1. Abundant Shale Gas Resources: Some Implications for U.S. Climate Policy Rutgers University April 28, 2010 Stephen Brown Resources for the Future

2. Abundant Natural Gas Substantial change in the quantity of U.S. shale gas resources available to be produced – Technological change Reduced U.S. reliance on imported natural gas Will it create a bridge to a low-carbon future? – Not without a low-carbon policy; reduced energy prices stimulate consumption, increase CO 2 emissions – Can help somewhat by lowering cost of policies to reduce CO 2 emissions 2 Is It A Game Changer?

3. Overview Shale gas resources and technology Implications for U.S. natural gas supply Methodological approach for assessing the effects on energy markets and climate policy Some implications for energy markets Some implications for climate policy Developing climate policy to accommodate uncertain natural gas resources 3

4. U.S. Shale/Tight Gas and Coal Bed Methane Basins Basin Areas Gas Play Areas Powder River Piceance San Juan Barnett Shale Woodford Fayetteville Haynesville Marcellus Black Warrior

5. Sources: Stratigraphy from Bowker, 2003, poster by Givens & Zhao, 2005 Barnett Marble Falls Viola-Simpson Ellenburger Bend Atoka, Penn Cretaceous Muenster Arch Barnett Shale: General Stratigraphy and Completion Strategies Dallas/Fort Worth Diagrammatic figure; no scale 5

6. Source: EOG Resources, Barnett Shale Overview, 2005 1000 ft Geophone array in Vertical well 6 Micro Seismic Fracture Mapping Mapped view of multiple fracking stages in horizontal wells

7. Barnett Shale hydrofracking job in progress From Devon Energy, 2006

8. Environmental Issues Frack water contains an array of fracture enhancers and biocides in small percentages – Under pressure from environmental groups, companies have released lists of the components in frack water … many chemicals, some carcinogenic – Frack additives being reformulated to produce “green fracks” Water produced in association with natural gas – A combination of frack water and formation water Formation water typically very saline (3 times as salty as seawater) so disposal is an issue Shale formation water can have significant levels of benzene and other light hydrocarbons Earthquakes/Unwanted fractures 8

9. Environmental Effects Earthquakes Groundwater and surface contamination apparently the result of poor well completions and spillage Shale gas production has a relatively short track record so much is unknown New York City watershed Hazen and Sawyer (2009): – “[A]ny individual hydraulic fracturing operation poses a relatively small risk to the water supply” – With the large number of wells to be drilled in Marcellus Shale “the likelihood of negative impacts and the subsequent risk” is “substantially higher” 9

10. Some Implications for U.S. Natural Gas Supply

11. Most of North America’s shale gas bounty is classified from p50 to p90 Source: Potential Gas Committee, Colorado School of Mines, 2009. 11

12. Shale resources resequences major gas resource holders (p50 and higher) 12 Sources: UNECE LNG Report, Chapter 1 (draft); EIA, Journal of Petroleum Technology 6/2006, Potential Gas Committee 2009, BSA 2010. 12

13. Methodological Approach Scenario Analysis with NEMS-RFF

14. NEMS-RFF NEMS: energy-economy market equilibrium modeling system for United States developed by U.S. Energy Information Administration NEMS-RFF: revision developed by RFF and OnLocation, Inc. Uses 14 modules to represent the entire U.S. energy system from primary energy production and imports, through refining, electric power generation, and transmission/distribution to end use through 2030. Market clearing conditions established in every market for every year subject to assumptions about technology, behavior, economic growth, resources, etc. Technology explicitly modeled Mixed solution methods 14

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18. More Abundant Natural Gas: Some Implications for U.S. Energy Markets

19. First Two Scenarios 1.Business As Usual, Low Gas 2.Business As Usual, High Gas 19 NEMS-RFF Low Gas is 269.3 tcf shale gas resources (EIA 2007 Assessment) High Gas is 615.9 tcf shale gas resources (PGC 2009 Assessment) Some other estimates of shale resources: Navigant (2008): could be as much as 842 tcf EIA (2010): 317 tcf

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23. Natural Gas Use Higher in All Sectors 23 Scenario 1Scenario 2Difference Total23.4626.0411.0% Electric Power6.718.2322.5% Industry6.296.899.5% Commercial3.433.635.8% Residential4.875.023.1% Natural Gas Use in 2030 (trillion cubic feet)

24. Relatively Small Differences Outside Electric Power Sector Technological barriers and possibly infrastructural barriers in transportation Behavioral, institutional, infrastructural, and technological barriers in residential and commercial sectors Industrial sector conventional wisdom: “Everyone who can switch from oil to natural gas has done so.” – Technological and infrastructural barriers? 24

