Next generation Sustainability Governance Design Assignment

ORIGINAL PAPER

Using integrated process and microeconomic analyses to enable effective environmental policy for shale gas in the USA

Rasha Hasaneen1 • Mahmoud M. El-Halwagi1,2

Received: 9 October 2016 / Accepted: 10 May 2017 / Published online: 17 May 2017

� Springer-Verlag Berlin Heidelberg 2017

Abstract As one of the largest consumers of energy and

emitters of greenhouse gases in the world, the USA must

balance energy demand and security with environmental

responsibility. Recently, shale gas has emerged as a

promising element toward a solution to this dilemma.

Currently, shale gas production is regulated under the same

rules that govern traditional oil and gas operations, without

consideration for the unique environmental challenges

associated with the unconventional gas extraction process.

It involves small independent operators that typically uti-

lize the most cost-effective extraction processes without

necessarily prioritizing the environmental impact of their

operations. As a result, opposition to shale gas extraction

threatens the continuity and sustainability of the shale gas

industry. The negative externalities and information

asymmetry associated with this market continue to be

captured in a price of natural gas which is not inclusive of

the environmental costs of the extraction processes. The

objective of this work is to determine the environmental

policies that will lead to sustainable shale gas production.

A hierarchical approach is developed to benchmark current

technologies and to generate, assess and select technologies

and policies that overcome market hurdles while address-

ing EHSS objectives. The approach analyzes the technical

and microeconomic impacts of environmental remediation

techniques and then takes a multipronged policy approach

which supports the microeconomic, environmental, health

and safety goals. To illustrate the usefulness of the pro-

posed approach, a case study is solved for the Barnett Shale

play to assess at the microeconomic and environmental

implications of environmental remediation technologies for

shale gas operations. Based on the results of the analysis,

technology changes create both economic and environ-

mental benefits for operators indicating a market failure

resulting in the priceless favorable technologies do not

reflect their impact on the environment. The market fail-

ures in the process are analyzed and four policy alternatives

to the status quo are evaluated against four policy goals.

The primary recommendation resulting from the analysis,

the Comprehensive policy alternative, uses a phased

approach to drive ongoing innovation in the shale gas

industry, stimulate demand for natural gas and reduce the

information asymmetry. The implementation of this policy

is then applied to an economic and environmental model of

a cluster of wells in the Barnett Shale to determine how the

policy would be implemented.

Keywords Environmental policy � Shale gas � Hydraulic fracturing � Waterless fracturing � Seismic activity � Carbon regulation

Introduction

The energy equation: assessing the symptoms

Energy demand and consumption in the USA continue to

be among the largest in the world, as does its carbon

footprint, especially when compared to other global

Electronic supplementary material The online version of this article (doi:10.1007/s10098-017-1366-5) contains supplementary material, which is available to authorized users.

& Rasha Hasaneen [email protected]

1 Chemical Engineering Department, Texas A&M University,

College Station, TX 77843-3122, USA

2 Gas and Fuels Research Center, Texas A&M Engineering

Experiment Station, College Station, TX 77843-3122, USA

123

Clean Techn Environ Policy (2017) 19:1775–1789

DOI 10.1007/s10098-017-1366-5

economies. The USA is expected to remain the largest

consumer of energy and emitter of CO2 after China through

2040 (EIA 2012b). Furthermore, the current energy mix of

the USA sways heavily toward coal and oil, totaling about

56% of total fuel consumption (EIA 2012c) leading to a

high environmental burden compared to cleaner sources.

Electricity generation leans more toward coal, while

transportation relies heavily on petroleum. Without clean,

domestic alternatives to support this demand, the USA will

continue to rely heavily on foreign energy sources and

negatively impact the environment.

Among fossil fuels, natural gas is considered among the

cleanest options. It also offers advantages over renewables

in terms of expense and intermittency issues. Given the

USA’ energy resource profile as well as recent techno-

logical improvements in horizontal drilling and hydraulic

fracturing (or fracking), natural gas and oil from shale rock

(dubbed shale gas and shale oil) have emerged as signifi-

cant potential contributors to the US energy equation.

These unconventional sources are expected to narrow the

production–consumption gap in the USA (EIA 2013). They

also have the potential to turn the USA into a net exporter

of natural gas and have spurred major investments for

downstream processing to produce fuels and value-added

chemicals (Al-Douri et al. 2016; Ehlinger et al. 2014;

Julián-Durán et al. 2014; Noureldin et al. 2014).

Although the current reserves of shale gas are expected

to support US consumption for anywhere from 100 to

200 years, the current production process, specifically

hydraulic fracturing, is perceived to negatively impact both

the immediate and broader environment. Hydraulic frac-

turing is also believed to affect the health and safety of

people in the immediate vicinity of the operation. The

hydraulic fracturing process involves the injection of large

amounts of water laden with chemicals and mud into the

‘‘well’’ and fracturing shale to release the gas. Water

management strategies must be developed (Lira-Barragán

et al. 2016) to ensure produced water, which could carry

hazardous material (Hurley et al. 2016), is compliant with

regulations. As a result, water must be treated before dis-

posal and re-injection (Estrada and Bhamidimarri 2016) to

ensure hazardous waste is properly handled (Elsayed et al.

2015). The gas is then captured and refined for use.

Although hydraulic fracturing has been used for decades to

stimulate traditional oil and gas wells, the main issue with

shale is scale. The size and number of fractures required to

release the gas from shale is much more significant than

those previously employed by the industry to date. In

addition, the reach of a single well does not compare with

that of conventional operations. Consequently, many more

wells must be drilled to access the oil and gas from shale.

At present, shale production is spearheaded by a number

of independent vendors who may not have the robust

environmental, health and safety practices and expertise of

the more established oil and gas vendors. The lack of clear

and specific regulation in the industry enables independents

to operate in the most cost-effective manner, without

necessarily prioritizing their impact on the surrounding

environment (Wang et al. 2011). This issue is becoming

more pronounced as more shale gas deposits are discovered

and characterized. Shale gas, therefore, behaves as a public

good and the negative externalities associated with its

consumption and the information asymmetry associated

with shale gas operations, lead to a price for natural gas

that does not reflect the true and total cost of extraction.

