America’s Unconventional Energy Opportunity

America’s Unconventional Energy Opportunity

          
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America’s Unconventional Energy Opportunity

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  • In This Report
    • A divisive and often misinformed debate about unconventional gas-and-oil resources is jeopardizing a once-in-a-generation opportunity to change America’s economic and energy trajectory.
    • This report, by Harvard Business School and BCG, provides a comprehensive economic, environmental, and climate fact base for U.S. unconventional gas-and-oil development, based on an extensive review of existing studies, new primary research, and interviews across all stakeholder groups.
    • The report’s 11 action steps—for industry, environmental, and government stakeholders—offer a viable, practical, and economically competitive path forward.

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    Unconventional gas-and-oil resources are perhaps the single largest opportunity to improve the trajectory of the U.S. economy, at a time when the prospects for the average American are weaker than we have experienced in generations. America’s new energy abundance can not only help restore U.S. competitiveness but can also create geopolitical advantages for America. These benefits can be achieved while substantially mitigating local environmental impact and speeding up the transition to a cleaner-energy future that is both practical and affordable.

    However, America is currently caught in an unproductive, divisive, and often misinformed debate about our energy strategy, which threatens our nation’s economic and environmental goals. There is an urgent need for the U.S. to get on a new path. We set forth an overall strategy for unconventional energy development that meets the most important goals of industry, environmental stakeholders, and governments, and allows the U.S. to responsibly achieve the full benefits of this unique and vital opportunity.

    We define unconventional gas-and-oil resources as shale gas and oil resources as well as tight gas and oil resources. These resources are accessed and extracted through the process of hydraulic fracturing. Unconventionals do not include other forms of oil and gas resources, such as oil sands, extra-heavy oil, coal-to-gas conversion, or coal bed methane.
    The U.S. Competitiveness Challenge

    The ability of the U.S. economy to improve the standard of living of the average citizen is weaker than it has been in generations. The deterioration began well before the Great Recession and is reflected by slow job growth and stagnating wages, especially for middle- and lower-middle-class Americans. While U.S.-based multinational businesses have outperformed those in other advanced economies, small businesses in the U.S. are registering eroding performance, and business failures have outnumbered new start-ups from 2009 through 2012—the last year of available data—for the first time since at least the 1970s. U.S. growth has exceeded that of Europe and Japan in recent years, but our growth is still the slowest in many decades.

    America’s poor economic performance is not cyclical but structural, and it reflects an erosion of the nation’s fundamental competitiveness. As documented by the U.S. Competitiveness Project at Harvard Business School (HBS), the overall quality of America’s business environment has declined in key areas, including skills, infrastructure, costs of doing business, and corporate tax structure. While the U.S. retains core strengths, partisan political gridlock has meant that little progress has been made on reducing any of America’s emerging weaknesses. This project is motivated by that gridlock, which is also threatening one of America’s emerging strengths: unconventional energy development.

    America’s Unconventional Energy Advantage

    America’s abundant and low-cost unconventional gas-and-oil resources are a once-in-a-generation opportunity to change the nation’s economic and energy trajectory. The U.S. now has a global energy advantage, with wholesale natural-gas prices averaging about one-third of those in most other industrial countries, and industrial electricity prices 30 to 50 percent lower than in other major export nations. That means major benefits for industry, households, governments, and communities, while reducing America’s trade deficit and geopolitical risks. The U.S. has had a 10- to 15-year head start in commercializing unconventional resources versus other countries. Though the recent decline in world oil prices has affected the short-term prospects of U.S. unconventionals, low prices are unlikely to significantly impact the fundamental U.S. competitive advantage over the next several decades. 

    The Energy Opportunity at Risk

    Despite these major benefits, however, public support for unconventional energy development, and especially hydraulic fracturing, is decidedly mixed and seems to be declining. Further development is increasingly threatened. Opposition reflects both legitimate concerns over local environmental and climate impacts, and widespread confusion over the facts.

    In today’s status quo, no stakeholder is achieving its most essential goals. The ability to change America’s economic trajectory is being eroded, industry is facing stiff opposition, local environmental performance is not improving as rapidly as it can and should, and large-scale progress toward a cleaner-energy and a lower-carbon future remains fiercely contested. There is now a real risk that America will fail to capitalize on this historic opportunity, much less build on it. 

    Creating a Win-Win Strategy

    The HBS–BCG project was established to develop a shared fact base, engage the key stakeholders, and advance a shared agenda for developing America’s unconventional gas-and-oil resources in a way that addresses the key objectives of all the stakeholders. This win-win pathway involves 11 action steps across three pillars:

    A.  Capitalizing on America’s new energy advantage to enhance U.S. competitiveness and the prosperity of the average citizen

    B.  Minimizing the local environmental, health, and community impacts of developing the new energy resources at competitive cost

    C.  Utilizing unconventionals to accelerate a practical and cost-efficient transition to a lower-carbon, cleaner-energy future
    A. Enhancing the Economic Opportunity

    Unconventionals have already created major economic benefits for the U.S., adding more than $430 billion to annual GDP and supporting more than 2.7 million American jobs that pay, on average, two times the median U.S. salary. Fully 50 percent of the unconventionals production jobs are middle-skills jobs, accessible to the average citizen. The U.S. is still in the early stages of capitalizing on this economic opportunity, and current activity is concentrated in the upstream energy-production sector. With proper policies and actions by the industry and other stakeholders, this economic opportunity can further spread into downstream industries, such as petrochemicals and energy-intensive industries, and more broadly throughout the economy.

