Just weeks after Gov. Pat McCrory signed the law to allow shale gas exploration in North Carolina, the state is spending taxpayer money to jump-start the industry, including a half-million dollars for drilling test wells near Sanford and another million for the energy sector.
This spending raises some important economic questions for the state: Will there be a boom? How long will it be until state coffers bulge with royalties? Could taxpayers actually lose money?
The recent experiences of Argentina and Poland show what could happen here. Argentina looks like it will be a shale oil and gas success. It already has more than 150 unconventional wells producing hydrocarbons. To get this far, the state-owned oil and gas company YPF has invested more than $1 billion. Only now is it starting to break even after several years. Argentina has extensive oil and gas experience and a huge shale resource that is mostly near existing oil and gas pipelines and infrastructure. Even so, it has taken big money to make it work there.
Poland looks like a bust. A few years ago, it was set to be the first European country to harvest shale gas its reserves estimated at 190 trillion cubic feet, a hundred times bigger than North Carolinas. Sixty wells later, Polands boom is ending before it began.
What went wrong? For starters, Poland had less gas in the ground than first thought, and it was harder to extract than people expected. Money turned out to be the ultimate constraint. Poland, like North Carolina, lacked the infrastructure to get the gas and oil to market. Moreover, wells cost as much as $15 million to drill in a new area. Theyre always expensive, but theyre really expensive as drillers work out the kinks in equipment and local geology.
Companies also have to drill a lot of shale gas wells to make money because most wells dont pay out. The shale gas business is similar to Las Vegas, where the casinos know if enough people gamble theyll make money because the odds are in their favor. Companies work to set the best odds possible in terms of rules and incentives and then drill a lot of wells knowing that most of them will lose money. Theyre banking on the quarter or third that strike it rich. Its an economy of scale.
In North Carolina, we dont have an economy of scale. Its true that were still learning about our resource here. We dont know exactly how thick the shale deposits are. We dont know whether well have 2 percent organic carbon content or 10 percent, or how much propane, butane and even oil well have.
We do know one thing for certain: The total area of shales in our state is tiny compared with other areas in the U.S. and other countries in the world. Nothing is going to change that fact. Its also the reason big companies arent paying attention to North Carolina.
In recent months, Ive sat in meeting after meeting with oil and gas executives, scientists from the U.S. Geological Survey and others. When North Carolinas energy potential comes up, there mostly are shaking heads and bemused smiles. Major drillers of oil and gas wont be coming to North Carolina anytime soon.
If they dont come, who will? The smaller wildcatters and mom-and-pop drillers, thats who. Major companies stick around 10, 25 or 50 years and have a financial incentive to follow environmental safeguards and stewardship. Small companies often dont. They come and go, and if theyre out of business when liability arises or when things need to be cleaned up, thats too bad for the taxpayers left holding the bill.
Which brings us to how much taxpayers will be asked to pay to bring drilling here. That depends on what additional incentives the state will provide on top of the millions were already spending.
If the major oil and gas companies are betting against North Carolina, we should be paying attention. And we should be watching the state budget closely to minimize what taxpayers shell out. If we dont, were going to get our pockets picked.
Rob Jackson is an earth sciences professor at Stanford University and long-time Duke faculty member.