Three Essays on the Economics of Hydraulic Fracturing
Asif Ehsan, Syed Mortuza
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Hydraulic fracturing has been increasingly used in the USA to economically extract natural gas and oil from newly discovered shale plays. Despite new, more severe, and long term impacts of hydraulic fracturing compared to conventional drilling, regulatory practices are mostly implemented by states that regulate with older regulations that were were written before the widespread use of hydraulic fracturing. This dissertation presents three essays on the economics of hydraulic fracturing. A standard renewable lease in hydraulic fracturing runs for a five-year primary term. The first essay examines the effect of initial contract length on extraction behavior and social costs. It finds that the rate of extraction decreases over time for both, the social planner and the private extractor. In addition, the social planner has a more stable extraction path compared to the private extractor. Holding other things equal, if the social planner seeks to induce a private extractor to leave a higher in situ stock un-extracted, then the optimal contract duration is longer. Simulations illustrate the magnitude of social costs inherent in hydraulic fracturing and non-optimal fixed contract lengths. The second essay investigates the impact of the significantly increased bonding requirements for horizontal wells introduced in West Virginia in December, 2011, on the probability of violation committed by those wells. Results suggest that the increased bonding requirement has reduced the probability of violation by 2.6 to 3.2 percentage points. Moreover, it slightly reduces the number of violations done by horizontal wells. Finally, the third essay explores several aspects of Act-13, introduced on February 14, 2012, by Pennsylvania. This act imposes new fees that are assessed annually for fifteen years, on all unconventional gas wells in Pennsylvania. This chapter explores the impacts of Act-13 on the likelihood of an unconventional well's shut-down, rate of extraction, and probability of violation. Results suggest that wells incurring this increased fee schedule have a significantly higher likelihood (more than three times) of shut-down. Also, Act-13 have reduced the extraction rate, and the probability of violation committed by unconventional wells in Pennsylvania.
- Doctoral Dissertations