Unconventional oil and gas: Economic Impact Assessment and scenario development of unconventional oil and gas in Scotland

Appendix B: Survey of relevant research

B.1 Context

Our views regarding potential development scenarios for UOG in Scotland and the approach to assessing the economic impact of the industry have been informed by a review of work that has been undertaken to assess the impact of UOG both in the UK and internationally. This appendix summarises some of the key papers we have assessed.

The research we reviewed covered a range of areas, with particular focus on:

• The UOG sector in Scotland, the UK and internationally;
• Economic impact assessment techniques from academic and government sources; and
• Methodologies employed in other Economic Impact Assessments for the UOG sector.

This enabled us to understand the various methodologies used in other UOG economic impacts studies and assess their strengths and limitations. The review also allowed us to identify factors that have been included or excluded in these studies in the past.

B.2 Reviews of UOG in Scotland, the UK and internationally

Given that the UOG sector in Scotland is in its infancy, there is a limited number of publically available data and studies on the subject.

The latest position of UOG in Scotland is the 'Report on Unconventional Oil and Gas' by the Independent Expert Scientific Panel (2014) on behalf of the Scottish Government. This study assesses the scientific evidence relating to UOG (including shale gas, associated liquids and CBM) and includes summaries of the geological and seismic evidence. The study also considers at length the regulatory requirements for the development of the UOG sector in Scotland. The authors conclude that there could be potential for positive economic impacts in terms of jobs created, taxes paid and gross value added from developing the UOG sector in Scotland. The authors stipulate that the industry could be developed at a reasonable scale, based on UK scenarios from reports by the (Institute of Directors (2013) and EY (2014) which suggest jobs created in the UK by unconventional gas could be between 64,500 and 74,000 at peak and spend could be up to £33 billion in supply chain activities between 2016 to 2032. The report also identified that any community impacts such as concerns around water contamination, public health, seismicity, climate impacts and wider social impacts could be mitigated as long as they are carefully considered and communities are consulted as early as possible.

There is a wider range of reports on the UOG sector for the UK. One of the key reports "Getting Shale Gas Working' (Institute of Directors, 2013)" also outlines the benefits of developing shale gas in terms of exports, taxes, job creation and environmental benefits. The authors used a scenarios-based approach to demonstrate what the industry may look like in terms of production capacity and cost profiles. The report provides a breakdown of costs and production profiles for a smaller pad of 10 wells with one lateral each (10 laterals in total) and a larger pad of 10 wells with four laterals each (40 laterals in total). The authors assume that for the smaller pad, expected gas production could reach 31.6 bcf over lifespan, with required investment of £142 million (per pad) and that each single pad could create up to 406 jobs at peak (total of direct, indirect and induced). For the larger pad, the authors assumed that production could reach 126.2 bcf over lifespan, with investment of £514 million of investment and 1,104 jobs created at peak (total of direct, indirect and induced). In addition to the single pads cases presented in the study, the authors provide an illustrative example of what widespread development could look like in the UK. This widespread development scenario assumes that shale gas production could reach commercial scale and that a hypothetical development of 100 pads of 10 wells of four laterals each ( i.e. a total of 4,000 laterals) could produce between 853 bcf and 1,389 bcf per annum at peak. Under this scenario combined capex and opex would peak at £3.7 billion and jobs would peak at 74,000 in total (direct, indirect and induced). This UK-wide study did not provide a breakdown of the benefits by region/country.

'Getting ready for shale gas' ( EY, 2014) analyses the cost profiles and supply chain impacts associated with development of shale gas in the UK. The authors highlight the fact that the UK does not currently have a developed supply chain and that there is currently a shortage of domestic skills in this industry. The authors suggest there is potential for a new £1.6 billion rig manufacturing industry and a new market for existing UK businesses. Compared to the Institute of Directors (2013) study, the EY report estimates that the shale gas industry could provide for 64,500 jobs. Both reports agree on the fact that the industry would provide an opportunity for skills development within the UK.