This situation has contributed to a growing opposition to

the hydraulic fracturing process with several bans and

moratoria on shale gas extraction both in the USA (led by

local and municipal governments) and across the world. As

such, many governments are taking a wait-and-see

approach to the issue until they better understand the

longer-term implications of shale gas production (Hag-

ström and Adams 2012).

Focus on hydraulic fracturing: framing the issues

Given the current fragmented nature of shale gas produc-

tion, without federal regulation it will be difficult for the

USA to realize the full potential that shale gas offers

toward improving energy security and the environmental

footprint of energy consumption. Leaving the current

industry unchecked may have significant adverse effects on

the immediate and longer-term environmental, health and

safety issues.

Shale reservoirs are massive. They typically span mul-

tiple communities with many coming close to metropolitan

areas and agricultural zones (EIA 2011). As a result, the

multiple wells that must be drilled to stimulate the gas are

frequently located on private properties. This situation

leaves energy security in the hands of many private owners

and municipalities and has led to inconsistent local regu-

lation on shale gas production. This fragmentation of pol-

icy poses a risk for larger operators which are more

environmentally conservative and narrows the market to

smaller entrants with higher risk-reward profiles; ulti-

mately reducing competition that involves economic as

well as environmental, safety and health objectives. Cur-

rently shale gas operations, specifically hydraulic fractur-

ing, are executed with the most cost-effective approach but

not necessarily the most ideal from the perspective of

environmental health and safety. In many cases, the current

lifecycle GHG emissions associated with shale gas can be

higher than those of conventional gas and even coal (Jenner

and Lamadrid 2013), especially when methane leakage is

taken into account (Howarth et al. 2010). These practices

have led to negative externalities associated with the

1776 R. Hasaneen, M. M. El-Halwagi

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consumption of natural gas, which behaves like a public

good. In this case, the low price of natural gas does not

reflect the additional cost of the environmental burden that

the extraction process imposes. Furthermore, the lack of

transparency between the shale gas operators and the

public has led to information asymmetry around the true

environmental impact and health hazards associated with

the extraction process.

The list of environmental issues associated with shale

gas extraction is broad with several complicating factors

that include:

• Number of wells that need to be drilled as well as acreage and clearing needed for well pads and

impoundments (Milt et al. 2016)

• Overconsumption of fresh water for hydraulic fractur- ing (2 million–6 million gallons/well) (Kell 2009)

• Contamination of water with hydraulic fracturing chemicals and methane (thereby impacting local

streams/rivers and well water) (Michalski and Ficek

2015)

• Fugitive methane emissions and flaring (Omara et al. 2016)

• Release of volatile organic compounds (VOCs) form well installation

• Radioactive particles in flowback and produced water resulting from hydraulic fracturing

• Release of pollutants from diesel and gasoline engines used in the operation (e.g., pumpers, trucks)

Without more consistent federal regulation around shale

production, the fragmentation of policy will continue to be

a barrier to larger more environmentally conservative

entrants into the market as their cost of operation will be

uncompetitive. This practice will continue to drive strong

opposition to shale gas production that will lead to more

fragmentation.

In addition to the energy security/independence and the

environmental perspective, shale gas production has the

potential to drive jobs, exports and tax revenue both in its

own right. It has the potential to boost the manufacturing

sector through the creation of a gas monetization infras-

tructure (to produce value-added chemicals) that enjoys

abundant and competitive feedstocks. Solving the shale gas

dilemma will help provide a more stable and secure envi-

ronment for these industries to operate. Finally, since the

USA is the global leader in the area of shale gas produc-

tion, other economies are looking to the USA to determine

how to set their own policies around shale reserves. This

will have a domino effect on the environment and energy

balance globally. By establishing policies that address both

the negative externalities that arise from production of

shale gas, and the information asymmetry in the market,

the federal government can lay the foundation for other

economies to effectively regulate this industry within their

borders.

Current US policy environment for shale gas

production

Despite the differences between unconventional gas pro-

duction and conventional methods, their production is

governed under the same regulations. Development and

production activities of oil and gas in the USA are regu-

lated under a complex set of federal, state and local laws

that address various aspects of exploration and operation.

All laws, regulations and permits that apply to conventional

oil and gas exploration and production also apply to shale

gas development (Kell 2009). As these regulations are

extensive, the more salient points will be summarized here.

The US EPA administers most of the federal laws and

development on federally owned land is managed by the

Bureau of Land Management and the US Forest Service. In

addition, each state has one or more regulatory agencies that

permit wells (design, location, spacing, operation and

abandonment), as well as environmental activities and dis-

charges (water, waste, air emissions, underground injection,

wildlife impacts, surface disturbance and worker health and

safety.

A series of federal laws govern most environmental

aspects of shale gas development. Federal laws are

implemented by the states under agreements and plans

approved by federal agencies. Most of these have provi-

sions for granting ‘‘primacy’’ to the states in which shale is

being produced. The regulations include:

• Clean Water Act—regulates surface discharges of water associated with shale gas drilling and production

as well as storm water runoff from production sites

• Safe Drinking Water Act—regulates the underground injection of fluids from shale activities, but excludes

methane contamination

• Clean Air Act—limits air emissions from engines, gas processing equipment and other sources associated with

drilling and production but does not include emissions

of greenhouse gases

• National Environmental Policy Act (NEPA)—requires that exploration and production on federal land be

thoroughly analyzed for environmental impact

• Occupational Safety and Health Act (OSHA)—regula- tions have provisions for handling naturally occurring

radioactive material (NORM)to protect gas field workers

State agencies not only implement and enforce federal

laws, they also have their own sets of state laws to

administer. The states have broad powers to regulate,

permit and enforce all shale gas development activities—

the drilling and fracture of the well, production operations,

Using integrated process and microeconomic analyses to enable effective environmental… 1777

123

management and disposal of wastes, and abandonment and

plugging of the well. States have implemented voluntary

review processes to help ensure that the state programs are

as effective as possible.