    To realize that potential, however, the U.S. must address a number of key challenges:

    1.  Continuing the Timely Development of Efficient Energy Infrastructure. Additional pipelines, gathering, and processing infrastructure are needed to safely and efficiently move unconventional gas and oil from producing regions to users across America.

    2.  Delivering a Skilled Workforce. The U.S. will need many more trained workers with the right skills across a wide variety of occupations to fill the well-paying middle-skills jobs.

    3.  Eliminating Outdated Restrictions on Gas and Oil Exports. With abundant resources, restrictions on exports created in response to the 1970s’ energy crises are no longer needed, and exports would boost U.S. economic and job growth while benefitting friendly nations.
    B. Minimizing Local Environmental Impacts

    The development of unconventional energy resources creates significant environmental risks to water, air, land, and communities, which must be clearly acknowledged. Our research reveals that real progress is being made in managing these environmental risks at a cost that does not threaten competitiveness. In addition, mitigation technology is rapidly improving. Significant progress has also been made in improving regulatory standards in most energy-producing states, and continuous-improvement bodies have been formed to diffuse leading practices among regulators and industry stakeholders.

    There is no inherent trade-off between environmental protection and company profitability. With sound regulation and strong compliance, the cost of good environmental performance is modest and gives companies a level playing field on which to compete. However, poor and uneven compliance by some operators and uneven diffusion of leading practices continue to create significant problems. Improvement is needed in four key areas:

    4.  Developing Transparent and Consistent Environmental Performance Data. Transparent environmental-performance data creates the foundation for monitoring compliance and stimulating innovation. State governments, industry, and NGOs all have roles to play.

    5.  Setting Robust Regulatory Standards. Better standards are needed to fill gaps, speed adoption of industry-leading practices, and encourage further innovation.

    6.  Achieving Universal Regulatory Compliance. Both industry and regulators need to strengthen regulatory enforcement and producer compliance.

    7.  Strengthening Bodies Driving Continuous Environmental Improvement. Continuous-improvement organizations such as STRONGER and CSSD have played an important role, but steps are needed to improve collaboration and better disseminate recommendations.
    STRONGER is the State Review of Oil and Natural Gas Environmental Regulations, and CSSD is the Center for Sustainable Shale Development.
    C. Speeding the Transition to a Cleaner-Energy, Lower-Carbon Future

    Over the past decade, the U.S. has begun a major transition toward a more-efficient, cleaner, and lower-carbon energy system led by the power sector. Our research finds that that transition will not only continue, but could accelerate over the next 20 to 30 years and will lead to major economic and environmental benefits.

    While many stakeholders still believe that unconventional energy development and America’s energy transition are antithetical, they are actually complementary. Natural gas is the only fuel that can cost-effectively deliver large-scale carbon emissions reductions over the next 20 years while also providing a bridge to achieving even lower carbon solutions over the long term.

    Our analysis shows that developing unconventional resources today is unlikely to delay the rollout of renewables. Instead, it can actually enable their scale-up. We also find that the use of natural gas today will not lock in greenhouse gas emissions for the indefinite future, and that low-cost natural-gas-fired power plants will provide the essential standby power needed to scale up renewables.

    However, to achieve this successful transition to a low-carbon future, the U.S. must address a number of key challenges:

    8.  Containing Methane Leakage. Uncontrolled methane leakage can offset the climate benefits of natural gas. Cost-effective methods to contain leakage are available and need to be deployed throughout the natural-gas value chain.

    9.  Setting Policies That Encourage Cost-Effective Emissions Reductions. Climate policies and regulations should be market based to encourage cost-effective carbon reductions, rather than specifying particular technologies.

    10.  Fostering Clean-Energy Technologies. The U.S. needs to encourage ongoing private- and public-sector research investments in cost-effective, low-carbon energy technologies and applications, including potentially broader uses of unconventional natural gas.

    11.  Building Out a Smart, Efficient Energy Grid. The long-term (by around 2050) transition to a low-carbon energy system will require a robust power-grid infrastructure capable of addressing the intermittent nature of renewable power sources. The U.S. federal government and states must invest now in these grid improvements to enable renewables to scale over the long run.
    Moving to Action

    These 11 action steps are a practical, achievable strategic agenda for America to make the most of its energy advantage while delivering on its most important economic, environmental, and climate objectives.

    To move these steps to action, we need to change the discussion, move beyond ideology, and break the gridlock. Industry, NGOs, governments, and academics must transcend their traditional positions, let go of the exaggerated rhetoric, and start overcoming historic skepticism and distrust that have led to the current, zero-sum mind-sets and halting progress. Every stakeholder will be most effective in meeting its essential goals if it can recognize the benefits of working toward a good overall outcome for America, not just maximizing its narrowly defined historical self-interests.

    The U.S. needs to achieve a “rational middle” ground to capitalize on this historic opportunity. The stakes are too high to fail. Long-entrenched opposition and antagonism will not dissipate overnight. But we must get started.

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    To Contact the Authors

    University Professor
    Harvard Business School

    Partner & Managing Director
    BCG Washington, D.C.

    Principal
    BCG San Francisco
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