Unquestionably, the United States are a leader of shale oil and gas production technology that has been first developed there several decades ago: the first horizontal wells were drilled in 1929 and hydraulic fracturing procedures date back to 1947. The 1970's saw a rapid development of unconventional oil and gas production technology , which followed a decade of testing and research (1). The first stage of shale technology development was driven primarily by government funding.
Government funding stage
Up to the 1990's, research & development in the unconventional oil and gas sector heavily relied on public funding. The U.S. administration officials decided to strengthen support to the development of technologies intended to achieve energy independence of the country.
The issue of reliance on imported oil and gas was exacerbated by the oil crisis that followed the Yom Kippur War of 1973. At the same time, there was a general consensus among the U.S. energy sector that shale gas production would not be commercially viable and would not justify any research in that area. Moreover, privately-owned businesses perceived the risks associated with initial research as prohibitively high.
Fred Julander, past President of the Colorado Oil&Gas Association, put it: ”The Departament of Energy was there with research funding when no else was interested and today we are all reaping benefits. Early DOE R&D in tight gas, gas shales and coalbed methane helped to catalyze the development of technologies we are all using today (2)”
The federal government was the only entity capable of financing the research on shale oil and gas development as it held adequate funds (especially following the merger of different programs and funds after the oil crisis). Moreover, the federal government assumed a much longer return on investment than even the largest oil and gas companies did, as well as a different perspective: to make the whole country energy independent to the benefit of all sectors (3).
In small companies, a lack of adequate funds is the key innovation development constraint. On the other hand, large companies have a low appetite for risk (which is inherent to technologically innovative projects), due to limited incentives to increase their market shares, large-scale expansion, etc. Big corporations operate their own research centres, but frequently rely on technologies purchased from smaller businesses which – due to inadequate resources and scale of operations – are unable to deploy innovative technologies, commercialize them and reap the benefits therefrom. The inherent risk of innovative energy technology projects is usually too high for privately-owned businesses in the initial stage of research. This dilemma is presented in a simplified form in Fig. 1 (Appendix).
In line with the assumptions of the administration and of the model of public funding of economic growth (in this particular case through the development of technology), the costs of research were spread (albeit not on an equal basis) on all sectors that would benefit from deployment and commercialization of government-funded projects. The effects of development and deployment of shale gas and oil production technologies to the entire U.S. economy have received extensive coverage in literature (5).
Mechanisms of support
The federal government provided support to the development of unconventional oil and gas production with the following measures:
- fundamental research funding,
- geological survey (resource mapping) funding,
- stimulation of and complementing industrial and R&D projects,
- deregulation of price charged for gas produced from selected reservoir types (since 1979) (6),
- tax credits (since 1980).
Geological surveying was essential at that time, considering the then inadequate knowledge of shale geochemistry with potential higher business and environmental risks.
Specific programs – EGSP
In 1976, on motion of US Congress the Energy Research and Development Administration launched the Unconventional Gas Research Program, which included the Eastern Gas Shales Project (EGSP). The Program was subsequently managed by the Department of Energy (DOE) (7).
The EGSP focused on determining the recoverable reserves of Devonian shale gas and on identifying the most effective technology for extraction of this gas in three basins at least cost. Total expenditures over program lifetime from 1976 to 1992 amounted to USD 92 million (USD 185 million in 2011 dollars) (8).
The EGSP was designed as a publicly-funded program which since its inception has collaborated with the upstream industry to encourage private investment in technological development by facilitating cost-sharing and risk-sharing between the government and industry. The Program is a model institution that has brought together academic centres, research institutions, the industry and public institutions (the United States Geological Survey - USGS). The key research and development areas were: horizontal drilling, fracturing technology and development of the 3D seismic technology.
