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Report: Unconventional oil, gas is largest source of competitive advantage for US in next decades

A report released today by the Harvard Business School (HBS) and the Boston Consulting Group (BCG) concludes that the local environmental impacts of hydraulic fracturing can be managed cost effectively – without hindering the significant economic opportunity offered by unconventional natural gas. This can be done by using known processes, filling gaps in regulation and improving enforcement. The report, “America’s Unconventional Energy Opportunity,” was based on an extensive review of existing studies, new primary research and interviews across all stakeholder groups. It also found that unconventional natural gas is the only feasible, cost-effective way for the US to substantially reduce greenhouse gas emissions through 2030 while enabling the penetration of renewables.

“Unconventional gas and oil represents perhaps the single largest source of competitive advantage and economic opportunity for the United States over the next decade or two, at a time when both are badly needed,” said Michael E. Porter, a professor at HBS, a co-chair of the school’s multiyear U.S. Competitiveness Project, and a coauthor of the report. “But there is a real risk that American citizens, companies and communities will fail to capitalize on this historic opportunity because of misunderstanding and distrust.”

“Our research makes clear,” he continued, “that, contrary to popular perception, the US can capture the full economic benefits of unconventional gas and oil while also substantially addressing local environmental impacts and making major strides toward a lower-carbon energy system.”

While previous studies have addressed the positive economic opportunities of unconventional energy, this report involved a comprehensive assessment of the potential economic gains across the economy. By 2030, the development of unconventional gas and oil could achieve significant results, it found. These include:

  • Support 3.8 million jobs with wages twice the national median – half of which would be accessible to middle-skilled workers;
  • Produce average annual energy savings of $1,070 per household from low-cost natural gas, up from nearly $800 today;
  • Contribute almost $600 billion in annual GDP and $160 billion in government tax revenue from production-related activities alone, with ripple effects in energy-intensive industries such as plastics, metals, and heavy manufacturing.

In addition to generating economic benefits, unconventional gas and oil will also continue to create major geopolitical benefits for the US, including reducing the trade deficit, improving energy security and exposure to unstable regions, and opening up new avenues for trade and diplomacy abroad.

Despite these high stakes, America lacks a strategy to fully capitalize on this crucial opportunity. Instead, unconventional energy production is mired in political gridlock, driven by public and stakeholder frustrations about the local community and environmental impacts of hydraulic fracturing, as well as climate concerns, according to the report.

Industry is facing state and local opposition and bans on hydraulic fracturing. Opposition to critical infrastructure projects has led to protracted delays in building safe and efficient pipeline infrastructure, while antiquated export restrictions on oil and gas limit US economic growth with no compensating benefits for Americans.

Environmental performance is also lagging. Spills, contamination, leaks and other local impacts persist despite available technologies to mitigate them. And progress toward carbon reductions is also stymied by divisive opposition and an inability to agree on a coherent policy approach.

Much of the debate over unconventional gas and oil is uninformed or reflects purposefully misleading arguments, the report says. The “facts” advanced by all sides are frequently incomplete or taken out of context. Many stakeholders are also hung up on the false trade-offs between harnessing America’s energy advantage, protecting the environment and mitigating climate change. All this leads to misinformation and confusion in the general public.

The report suggests a new path forward. “We must approach this challenge from the perspective of what’s in the national interest and where industry, NGOs, governments and local communities can find common ground,” said David S. Gee, a BCG partner, the North America leader of the firm’s Energy practice, and a coauthor of the report. “There is no inherent trade-off between environmental protection and industry profitability – we can have both.”

The report finds that the development of unconventionals creates significant environmental risks but that real progress is being made in managing these risks at a cost that does not threaten competitiveness. With sound regulation and strong compliance, the cost of good environmental performance is modest. Mitigating the environmental impacts, such as through water recycling and reduced flaring, can actually reduce costs.

Pursuing America’s energy advantage and mitigating climate change are complementary, not antithetical. The report finds that increasing the use of natural gas in the power sector is essential for achieving large-scale greenhouse-gas emission reductions over the next 15 to 20 years and for supporting the near- and longer-term growth of renewables. Climate advocates benefit from unconventionals because the utilization of low-cost natural gas supports critical grid investments and provides the standby power capacity that is essential to lower carbon solutions over the longer term.

Industry also benefits from progress on climate change because it will enlarge demand for natural gas and reduce opposition to critical infrastructure and expanded development, according to the report.

The report outlines 11 action steps – involving all stakeholders – that offer a viable, practical and economically competitive path forward:

  • Continue the timely development of efficient energy infrastructure;
  • Deliver a skilled workforce for critical growth industries;
  • Eliminate outdated restrictions to gas and oil exports;
  • Develop transparent and consistent environmental performance data;
  • Set robust regulatory standards to address environmental risks;
  • Achieve universal regulatory compliance;
  • Strengthen bodies driving continuous environmental improvement;
  • Contain methane leakage with regulatory standards and voluntary reductions;
  • Set climate policies that encourage cost-effective emissions reductions;
  • Foster clean-energy technologies through industry and government research and development; and
  • Build out a smart, efficient energy grid.

The report finds that, to pursue this strategy, stakeholders must let go of the misconceptions, historic rivalries and distrust that have led to zero-sum mind-sets and slow progress. All sides need to acknowledge the legitimate concerns of other groups while focusing on solutions based on a common fact base. The facts reveal an ample middle ground where all stakeholders can benefit from unconventional energy development.

To download a copy of the report, visit BCG or HBS.

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