• Ground Water Protection Council (GWPC)—has a program to review state implementation of the Under-

ground Injection Control (UIC) program

• State Review of Oil and Natural Gas Environmental Regulation (STRONGER)—has developed a set of a set

of environmental guidelines against which state pro-

grams can be reviewed

• Interstate Oil and Gas Compact Commission (IOGCC)—conducted state reviews against a set of

similar guidelines before STRONGER was formed

Much of the environmental policy, today, takes the stand

that environmental health and safety represents an increase

in cost on capital businesses. As a result, public policy in

that area is developed using methods which force busi-

nesses to choose the lesser of two evils. This is typically

ineffective and meets with a great deal of opposition from

the private sector. In many cases, technology exists that

improves both the environmental footprint and the inherent

safety of these operations; however, the industry has been

slow to adopt those technologies.

Much of the proposed environmental policy has focused

on developing a carbon scheme that puts a price on carbon.

While successful energy policy has been multipronged,

combining tax incentives with other policy instruments

such as incentive pricing and research credits (Wang and

Krupnick 2013), environmental policy has not historically

followed suit. Public policy in this area approaches the issue

from the perspective of driving environmental improve-

ments without a thorough understanding of the microeco-

nomic impact of the policy instrument. As a result, it either

meets with opposition or is ineffective in driving adoption

and less environmentally friendly solutions continue to be

employed in the field leading to both a larger environmental

footprint and more economic losses than required.

Methodology

In looking at the environmental policies related to

unconventional gas plays, the approach taken in this paper

is to analyze the technical and microeconomic impacts of

environmental remediation techniques and then take a

multipronged policy approach which supports the

microeconomic, environmental, health and safety goals. It

is expected that this policy approach will enable adoption

of new technologies which also have a positive long-term

economic impact and reduce the initial financial hurdles of

an operation. The primary objective of this approach is to

create economically and environmentally sustainable

operation which would constitute a win–win scenario for

the policy makers, the oil and gas operators, and for the

citizens of the USA. Figure 1 presents an overview of the

methodology used for the development public policy

using process and microeconomic analyses as a basis.

While many of the environmental and policy issues are

common among unconventional gas plays, the unique

composition of the gas in each play may require additional

processes which would also need environmental remedia-

tion such as de-watering or CO2 removal. In addition, the

unique location of the play and the related local policy

environment can dictate how the development of the

resource is executed. As a result, looking at these issues for

a specific play can enable a focused analysis of the issues

and form a foundation for analysis of other plays. In order to

apply the findings across other plays, additional analyses

and adaptations must be applied. It is also worth noting that

the competing objectives can be reconciled and traded off

using multi-objective augmentation techniques (e.g., El-

Halwagi 2017).

Case study: the Barnett Shale play

In order to focus the analysis and demonstrate its appli-

cability and usefulness, a specific shale gas play was

evaluated. Depending on the underlying depositional sys-

tem, different shale plays will require different remediation

approaches, so limiting the analysis to a specific play

enables a focused approach to the analysis. The Barnett

Shale was chosen as it is among the most established and

most mature shale gas plays in the USA today and it plays a

critical role in the US natural gas landscape. As a result, a

robust data set collected from operations in the Barnett

could be used to conduct the analyses.

The Barnett Shale is a geological formation, located in

North Texas (Rahm 2011). It is estimated to extend 5000

square miles, across 25 counties with the core producing

area located around Fort Worth (Armendariz 2009). The

formation rests between 6500 and 8000 feet in depth, with

an average thickness of 350 feet (Martineau 2007).

As of March 2016, there were over 17,500 wells, pro-

ducing 4018 million cubic feet per day of natural gas,

according to the Texas Railroad Commission (2014). In

addition, the Barnett Shale produces approximately 4125

barrels per day of oil and 12,000 barrels per day of con-

densate, making it a considerable resource for Texas and

placing it among the top five shale gas plays in the USA,

with the success of horizontal drilling driving the success

of the play. Today, horizontal well count is triple that of

vertical wells in the formation, and horizontal well pro-

duction dwarfs that of verticals wells in the play (Dong

2012; Sieminski 2014). Shale gas from the Barnett play

1778 R. Hasaneen, M. M. El-Halwagi

123

1. Map Exis�ng Process

2. Model Process

3. Develop Process Baselines

4. Generate Process Alterna�ves

5. Iden�fy & Evaluate Impacts of Alterna�ves

8. Determine Market Failures

Market Failure?Market Solu�on No

9. Determine Policy Goals

10. Develop Policy Alterna�ves

6. Determine Op�mal Combina�on of

Alterna�ves

11. Analyze Policy Alterna�ves

7. Develop New Process

12. Select Policy

13. Determine Na�onal/Global Impact

Acceptable Impact?

Implement Policy

Re-assess Policy Goals

Yes

No

Yes Process Map highligh�ng major environmental elements

Primary outcomes (Ys) Cri�cal Drivers (Xs)

Conduct environamental and micro- economic analysis of process

For each of the cri�cal drivers; develop environmentally favorable alterna�ves

Develop environmental and micro- economic analysis of alterna�ves

Select the alterna�ves that op�mize the primary outcomes

Combine alterna�ves to map out “new”op�mized process

Determine if there are market failures hindering the adop�on of op�mal solu�on

Determine policy goals aligned with the primary process improvement outcomes

Develop policy alterna�ves that enable policy goals

Analyze policy alterna�ves against policy goals and rank alterna�ves

Select policy alterna�ve the most closely aligns to policy goals

Based on the environmental and micro-economic analysis, determine macro impacts

Detailed process and equipment defini�on

Cost and EHSS impact of process elements/equipment

Opera�ng costs, opera�ng & equipment parameters, fuel characteris�cs & EHSS

impact of base elements

Opera�ng costs, opera�ng & equipment parameters, fuel characteris�cs & EHSS

impact of alterna�ves

1. The shale produc�on process was mapped and the major elements impac�ng environmental impact were iden�fied

2. The primary outcomes of profitability and environmental impact and their measures were iden�fied. The cri�cal drivers were then iden�fied as: fuel type to power equipment (and its rela�ve parameters), fracturing fluid (and its rela�ve parameters ) and impact of changes on the safety of opera�ons.

3. Process baselines for the cri�cal drivers was determined and the primary outcomes based on these were developed.

4. For each of the cri�cal drivers, alterna�ves were developed which were expected to reduce the overall environmental impact of the opera�on.

5. These alterna�ves were subs�tuted into the base process and the total environmental and profitability impacts were evaluated.