Thirty five experimental wells were drilled in the Appalachian Basin under EGSP in collaborative effort with oil and gas companies. Moreover, maps, studies and over 300 technical reports were prepared on the basis of EGSP studies (9). Personnel from the EGSP would later be hired by private industry taking their knowledge and skills with them. That stage is now thought to be crucial for the development of unconventional oil and gas extraction technology. Gas production has increased substantially as a result of EGSP: throughout project lifetime (1976-1992) Devonian shale gas production (mainly in the Appalachian Basin) grew threefold, and more than tenfold by 2004 (10). The EGSP accounted for 50% of research and exploration activities in the initial phases of the Program and for approximately 10% of them in other basins.
GRI
At the same time the Federal Energy Regulatory Commission (FERC) imposed a charge on interstate gas sales (that generate approx. USD 200 million per year) (11), to support the Gas Research Institute (GRI) – another organisation established to develop unconventional oil and gas extraction technologies in collaboration with industry partners. GRI's budget was significantly higher than that of EGSP. In principle, the GRI was designed to complement EGSP and other DOE programs: the EGSP focused on fundamental research, while the GRI on deployment and commercialization of technologies. Like the EGSP and DOE, GRI constantly collaborated with the private sector (including the well known Mitchell Energy Company) in such areas as microseismic fracture mapping or testing new drilling materials and technologies (e.g. polycrystalline diamond compact – PDC) (12). Moreover, Departament of Energy funded the development of telemetry technologies.
GRI was dissolved in 2000 and superseded by FERC-funded Gas Technology Institute (GTI). The Royalty Trust Fund (RTF) was established in 2005 with a budget of USD 500 million (13), to support unconventional and deep offshore oil and gas production projects.
Total expenditures
Total DOE's expenditures incurred from 1976 to 1992 on research and development of unconventional oil and gas extraction technologies amounted to approx. USD 220 million (14). However, this amount represents only a part of total DOE's expenditures made over these years and even at the time of peak support unconventional oil and gas projects were perceived as less important than conventional ones (15).
In addition to direct support, tax credits (Section 29) played a key role: the total value of the credit in 1982 to 2002 is estimated at USD 13 billion (see Fig. 2 and 3).
The degree of support research and development had been lower in the 1980's but increased again since 1992.
Public support to unconventional oil and gas extraction technologies decreased with the progress of research projects, development of technologies and their transfer to privately-owned companies. In 2001, DOE funds allocated to research and development in the gas sector were USD 44 million worth and ramped down to USD 12 million in 2007 (Fig. 5).
Most of the funds were redirected to research and development of renewable sources of energy.
Did it pay off?
Undeniably, the progress in unconventional oil and gas production would never materialize without public funding. Upstream sector representatives themselves do not question that view and agree that government support has been crucial for the development of US shale sector. Privately-owned companies were unable to take the risk of drilling without certainty to recover the costs in a medium-term period. Notably, it takes 16 years in the USA to pass from a concept to commercial adaption of an oil and gas technology (20) (a number of experts argue that it takes even longer).
In the case of hydraulic fracturing, which made USA the world leader in crude oil production, that process lasted almost four decades – the technology was first applied in 1946, but major advancement took place in mid 1990's as a result of efforts by Mitchell Energy.
Government funded drilling for science purposes and to convince the industry that unconventional resources are worth of exploration. Federal support minimized risks incurred by the private sector, while enabling knowledge sharing between government agencies and the upstream sector (including the aforementioned human capital transfers), learning from doing, that would be otherwise impossible without public funding (most probably, privately-owned business would never embark on their own research and development projects).
In the case of US shale technology, a complementary economic policy – integrated with technology, industrial, fiscal and regulatory policies (unconventional gas price deregulation) – was the key to the success. It has been initially assumed that technology innovations are not linear and require long-term projects, which is specific not only to technological and industrial projects. All of the key “ground-level” conditions for the success of the project have been satisfied (support from public funds, adequate fiscal and regulatory policies), to take advantage of the “underground” potential, as determined by geology and available resources. The program of support to the development of unconventional resources, as launched in 1978, has also specific measurable targets of increasing gas production and the size of recoverable reserves (21).
