The United States is in the midst of a once-in-a-generation energy opportunity. The advent of hydraulic fracturing has launched a new era of energy abundance—a stark contrast to the decades of growing domestic energy scarcity that preceded it. This abundance has contributed to a sharp reduction in oil prices during the past year. Moreover, US natural gas prices have remained well below the global average and are one-third the level of those of many of its largest trading partners.
Yet the general public shows little appreciation for, or even an understanding of, the relationships between “fracking” and increased domestic production and lower fuel costs.* A recent Pew Research Center study found that more Americans oppose hydraulic fracturing than support it, and the opposition is growing. In many parts of the country, fracturing has become a derisive term for all drilling activity.
The energy industry is losing the battle for public and political legitimacy. Eroding public support poses a threat to the ongoing progress of the industry and the US in boosting energy output, and it threatens to curtail the economic and environmental benefits of future energy production.
However, our recent report, “America’s Unconventional Energy Opportunity” by Harvard Business School (HBS) and The Boston Consulting Group (BCG), shows that a rational middle does exist (Porter et al. 2015). We found that it is possible to safeguard the economic benefits of unconventional oil production while simultaneously improving environmental performance and accelerating the transition to a lower-carbon energy future.
Divisive Debate
Opposition to unconventional production has already worked its way into public policy in many parts of the country. In late 2014, Gov. Andrew Cuomo of New York banned hydraulic fracturing in the state after health officials in his administration decided on the basis of limited evidence that regardless of how drilling procedures are regulated, fracturing poses a threat to air quality, clean water, and public health. At about the same time, the citizens of Denton, Texas, which is located just a few miles from where hydraulic fracturing was perfected, passed a ballot initiative that would ban hydraulic fracturing within the city’s limits. (The ban has since been overturned by the Texas Legislature, which gave the state government exclusive jurisdiction over the oil and gas industry.)
Sad to say, much of the discussion that has dominated the hydraulic fracturing debate has been divisive and done little to alter entrenched positions or increase public understanding. Both sides are essentially talking past each other. Many hydraulic fracturing opponents focus on fears that are either irrational or lack a basis in scientific fact. Some industry representatives, meanwhile, have adopted a dismissive attitude toward community concerns, minimizing even real threats to the environment and public health. The industry has not helped itself by denying studies that link hydraulic fracturing to increased seismic activity—despite compelling data to the contrary—or by initially opposing the disclosure of chemicals used in the hydraulic fracturing process.
The industry must recognize and address its trust deficit with the public. Producers cannot call for less regulation while they accept the poor practices of some of its members, eschew transparency, or ignore legitimate concerns of the communities in which they operate.
Economic Benefits
Although environmental issues often dominate the debate over unconventional production, there is little doubt that the potential for economic benefit is tremendous. The HBS-BCG report estimates that unconventional production contributes more than USD 430 billion annually to the US gross domestic product. That is roughly equal to the economy of a state the size of Michigan or North Carolina. Unconventionals support about 2.7 million jobs and, on average, these jobs pay nearly twice the US median wage.
These benefits are evident not just in the big numbers that economists follow. They also hit home—quite literally. Each US household is saving about USD 800 a year, thanks to lower natural gas prices, and that figure does not include the savings from lower gasoline and diesel prices. In addition, the amount that people will save is likely to continue to grow, reaching USD 1,070 per household by 2030.
Finally, unconventionals have altered US foreign policy and its role in the global energy economy. The US is now self-sufficient in natural gas production, and oil imports have fallen by 28% in the past decade. This newfound abundance has undermined OPEC’s share of the global oil market, playing a significant role in lowering prices worldwide, and prices are not likely to recover for years to come. While painful for the producer community, lower prices stimulate the overall economy.
The economic benefits are just the beginning. Low-cost hydrocarbons have created a ripple effect that will flow through the downstream industry. Cheaper natural gas feedstock, for example, has made the US competitive once again in petrochemicals, plastics, and inorganic chemicals, attracting about USD 138 billion in new investments. The lower prices have also spurred increased competition among fuels in areas such as transportation and power generation, paving the way for reductions in greenhouse gas emissions, improvements in water conservation and, ultimately, a lower-carbon future.
Environmental, Climate Concerns
The potential benefits have, however, been overshadowed by concerns—some rational, some not—about unconventionals’ impact on the environment and climate, as well as widespread confusion over the facts. To be sure, the development of unconventionals has created real risks to the environment, public health, and local communities. Water contamination, wastewater disposal, methane leaks, carbon emissions, land degradation, and increased seismic activity have all been linked, in varying degrees, to the expansion of drilling activity in the US. At the same time, many communities have felt the effects of increased road traffic and noise.
