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ROD HILL COMMENTARY, Telegraph Journal, 18 September 2018

According to a story, still popular in some quarters, exploiting shale gas reserves in New Brunswick will provide jobs and lots of money for the public purse. The popularity of a story with such a seemingly happy ending is easy to understand. But is the story true, or is it wishful thinking?

In a recent article,“It’s time to make NB a ‘have’ province” (Sept. 14), Colleen Mitchell of the Atlantica Centre for Energy claims it’s true. She writes that while Newfoundland and Labrador and Nova Scotia have received billions in royalty revenues from offshore oil and gas, this “is critical revenue that New Brunswick has been shut out of,”  apparently preferring “handouts” to exploiting our mining, oil and gas resources.

The recently released Progressive Conservative party platform seems to agree with this view, stating: “Subject to rigorous safety and environmental protections, and with local support, we will allow for regional resource development, including natural gas development.”

Ms. Mitchell claims that “Natural gas development alone could boost the New Brunswick economy $900 million annually – enough to fund a reduction in taxes and provincial debt, while still delivering services to residents.”

What do we really know about the potential for shale gas development in New Brunswick?

Most of the leases for exploration and drilling in New Brunswick are held by Southwestern Energy  (SWN), an American company. Like others in the business, it has been struggling with persistently low natural gas prices. Four years ago, a share of SWN cost about $45.

It now trades for $5. Earlier this month, the company announced that it was selling its shale operations in Arkansas to help pay off some of the $3 billion of debt that the company incurred years ago when natural gas prices were high.

When the moratorium on shale gas was announced by the provincial government in 2015, SWN Resources quietly closed its office without much complaint. I suspect that the firm was happy not to have to spend any more money here, as it would have had to do to maintain its leases.

In the years before the moratorium was enacted, seismic testing was carried out in many places in the province to gather further information about geologic conditions beneath the surface.

This gives information about whether the area has the potential to produce natural gas. As far as I know, the results of those seismic tests have never been made public.

In any event, the images of subsurface structures that they produce do not say whether natural gas is actually present. That requires millions of dollars of investment to drill exploratory wells to see if the area can produce economically recoverable natural gas.

Back in 2010, Corridor Resources, a small company operating some natural gas wells near Sussex, claimed to have found “more natural gas in place in southern New Brunswick than is available in all of western Canada’s proven reserves” (quoting a CBC report). You can be forgiven if you have forgotten the discovery of this bonanza, because it came to nothing.

Corridor Resources partnered with another company, Apache Canada, to drill two exploratory wells near Elgin. Apache pulled the plug on the project in 2011, having spent $25 million on two wells that failed to produce a sustained flow of gas. Corridor couldn’t find another partner and the project was abandoned.

What can we say about the potential for royalty revenues from shale gas, supposing that productive unconventional shale gas wells could actually be drilled?

At the end of 2016, Andrew Secord of St. Thomas University, Maggie Murphy of Carleton University and I published an article in the Journal of New Brunswick Studies in which we calculated royalty revenues over the next 25 years, given a variety of assumptions about the productivity of natural gas wells.

Using other’s estimates of production costs and future natural gas prices, we concluded that even if natural gas wells in New Brunswick were considerably more productive than those in Pennsylvania’s Marcellus shale, royalty revenues would be modest. If 50 wells per year were drilled, the rate proposed by the previous government, royalty revenues would be less than $35 million per year over the first nine years. Over the 25 year simulation, royalties average only $68 million a year – not very large in the context of an $8.8 billion budget.

Only if New Brunswick happened to have the most productive shale gas wells in North America – something for which there is no evidence  – would royalty revenues be significant.

Naturally, the decision about whether or not to produce natural gas by fracking depends on much more than potential royalty revenue. Environmental and public health concerns have a legitimate place in the debate.

A theme of much commentary these days is the idea that New Brunswickers are voluntarily holding back a potential economic boom that could result by digging up the riches under our feet. The evidence for this seems scant indeed.

Perhaps it’s time to set aside wishful thinking about get rich quick schemes and adopt a more realistic outlook about guiding New Brunswick’s economic future.

Rod Hill is a Professor of Economics in the Faculty of Business, UNB Saint John campus.

 

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