Chapter 8
Economic Outlook and Conclusions
Abstract
Albert Einstein said, “One of nature's biggest forces is exponential growth.” Information age has taught us that this exponential growth cannot be intangibles. Ever since the plastic revolution, there has been an exponential growth in GDP as well as nongenetic diabetes, cancer, Alzheimer, and numerous other maladies; so what? Success of the human race hinges upon how we manage our resources and how closely we emulate nature, because nature is the only one that can allow exponential growth. Unconventional gas has opened up opportunities that can revolutionize the energy outlook of the world.
Keywords
Economics of intangibles; energy crisis; GDP growth; reserve analysis; sustainable development8.1. Summary
Albert Einstein said, “One of nature's biggest forces is exponential growth.” Information age has taught us that this exponential growth cannot be intangibles. Ever since the plastic revolution, there has been an exponential growth in GDP as well as nongenetic diabetes, cancer, Alzheimer, and numerous other maladies; so what? Success of the human race hinges upon how we manage our resources and how closely we emulate nature, because nature is the only one that can allow exponential growth. Unconventional gas has opened up opportunities that can revolutionize the energy outlook of the world.
There is this conventional analysis that would tell us how unconventional oil and gas will increase our disposable income, save in energy costs, and sustain economic growth for another century of new golden era of petroleum. Then there is this group of doubters, environmental Jihadists, who would remind us that such growth cannot be sustained and the human/environmental costs would add to the train wreck of the runaway “technological disaster” train. This book subscribes to neither of these two camps and puts unconventional gas in scientific perspective. It shows that unconventional gas has the potential of not only minimizing the environmental impact, but to improve the environment also. It not only saves in economic terms, but also creates sustainable growth in economy for both short term and long term.
This book deconstructs existing notions that mainly came from conventional analysis—the one that does not apply to unconventional reservoirs. It then shows the new synthesis that is entirely scientific and free from bias and prejudices of New Science that has been marred with contradictions and paradoxes. With the new synthesis presented is the energy outlook that indeed looks very rosy—something unprecedented in modern era.
This book neither invents any new theory nor introduces any new technology. It simply adds a new perspective that was not used in the context of unconventional gas. With this outlook, it shows how reservoirs should be characterized for proper assessment of reserve and strategies made for sustainable growth that is indeed exponential. It taps into existing technologies that are matured in the enhanced oil recovery (EOR) domain and shows that they are more easily applied for unconventional gas recovery. This can indeed lead to exponential growth with environmental appeal—a notion that is indeed unprecedented in the modern era.
8.2. Economics of Unconventional and Economics of Intangibles
The world looks at the United States for economic leadership. Energy being the driver of the current civilization, the role of energy economics cannot be overemphasized. At a current average global consumption growth rate of 2% annually (1995–2005), by 2025 the world will need 50% more oil (120 million bbl/day), and the International Energy Agency (IEA) admits that Saudi will have to double oil production to achieve this, which is not feasible in even the most optimistic scenario. And that is not even taking into account that 80% of the world is only just starting to use oil and gas. In recent years, energy demands from most emerging economies have increased dramatically in populous countries as their oil consumption per capita grows. The IEA estimates that 93% of all incremental demand comes from non-OECD countries. Therefore, in time, oil prices will continue to rise.
8.2.1. The Conventional Economic Analysis
In United States, the energy economics has been tremendously impacted by unconventional oil and gas production. The economic and employment contributions from US unconventional oil and gas production are now being felt throughout the US economy, increasing household incomes, boosting trade, and contributing to a new increase in US competitiveness in the world economy.
A recent report shows that unconventional oil and gas activity increased disposable income by an average of $1200 per US household in 2012, as savings from lower energy costs were passed along to consumers in the form of lower energy bills as well as lower costs for all other goods and services. This figure is expected to grow to just over $2000 in 2015 and reach more than $3500 in 2025 (HIS Report, 2013).
