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Dan Byles and the 74,000 jobs joke

We are very unimpressed with the claims made in the recent IoD report on shale gas that there might be 74,000 jobs created by the government’s dash for gas. We recently tried to raise this with Dan Byles MP who does keep repeating the claim

On July 12th we wrote to him

Dear Dan

Thanks for agreeing to looks at my questions regarding the number of jobs that the IoD report claims may be created by fracking.

There are two distinct areas where I feel the report’s authors have made unsustainable claims based on questionable assumptions.

1. Jobs at a UK level

The IoD report suggests a total of direct, indirect and induced jobs at peak level of 74,000.

This is more than 7 times higher than that suggested at the UK level by even the high scenario estimate in the Regeneris report “Economic Impact of Shale Gas Exploration & Production in Lancashire and the UK” (also sponsored by Cuadrilla) which was based on a total of 80 well pads – not so far off the IoD’s assumption of 100 pads.

http://www.shalegas-europe.eu/en/index.php/resources/library/economic-impact/39-economic-impact-of-shale-gas-exploration-production-in-lancashire-and-the-uk

The Regeneris report’s high end scenario predicts a UK total for direct, indirect and induced employment of just 6,550 from the extraction of gas from the Bowland Shale on page 47. The impacts are estimated to last for just 11 year period from 2016 to 2026 inclusive.

Given that this is only for the Bowland Shale, which has a resource estimate of 200 TCF compared to a UK total resource estimate in the IoD report of 309 TCF we could reasonably extrapolate that employment impact up to about 10,000 jobs from the UK shale gas resource as a whole. This though is more than 7 times lower than the IOD’s estimate of 74,000.

So what is the basis for this astounding figure of 74,000?

It is made clear on page 118 of the IoD report that

“We assume that each £1 million of capex and opex leads to the creation of 20 jobs in total (direct, indirect and induced). This is similar to the North Sea, where £17 billion of capex and opex supports 339,000 jobs (direct, indirect and induced, not including the jobs from exporting goods and services) at an average of £50,147 of expenditure per job. It is also similar to the US, where, according to the models developed by IHS, each $1 million (around £650,000) of capex leads to the creation of 19 jobs in total (direct, indirect and induced). For each pad, we take a 6-year moving average of capex and opex in order to calculate the number of jobs.”

Corin Taylor, before he stopped replying to me added “regarding the US figures that That works out at just over £34,000 capex per job. If you then make an allowance for operating expenditure, a total of close to £50,000 capex and opex per job is also reached. ”

How very convenient.

Clearly, trying to extrapolate the number of jobs which might result from on-shore drilling by using a jobs per million opex /capex divisor from North Sea off-shore drilling is simply too crude to be meaningful – it would require the capex and opex per onshore drilling pad / offshore rig to be similar in scale.

If this were the case they’d be getting ready to drill offshore in the Irish Sea and avoid all of the community “licence to operate” issues which are bedevilling them at the moment.

As we both very well know It absolutely is not the case – offshore would require between at least 10 times more capital and opex per well pad / rig (some sources suggest 20) . If you factor those multiples in your estimates you would have to multiply the job estimates for onshore UK by 10, or maybe 20 giving an even more unbelievable figure of 1.4 million jobs at the high end.

Equally it is almost universally accepted that the cost of on-shore fracking in the UK will be vastly different to on-shore fracking in the USA where it is (according to the IEA) 2 – 3 times cheaper in terms of capex / opex. So this comparison now veers off in the opposite direction entirely, and again renders its use as the basis for extrapolation highly questionable. In this case the IoD should be reducing the job estimate by up to two thirds giving maybe 24,000 jobs.

The possible range by using a properly weighted version of this assumption would give a rather laughable range of 24,000 to 1.4 million jobs

In spite of this The IoD report suggests that as both of these cost bases give the same convenient answer 20 jobs per £ million invested and that they can therefore reasonably apply that figure totally unweighted to the UK scenario. This is quite unbelievable.