25. Energy Use Higher in All Sectors 25 Scenario 1Scenario 2Difference Total110.5111.61.0% Transportation31.031.10.3% Industry31.632.11.6% Commercial23.123.30.9% Residential24.024.20.8% Energy Use in 2030 (quadrillion Btu)

26. Composition of Energy Use Differs 26 Scenario 1Scenario 2Difference Total110.5111.61.0% Petroleum40.039.9-0.3% Natural Gas24.126.811.2% Coal25.424.7-2.8% Nuclear9.38.9-4.3% Renewables11.511.3-1.7% Energy Use in 2030 (quadrillion Btu)

27. More Abundant Natural Gas Increased use in electric power generation Natural gas consumption increased in all sectors of the economy Prices for all energy sources reduced Energy consumption increased in all sectors of the economy—by more than 1 percent CO 2 emissions increased almost 1 percent 27

28. More Abundant Natural Gas: Some Implications for U.S. Climate Policy

29. Two Additional Scenarios 29 NEMS-RFF Low Gas is 269.3 tcf shale gas resources (EIA 2007 Assessment) High Gas is 615.9 tcf shale gas resources (PGC 2009 Assessment) 3. Low-Carbon Policy, Low Gas 4. Low-Carbon Policy, High Gas 1. Business As Usual, Low Gas 2. Business As Usual, High Gas

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32. Natural Gas Use Lower in All Sectors 32 Scenario 1Scenario 3Difference Total23.4621.79-7.1% Electric Power6.715.70-15.1% Industry6.296.06-3.7% Commercial3.433.29-4.1% Residential4.874.68-3.9% Natural Gas Use in 2030 (trillion cubic feet)

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36. Natural Gas Use Lower in Most Sectors 36 Scenario 2Scenario 4Difference Total26.0425.32-2.8% Electric Power8.238.472.9% Industry6.896.46-6.2% Commercial3.633.39-6.6% Residential5.024.77-5.0% Natural Gas Use in 2030 (trillion cubic feet)

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38. Natural Gas Use Higher in All Sectors 38 Scenario 3Scenario 4Difference Total21.7925.3216.2% Electric Power5.708.4748.6% Industry6.066.466.6% Commercial3.293.393.0% Residential4.684.771.9% Natural Gas Use in 2030 (trillion cubic feet)

39. Natural Gas Use Higher in Most Sectors 39 Scenario 1Scenario 4Difference Total23.4625.327.9% Electric Power6.718.4726.2% Industry6.296.462.7% Commercial3.433.39-1.2% Residential4.874.77-2.1% Natural Gas Use in 2030 (trillion cubic feet)

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43. Low-Carbon Policy with More Abundant Natural Gas Natural gas use increased in electric power sector Natural gas use decreased in other sectors of the economy Cost of meeting emissions goals reduced – Emissions allowance falls about 1 percent – PV cost of carbon policy reduced about $1 billion 43

44. Why Small Changes in Climate-Policy Costs? Natural gas price reduction is moderate Most of the action is in the electric power sector Together coal, renewables and nuclear power can provide a competitive alternative to natural gas in electric power generation and reduced CO 2 emissions – Climate goals – Moderate cost 44

45. Abundant Natural Gas Can Help Facilitate a Bridge to Low-Carbon Future Depends on implementation of low-carbon policy Without low-carbon policy, abundant natural gas boosts energy use and CO 2 emissions Abundant natural gas moderately lowers cost of reducing CO 2 emissions Dramatic differences in electric power sector – Without abundant natural gas, reducing CO 2 emissions reduces natural gas use in electric power sector – With abundant natural gas, reducing CO 2 emissions increases natural gas use in electric power sector 45

46. Shale Gas Uncertainty and Policies to Reduce CO 2 Emissions What If Climate Policy Takes a Non-Price Approach?

47. Shale Gas Uncertainty Sources of uncertainty – Relatively little experience producing natural gas from shale formations – Potential environment regulation How natural gas and other resources are used varies considerably across policy scenarios To obtain cost effective reductions in CO 2 emissions, policymakers must accurately predict resources and technology or use market-based policies 47

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52. Abundant Shale Gas: Summary and Conclusions New technology responsible for abundance – Environmental issues Not a bridge to a low-carbon future without low-carbon policy – Reduced energy prices stimulate consumption, increase CO 2 emissions Can help create a bridge to a low-carbon future with low- carbon policy – Cost of carbon policy is reduced Most cost-effective means of meeting climate policy depends on available resources and technologies – Uncertainty about shale gas resources and other energy sources suggests reliance on market-based policies for reducing CO 2 emissions 52