US trade position will continue to improve, owing to the significant reduction in energy imports and the increased global competitiveness of US-based energy-intensive industries. Driven by a rise in domestic production and manufacturing that will displace imports, as well as a favorable export position for these industries, the trade deficit will be reduced by more than US$ 164 billion in 2020—equivalent to one-third of the current US trade deficit. Unlike previous studies, which focused solely on upstream unconventional activities, this study considered overall activities and found that the sector of the energy value chain currently supports more than 1.7 million jobs and will grow to nearly 3 million by the end of the decade. The new study widens the breadth of the research to include the full energy value chain (upstream, midstream, and downstream energy and energy-related chemicals) and the overall macroeconomic contributions on the manufacturing sector and broader US economy. Midstream and downstream unconventional energy and energy-related chemicals activities currently support nearly 377,000 jobs throughout the economy, the study finds. Combined with upstream activity, the entire unconventional oil and gas value chain currently supports more than 2.1 million jobs. Total jobs supported by this value chain will rise to more than 3.3 million in 2020 and reach nearly 3.9 million by 2025.
“The unconventional oil and gas revolution is not only an energy story, it is also a very big economic story that flows throughout the U.S. economy in a way that is only now becoming apparent,” said Daniel Yergin, IHS Vice Chairman and author of The Quest: Energy, Security and the Remaking of the Modern World. “In addition to significant job and economic impacts from energy production and its extensive supply chains, the growth of long-term, low-cost energy supplies is benefiting households and helping to revitalize U.S. manufacturing, creating a competitive advantage for U.S. industry and for the United States itself.”
Energy-related chemicals and other energy-intensive industries such as petroleum refining, aluminum, glass, cement, and the food industry are some of the primary beneficiaries from secure supplies of low-cost energy from unconventional production, the study says. More than 70% of the cost of producing energy-related chemicals— which include major commodity petrochemicals such as olefins, methanol, and ammonia—is the cost of raw materials and energy feedstocks.
The chemical manufacturing industry accounted for 13% of all US merchandise exports ($198 billion) in 2012—compared to $ 152 billion in 2007.
This trend is expected to continue as energy-intensive industries benefit from lower energy and electricity prices and increased demand for their products, as growth in investment spurs domestic consumption. In addition to measuring jobs supported by the full unconventional value chain, the study also quantifies the additional manufacturing jobs attributed to the broader macroeconomic contributions that begin with unconventional oil and natural gas. More than 460,000 combined manufacturing jobs (3.7% of all manufacturing jobs) will be supported in 2020, rising to nearly 515,000 (4.2% of total manufacturing jobs) in 2025. The manufacturing sector will become increasingly connected to unconventional development as a primary source to create and sustain jobs over the course of the study period. Manufacturing jobs will represent 1 out of every 8 jobs supported by unconventional oil and gas development during that time.
The entire unconventional oil and gas value chain and energy-related chemicals will contribute $ 284 billion in value-added contributions to GDP in 2012, a figure that will increase to nearly $ 533 billion annually in 2025. The full value chain of industrial activity and employment associated with unconventional oil and natural gas contributed more than $ 74 billion in federal and state government revenues in 2012. Tax receipts will rise to more than $ 125 billion annually by 2020 and reach $ 138 billion by 2025. Workers' earnings from all unconventional energy and chemicals activities were nearly $ 150 billion in 2012. This total will rise to $ 207 billion in 2015 and will be nearly $ 269 billion in 2025. Industrial production increases directly resulting from lower feedstock prices and energy costs associated with the full value chain of unconventional activity will be $ 258 billion (3.5% increase) by 2020 and rise to $ 328 billion (3.9% increase) in 2025. Between 2012 and 2025, IHS (2013) projects a cumulative investment of nearly $ 346 billion across the midstream and downstream energy and energy-related chemical value chains. Close to $ 216 million of this will come in the midstream and downstream segments of the unconventional value chain, including 47,000 miles of new or modified pipeline infrastructure.
More than $ 31 billion in new capital investments will drive the addition of more than 16 million tons of chemical capacity by 2016. Cumulative investment will grow to more than $ 129 billion to support nearly 89 million tons of capacity by 2025.
Employment contributions from the midstream and downstream sector are at their greatest in the near term (currently supporting nearly 324,000 jobs), as expansions and other capital expenditures are made to increase capacity connecting the resource base with broader end users.