6. Combina�ons of alterna�ves which had the most favorable impacts were iden�fied.

7. New processes using these alterna�ves were developed.

8. The EHSS impact of each alterna�ve was compared against the impact on profitability to determine if a market failure was present

9. In the case where a market failure was found policy goals were determined to align profitability outcomes with EHSS ones.

10. Policy alterna�ves were then developed to a�empt to reach the policy goals.

11. Each policy alterna�ve was evaluated against each policy goal and the alterna�ves were ranked based on how well they aligne d to the goals.

12. The policy which best aligns to the policy goals and closes the gap between the profitability and EHSS gaps was selected.

13. Based on the economic and environmental benefits of the individual case study, the results of policy implementa�on were extrapolated to determine the expected na�onal impact of the policy to ensure a significant improvement over status quo.

Fig. 1 Process for environmental policy development using on process and microeconomic analyses

Using integrated process and microeconomic analyses to enable effective environmental… 1779

123

does not require CO2 and H2O processing to make it usable

and can therefore be used as a baseline for further analyses.

Operations in the Barnett Shale are typical for many

shale plays, low costs diesel and gasoline engines power

rigs and transportation vehicles and large volumes of water

are used to hydraulically fracture the underlying formation,

leading to a high environmental footprint. While more

sustainable options are available, they require a higher

initial capital investment and are therefore not currently

used in the operation.

The analysis use mass targeting techniques to break the

lifecycle of the operation down into its key components.

The process modeled along the areas of economic and

environmental footprints using cost data from a field

operator and standard emissions data based on the equip-

ment specifications. Available, alternative technologies are

also modeled and then substituted for the base technologies

and the same techniques are used to evaluate the remedi-

ated operations. The net present value (NPV) of the

changes required for remediation was then used to deter-

mine their economic viability. Public information was used

to estimate environmental footprint and economic impact

and where public information was not available, vendors

were contacted directly for estimates.

Well lifecycle analysis and environmental impacts

In looking at the environmental impacts of shale gas, it was

assumed that once the gas is produced and processed for

transportation, its environmental footprint will be similar to

that of natural gas from conventional sources. Therefore,

the focus of this analysis is on the environmental footprint

of the drilling and production processes associated with

shale gas extraction, the ‘‘well’’ lifecycle, and not on the

entire lifecycle of the shale gas itself.

As discussed previously, there are a number of envi-

ronmental issues tied to shale gas development. Issues

around greenhouse gas emissions; water consumption and

disposal during hydraulic fracturing; seismicity are the

most consistent among shale gas plays and have the most

direct impact on the immediate environment. In addition,

these elements are among the most difficult to manage and

mitigate.

As a result, a well lifecycle analysis was conducted

focusing on these three elements and the proposed

improvements to reduce the impact on the immediate envi-

ronment were proposed and analyzed. The total microeco-

nomic and environmental impacts of the proposed options

for environmental remediation were developed to form a

basis for policy recommendations. The first was remediation

of greenhouse gas emissions from the burning of fossil fuels

in the operation. The second was reducing the impact on

water resources both in terms of fresh water usage as well as

wastewater management. The third was looking at the

reduction in induced seismicity resulting from shale opera-

tions. A thorough review of the literature revealed that

induced seismicity was inextricably linked to wastewater

management, so these two areas were combined into a single

analysis.

A systematic approach was used to analyze the key

process elements in shale gas operation. An analytical

model was then developed, and an economic and envi-

ronmental simulator was built. Alternative technologies

were then substituted for the most impactful levers of the

operation to reduce the environmental impacts. The

remediated operations were then simulated and analyzed

from both environmental and microeconomic perspectives.

Policy goals and analysis

Once the need for policy was established, a series of policy

goals were developed to ensure objective evaluation of the

policy alternative. A series of metrics for each goal were

defined, and each alternative was analyzed against each of

the policy goals to help determine the policy recommen-

dations. In addition, a number of constraints were identi-

fied, within which the chosen policy will be bound. Policy

alternatives were evaluated against the policy goals of

economic efficiency, environmental health and safety

preservation, equitable distribution and political feasibility.

‘‘Appendix 1’’ in the Supplementary Material discusses

each of these policy goals in detail.

Improving the environmental footprint of shale gas production in the Barnett Shale

Environmental remediation techniques for shale gas

production

The first environmental remediation technique evaluated

was the substitution of natural gas for diesel and gasoline in

powering the shale gas operation. In evaluating several

alternatives, the approach which had the biggest economic

and environmental benefit while continuing to meet the

needs of the drilling and production operations was:

• The use of dual fuel heavy duty equipment for drilling and completions. The equipment would burn raw

natural gas directly from the well head 70% of the

time and diesel for 30% of the time to satisfy periods of

high-power and torque requirements; and

• The use of light duty compressed natural gas vehicles for transport

The second environmental issue, water consumption and

management, was addressed with two waterless fracturing

1780 R. Hasaneen, M. M. El-Halwagi

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options. The analysis used substances that are naturally in a

gaseous state but are either liquefied or foamed to enable

fracturing, thereby limiting the amount of water used to

drilling operations and limiting waste water management to

management of water produced from the formation itself.

• Liquefied petroleum gas or LPG fracturing which uses a cross-linked gel made of largely propane and in some

cases includes some butane; and

• Carbon dioxide fracturing which uses CO2 in a foamed or supercritical form. While supercritical CO2 has had

some experimental success, foamed CO2 has been used

in the field with quite a bit of success.

While all of these alternatives have an initial up-front

investment and some operational risk associated with their

relative newness in this application, the economic benefits

are expected to outweigh those costs.

Environmental and microeconomic impacts

of technology alternatives

As much of the environmental impacts of the shale gas

operation occur during the drilling and completion phases

of the well lifecycle, and it take approximately one month

to drill a well, a cluster of 12 wells was used as the unit of

measure for the analysis. This represents an ‘‘annualized’’

cost model. The net present value of the remaining costs

which run through the life of the well cluster (assumed to

be 25 years) as well as the lifetime revenue of the cluster

was then compared to this annualized cost to develop an

expression for the lifetime profitability of the well.

In addition to a number of critical operating assumptions

which were made in modeling the operation, the following

assumptions were made to compare the key alternatives:

• The life of a well is, on average 25 years. Should the well life be shorter or longer, the well life is such that it

would not change the outcome of the analysis

significantly.