I hate to say this, Dan, but I would not put my name at the front of a report that used this type of over-simplistic assumption. Frankly I find it hard to believe that the IoD should present FTE estimates to the general public, based on this assumption, which results in numbers which are so hugely different to the more scientifically based estimates made by Regeneris. The IoD were obviously aware of the Regeneris report in writing the report as it is referenced on page 144. I would point out in passing that industry experts also question the scale of even the Regeneris estimates for long term employment. Cuadrilla’s own experience would appear to support this view – Writing of their Elswick site, the Observer recently reported “For most of the week, the site – surrounded by farmland – is unmanned.” and goes on to say “according to Cuadrilla, Elswick is a model for the kind of energy plants it will set up on several Lancashire sites.” Employment opportunities after the initial fracking operations therefore appear to be limited to say the least.

In short the 20 jobs per £ million investment assumption is based on cost structures so different from each other and from what would happen in the UK that the comparison is totally meaningless, and the inadequacy of the methodology is amply illustrated when we come to the second problem – the inexplicable inflation in employment per pad (direct, indirect and induced) estimates which result from applying this type of assumption to both 10 and 40 well per pad scenarios.

2. Per Pad employment

It is clear that the number of jobs required on a 40 well pad would not be significantly greater than for a 10 well pad but would possibly last longer. The IoD calculations, however suggest that because of the increase in capex/opex the number would go up from 406 at peak with main activity concentrated over two years to 1104 at peak concentrated over 5 years.

It is inarguable that the number of well pads has a greater bearing on the direct FTE numbers (and thus on the indirect and induced numbers) than the number of lateral wells on each pad, which will affect the employment duration but NOT the number of staff required at any one time (at least in any significant way).

In using the Capex / Opex divisor as they do, they clearly are having two bites at the very same cherry – they are increasing both the estimate for the number of employees AND the time they would be needed for. This is not justified by the facts, and further demonstrates the weakness of using these capex/opex assumptions, which seem to me to be totally discredited when you look at them properly as we are doing here.

I have raised both of the points several times with Corin Taylor but he no longer responds to my emails (which I consider quite unprofessional of him).

Thank you for taking the time to read this – I will look forward to hearing your comments as somebody who has publicly professed himself to be happy with these calculations.

He replied on 15th July

Thanks for your detailed email. I apologise that I don’t have the time to reply in a similar level of detail.

In a nutshell though, you make a detailed comparison with the Regeneris report which is not comparing like with like. They are comparing a different number of wells and laterals over a different timescale. It was also written before further research was published in the form of the IHS study in the States, which has moved this debate further.

The IoD report is explicit in the rapid drop off in jobs, and the headline figure is the ‘at peak’ figure and is open about this. The jobs drop off is clearly shown in the accompanying graphs.

You may disagree over the peak jobs per pad and the capex calculations, but the methodology is clearly laid out. This is not an exact science, but the comparisons made are sensible and in keeping with the evidence from the oil and gas industry in the North Sea and the US. Again, the IHS report concurs with this. I really don’t understand your point about Corin Taylor’s response in which you said “how very convenient”. If Corin had stuck with £34k per job he would have come up with a higher total jobs figure. You appear to be criticising him for being more conservative.

Basically, I’m afraid your email simply shows that you don’t agree with the methodology used by the IoD report (and implicitly the IHS report), rather than demonstrates that the IoD report is wrong. One of the values of a transparent report such as this is that the methodology is openly laid out and anyone has the right to disagree with it. I simply don’t share your disagreement.

It is worth bearing in mind that 74,000 jobs is not that outlandish a number. In Pennsylvania alone, a state with a population of just 13m, the shale gas industry supports 79,000 jobs. Oil and gas activity supports 137,000 jobs in Aberdeen City and Shire, and 439,000 jobs across the UK.

The IoD is a credible and professional organisation, and Corin Taylor is a very competent economist. I am happy with his methodology and I consider the 244 page IoD shale gas report to be a comprehensive and valuable contribution to the debate. Ultimately, any such analysis at this stage will be based on assumptions and extrapolations from elsewhere. The best way to improve our understanding of the reality is to get on and drill further exploratory wells. There are many unanswered questions that can only be answered with experience and activity.