Energy-related chemicals (currently supporting more than 53,000 jobs) will support a growing number of jobs in the long term. By the end of the decade, energy-related chemicals will support more than 277,000 jobs—a fivefold increase—and rise to nearly 319,000 by 2025.
8.2.2. The New Synthesis
This book presents a new synthesis throughout. In scientific and technology terms, it meant material characterization, followed by the characterization of a process and energy source. In economic term, it should involve an approach that can be called ‘economics of intangibles’ (Zatzman and Islam, 2007). It includes all factors, rather than just one factor (often selected based on price index). Each of these factors has an index for environmental impact that is either negative or positive. The positive impacts are expected to keep an ecological balance. Most of the processes that are established to date disrupt ecological balance and produce enormous negative effects on all living beings. The new synthesis first adopted to petroleum engineering calculations by Islam et al. (2010) paved the way to accounting for environment-friendly and socially responsible technologies. Such approach indexes effects of:
1. Natural versus artificial: For instance, the use of Freon in a cooling system disrupts ozone layers and allows vulnerable rays of the sun to hit the earth and living beings. Similarly, chemically “purified” petroleum products pollute the environment by releasing harmful chemicals that add to global warming. Energy extraction from nuclear technology leaves harmful spent residues. All these can be accounted for if a negative index is assigned at every level of processing.
2. Quality of energy: The quality of energy is an important phenomenon. However, when it comes to energy, the talk of quality is largely absent. It is because of the disconnection between energy and mass analysis that itself is embedded in the definition of photon. With the scientific characterization tool introduced in this book, one can assign an index for quality for every type of energy source, by assigning a negative number for artificial sources and positive number for natural sources. Within a certain category, discussion of relative merit can be carried out.
3. The final value added products: During the value addition process, different indices should be attached to different processes depending on the contamination due to departure from natural processes. Consider, for instance, an operation with all natural chemicals and another with artificial chemicals. The former creates products that are part of environmental integrity, whereas the latter is part of the environmental insult. The new synthesis allows for a distinction between the two processes.
Table 8.1 shows the heating value of various fuels. The economic attractiveness of unconventional natural gas increases dramatically if the development and operational costs are decreased or if there is a fundamental change invoked. This book shows how that is done through:
Table 8.1
Heating Value of Various Fuel Types
| Fuel type | Heating value |
| Premium wood pellets | 13.6 million Btu/ton |
| Propane | 71,000 Btu/gal |
| Fuel oil#2 | 115,000 Btu/gal |
| Fuel oil#6 | 124,000 Btu/gal |
| Seasoned firewood | 15.3 million Btu/cord |
| Oven-dried switchgrass | 14.4 million Btu/ton |
| Bituminous coal | 26 million Btu/ton |
| Shelled corn @15% MC | 314,000 Btu/bushel |
| Natural gas | 1050 Btu/scf |
From Islam et al., 2010.
1. re-assessment of reserve based on conventional gas reserve (rather than separate unconventional gas reserve);
2. introducing cost-effective technologies for unlocking unconventional gas, rather than relying on expensive currently used technologies;
3. minimizing expensive data acquisition techniques that are not applicable to unconventional reservoirs;
4. properly characterizing (with dynamic refinement of data) reservoirs and identifying “sweet spots” within existing conventional reservoirs;
5. lower capital cost by selecting sites within developed regions.
In United States, since 2007, natural gas production has increased by 5931 Bcf. The overwhelming majority of this increase, i.e., 98.5%, came from unconventional oil and natural gas resources beneath onshore nonfederal land. This natural gas production accounted for approximately 82% of total US production in 2012 and grew by 40% between 2007 and 2012. Gas production from onshore federal lands also increased from 2007 to 2009, but has since returned to 2007 levels, representing a mere 3%. If new synthesis is applied to this unconventional outlook of the United States, a much brighter picture emerges, with all sustainable products to complement this production. As an example, the job creation with unconventional gas can be cited. Figure 8.1 combines published data with new synthesis outlook.