• All alternative fracturing fluids recovered from each well would be recycled in the following wells in the

cluster and there would be approximately a 10% loss in

fluid volume which would need to be replenished.

• Carbon dioxide used for fracturing is partially seques- tered in the formation at a rate of 30%.

• Alternative fracturing fluids would yield enhanced gas production at a rate similar to that of other field studies

using that fluid

Figure 2 highlights the combined environmental and

microeconomic impacts of the proposed technology

alternatives.

While there is a reduction in operating costs resulting

from each of the three alternatives, the largest cost reduc-

tion comes from the substitution of natural gas with diesel

as a fuel, even though this option does not produce the

most optimal greenhouse gas reduction. A different picture

emerges when the increase in production resulting from the

alternative fracturing fluids is taken into account, as shown

in Fig. 3.

The improvements in the overall microeconomic foot-

print of the operation are shown by looking at the overall

profitability of the well cluster over its expected life. The

Fig. 2 Environmental improvements and operations

savings of technology

alternatives

Using integrated process and microeconomic analyses to enable effective environmental… 1781

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increases in profitability resulting from the alternative

fracturing fluids far outweigh the cost savings involved. If

only the economic view was taken, it can be surmised that

the use of natural gas as a fuel coupled with the use of LPG

or propane as a fracturing fluid would yield the best solu-

tion. This option does not, however, lead to the most

effective economic solution. This economic disparity

results from a number of inherent issues, the most signifi-

cant of which are:

• As more carbon dioxide is sequestered in the operation, a positive environmental outcome, more carbon dioxide

must be purchased to compensate for the ‘‘loss’’

• The cost of carbon dioxide is very high as there is a distinct lack of infrastructure to capture, process and

transport carbon dioxide to site

• In field studies, carbon dioxide foam did not increase production by as large a percentage as LPG gel, thereby

leading to a higher boost in revenues tied to LPG

This case study vividly demonstrates the negative

externalities associated with many environmental issues.

As a result, it lends itself well to the institution of public

policy to eliminate or reduce the dead weight loss in the

market and drive the desired economic and environmental

outcomes. In short, the analysis shows that while all

technology options offer both economic and environmental

benefits, left to standard market dynamics, operators would

gravitate toward the use of natural gas as a fuel and LPG as

a fracturing fluid (‘‘natural gas/LPG’’) rather than the

safer, and more environmentally favorable, use of carbon

dioxide as a fracturing fluid. Public policy is therefore

recommended to support the natural gas and CO2 (‘‘natural

gas/CO2’’) solution as the more environmentally favorable

option.

Policy recommendations for improving the environmental footprint of shale gas production

Policy alternatives

The broad nature of the shale gas extraction issue lends

itself to multiple policy alternatives. In reality, a multi-

faceted approach is likely the best option. The challenge

will be to keep the chosen policy framework simple enough

to understand and implement while ensuring it is compre-

hensive enough to address the issues posed by the shale gas

extraction issue. In addition, since the environmental issues

have long-term implications, it will be critical that the

chosen policy withstand multiple administration changes.

The goal of these alternatives is to internalize the negative

externalities associated with shale gas production and

resolve the information asymmetry.

Alternative I: status quo

The current regulatory environment for shale gas extrac-

tion, as for conventional oil and gas exploration and pro-

duction, is complex and multilayered. Today, the laws,

regulations and permits associated with conventional oil

and gas apply to shale gas extraction (Kell 2009).

Fig. 3 Environmental and microeconomic impacts of

technology alternatives

1782 R. Hasaneen, M. M. El-Halwagi

123

Many of the governing regulations set limits on envi-

ronmental impact elements such a water pollutants or air

pollutants. They manage compliance using permitting

mechanisms and fines for non-compliance. Many have

specific recordkeeping and reporting requirements for the

operators to ensure monitoring and transparency. It is

important to note that there is no current regulation on

greenhouse gas emissions for all but the very largest sta-

tionary sources. There are also no provisions in place for

regulating methane (the primary component of shale gas)

contamination of drinking water (Jackson et al. 2011). In

fact, there are a number of exemptions for oil and gas

producers in many of these regulations today, the Hal-

liburton Loophole (Howarth et al. 2011).

In addition, there are two major state, industry and

environmental consortia that work to govern oil and gas

producers at the state level. The Interstate Oil and Gas

Compact Commision (IOGCC) and State Review of Oil

and Natural Gas Environmental Regulation (STRONGER)

represent constituents responsible for 90% of onshore

domestic production. They also update regulatory guideli-

nes consistent with developing environmental and oilfield

technologies and practices.

The Comprehensive Environmental Response Compen-

sation and Liability Act (CERCLA or Superfund) taxes

chemical and petroleum industries and funds a trust for the

cleanup of hazardous waste sites. This excludes natural gas

and oil but would apply to shale gas in the event other

hazardous material is discharged. This is the only specific

environmental tax element today for shale gas producers.

Finally, the Emergency Planning and Community Right

to Know Act (EPCRA) has disclosure requirements for all

oil and gas producers regarding all hazardous material on

site. The EPA’s Toxic Release inventory (TRI), which is

authorized as part of the EPCRA, provides valuable

information regarding chemical releases and waste man-

agement to the public but it currently does not include the

oil and gas industry (part of the Halliburton Loophole).

This specific element goes to the issue of information

asymmetry.

Alternative II: stimulate demand

This alternative involves an environmental tax/cap and

trade mechanism on both the supply (shale gas operators)

and demand (large shale gas intermediaries) balanced by

forced percentage reduction in greenhouse gas emissions

for utilities and large energy consumers, equivalent to the

difference between the greenhouse gas emissions for coal

or oil and natural gas. Tax revenue goes to funding

infrastructure investments (staff, management and tech-

nology) for monitoring and enforcement. This policy

would be regulated by the Department of Energy and EPA

to ensure balance and would mandate increased reporting

requirements to support tax enforcement only. To

approximate national emissions policies most actively

pursued at present we would impose (1) a renewable

energy standard (RES) requiring a 25% renewable share of

electric generation by 2030 and (2) the retirement of 50%

of current US coal-fired generation capacity by 2030 (Ja-

coby et al. 2012).