In Poland, the United States are perceived as a country with a minimum level of government intervention into the economy, including economic growth stimulation. As evidenced by the program of support to unconventional gas and oil extraction, this view is wrong. The case of United States is that of a model of proactive role of the government in innovation building and achieving competitive edge. Technology-based edge is intended to ensure energy security and decrease the cost of energy commodities. To this end, the government provides support to specific infant industries. These mechanisms are normally associated with controlled market economies (CME) rather than liberal market ones (LME). A strong position enjoyed by the private sector in the United States does not contradict a key role played by the federal government and use of its growth stimulation tools.
As Vello A. Kuuskraa, President of Advanced Resources International, commented on the role of DOE programs: "The history of unconventional gas also provides a rich set of lessons learned. These lessons demonstrate that combining a well managed joint government/industry R&D program with performance-based incentives for early application of new technology can be highly successful, providing significant benefits to the U.S. economy.”(22)
Economic benefits from unconventional gas and oil production in the United States outweigh both direct and indirect expenses thereon. According to DOE estimates of effects from the EGSP, the profit to cost ratio is equal to or better than 10:1, while savings to gas consumers (due to lower gas prices) are in the order of USD 8 million (23). Obviously, DOE estimates should be treated with caution, as in the case of any organisation that assesses the effects of its own program. Nonetheless, oil and gas are important intermediate commodities used in industry and transport, so their lower purchase cost may have a significant effect on the competitiveness of other sectors (24).
However, the successful public funding of unconventional gas and oil production should not be automatically extrapolated to other sectors or even energy sector projects without giving consideration to industry-specific traits. It should be emphasized that, due to heterogeneous nature of energy technologies, there is no any single model for commercialization of all technologies (25). Similarly, there is no a single universally optimal model for supporting technology and industry development from public funds (albeit certain universal mechanisms and rules that increase probability of success are in place).
An assessment of the financial and economic effects of government-supported unconventional gas and oil programs is a complex matter that would require, in addition to the estimated benefits to industrial and non-industrial customers from lower prices and profits on exported commodities, the profits on transfer of shale technologies should be compared with alternative strategies of allocating the funds disbursed to these government programs (26).
The U.S. plan to achieve energy supply independence was undeniably a success. In 2011, domestic production accounted for approx. 95% of the total gas consumption in the U.S. (27), and this year the United States topped Saudi Arabia as the largest oil producer worldwide. The program of support to unconventional gas and oil production is a case of successful long-term government policy intended to ensure energy security and set the stage for a robust growth of the economy. Therefore, it should be analyzed in detail in the context of our domestic energy and industry development plans.
22.10.2014
Mateusz Kędzierski - Sobieski Institute expert, former lecturer at Cracow University of Economy
- Por. Z. Wang, A. Krupnick, A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom?, RFF, Discussion Paper, Washington, April 2013, s. 7.
- J. Burwen, J. Flegal, Unconventional Gas Exploration & Production. Case Studies on the Government’s Role in Energy Technology Innovation, American Energy Innovation Council, March 2013, s. 3.
- Rola państwa we wsparciu rozwoju technologicznego i przemysłowego jest szeroko opisywana w literaturze, por. A. Chandler, Scale & Scope: The Dynamics of Industrial Capitalism, Cambridge, MA: Belknap Press, 1990, A. H. Amsden, Asia’s Next Giant. South Korea and Late Industrialization, Oxford University Press: Oxford 1989, J.-E. Woo, Race to Swift. State and Finance in Korean Industrialization, Columbia University Press: New York 1991, Report of the MIT Taskforce on Innovation and Production, Massachusetts Institute of Technology, February 2013.
- V. Narayanamurti, K. Diaz Anandon, H. Breetz, M. Bunn, H. Lee, E. Mielke, Transforming the Energy Economy: Options for Accelerating the Commercialization of Advanced Energy Technologies, Harvard Kennedy School, Cambridge, MA, February 2011,s. 35.
- Przykład, zob. M. Barteau, S. Kota, Shale Gas: A Game Changer for U.S. Manufacturing, University of Michigan, July 2014.
- Zob. więcej: Z. Wang, A. Krupnick, A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom?, RFF, Discussion Paper, Washington, April 2013, s. 8.
