What led to shale gas boom? Essay

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Issue Brief #

ISSUE BRIEF

US Shale Gas Development
What Led to the Boom?

Zhongmin Wang and Alan Krupnick

May 2013
Issue Brief 13-04

Resources for the Future
Resources for the Future is an independent, nonpartisan think tank that, through its social science research, enables policymakers and stakeholders to make better, more informed decisions about energy, environmental, and natural resource issues. Located in Washington, DC, its research scope comprises programs in nations around the world.

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[AUTHORS] | RESOURCES FOR THE FUTURE

US Shale Gas Development
What Led to the Boom?
Zhongmin Wang and Alan Krupnick1
Key Points


The shale gas boom resulted from factors that ultimately enabled firms to produce shale gas profitably, including technological innovation, government policy, private entrepreneurship, private land and mineral rights ownership, high natural gas prices in the 2000s, market structure, favorable geology, water availability, and natural gas pipeline infrastructure. 

The key question for policymakers in countries attempting to develop their own shale gas resources is how to generate a policy and market environment in which firms have the incentive to make investments and would eventually find it profitable to produce shale gas.

1. Introduction
In this issue brief, we provide an overview of the economic, policy, and technology history of shale gas development in the United States to ascertain what led to the shale gas boom. For a much more detailed review, see our discussion paper (Wang and Krupnick 2013).
In the past decade, shale gas experienced an extraordinary boom in the United States, accounting for only 1.6 percent of total US natural gas production in 2000, 4.1 percent by 2005, and an astonishing 23.1 percent by 2010. This remarkable growth has spurred interest in exploring for shale gas resources elsewhere. A number of countries, including China,
Mexico, Argentina, Poland, India, and Australia are beginning to develop their own shale gas resources. Although it is difficult to know definitively the necessary or sufficient conditions for stoking a shale gas boom, a historical review of the US experience can be informative.
For a real boom to occur in the private sector, high profitability, or at least the expectation of future high profitability, is a necessary ingredient. Our review suggests that a number of factors converged in the early 2000s—
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1 Wang (wang@rff.org) is a fellow and Krupnick (krupnick@rff.org) is a senior fellow and director of the Center for Energy

Economics and Policy at Resources for the Future.

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WANG AND KRUPNICK | RESOURCES FOR THE FUTURE

including high natural gas prices, favorable geology, private land and mineral rights ownership, market structure, water availability, and natural gas pipeline infrastructure—to make it profitable to produce large quantities of shale gas, but that the most important factor was innovations in technology. Some of the key technological innovations resulted from government research and development (R&D) programs and private entrepreneurship that aimed to develop unconventional natural gas, but other important technologies were largely developed by the oil industry for use in oil exploration and production.
The seed of the shale gas boom was planted in the late 1970s, when the US government aimed to encourage the development of unconventional natural gas in response to the severe natural gas shortage at the time. Private firms lacked the incentive to make large, risky R&D investments, partly because it is difficult to keep new technologies proprietary in the oil and gas industry, where few technologies are patentable or licensable. Also, in the early years, unconventional gas sources could not compete with conventional oil or gas sources for investment dollars, and most
US gas producers were small and did not…