Alternative III: most effective technology

This alternative involves tax incentives for use of the most

effective technology for abatement of environmental

impact. To ensure continuous improvement, incentives are

tiered and only continue at the highest level if organiza-

tions make year over year improvement in their environ-

mental footprint. To implement this policy, there would be

regional individual and co-op-based environmental

responsibility tied to drilling rights and enforced via dril-

ling permits (Weimer and Vining 2011). This includes

infrastructure investments for monitoring environmental

impact and reporting and disclosure, putting the onus on

the operators for monitoring and reporting to get the tax

incentives. Industry associations would be recruited to

determine and enforce ‘‘best available technology’’ usage

via their existing audit programs (a.l.a. API monogram

program). The EPA and Department of Energy enforce

regulation and tax rate reductions using the same mecha-

nisms used for wind and solar credits. The reduction in tax

rate would have to be enough to create a positive or neutral

net present value on the initial investment in infrastructure

by corporations.

Alternative IV: plug the loopholes

In this alternative, there is also regional individual and co-

op-based environmental responsibility tied to drilling rights

and enforced via drilling permits. Regulations are put in

place to plug the Halliburton loopholes on reporting,

transparency and environmental impact using the current

regulators and enforcement mechanisms in place for other

industries. Revenue from the fines associated with

increased regulation is invested in upgrading the infras-

tructure to accommodate the increased data load on the

monitoring agencies and systems (IHS 2009).

Alternative V: comprehensive policy

In this alternative, there is, again, regional individual and

co-op-based environmental responsibility tied to drilling

rights and enforced via drilling permits. The policy is based

on the ‘‘most effective technology’’ policy with modifica-

tions to address the shortfalls of the original alternative. It

Using integrated process and microeconomic analyses to enable effective environmental… 1783

123

involves a phased in approach starting with tax incentives

and research funding for most effective technology to fund

investment in infrastructure improvements to plug the

associated informational and environmental (Halliburton)

loopholes around the most critical of environmental factors

(2–3 years). Again, industry associations would determine

and enforce the ‘‘most effective technology’’.

Once a baseline environmental footprint is established,

incentives would continue to be offered for continuous

improvement and demand would be driven with environ-

mental impact reduction policies on utilities and large

energy customers with taxes/fines after the initial 2–3-year

grace period. This ensures that demand for natural gas

remains high enough to counter any potential oversupply

with the tax incentives driving down costs.

Environmental tax would be imposed on all suppli-

ers/operators those who, after 2–3 years do not employ the

‘‘most effective technology’’. The EPA and Department of

Energy would invest up-front in infrastructure and moni-

toring in preparation for the 2–3 year cutoff. Taxes and

fines, in all cases, go to return the initial agency investment

and fund ongoing monitoring and regulation enforcement

after the initial 2–3-year period.

Analysis of policy alternatives

In order to adequately evaluate these alternatives and make

a recommendation, each alternative was analyzed against

each of the policy goals outlined in the previous sec-

tion. Table 1 summarizes these results. The detailed anal-

yses of each policy alternative against the policy goals are

included in ‘‘Appendix 2’’ of the Supplementary Material.

Each of the impact categories is given metrics which

help determine how the alternatives will be evaluated and

the scale is highlighted as part of Table 1. For each impact

category the high, low and median scores were given

values and descriptors and then each alternative was

evaluated against the status quo and given a relative and

more qualitative score along the range from high to med-

ium to low. Additional research will be required in order to

better refine these values quantitatively, and this is a rec-

ommendation for future work on this analysis.

Policy recommendations

Based on the evaluation of policy alternatives against the

proposed policy goals, it can be seen that each of the

alternatives has benefits and drawbacks. All of the alter-

natives are more favorable than the status quo on the EHSS

preservation aspect although not all can improve this aspect

without significant degradation in economic efficiency.

Therefore, it is concluded that the status quo is not an

option when looking at the issue of shale gas extraction.

The comprehensive proposal ranked highest among the

remaining alternatives along all the policy goals except for

political feasibility where ranks second to the most effec-

tive technology policy, due to its complexity and the

longer-term nature of the phased implementation. It is a

close call among these two alternatives. It is our conclusion

that the, more holistic and longer-term impact of, the

Hybrid policy warrants the potential risks.

The Comprehensive policy alternative, while more

complex, is more aligned with successful energy policy and

more effectively leverages public private partnerships to

foster competition with in the marketplace and support

innovation in more environmentally sustainable technolo-

gies for shale gas production. It is expected that the long-

term effects of this policy will continue to drive favorable

environmental outcomes into the future, even should the

administration discontinue the policy at some point.

Should the implementation risks associated with the

Comprehensive policy be deemed too high, the most

effective technology policy is recommended as an alterna-

tive. It should be noted that, while it is expected that the

initial impact of this policy will be positive, not all shale

gas operators will be inclined to comply and without the

checks and balances of the comprehensive policy, a sub-

optimal position may be reached.

Environmental and microeconomic impacts of policy recommendations

The primary objective of the Comprehensive Environ-

mental Policy is to drive technology adoption and support

infrastructure development for the most environmentally

sustainable alternative for shale gas production. Based on

the technical and microeconomic analysis, the solution the

uses the ‘‘most effective technology’’ is that with natural

gas a fuel and CO2 as a fracturing fluid (‘‘natural gas/CO2).