- W tym czasie stworzono również Western Gas Sands Program (WGSP) i MethaneRecovery from Coalbeds Program (MRCP), a w późniejszym okresie wdrożono trzy inne programy dotyczące hydratów metanu, gazu ze złóż głębinowych oraz wydobycia ze złóż o złożonej budowie geologicznej – Secondary Gas Recovery. EGSP i GRI zostały opisane w tekście jako najistotniejsze i najlepiej obrazujące mechanizm wsparcia rozwoju technologicznego i przemysłowego w obszarze wydobycia węglowodorów ze złóż niekonwencjonalnych.
- J. Burwen, J. Flegal, Unconventional Gas Exploration & Production. Case Studies on the Government’s Role in Energy Technology Innovation, American Energy Innovation Council, March 2013, s. 3.
- Lista najistotniejszych badań i innowacji opracowanych dzięki programom Departamentu Energii, zob. DOE’s Unconventional Gas Research Programs1976-1995. An Archive of Important Results, US Department of Energy, January 2007, s. 30-34.
- DOE’s Unconventional Gas Research Programs1976-1995. An Archive of Important Results, US Department of Energy, January 2007, s. 18.
- The Future of Natural Gas. An Interdisciplinary MIT Study, MIT, s. 166.
- Rodzaj wiertła zastosowany w latach 70-tych XX wieku pozwalającego na odwierty w szczególnie trudnych warunkach geologicznych.Więcej informacji, zob.: Polycrystalline-Diamond-Compact (PDC) Bits Drill Out Casing-Float Equipment, Halliburton, White Paper, September 2006, F. Bellin, A. Dourfaye, W. King, M. Thigpen, The current state of PDC bit technology, World Oil, September 2010, s. 41-46.
- Struktura RTF został krótko opisana w: The Future of Natural Gas. An Interdisciplinary MIT Study, MIT, s. 167-168.
- DOE’s Unconventional Gas Research Programs1976-1995. An Archive of Important Results, US Department of Energy, January 2007, s. 3.
- DOE’s Unconventional Gas Research Programs1976-1995. An Archive of Important Results, US Department of Energy, January 2007, s. 16.
- The Future of Natural Gas. An Interdisciplinary MIT Study, MIT, s. 163.
- The Future of Natural Gas. An Interdisciplinary MIT Study, MIT, s. 167.
- DOE’s Unconventional Gas Research Programs1976-1995. An Archive of Important Results, US Department of Energy, January 2007, s. 14.
- Oil and Gas Technology Development, National Petroleum Council, Working Document, 2007, s. 20.
- Oil and Gas Technology Development, National Petroleum Council, Working Document, 2007, s. 1.
- DOE’s Unconventional Gas Research Programs1976-1995. An Archive of Important Results, US Department of Energy, January 2007, s. 12.
- J. Burwen, J. Flegal, Unconventional Gas Exploration & Production. Case Studies on the Government’s Role in Energy Technology Innovation, American Energy Innovation Council, March 2013, s. 8.
- DOE’s Unconventional Gas Research Programs1976-1995. An Archive of Important Results, US Department of Energy, January 2007, s. 8.
- 63% konsumpcji gazu w Stanach obejmuje produkcja przemysłowa i produkcja energii elektrycznej, w której gaz wypiera węgiel kamienny i brunatny, zob.: Modern Shale Gas Development in the United States: An Update, NETL, September 2013, s. 7.
- V. Narayanamurti, K. Diaz Anandon, H. Breetz, M. Bunn, H. Lee, E. Mielke, Transforming the Energy Economy: Options for Accelerating the Commercialization of Advanced Energy Technologies, Harvard Kennedy School, Cambridge, MA, February 2011, s. 9.
- Opracowanie takiego modelu i analiza danych mogłaby być interesującym i przydatnym narzędziem do badania skuteczności polityki inwestycyjnej państwa.
- M. Barteau, S. Kota, Shale Gas: A Game Changer for U.S. Manufacturing, University of Michigan, July 2014, s. 9.