Energy producers and regulators have made considerable progress in addressing many of these concerns by, for example, improving water recycling rates, being more forthright in their disclosures about chemicals, and decreasing the size of well pads. But they could do much more. Our research shows that the cost of complying with practices already endorsed by groups such as the American Petroleum Institute and the Center for Sustainable Shale Development would cost only 1% to 2% of a well’s lifetime revenues. Even with today’s weaker oil and gas prices, such measures should be seen as affordable.
However, compliance is uneven. For example, in Pennsylvania, we found considerable variation in compliance among producers. On average, small producers’ violation rates were four times those of larger companies. Better regulator funding and more targeted enforcement would help improve environmental performance significantly.
In addition, new natural gas power plants have contributed significantly to a 15% reduction in power-sector carbon emissions from 2005 to 2013. Although natural gas combustion emits 50% less carbon dioxide than coal, many climate advocates have become skeptical of all fossil fuels and actively oppose future development of production and pipelines. Our research, however, shows that, in line with the Obama administration’s proposed Clean Power Plan, natural gas can provide the most cost-effective path to major carbon reductions through 2030 and can also complement the growth of renewables.
A Plan for the Future
At the moment, neither side is winning the debate, and neither is moving closer to its goals. The industry continues to face strident opposition to the development of unconventional production. Industry opponents are seeing uneven environmental performance by producers, and the reduction of carbon emissions is slower than they would like.
By synthesizing often contradictory research into a common fact base and directly engaging the industry, environment, climate, and government stakeholders, BCG and HBS have developed an alternative plan for enabling the US to capitalize on its tremendous energy opportunity, while both minimizing the environmental and community impacts from increased drilling activity and significantly reducing greenhouse gas emissions.
Individually, none of the following steps represents a radical action, but taken together, they provide a pathway for all stakeholder groups to benefit substantially. The plan covers a number of steps in three broad areas.
- Enhance the economic opportunity. The US must address key challenges, for example, in determining the best way to continue the timely development of pipelines, gathering systems, and other infrastructure for moving production from producing regions to users across the country. It must also encourage the growth of its skilled workforce. Energy industry jobs pay, on average, two times the US median wage, and the US will need more trained workers with skills in a variety of areas to meet demand. Finally, the country must eliminate outdated restrictions on oil and gas exports. Despite its newfound energy abundance, export policy remains mired in the 1970s scarcity mind-set. By lifting the ban on exports, the US can boost its economy, create additional jobs, and improve relations with friendly nations.
- Minimize local environmental impacts. Our analysis shows no inherent tradeoff between environmental protection and company profitability. Companies must develop transparent and consistent environmental performance data to create a foundation for monitoring compliance, improving public trust, and stimulating innovation. Governments must develop better regulatory standards, speed the adoption of industry-leading practices, and encourage more innovation. Both the industry and regulators must strengthen enforcement and require compliance from all producers.
- Speed the transition to a cleaner energy future. Our analysis shows that developing unconventional resources today is unlikely to delay the rollout of renewables or prevent the US from significantly reducing carbon emissions. To achieve the transition to a lower-carbon future, companies must address problems such as uncontrolled methane leaks. Governments must set policies that encourage cost-effective emission reductions that are market-based rather than technology specific, and they must encourage clean energy technologies through private and public investments. Finally, in order to ensure a transition to a lower-carbon energy system by 2050, the US needs a robust power grid capable of addressing the intermittent nature of renewable power sources. Investments in such improvements must start now to enable renewables to achieve scale over the long run.
Unconventional natural gas production offers a unique opportunity for the US to enhance its economy, increase its competitiveness, provide more geopolitical flexibility, improve the environment, and lower carbon emissions—all at the same time. Far from being yet another issue that divides the energy industry from its critics, hydraulic fracturing should be the concern that unites them.
Reference
Porter, M., Gee, D., and Pope, G. 2015. America’s Unconventional Energy Opportunity.
*Throughout this article, the terms fracking and hydraulic fracturing refer to the entire process of drilling and producing unconventional resources, including water access and disposal and site preparation.
Gregory J. Pope is a principal in BCG’s Energy and Strategy and Sustainability practice areas and a consultant in power, oil and gas, renewables, and economic development. He holds a BA in economics from Georgetown University, an MSc in environmental and resource economics from University College London, and an MSc in environmental change and management from the University of Oxford, where he studied as a Marshall Scholar.
Alan G. Thomson is a managing director at BCG. He leads the firm’s North American Oil and Gas practice and is the managing partner of its Houston office. He is globally recognized as a topic expert in the energy value chain with experience in portfolio strategy, operations, and organization transformation. He holds a BEng in chemical engineering from McMaster University.