The Economics of Shale Gas Extraction

Overview —

The potential environmental impacts of shale oil and gas extraction (SGE) by means of hydraulic fracturing (“fracking”) have been well explored by various groups concerned by this newly prominent technology but rather less well known by campaigners and activists are the economic impacts.

This report looks at key questions regarding the economic structure and impact of the SGE industry and the findings are detailed.


Dr Craig Dalzell

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Shale gas extraction (SGE) by means of hydraulic fracturing (“fracking”) is a form of Unconventional Gas Extraction currently being explored by the United Kingdom Government as a potential fuel and hydrocarbon feedstock source to be exploited in the coming decades. It is seen as a potential replacement and/or continuation of the maturing hydrocarbon sources of the North Sea and other deposits within the UK’s geographic control. This source of gas, already in use in many forms in the United States, is experiencing significant opposition from many groups concerned chiefly with its environmental impact, but somewhat less well explored are the economic impacts.

The purpose of this briefing paper will be to outline how SGE sites are financed (“Who pays for them?”), the typical profitability profiles of such wells (“How much money do they earn and who gets that money?”), the economic impact on communities near the wells (“Do they boom or bust?”), the actual effectiveness of SGE as a source of fuel (“Will it reduce fuel prices?”), and the broader costs associated
with SGE which may or may not be directly paid for during extraction (“Who cleans up the mess?”).


― The SGE market in the US and, so far, in the UK is dominated by larger companies occupying the most profitable licences. There is little scope for community owned or small company development to occupy a significant market share.

― Individual wells become largely non-productive within a few years of development which, due to market demand for constant production, forces companies to continue drilling new wells in new locations at a rapid pace.

― The low recoverable volumes and high capital and running costs of wells may render profit margins comparatively small and extremely sensitive to oil and gas pricing. There appears to be little scope for economic development of SGE in the UK until and unless wholesale prices return to historic highs and even then significant subsidy may be required.

― Communities are likely to be significantly adversely impacted by nearby SGE fields. The concentrated pattern of land ownership and comparatively weak situation of local government renders communities vulnerable to being unable to capture wealth generated by nearby wells whereas the burden of environmental degradation or even simply the threat of such degradation can lead to community stress and negative economic effects.

― The jobs created by SGE appear to be short-lived and highly mobile. The job demographic of the planning, drilling and production phases are each relatively exclusive meaning that they will move to the next site more rapidly than the wells themselves do. This creates the risk of a “Boom-Bust” effect in communities.

― Shale oil and gas is considered a relatively poor source of fuel due to high extraction costs. The UK’s reserves are also likely to have an insignificant impact on global markets and hence a negligible impact on end-user prices.

― Significant externalities have been identified in the form of environmental degradation due to methane leaks. The costs to mitigate these may exceed the lifetime revenues generated by the well which produced them. Further, the UK has a poor record in terms of ensuring adequate decommissioning and restoration bonds which may lead to further public funding being required after the SGE companies have left an area.

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