Tax incentives to offset up-front capital investment

Based on the technology analysis, an up-front capital

investment for brown field applications to convert operations

for well cluster to natural gas and carbon dioxide was found

to be in the neighborhood of $3,000,000. For green field

applications, the difference in capital investment would be

slightly less as the initial cost of the older technology would

need to be taken into account and subtracted from the

financial impact on the operator. The tax incentives tied to

this value can be in the form of one-time tax credits at the

time the equipment is purchased, or a cost per million cubic

feet of natural gas over the life of the well. While the tax

incentive over the life of the well cluster would offer a more

economically feasible option for the public sector, a one-

1784 R. Hasaneen, M. M. El-Halwagi

123

Table 1 Policy goals and alternatives matrix

Goals Impact Category Policy Alterna�ves

Status Quo S�mulate Demand Most Effec�ve

Technology Plug the Loopholes Comprehensive

Economically Efficient Shale Produc�ona

Cost of Produc�on

Produc�on Rate

EHS Preserva�onb Environmental Footprint of Produc�on

Year on year improvement of footprint

Ci�zen Health Index

Safety of Opera�on

Implementa�on Feasibilityc

Ease of Enforcement

Ease of Monitoring

Equitable Distribu�ond

Fairness to land owners

Fairness to corpora�ons

Fairness to neighbors

Fairness to the average ci�zen

Informa�on Dissemina�one

Brand awareness

Ci�zen sa�sfac�on

Poli�cal Feasibilityf Likelihood of successful adop�on

Program similarity

Legend:

aEconomic Efficiency Cost of Produc�on: Impact of the policy on the cost to product natural gas

No Impact Impact does not affect well viability Impact significantly reduces well viability Produc�on Rate: Impact of the policy on an operator’s ability to produce at the current price of natural gas

Remain at current high levels Reduced but s�ll compe��ve at current price point Uncompe��ve at current price point bEnvironmental Health and Safety Preserva�on

Environmental Footprint of Produc�on: Rela�ve impact of opera�ons on the immediate environment

In line with green opera�ons benchmark In line with other (non-shale) industrial ac�vi�es Impact on environment greater than others Year on year improvement of footprint: Measures impact of the policy on sustainable environmental improvements

>5% improvement 1-5% improvement No Improvement Ci�zen Health Index: Measures our ability to develop root causes and solu�ons for impact on ci�zen health in the vicinity of opera�ons

No impact to ci�zen health (or be�er) Causes of impacts to health known and resolving Unknown impact on ci�zen health Safety of Opera�on: Uses standard OSHA defini�ons for oil and gas to determine safety of opera�ons

Equal to other oil and gas opera�ons 1-10% worse than oil and gas opera�ons >10% worse than oil and gas opera�ons cImplementa�on Feasibility Ease of Enforcement: Measures the need for investment in mechanisms for enforcement

Uses exis�ng mechanisms Uses repurposed mechanisms Requires new mechanisms Ease of Monitoring: Measures the need for investment in infrastructure (technology, people, management) for monitoring

Uses exis�ng infrastructure Uses repurposed/expanded infrastructure Requires new infrastructure dEquitable Distribu�on

Fairness to land owners: Directly correlated to level of burden and personal gain (in the form of royal�es received from operators…related to produc�on rate)

Low burden and high personal gain High burden or low personal gain High burden and low personal gain Fairness to corpora�ons: Directly related to company benefit (profitability and reputa�on) and level of burden (�me and money)

High benefit and low burden Low benefit or high burden Low benefit and high burden Fairness to neighbors: Determined by personal gain from opera�ons (in the form of jobs and consump�on of local goods and services) and level of burden (health and safety)

Low burden and high personal gain High burden or low personal gain High burden and low personal gain Fairness to the average ci�zen: Manifested in the form of personal gain (cost/price of natural gas) and level of burden (impact on the larger environment)

Low burden and high personal gain High burden or low personal gain High burden and low personal gain eInforma�on Dissemina�on

Brand awareness: Measures the awareness, understanding and acceptance of the average ci�zen of the issues and facts related to shale gas

Aware and Understands facts Aware of facts; may not understand issues vs. fic�on Unaware of facts, follows propaganda Ci�zen sa�sfac�on: Measures acceptance of and sa�sfac�on with policies in place related to shale (% of people measured w ho are sa�sfied or be�er with policies and measures)

>60% are sa�sfied or be�er 20%-60% are sa�sfied or be�er <20% are sa�sfied or be�er fPoli�cal Feasibility

Likelihood of successful adop�on: In the current climate, how aligned is it with stakeholder mo�va�ons and beliefs and is there a precedence of rejec�on of similar policies

In line with all stakeholder mo�va�ons and beliefs

Aligned with many mo�va�ons and beliefs; no precedence of policy rejec�on

Aligned with minority mo�va�ons and beliefs; precedence of similar policy rejec�ons

Program similarity: Measures if there are any similar policies both domes�cally and/or interna�onally that have been successfully implemented

Similarity in the US and interna�onally Similarity in the US or interna�onally No similarity in the US or interna�onally

Using integrated process and microeconomic analyses to enable effective environmental… 1785

123

time credit aligned with the timing at which the cost was

incurred would have a more favorable impact on the private

sector and better support adoption. There are a number of

variations which can be used to balance these interests. A

partial up-front credit balanced with a per MCF credit over

the life of the well cluster. Also, given the fact that there is a

positive net present value (NPV) associated with the most

effective technology option, it may be sufficient to offer a

partial tax credit to stimulate adoption without offsetting the

entire difference in investment.

Breakeven carbon price for maximum

environmental impact

After the capital investment incentive period of 2–3 years

expires and to ensure adoption of the CO2 fracturing

option, a carbon tax on the less favorable alternative would

be applied. This would ensure that the operating costs

between the options are equalized. The target tax would

need to be enough to bring operating costs of the CO2 option to be equal or better than the LPG option. The tax

may either be applied on the CO2 emitted by the operation

or on the natural gas produced using the less effective

technologies. There are number of pros and cons to each

approach. Taxing the CO2 is the more accurate method as it

taxes the actual environmental factor; however, it raises the

challenge of monitoring and verifying how much CO2 is

actually emitted. Also, because the CO2 is emitted early in

the operation, the tax burden is incurred by the operator all

at once. While a tax on the natural gas is a less direct

approach, it is easily auditable and operators already report

how much is produced, so the enforcement would be less

cumbersome. In addition, the tax is amortized throughout

either part or all of the life of the well cluster which makes

it more affordable to operators and aligns the tax to when

they actually recognize the revenue. Table 2 demonstrates

some carbon tax options which would bring the ‘‘natural

gas/CO2’’ option on par with that of ‘‘natural gas/LPG’’.

Research and infrastructure credits

Supporting the policy scheme targeted at operators, addi-

tional research credits targeted at developing technologies

which further reduce the environmental footprint of shale

operations would be offered. This would include the sup-

port of field testing of related technology with requirements

to produce microeconomic and environmental impacts

resulting from the research. Once technology resulting

from this research is tested and proven to reduce the

environmental impacts of shale operations, the core ‘‘most

effective technology’’ policy would be updated to drive

more rapid adoption.