If this model is applied to the rest of the world, a total energy outlook emerges that gives great hopes for the future. Figure 8.2 plots the new energy outlook involving natural gas that includes unconventional gas. This figure shows, by the year 2030, natural gas alone can carry the bulk of the energy load of the world.
Figure 8.1 New synthesis versus conventional analysis.
Figure 8.2 Energy outlook with natural gas under the new synthesis scenario.
8.3. Conclusions and Recommendations
Ever since the oil embargo of 1972, the world has been gripped with the fear of “energy crisis.” The U.S. President Jimmy Carter, in 1978, told the world in a televised speech that the world was in fact running out of oil at a rapid pace—a popular Peak Oil theory of the time—and that the US had to wean itself off of the commodity. Since the day of that speech, worldwide oil output has actually increased by more than 30%, and known available reserves are higher than they were at that time. This hysteria has survived the era of Reaganomics, President Clinton's cold war dividend, President G.W. Bush's post-9/11 era of “fearing everything but petroleum” and today even the most ardent supporters of petroleum industry have been convinced that there is an energy crisis looming and it is only a matter of time, we will be forced to switch no-petroleum energy source. This book can provide a delinearized history of energy and places unconventional gas in its proper place as the fuel for an energy revolution.
8.3.1. Unconventional Gas Reserve
Based on the discussion presented in the book, the following conclusions can be made.
1. The resource triangle is valid in its scope but the perceived difficulty associated to the development of unconventional reserve is unfounded.
2. Any resource base of unconventional gas should be conventional oil and gas that are already developed in order to minimize exploration and development costs. This includes abandoned or depleted reservoirs.
3. Conventional analysis with cutoff porosity or saturation points is not applicable to unconventional reservoirs.
4. In evaluating unconventional gas reserve, no cutoff point or net thickness calculations should be made, instead resorting to estimating the trap size from geological structural analysis, supported with seismic data and refined with core data.
5. Reserve estimates can increase as much as 100% in many instances with the new analytical tool presented in the book.
8.3.2. Unconventional Gas Designation
6. Natural gas contained in gas hydrate should be included in total reserve estimates.
7. Natural gas trapped in caprock, volcanic rocks, and other previously nondesignated formations should be considered.
8.3.3. Gas Reservoir Development
8. Systematic screening criteria presented in the book should be used prior to deciding on hydraulic fracturing or placement of horizontal wells.
9. Fracturing should be avoided in reservoirs that are deep and/or exhibit profuse natural fracture networks.
10. Existing EOR technologies should be considered to determine applicability to unconventional gas reserve. Most reservoirs are amenable to such EOR technologies and are likely to yield beneficial results.
8.3.4. Reservoir Characterization
11. Reservoir characterization should be performed with natural chronology, i.e., geology, followed by geophysics, drilling, coring, well test.
12. Well logging should not be automatic for known tight gas formations as they are not effective and often lead to erroneous conclusions.
13. Only a few geophysical tools function in an unconventional setting.
14. The origin of rock as well as fluid must be determined in order to characterize a reservoir.
15. Proper reservoir characterization can alter the reserve estimate; as well as screening criteria presented in the book should be used prior to deciding on hydraulic fracturing or placement of horizontal wells;
8.3.5. Reservoir Simulation
16. Most unconventional reservoirs are not represented with conventional simulation that uses Darcy's law.
17. While complex dual permeability, dual porosity models are difficult to implement, they do not improve accuracy of prediction over material balance calculations and simple rules of thumb.
18. Proper modeling should include Brinkman equation in the matrix and Forchheimer equation in the fracture.
8.3.6. Economic Outlook
19. Conventional economic analysis shows good performance of unconventional reservoirs but suffers from the short comings associated with centuries old accounting principles that do not apply in the information age.
20. Including salient features of long-term economic analysis and environment integrity, a much healthier energy outlook emerges. This analysis shows that unconventional gas reservoirs are the only ones that would support exponential growth in economics.
8.3.7. Overall Outlook
21. Unconventional gas has the potential of making natural gas, the most prominent and most environmentally appealing energy provider of the world.
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