life-time of the play
- More pronounced for smaller shale plays
Exacerbated by sharp decline in IP (initial production) rates per well of between 75% to 95% within first
three years of production.
Law of Diminishing Returns:
Figure 3 Annual Field Rate Decline at end 2011
No. Wells required annualy to off-set decline
Overall annual field rate decline (pre-2011)
60
1600
1507
1400
50
40
30
In
the Barnett,
1111
94% of wells proved uneconomical
as the field declined.
945
774
707
1200
1000
800
699
561
600
20
400
239
10
400
222
206
127
122
41
21
200
10
•
Antrim
Miss. Lime
Permina Del. Midland
Niobrara
Marcellus
Bakken
Woodford
Barnett
Mancos Hilliard Baxter
Source: Hughes, D.J. (2013) Post Carbon Institute, Feb
Austin Chalk
Fayetteville
Bossier
Eagle Ford
Borie Spring
Granite Wash
0
Haynesville
0
2% wells deliver in excess of 20 mmcf / day; 75% less than 10m mcf. Skew more marked for smaller plays.
Tamboran’s projections assume exceptional productivity rate
Figure 4 Comparison of Tamboran Projected Productivity at
peak with Highest Achieved in Smaller US Shale Plays
No of operating wells
•
Tamboran assume above average well
lifespan. 7.5 yrs v median 5 yrs in US
•
Tamboran’s IP decline rate is less steep,
hyperbolic decay rate of 1.5 v less than 1.0
in US
•
Tamboran project no decline in well quality
over play; indeed productivity increases
•
Tamboran adopt a controlled cost of well
production, despite increase life-cycle costs
per unit in US
•
Achieved EURs in the US have fallen short
of initial projections by approximately 50%
due to shorter than expected life-span of
wells and unforeseen decline in well
quality
•
In the US, by 2012 even the EIA had revised
estimates of reserves down by some 42%
•
Projections of recoverable resource likely
to be grossly over-estimated
Production Bcf.day
600
0.45
0.4
500
0.35
400
0.3
0.25
300
0.2
200
0.15
0.1
100
0.05
Source: Hughes, D.J. (2013) Post Carbon Institute, Feb; Tamboran (2012)
Cody
Utica
Pearsall
Tuscaloosa
New Albany
Hermosa
Mowry
Manning
Chattanooga
Mulky
Tamboran est
Pierre
Bend
Bossier
Miss. Lime
Mancos Hilliard Baxter
Lewis
0
Spraberry
0
- negligible energy supply for UK
- low impact for public purse
Especially given scale
2. Direct Employment
•
In April 2012, Tamboran halved job projections for Fermanagh from 600 to 300 FTEs by
2025. By 2014, projections revised down by a further 40% to 180 FTEs
•
Jobs remain overstated given inflated productivity and lifecycle projections
•
By nature the industry is labour intensive during the development phase and capital
intensive during the production phase
•
In practice, there is financial pressure to front-load drilling activity, resulting in boom &
bust labour economics
•
Approximately 98% of jobs are associated with well development, are short-term, lowskilled and predominantly filled by a transient work-force experienced in the industry.
•
The production phase accounts for 2 to 5% of jobs which remain more local and
predictable. Using Tamboran’s job projections, this accounts for 3.6 to 9 FTEs
3. Multiplier Effect and Public Purse
•
•
•
•
•
•
•
•
Tamboran have suggested a Type 1 multiplier of
5.0, but provide no basis for the assertion.
The Scottish Executive calculated a Type 1
multiplier of 1.2 for their oil & gas industry, while
building construction is associated with a Type 1
multiplier of 2.09.
The direct supply chain associated with the
construction industry tends to be more local while
beyond concrete, and gravel for road building,
supplies of specialist equipment and plant &
machinery to the oil & gas industry are imported.
Associated jobs are not accretive. That is, the
industry has significant displacement costs.
Industries transient workforce leads to low tax
recovery (direct & indirect)
Exacerbated by low profitability of industry due to
evidence of financial bubble as long ago as
2011/12
Falling price of gas since 2008 has resulted in full
cycle costs of production exceeding gas price. Oil
price has since collapsed
As a result energy companies have been making
significant write-downs and selling assets at a loss
since end 2011.
£1
Investment
£1
Direct
Wage income
and corporate
profit, plus non
labour inputs.
In contrast to
construction
industry
significant
proportion of
investment and
corporate profit
is not retained
within
jurisdiction
=
Un-quantified
£0.20
+
Indirect
+
Direct supply
chain impacts.
Benefits to
concrete and
quarry suppliers.
Other impacts
directly related
to manufact.
(plant &
machinery) and
services
(engineers,
geologist etc)
predominantly
imported.
Induced
Increase in
household
income and
indirect demand
for goods &
services. Much
lower, potentially
negative impact
compared to
construction
sector (0.75) due
to leakage
associated with
more transitory
work-force and
local inflationary
pressures
less
Displacement Costs
Long-term erosion of GVA and employment in incompatible
economic sectors, notably tourism, agriculture and agri-foods;
Increased short-term demand for public services, health,
education, housing etc.
Environmental monitoring
Roads
Economic Costs
1. Short-term cost outweighs short-term gain
Road Damage
•
Fracking activity reduces the life-cycle of
roads by 75% (from 20 to 5 years) in
every state where drilling has occured8
•
A Texas Dept of Transport (TxDOT) survey
in 2012 revealed that:
– 1,184 loaded lorries required to bring
a well into production
Texas 2012:
Road Damage $4 bn
Revenues $3.6 bn
Arkansas 2012:
Road Damage $0.45 bn
Revenues $0.182 bn
– 353 are required for annual
maintenance
– 997 are required to re-frack each well
•
Equivalent to 8 mn car journeys to
develop and 2 mn cars pa to maintain
8Rogers,
D (2013) Externalities of Shale: Road Damage, April,
Pennsylvania2012:
Road Maint. $3.5 bn
Impact Fee $0.204 bn
2. Long-Term displacement of dominant economic sectors
Shale industry is incompatible with dominant sectors of economy
•
In short, shale gas exploration would replace existing economic activity. It
is not accretive
•
The destruction and contamination of the natural landscape by heavy
industry is irreversible
•
USP of Fermanagh is its environmental purity and underpins tourism,
agriculture and agri-foods
•
The economic value of the ‘environmental economy’ was identified as
early as 2005 in a specially commissioned report and accounted for
32,749 jobs and £573 mn per annum of GVA. It is a cornerstone of the N
Ireland economy and a growth sector
•
Capitalisation of GVA in long-term greatly exceeds proposed investment
•
Turnover of food production in N I alone is £3.7 bn pa (2010)
Summary: The net economic benefit is deeply negative
Shale industry is incompatible with dominant sectors of economy
•
Why?
– Business model inputs to productivity estimates are wildly optimistic
– Resource is likely to be much, much lower
– Jobs growth over-stated, likely to be transient and short-term
– Road damage costs significant
– Crowding out of other industries
– Not accretive. Displaces existing economic sectors and jobs
•
The environmental degradation, whether real or perceived, will obliterate
tourism in Fermanagh and reduce demand for agricultural products and
agri-foods from the island of Ireland.
And economics are only one cost!
Economic
Social
Cost:
Benefit
Public Health
Environmental