In addition, credits could be introduced to build CO2 infrastructure which would further reduce the price of CO2 and reduce the disparity between LPG and CO2 as frac-

turing fluids. This would allow the carbon tax to be phased

out. This incentive would be for pipeline and CO2 plant

operators and should drive the building of an infrastructure

to support the most effective technology over time.

Stimulating demand

The final element of the policy approach is in stimulating

demand for both natural gas and carbon sequestration

among large carbon emitters such as large utilities and

energy intensive industries. This is expected to increase the

price of natural gas as well the supply of CO2 for fracturing

and thereby further bringing down the price of CO2. This is

expected to stimulate a market for commercial-grade car-

bon dioxide that could be self-sustaining and would

involve a series of carbon-based policies for some of the

largest emitting industries. To determine the nature of this

scheme, a similar microeconomic approach, to the one used

in this research, would need to be undertaken to ensure the

carbon policy also has microeconomic viability. This

would further enable CO2 infrastructure development and

help develop a self-sustaining marketplace.

Table 2 Carbon scheme for recovering economic losses

from CO2 versus LPG fracturing

Policy scenario Breakeven carbon price b

% of revenue a

Tax applied to CO2 (USD/ton CO2e)

Economic recovery in 1 year $628/ton 110

Tax applied to produced natural gas (USD/MCF)

Economic recovery in 10 years $0.47/MCF 11

Economic recovery in 15 years $0.31/MCF 8

Economic recovery in 25 years $0.19/MCF 5

a This is the annual tax burden as a percent of revenue for the year(s) in which the tax is applied

b Based on 2,683,000 MCF annual production (Browning et al. 2013) and a price of $4.21/MMBTU for

natural gas (EIA 2014)

1786 R. Hasaneen, M. M. El-Halwagi

123

Broader economic and environmental benefits

US economic and environmental benefits

Based on the well cluster analysis, it can be seen that the

use of natural gas for fuel and carbon dioxide as a frac-

turing fluid can yield both environmental and economic

benefits for operators provided increases in production are

taken into account, and especially when fluid recycling is

employed. When supported by a Comprehensive Environ-

mental Policy, the potential benefits can result in a CO2 marketplace that enables significant carbon sequestration in

the industry. Using the scenario that includes the substi-

tution of natural gas for gasoline and diesel for combustion,

and CO2 as a fracturing fluid, taking into account produc-

tion impacts and fluid recycling, then extrapolating these

results to encompass the 1000–1200 new wells to drilled

annually across the entire Barnett Shale play (NGI 2014)

and the *3700 new wells to be drilled annually across the USA (Hughs 2014), operators can reduce the environ-

mental impact of natural gas extraction and save the

industry money of the life of their wells, as shown in

Table 3.

As demonstrated by the analyses, the economic benefits

tied to LPG outweigh those of CO2 in the substitution of

water as a fracturing fluid, while the environmental benefits

of CO2 outweigh those of LPG. While both options drive

economic and environmental benefits, driving the industry

toward the safer, more environmentally friendly alternative

requires the institution of policy that will incent the

development infrastructure to drive down the price of CO2 and create a sustained carbon economy. With the right type

and duration of policy actions, a carbon economy can be

developed that far outlasts the policy itself and encourages

the capture and sequestration of carbon for years to follow.

Unlocking arid and water sensitive shales

In addition to improving the economics and environ-

mental footprint of existing shale plays, an added benefit

of waterless fracturing is unlocking additional shale plays

that were previously infeasible either due to water scarcity

or an under-saturation of the shale formation rendering it

water sensitive. This not only unlocks a significant

resource within the USA, but also provides a platform for

countries like China, Mexico and South Africa that have a

significant, characterized resource in very arid or water-

stressed parts of the country (Reig et al. 2014). This could,

in turn, have a significant impact on some of these

developing nations’ energy independence, or their

dependence fuels such as coal and their greenhouse gas

footprint. Again, for a country like China (EIA 2012a),

that has a substantial GHG footprint, this shift could

significantly improve the global greenhouse gas profile

and change the dynamics of the energy industry (Yuan

et al. 2015).

Conclusions

When looking at the environmental remediation of oil and

gas processes, it is important to understand the microeco-

nomic implications of the proposed technologies and their

impact on operators. Frequently, the more economic ben-

efit that can be derived, the more open an operator is to

implementing the technology. However, sometimes those

economic benefits are realized over a period of time and an

up-front capital investment must be made to realize the

long-term savings. In these cases, when the operator is

unable to make the up-front investment and if the potential

environmental benefits are significant enough, public pol-

icy can be implemented to lessen the financial burden on

the operator and encourage adoption. Policy can also be

used to neutralize economic discrepancies between less

favorable technologies and encourage the maximum envi-

ronmental benefit.

By applying principles similar to those used for energy

policy to environmental policy, comprehensive policies

addressing the various elements of the related environ-

mental issues can be developed. In the case of shale gas

production, a multipronged comprehensive policy which:

• Offsets the capital investment hurdles for natural gas- operated rigs and vehicles as well as CO2 fracturing

equipment;

Table 3 Extrapolation of results across Barnett shale and

all US shale plays

Impact across Barnett Shale play Impact across all US shale plays

Annual savings (MM USD) $23,070 $71,133

CO2 reductions (tons) 47,565,437 146,660,097

NOx reductions (tons) 19,944 67,086

CO reductions (tons) 11,487 38,638

VOC reductions (tons) 1494 5026

PM reductions (tons) 657 2121

Using integrated process and microeconomic analyses to enable effective environmental… 1787

123

• Ensures that the economic discrepancy between CO2 fracturing and LPG fracturing is eliminated;

• Supports research and infrastructure investments; and • Stimulates the demand for natural gas and the supply of

CO2 from adjacent industries

can be developed. It is expected that this type of policy

will stimulate competition and innovation in a way that

sustains a market for CO2 and enables more and more

carbon sequestration in an economically viable fashion.

By extrapolating the environmental and microeconomic

impacts of alternative technologies on a single well cluster

in the Barnett Shale play, it is estimated that public policy

which enables the adoption of these technologies could

result in a carbon reduction of over 146,000,000 tons of

CO2 and save the industry over $71,000,000,000.

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