Study: US Can Profit from Unconventionals While Protecting Environment

Contrary to popular belief, the United States can capture the full economic benefits of unconventional gas and oil while also substantially addressing local environmental impacts and making major strides toward a lower-carbon energy system. But stakeholders must let go of the misconceptions, historic rivalries, and distrust that have led to zero-sum mindsets and slow progress, according to a recent report from Harvard Business School (HBS) and The Boston Consulting Group (BCG).

The report, America’s Unconventional Energy Opportunity, offers a comprehensive plan to overcoming the “false trade-offs between reaping the enormous economic benefits of developing unconventional gas and oil, minimizing environmental impacts, and making major progress towards reduced greenhouse gas emissions.”

U.S. unconventional oil and gas development, which has eliminated the need for natural gas imports and reestablished the United States as the world’s second largest oil producer for the first time since 1991, offers the United States the largest single opportunity to change the nation’s competitiveness and economic trajectory over the next two decades, but also its geopolitical standing, according to the report. This opportunity comes as the United States seeks to overcome the erosion of its economy, which began even before the Great Recession.

Unconventional energy development has contributed more than $430 billion to the United States’ annual gross domestic product, and supported more than 2.7 million jobs that, on average, pay twice the median U.S. salary, from exploration and production to supporting industries and local services. By contrast, the U.S. economy since 2005 has only added 4.9 million new jobs.

However, a real risk exists that American citizens, companies and communities will fail to capitalize on this historic opportunity because of misunderstanding and mistrust, said Harvard Business School professor Michael E. Porter, a report co-author and co-chair of the school’s multi-year U.S. Competitiveness Project, in a June 11 press statement.

Report Seeks to Lay Out All Facts on Unconventional Energy

The findings of the report are based on an extensive review of existing studies, new primary research, and interviews conducted across all stakeholder groups. Previous studies have examined the positive economic opportunities presented by unconventional energy; this new research involved a comprehensive assessment of the potential economic gains across the economy.

The report came from a project established by HBS and BCG and recognizing the economic potential for U.S. unconventional energy. HBS and BCG sought to put a more comprehensive set of facts on the table not just from one advocacy group, but producers, regulators, and environmental groups, said David S. Gee, a study co-author, BCG partner, and North America leader of BCG’s energy practice, in an interview with Rigzone.

Unconventional development has been credited with the United States’ potentially achieving energy independence, as well as creating a renaissance in U.S. manufacturing. In spite of the benefits of unconventional development, public support for hydraulic fracturing has waned and expanded development, threatened due to legitimate concerns on how unconventionals affect climate change and widespread confusion over the facts. Late last year, New York Gov. Andrew Cuomo’s administration said they would ban hydraulic fracturing statewide even though southern New York has excellent potential for cheap and plentiful gas resources. Other communities across the United States, including Texas, have implemented bans on hydraulic fracturing. Officials in Denton, Texas – which passed a ban late last year – will keep the ban on their books for now.

By 2030, the development of unconventional gas and oil could achieve significant results, such as supporting 3.8 million jobs with wages twice the national average, average annual energy savings per household of $1,070 from low-cost natural gas, and nearly $600 billion in annual contributions to the United States’ gross domestic product and $160 billion in government tax revenue from production-related activities alone. This also will have ripple effects in energy-intensive industries such as plastics, metals and heavy manufacturing.

The report outlines 11 action steps – involving all stakeholders – to guide the development of unconventional resources. These steps include:

• Continuing timely development of efficient energy infrastructure
• Deliver a skilled workforce for critical growth industries
• Eliminate outdated restrictions to oil and gas exports
• Develop transparent and consistent environmental performance data
• Set robust regulatory standards to address environmental risks
• Achieve universal regulatory compliance
• Strengthen bodies driving continuous environmental improvement
• Contain methane leakage with regulatory standards and voluntary reductions
• Set climate policies that encourage cost-effective emissions reductions
• Foster clean-energy technologies through industry and government research and development
• Build out a smart, efficient energy grid

“The lack of trust and productive solutions-based dialogue among stakeholders has created gridlock and put America on a path that is not in anyone’s interests,” the report authors said. “We see many stakeholders talking past each other and too few efforts to synthesize and find common ground. That has created unnecessary risks for our energy development, future U.S. competitiveness, and the trajectory of the overall U.S. economy.”

US Economic Performance Eroding

Over the past five years, HBS already had been examining ways to understand what caused the erosion in the United States’ fundamental competitiveness in economic performance through the U.S. Competitiveness Project. This erosion started well before the Great Recession and subsequent slow recovery.

While highly skilled individuals, large international companies, and some high-tech startups are doing well, middle and lower-class Americans have seen slow job growth and stagnating wages. Small businesses are creating fewer jobs, and more are closing than opening.

“Although the U.S. is doing relatively better recently than other advanced nations, such as in Western Europe and Japan, U.S. economic performance by many indicators is worse that we have experienced in generations,” the report authors said.

This poor performance is not cyclical, but structural. In its research, HBS found that the United States retains core strengths that provide advantages relative to other countries. However, the overall quality of America’s business environment has eroded in key areas, including skills, infrastructure, costs of doing business, and corporate tax structure.

As part of this plan, the United States needs to eliminate its outdated ban on oil and gas exports.

“With abundant resources, restrictions on exports created in response to the 1970s energy crises are no longer needed, and exports would boost U.S. economic and job growth while benefitting friendly nations,” according to the report.

Other proponents of lifting the ban argue that doing so would not only boost the U.S. economy, but enhance its global leadership, Reuters reported in March.

One constructive approach that the oil and gas industry and environmental groups can take is to actually work together to address issues. The oil and gas industry also needs to do a better job acknowledging legitimate issues, such as the potential link between injection wells and earthquakes, and not just go into denial mode, said Gee.

One way to bring these groups together is to hold more forums like the one held in Cambridge, Massachusetts and organized by the study authors.

“You have to find people who want to move to the rational middle,” Gee told Rigzone.

But getting the people who want to compromise is difficult due to the resistance of polar extremes on issues, Gee said. One was an oil company representative who told Gee that others in industry shunned them because they started disclosing the chemical compounds in hydraulic fracturing fluids. Another is a representative from an environmental group who agreed with the idea of burning more natural gas as a transition to a lower carbon future, but couldn’t be seen saying it publicly because other environmental groups oppose it.

Development of unconventional oil and gas resources also will not delay the rollout of renewable energy, but can actually enable the scale-up of renewable energy usage, according to the report.

“We also find that the use of natural gas today will not lock in greenhouse gas emissions for the indefinite future, and that low-cost natural gas-fired power plants will provide the essential standby power needed to scale up renewables,” the report authors noted. 

Consistent application of compliance standards is another step needed to fully realize the economic potential of unconventionals while maintaining environmental standards. A balance between state and federal regulations also is needed. Water issues – which vary by state and shale plays – are better regulated at the state level, while air issues tend to be better regulated at the federal level.

“There’s no black and white,” said Gee. “It will be natural to have an overlapping set of regulations, given the nature of what you’re trying to regulate.”

While the recent decline in near-term commodity prices will impact oil and gas production, the decline is unlikely to significantly impact the United States’ fundamental competitive advantage over the next several decades.

“In fact, price pressure has led to increased innovation in unconventionals technology and lower production cost in the U.S., while deterring efforts in other countries to develop this resource,” the report said.