Natural Gas from Shale: Socioeconomic Impacts for Bulgaria

Executive Summary

Bulgaria’s citizens and economy, which currently pay higher price for natural gas relative to their income, are likely to benefit from shale natural gas production in the country. This report articulates what are the costs and benefits of such perspective, and most importantly, describes the knock-on effects that shale natural gas production will cause on Bulgaria’s economy and welfare.

The purpose of this report is to outline opportunities that could be potentially missed by Bulgaria.  We examine the direct, indirect and induced impacts of shale gas exploration and production on the economy, the employment tax revenues of the state and local budgets, and the probable side effects of greater energy diversity and security.[1]

Methodology[2]

The impacts are measured in two perspectives: first, on the  sample block of Novi Pazar and socioeconomic conditions in the region in order to outline the effects on local communities, and then, these effects are extrapolated for the entire country on a pro rata basis on other blocks under exploration.

The direct, indirect, induced and knock-on effects are measured in constant 2013 EURs.  The knock-on effects are those, which arise from lower prices. They affect the economy as a whole since natural gas is used as an energy source and a raw material.  We examine in detail a possible situation when one new supplier of natural gas emerges – the volume of the produced natural gas from shale gas pushes the price down, leading to a decrease in the production costs for different value chains, while the respective output goes up, so that freed resources could be shifted towards investment, job creation, consumption, and wages.

The estimation of the country’s Full-Potential is calculated for the sample and two additional blocks, Lovech and Koynare, which are assigned to different investors, taking into account natural gas price elasticity effect that typically emerges from competition. In this calculation we do not include the Vranino block in Eastern Dobrudja.[3] 

The calculations are made for a period of 40 years, of which 10 years of exploration and 30 years of extraction and increased natural gas consumption.  It should be also noted that the development of natural gas from shale is different from typical investment projects since “capex” and “opex” stages overlap.

We define three probable scenarios for the sample block: Limited Exploration or failure to identify technically recoverable resources, Pessimistic Potential and Optimistic Potential scenarios.  The estimation on Full Potential is made on the basis of the Optimistic scenario.  The purpose of this exercise is to outline thinkable limits of respective socioeconomic impacts.

For the sample block of Novi Pazar, we assume the only available official estimation that recoverable shale gas resources could be in the range of 0.3 to 1.0 Tcm[4] and make a conservative estimation on the lower end of 300 bcm.

The difference between the two shale development scenarios on this block is described below.

The Low Shale scenario envisions that the volume of extracted and supplied natural gas from shale is 4.8 bcm per year, which pushes the whole-sale price down by 25%. The Optimistic Potential scenario is calculated on the premises that the volume of extracted natural gas from shale is 9.6 bcm per year, where the whole-sale price decreases by 30%. Investment costs for both scenarios are the same since production volumes depend on how rich the shale gas formations are.

Findings

Limited exploration (sample block)

  In case when companies explore the respective blocks but not find technically recoverable resource, the costs are fully at the expense of the exploring companies, and socioeconomic impacts resulting from the exploration activities (seismic tests, appraisal and pilot drilling) are to be fully restored at the expense of the exploring agent.

If we evaluate only the sample block of Novi Pazar, the impacts on the economy would be the following:

•  Wages, social insurance contributions, income taxes, profits, depreciation, fees and permits, or the gross value added of direct, indirect and induced activities, will be EUR 86.9 million for seven years;
• The seismic stage (tests of 500 linear kilometers, 2D seismic lines, for an eight-month period)   will employ at least 166 workers;  appraisal drilling and pilot wells will employ  364 workers for a period of five years –  125 core personnel employed in direct drilling, administration and maintenance of the logistics site, and 239  jobs created in the local economy for subcontractors and service providers;
• The overall fiscal impact of this employment would be EUR 1.55 million in direct taxes. Induced consumption spending by workers’ households would bring to the national budget nearly EUR 0.7 million in VAT and excise duties. The exploration permit is likely to cost the exploring company at least EUR 30 million;[5]
• EUR 3.2 million will be spent on consumption within the local economy. The average monthly salary is expected to be nearly three times higher than the average monthly salary for 2013, since the exploration activities mobilize highly qualified specialists and geologists;
• If the exploration fails to prove recoverable natural gas from shale, some of the resulting facilities will remain in the local community as a net benefit in terms of a developed local resource: a case in point here are the fees for water use, easements rights, rents paid to land owners, and the costs of water wells that we assume will be needed for the appraisal drilling (approximately EUR 340 thousand).