Similarly, Amion Consulting produced reports on the UK Ocean Gateway potential (2014) and the Bowland Shale (2015). It considers the six main stages of activity involved in shale gas extraction, which are in line with those identified by EY ( EY, 2014). The authors based the cost profiles on sites of 10 vertical wells of four laterals each and then use economic multipliers to calculate the economic impacts. Finally, the UK Ocean Gateway study estimates cumulative spend to 2035 of £9.8 billion and potential number of jobs in the UK at over 3,504 associated with Ocean Gateway. The 2015 report estimates cumulative spend to 2048 of £30.6 billion and potential number of jobs in the UK at over 5,300 without a supply hub and 13,100 with a supply hub.

In line with the reports mentioned above, the Task Force (2015) published a report on the economic impact of shale gas and concluded that the UOG sector could create thousands of jobs for the country. The Deloitte (n.d.) study on the Bowland Basin Shale gas development in the north of England provides estimates of possible tax revenue generation of up to £580 million per annum by 2020 as well as the number of jobs the industry could support. They estimate that between 6,900 and 23,600 jobs could materialise based on estimates from developed US shale gas fields.

Of reports on the UOG sector internationally, Hefley and Seydor (2011) give an overview of the costs associated with building a Marcellus shale well. They estimate direct costs of nearly USD 8 million per well. The authors conclude that although the costs are significant, the development will deliver considerable economic benefits to the region through supply chain development, particularly where companies can outsource. The study highlights the opportunity to enter a new market for small business owners. The report also highlights further studies that have projected up to 110,000 jobs in Pennsylvania (Hefley & Seydor, 2011).

A study conducted by the Australian Government analyses the costs and benefits of coal bed methane in Queensland (Australian Government, 2015). The authors identify and assess the 'socioeconomic' impacts and so consider community costs and benefits as well, such as physical and mental health impacts, environmental and physical impacts and demographic and social change. The conclusions drawn are that the economic impacts of CBM development are net positive; for example, during the peak construction period for CBM in Queensland unemployment fell in the Surat Basin by 2.8% and in the Bowen Basin by 2.1% (although this cannot all be attributed to the CBM sector only). Another example is that there was an increase in the number of high income residents in CBM regions with direct value added to Gross State Product ( GSP) in 2013-2014 of AUD 13.3 billion ( USD 10.18 billion; GBP 7.15 billion). However, it was found that the community impacts were more variable with positives and negatives mostly due to how the impacts are distributed. The report also highlights that evidence so far suggests there has only been negligible impacts on water and air quality.

B.3 What is typically considered in an 'economic impact assessment'?

Typically an economic impact assessment measures three main impacts: 1) Direct impacts to GDP, employment, wages etc. 2) Indirect impacts and 3) Induced impacts (Oxford Economics, n.d.). Direct impacts are those that are directly associated with the developing industry, for example an increase in capital expenditure may cause a rise in GDP. Indirect and induced impacts are deduced from economic multipliers which are generated by bodies such as Office for National Statistics ( ONS) in the UK using Input-Output tables. Input Output tables are a tool used to identify the amount of spend occurring in an economy between different industries. From this it is possible to identify how a change in one industry can impact others.

B.4 Topics considered in other economic impact assessments for UOG

UK-based Economic Impact Assessments on UOG consider the following range of impacts:

• The costs of production, although studies differ on which components to include. Both EY (2014) and Institute of Directors (2013) do not explicitly appear to include costs associated with planning and licensing and exploration;
• The effect on GDP/ GVA and expenditure;
• The effect on employment and wages;
• The development of further skills and infrastructure - for example the EY (2014) report 'Getting ready for shale gas' did an extensive review on the matter; and
• Tax revenues and allocation of community benefits payments to local communities.

A study by Poyry (2013) on the macroeconomic effects of European shale gas production also includes the effects of UOG development on gas and energy markets, including impact on prices and fuel imports. Further impacts are also considered in a report on UK shale by Amion Consulting (2014) where the authors consider impacts on business competitiveness and the related costs of seismic testing.

From the studies reviewed for the purpose of this Report, the UOG-related economic impact assessments do not tend to include evaluations or quantifications of the potential environmental impacts of UOG development. Some socioeconomic studies that have tried to do this for example a report entitled 'Review of the socioeconomic impacts of coal seam gas in Queensland' suggested that community impacts may have a greater influence on welfare in the long run than more traditional economic impacts such as employment and GDP (Australian Government, 2015). However, even within these studies there are some limitations to quantifying these impacts, and socioeconomic impacts therefore tend to be handled in a qualitative manner.