The economics of hydraulic fracturing in the NT assessed

On 27 October 2017, the Inquiry released the ACIL Allen Consulting's independent economic impact assessment, The Economic Impacts of a Potential Shale Gas Development in the Northern Territory, which shows that there could be a financial benefit resulting from a successful shale gas industry should the current moratorium on hydraulic fracturing be lifted however qualifies that there is more than unusual uncertainty surrounding this industry.

Scope of assessment

On 24 May 2017, ACIL Allen was appointed by the Inquiry's expert Panel to assist the Inquiry understand the potential economic benefits, impacts and risks of the development of an onshore unconventional gas industry in the Northern Territory.

ACIL Allen was required to focus its assessment on the actual and potential direct and indirect economic benefits, impacts and risks of hydraulic fracturing for onshore shale gas development in the Northern Territory under the current regulatory regime and consider the following scenarios based over a 25-year period:

• Scenario 1, or the baseline scenario: where the moratorium on hydraulic fracturing of unconventional shale gas reservoirs remains in place;
• Scenario 2: which involves the development of the onshore unconventional shale gas industry in the Northern Territory; and
• Scenario 3: which involves the development of unconventional shale gas reservoirs in the Beetaloo sub-basin only.

It is understood that after initial research and stakeholder consultation, ACIL Allen considered that it was not possible to conduct economic modelling based upon the three scenarios outlined above, primarily due to lack of information about the size or scope of commercial shale gas reserves in the Northern Territory (both in the Beetaloo sub-basin and in the Northern Territory more broadly), and the embryonic stage of the industry’s life cycle.

Consequently, in July 2017 ACIL Allen sought to vary the scope of works to the following scenarios:

• Baseline: The moratorium remains in place.
• Shale CALM: The moratorium is lifted, and exploration and appraisal activity occurs. However, the results of testing indicate the resource is not commercial, and no further activity takes place.
• Shale BREEZE: The moratorium is lifted, and exploration and appraisal activity occurs. A relatively small scale development occurs, targeting production of 100 terajoules (TJ) per day.
• Shale WIND: The moratorium is lifted, and exploration and appraisal activity occurs. A moderate scale development occurs, targeting production of 400 TJ/day.
• Shale GALE: The moratorium is lifted, and exploration and appraisal activity occurs. A relatively large scale development occurs, targeting production of 1000 TJ/day.

Economic assessment at a glance

From the outset, ACIL Allen qualifies the economic modelling that was required for the assessment in terms of the uncertainty of the shale gas industry in the Territory:

• it is only in its early stages in the Territory with only one fracture stimulated horizontal well that has been tested in a near-production setting; and
• the quantity and quality of gas in situ in the Territory is currently unknown.

Accordingly, ACIL Allen states in its assessment that the determination of what a successful shale gas industry development may look like, was based on:

• the views of the Northern Territory Government, potential industry operators, non-gas industry stakeholders, Traditional Owners and native title holders, non-government organisations, and representative bodies;
• ACIL Allen's expertise in gas market and economic impact modelling;
• the experience of shale gas industry development in analogous regions across the world; and
• the latest research, data and insights of shale gas industry economics.

The key findings of the assessment based upon the modelling for the forecast period of 25 years were:

1. Where no shale gas industry development occurs in the Territory (ie. the Baseline and Shale CALM scenarios) the Territory economy will continue to grow into the future.

2. A successful shale gas industry could:

• have an overall net positive impact on the future growth of the Territory economy ranging from $5.1 billion (Shale BREEZE scenario) to $12.1 billion (Shale WIND scenario), to $17.5 billion (Shale GALE scenario), in real 2018 dollar terms. This is between $196.5 million, $466.4 million and $674.4 million per annum which is the equivalent of an additional 0.8%, 1.9% to 2.9% of the Territory’s forecast Gross Territory Product in 2018;
• result in a net real income increase of between $937.2 million (Shale BREEZE scenario), $2.8 billion (Shale WIND scenario) and $5.8 billion (Shale GALE scenario) for the Territory. This is between $36 million, $108.4 million and $222.2 million per annum.
• result in the rest of Australia seeing a lift in real income, of between $3.4 billion (Shale BREEZE scenario), $9.1 billion (Shale WIND scenario) and $12.5 billion (Shale GALE scenario) as a consequence of the flow on impact of lower gas prices across the economy and the increase in Commonwealth taxes associated with the development;
• generate employment opportunities for Territorians, with an estimated 2,154 FTE (fulltime equivalent) job years (Shale BREEZE scenario), to 6,559 FTE job years (Shale WIND scenario) to 13,611 FTE job years (Shale GALE scenario) generated by the various development scenarios which are over and above the existing employment growth ACIL Allen has forecast in its base case;
• generate between $757 million (BREEZE), $2.1 billion (WIND) and $3.7 billion (GALE) in additional revenue for the NT Government; and
• deliver a windfall growth in Commonwealth revenue between $1.3 billion(BREEZE), $4.6 billion (WIND), and $5.5 billion (GALE) in income and profits based taxation.

What next?

As the next step in the Inquiry process, the Panel will now consider ACIL Allen’s report in its release of the draft Final Report. Whether or not the economic benefits identified in the economic assessment are enough to warrant the lifting of the moratorium will remain to be seen.

It is expected that the Panel will release its draft Final Report towards the end of the year; the Final Report is expected in March 2018, at which point the Government will look to make its decision to either ban fracking in the Northern Territory or allow it in highly regulated circumstances in tightly prescribed areas.

Related Insights

• NT hydraulic fracturing inquiry interim report released
• NT hydraulic fracturing inquiry background and issues paper released for consultation