Low Natural Gas from Shale

When the sample block is developed, the following effects are likely to take place:

• Natural gas dependency ratio will be significantly lower compared to the zero shale gas scenario, approximately 70-71% compared to EU Commission estimate of 94% for the 2006-2012 period;
• During this 30-year extraction period the necessary investment would be EUR 6.78 billion (240 production wells per cycle meaning a total of 1,200 production wells for the whole period), while the expected net sales (of 4.8 bcm per year) of the company would be worth EUR 34.8 billion;
• Direct contribution to the annual average new value added to the economy will account for 1.7% of GDP and 1.98% of total GVA for the entire period;[6]
• The expected increase of value added will accelerate the economic growth rate by 0.59 percentage points or EUR 239.7 million a year for a 30-year period;
• The direct investment impact is an increase of annual fixed capital formation by 2.83% of overall annual investment in the country (or more than 1/20 of the current fixed capital formation measured in constant prices)[7];
• The expected  total number of personnel involved in the natural gas extraction is 1,755; subcontractors would hire 635 people to facilitate the main gas extraction activities – drivers, machine operators, building personnel, engineers, lawyers, consultants, etc.; the immediate induced business is likely to create  120 long-term jobs;
• Knock-on job creation effect would be 23,612 workers;
• The total fiscal impact would be EUR 8.2 billion for the period.

The fiscal revenue channels are summarized in the following table.

Summary fiscal effects (Low Shale, in EURO bln) 

Optimistic Shale

• Gas dependency ratio will be lower than in the previous scenario – 55-62%;
• The annual average value added will account for 3.2% of GDP and 3.7% of the overall gross value added in the economy, contributing approximately EUR 1.3 billion to the GDP per year (the calculation is based on the 2013 volumes of GDP of EUR 40.4 billion and GVA – EUR 34.7 billion.);
• The expected increase of value added will accelerate the economic growth rate by 0.74% or EUR 299 million a year for a 30-year period;
• The investment of EUR 13.5 billion for the period (480 production wells per cycle or total 2 400 production wells) would make possible a gross output of EUR 78.5 billion.;
• Accounting for direct, indirect, induced and knock-on effects the gross output of the project would be around EUR 103.6 billion, which is 18% higher than the estimated gross output of the country in 2013 (EUR 87.2 billion).

Knock-on (competition) impacts

The table below allows for some comparison between different interconnected stages of natural gas from shale development.

A comparison of different stages effects to Optimistic Potential Scenario

Source: KC2 Ltd.

• The full shale gas potential scenario would provide 29,526 jobs based on expected creation of GVA in the business.  In economic terms this means EUR 3.7 billion   contributions to the state budget, out of which EUR 2 billion would come from higher wages. The household consumption made possible by the shale gas extraction is estimated at EUR 2.6 billion for 30 years. 

Impact on local employment

Total estimated workforce under the Optimistic Potential scenario is 32,611 people for the whole investment and extraction period.  Nearly 70% of these new jobs will employ local workforce (22,827 people).  This figure represents 5% of the current level of unemployment in Bulgaria, which is considered to be relatively high.  Compared to the actual unemployment data for the four districts of North-Eastern Bulgaria, the number of the jobs created by this scenario is equal to 44% of all unemployed in the area and to 2.3% of the population of municipalities in the extraction area.

Full Production

In the event that all blocks are developed, the following macroeconomic effects are likely to be seen.

During this 30-year-exploitation-drilling phase the total investment is estimated at EUR 22.5 billion (800 production wells per cycle or 4 000 production wells for the whole period). The expected net sales of the extraction companies (for the above mention volume of natural gas of 16 bcm per year or 480 bcm for the whole period) is estimated at EUR 103.4 billion.

Direct contribution of the project is even more significant than in the Optimistic scenario as the annual average value added will account for 5.1% of GDP and 6% of the overall GVA in the economy, contributing approximately EUR 2.1 billion to the GDP[8].  This implies that  shale gas operators will have substantial share of industrial production in the country.[9]()

In terms of investment the direct effect will be more significant as the projects will account for 9.3% of overall investment in the country. The calculation is based on 2013 volume of investment – EUR 8.3 billion.

The two tables below provide information for job creation, welfare (household consumption) and fiscal benefits resulting from shale gas development stages.

Job Creation by Shale Gas Development Stages

Key Impacts on Jobs, Household Consumption, and State and Local Budgets for Different Stages of the Full Potential Scenario

The table below compares the values of investment, job creation, knock-on effects, fiscal impacts and GVA between different scenarios.

Main Economic Effects of Different NGS Scenarios

For more details, please see the full report.

[1] See the text and Annex 1 for greater detail on methodology and assumptions.

[2] See more detailed description in Attachment 1 to the Report.

[3] See for details: USEIA, Op. cit., p. X-23 — X-24 and “Hydrocarbon Potential and Prospects of NE Bulgaria and Offshore Black Sea – An Overview.” Sofia, Institute of Geology and Mineral Resources, 26 January 2011.

[4] Ibidem.

[5] This is the total of the so-called signature payment – a direct and unconditional revenue of the central budget. The environment impact assessment and other related procedures are included in the direct and indirect costs.

[6] The calculation is based on the 2013 volumes of GDP of EUR 40.4 billion and GVA – EUR 34.7 billion.

[7] The calculation is based on the 2013 volume of investment of EUR 8.3 billion

[8]Reference values for GDP, GVA and investment are for 2013.

[9] Calculation, again, is based on  2013 volumes of GDP of EUR 40.4 billion and GVA of EUR 34.7 billion.