Report estimates benefits, costs of N.C. energy exploration

Date posted: April 15, 2013

picture of offshore oil exploration platformA report by Mike Walden, William Neal Reynolds Professor of Agricultural and Resource Economics, estimates the costs and benefits of oil and gas exploration in North Carolina.

Media Contact: Dr. Mike Walden, William Neal Reynolds Professor of Agricultural and Resource Economics, 919-515-4671 or michael_walden@ncsu.edu

Drilling for oil and gas off the North Carolina coast and for natural gas inland could generate millions of dollars in economic activity and create thousands of jobs. That same energy exploration and recovery could cause millions of dollars in damage to coastal communities and reduce property values inland.

Those are the conclusions of a report by a North Carolina State University economist that attempts to look at both the benefits and costs of developing North Carolina’s energy resources.

The report, titled “The Economic Potential from Developing North Carolina’s On-shore and Off-Shore Energy Resources,” was written by Dr. Mike Walden, William Neal Reynolds Professor of Agricultural and Resource Economics. The full report is available online at http://www.ag-econ.ncsu.edu/faculty/walden/publications/drillingnc.pdf.

Walden said he decided to write the report as a research project that would take an objective look at the benefits and costs of developing North Carolina’s energy resources. He added that he did not receive funding from any outside sources to produce the report.

North Carolina is thought to have significant oil and gas reserves off the coast that could be tapped with offshore wells, while areas of the state are thought to contain natural gas reserves that could be recovered using a drilling technology called hydraullic fracturing, or fracking.

Walden developed his costs and benefits estimates after examining federal government estimates of the amount of oil and gas off the state’s coast and natural gas beneath North Carolina’s soil along with reports on environmental damage from off-shore drilling and fracking. He also looked at oil and gas price forecasts from national and international sources.

Off-Shore Drilling

Walden’s conclusion is that over a seven-year build up period, off-shore drilling would generate $181 million in income annually, of which $11 million would be public revenues. In addition, 1,122 jobs would be created.

After the seven-year build up period, off-shore drilling would generate $1.9 billion in income annually, of which $116 million would be public revenue. This income and revenue generation would occur over a 30-year-period, during which 16,910 jobs would be created.

However, Walden shows, these estimates are highly sensitive to projections of the quantities of oil and gas off-shore as well as future prices of those resources. Changes in projected quantities and prices significantly change the economic impact to North Carolina.

Also, the estimated economic impacts should be put in context to the $440 billion of economic production generated annually in  North Carolina.

The downside to off-shore drilling is potential environmental damage from oil spills. In estimating oil spill damage, Walden looked at “ the spillage rate during the period 1964-2010 for U.S. outer continental shelf platform and pipeline operations.”

Using this information, he put the potential average annual cost of environmental damage at $83 million, primarily to the fishing and tourism economy in coastal counties. Walden points out that the size of the Deepwater Horizon oil spill in the Gulf of Mexico in 2010 increased the historic average of oil spill damage.

On-Shore Exploration

Walden used average estimates for natural gas supply and prices to estimate that natural gas exploration and extraction inland would generate $80 million annually in income, including $4.9 million in public revenue, and create 496 jobs as infrastructure and facilities were developed. Once wells were drilled and gas was being produced, Walden estimates that natural gas production would generate $158 million in annual revenue, including $9.6 million in new annual public revenue, and create 1,406 jobs over a 20-year period.

Again, Walden cautions that the economic impacts change as the assumed quantity and/or price of the energy resource changes.

The costs of natural gas exploration are more difficult to estimate because hydraulic fracturing, which involves injecting a solution of water and chemicals underground to fracture rock formations containing natural gas, is a relatively new technology and does not have the history of off-shore drilling. Nevertheless, Walden used reports on natural gas exploration in Pennsylvania, where hydraulic fracturing is widespread, to estimate possible environmental damage that “could reduce property values in the affected counties by between $636 million and $4.7 billion.”

Walden focused on North Carolina’s Deep River basin for natural gas exploration. This area, which includes parts of Anson, Chatham, Durham, Granville, Lee, Montgomery, Moore and Wake counties, is thought to have the greatest potential for natural gas exploration. Of these counties, Walden writes that Chatham, Lee and Moore have attracted most of the attention for drilling.

“There are both potential ‘upsides’ and potential ‘downsides’ to energy resource development in North Carolina, and neither the ‘ups’ nor the ‘downs’ should be ignored,” Walden writes. “Benefit estimates should be continually refined as updated price and quantity information becomes available. Potential cost information should also be reviewed with the goal of narrowing the range of estimates. Plans, procedures and contingencies for both reducing potential costs as well as addressing costs when they occur should be developed and debated.”

Written by: Dave Caldwell, College of Agriculture and Life Sciences communications, 919-513-3127 or dave_caldwell@ncsu.edu

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