Economic effects in the UK periphery from unconventional gas development: Evidence from Wales

Highlights

• Unconventional gas development in Wales may have limited regional economic benefit.

• Region shown to have difficulty internalising economic benefits.

• Supply side constraints in local economy critical.

• Scenario analysis reveals limited employment benefits from any sector growth.

Abstract

The paper examines the potential regional economic benefits of the development of unconventional gas. Wales (UK) represents an interesting lens through which to examine the expected effects of unconventional gas developments. In spite of significant resource endowments the region has found it difficult to internalise the economic benefits from prior energy developments. We examine whether possible commercial exploitation of unconventional gas in Wales will be any different from recent rounds of resource and energy investment. We address the challenges for resource peripheries in embedding economic activity linked to unconventional gas and show that there are dangers in generalising economic impact evidence from other states.

Introduction

The paper examines the potential regional economic benefits of the development of unconventional gas.¹ As the global demand for energy continues to grow, the potential for exploiting unconventional gas has attracted interest [1]. Technological developments have made it feasible and profitable (in some places) to exploit unconventional fuels such as shale gas and coalbed methane (CBM). Bilgili et al. [2] have argued that much of the energy economics literature has focused on conventional energy such as coal, oil and natural gas and there is less clarity on how developments in the field on unconventional gas might contribute to regional economic development prospects. Whether the exploitation of unconventional energy generates economic benefits such as income and employment growth remains controversial, and the magnitude of such effects varies greatly between studies [3]. Kinnaman [4] argues that research on the expected economic impact of unconventional gas tends to overestimate the economic benefits. Fry et al. [5] echo the conclusions of Kinnaman showing that few studies empirically explore the full range of effects resulting from local shale gas development, and Hoy et al. [6] in the US shale gas case also argue that studies of impacts of shale gas development can lead to ‘gross overestimates’ of economic impacts. There is a further problem in that much of the analysis in the UK (and Europe) has drawn inference on potential economic effects by examining the US case, and with only a few studies covering other countries such as Australia and China [7]. More generally, drawing inference from effects observed in the US ignores its very different institutions, firms, geology and structures [4].

Unconventional gas exploitation in the UK is at an early stage, but with research already suggesting that the contribution of UK-produced onshore shale gas to energy markets and economic growth could be very modest in comparison with the US case (see for example, [8]. However, there is still scope for an assessment of the likely effects of sector expansion on more regional economies.

Wales (UK) represents a particularly interesting lens through which to examine the expected effects of unconventional gas developments. The region has found it difficult to embed resource and energy industries into the local economy (see Ref. [9], and with many of the economic benefits leaking outside of the region [10]. For example Bryan et al. [9] examined how different electricity generation technologies worked to support direct employment in Wales through plant operations, but also employment supported in the supply chain to power generation plants and employment supported in the development and construction process. The Welsh supply side limited the economic opportunities from new power generation development, and with much of the economic opportunity benefiting firms outside of the region, and with the conclusion made that key decisions on capital investment were made externally, developers and managing contractors were based externally, and then with the risks and rewards of new energy development internalised elsewhere. An issue explored in this paper is whether an expansion of capacity in unconventional gas production in Wales will be any different from recent rounds of resource and energy investment in (and for) the regional economy.

The paper then aims to make a contribution in the following areas. First, much of the analysis of the potential economic effects of unconventional gas in the UK has been developed at national level, with limited consideration of effects and constraints on development at smaller geographies. We seek to address this limitation, focussing on local/regional effects in terms of employment and income support, rather than more complex and holistic energy-supply side impacts that imply price and displacement effects. Second, through a series of development scenarios, the paper highlights how constraints in the regional economic supply side place severe limits on how the expansion of unconventional gas capacity might create new opportunities in the peripheral Welsh economy. Third, we point to the factors that may either enhance or restrict how new energy and resource investments can work to bolster local economic prospects in more peripheral parts of the UK economy. This leads to policy implications for regions in the UK that are seeking to capitalise on energy and resource investments.

The remainder of the paper is structured as follows. The second section examines prior research on the economic effects of unconventional gas, and the third section provides background and the method employed to examine the expected effects of unconventional gas development in the case economy. The fourth section reveals the results from the scenario analysis. The final section contains some discussion and conclusions.