Thank you for sharing your thoughts with me.

to which we replied the same day

Dan

Thanks for taking the time out of your busy schedule to respond.

“In a nutshell though, you make a detailed comparison with the Regeneris report which is not comparing like with like. They are comparing a different number of wells and laterals over a different timescale.”

The comparison with Regeneris is not the prime thrust of my argument as I think was quite clear. I mentioned Regeneris by way of comparison, and would point out that the Regeneris report looked at a similar scale of well pads – 80 as compared to the IoD’s 100. Getting a serious response re number of well pads, wells and laterals is impossible – Cuadrilla claim 10 well pads on their web site but 100 to the press and others. This is another reason why any guesses about employment levels need to be taken with a huge pinch of salt and not just quoted in parliament as though they were actually based on something reliable:

“I, too, welcome the Prime Minister’s strong support for developing UK shale gas. Is he aware of the comprehensive Institute of Directors report published last month which showed that a UK shale gas industry could support up to 74,000 direct and indirect jobs” (Dan Byles june 3rd)

You state in your reply to me

You may disagree over the peak jobs per pad and the capex calculations, but the methodology is clearly laid out

The fact that the methodology may be clearly laid out does not I am afraid make it either sensible or reasonable. Neither does it make up for the inherent illogicality of comparing areas with capex structures which are wildly different and then trying to draw conclusions from the figures without taking those differences into account in any way.

You misunderstood my comment “how very convenient” in a way which leads me to question whether you actually understood the point I was making about the relativity of the capex/opex structures.

Clearly Corin had to add the to the capex in his US comparison as he was going to try to use it to support his attempt to use capex/opex in the UK as a basis for an estimate of jobs. I was making the point that Corin appears to have drawn his conclusion and then conveniently found some evidence which he believes supported it from two disparate sources with hugely divergent cost structures – in fact, as I explained, because they have such very different capex/opex requirements the examples he draws on do not logically support his hypothesis at all, even though they may end up coincidentally (and conveniently) with the same ratio as each other if you don’t take the unavoidable differences in relativity into account.

I do not understand your attempt justify your support for Corin’s guesstimate by linking jobs to population density. Clearly the employment is mostly linked to the level of industrial activity and not the density of the local population – or are you suggesting you believe otherwise? Comparisons with Aberdeen where the on-shore base for a huge amount of off shore activity is concentrated in one town really don’t stand up to much scrutiny either if you are trying to draw comparisons with what might happen with on-shore development.

You say

Ultimately, any such analysis at this stage will be based on assumptions and extrapolations from elsewhere

and of course I agree.

However, when those assumptions are as badly flawed as Corin Taylor’s are, and when he is not prepared to defend them himself, then it is quite legitimate to question them, and to ask those who repeat them whether they are aware of the limitations.

In spite of having these pointed out to you it seems you still feel that “the comparisons made are sensible” and “I am happy with his methodology” .

However, you haven’t addressed the points I make about the different capex/opex structures, or the weakness of this as a basis for estimates when applied to different fracking scenarios, so I shall ask two questions again more clearly:

1. Do you believe that, given the different capex/opex structures offshore, North Sea (10 x as capex / opex intensive) and onshore USA (2-3 times less intensive) , that it is reasonable to apply jobs per capex/opex from either or both of these, totally unweighted, to projections for UK capex/opex and if so how would you justify doing so?

2. Do you believe that a 40 well pad would generate nearly 3 times as much employment as a 10 well pad as per Corin Taylor’s analysis and if so on what logical basis.

I would be most grateful if you would take the time to indulge me a little further with a response to those two questions.

He hasn’t replied yet but he did repeat the claim in the House of Commons on 16th July saying

The highly detailed report by the Institute of Directors estimated that there is potential for up to 74,000 direct and indirect jobs nationwide from developing

There are, as they say, none so blind as those who will not see.

5 Responses to Dan Byles and the 74,000 jobs joke

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