High oil prices and non-competitive energy market structure have
driven. Countries around the world to explore stable energy resources.
Unfortunately, inelastic energy consumption in developed countries
and recent increase in energy demand in developing countries
have perpetuated high energy prices. Also, geopolitical factors such
as OPEC’s market power have long threatened stable energy supply.
For those reasons, many countries have been searching for alternatives
to traditional fossil fuels.
  Fortunately, latest developments in technology have brought

down production costs and therefore enabled mining unconventional
energy sources. Of many unconventional energy sources,
shale gas has been receiving the spotlight due to its many desirable
qualities such as its abundance, widespread geographical distribution,
and low carbon footprint.
  As shale gas production increases the global energy mix is expected
to change: Natural gas is expected to become the primary energy
source instead of oil. In case of United States, a leader in shale gas
development, shale gas revolution has brought downward stabilization
of energy prices and domestic manufacturing renaissance. Witnessing
such phenomena, many other countries are embarking on
shale gas development.
  As seen in the United States, shale gas development is expected
to change the economic landscape as well as the energy mix. Yet
despite Korea’s dependence on energy imports there seems to be a
lack of awareness about shale gas. For those reasons, this report explains
what shale gas is and how countries around the world are developing
shale gas. This report also discusses energy mix prospects
in light of mass shale gas production. It then explores the shale gas
industry value chain, analyzes how shale development affects the
Korean industries, and discusses industrial strategies accordingly.
Part I of the report explains those settings and discusses previous
literature on economic impact of shale gas.
  Part II of the report introduces what shale gas is and how shale gas
development affects the environment. It also examine the economic
significance of shale gas development. Shale gas is gas deposited inside
250-8,000 feet-deep shale rock that is formed by consolidation of
clay. The composition of shale gas is identical to that of natural gas.
Traditionally extraction of shale gas was not economical because of
high production cost caused by shale rock’s impermeability. However,
new technologies such as hydrofracturing, horizontal drilling
and seismic simulation have made shale gas production profitable.
  As shale gas production has become profitable production is increasing
and so are environmental concerns. For instance, hydrofracturing
commonly used for shale gas extraction can lead to shortage
of water and water contamination. In addition, while shale gas
has lower carbon footprint than other fossil fuels methane can be
released into the air in the course of production. The risk of soil
contamination and earthquakes is also problematic. Therefore, in
order for shale gas development to succeed consensus among stakeholders
and sound environmental policies are necessary.
  Despite those environmental concerns, shale gas development
is spreading due to three advantages. First, shale gas reserves are
abundant and are widely distributed throughout the globe. Second,
unlike other energy sources shale gas is relatively unaffected by high
oil prices, which can bring downward stabilization of energy prices.
Last but not least, shale gas is desirable in that it has low carbon
emissions.
  Part III examines how countries around the world are developing
shale gas and discusses possible future changes in the energy
mix. Each country’s development differs depending on the technology
level, capital accumulation, and market conditions. In general
shale gas development follows those five steps: land acquisition,
de-risking, commercial pilot, development, and consolidation. Currently
the United States and Canada are leading the shale gas development.
China, Argentina, Indonesia, Australia, and many other
countries are also pushing for development.
  As shale gas development spreads, the relative energy price and
the composition of world energy supply are expected to change.
Increased shale gas production will lead to downward stabilization
of gas prices. Also, increased shale gas production backed by
abundant supply and low production costs is expected to bring the
Golden Age of Gas.
  Part IV identifies the shale gas industrial landscape through value
chain analysis. Value chain analysis involves analysis of input, output,
value-added and comparative advantage at a firm or industrylevel.
Within a given value chain a producer engages in the following
activities: inbound logistics, operation, outbound logistics,
marketing and sales, and services. In addition to value chain analysis
this report used the delphi method and the U.S. Internal Revenue
Service(IRS)’s resources to explain different sectors and related industries
of the shale gas industry. The industry is largely divided into
three sectors: the upstream sector, the midstream sector, and the
downstream sector.
  In the upstream sector, producers explore, develop, drill and produce
shale gas. Usually gas wells have eight lifecycle stages: site
construction, drilling, fracturing, completion, production, workover,
and plugging and abandonment or reclamation.
  Next, the midstream sector involves gathering, storing and transmitting
gas that was produced in the upstream sector. Important
infrastructure in this sector includes gathering systems, storage fields,
and transmission pipelines. The most important industry in this sector
is the special steel industry, because transmitting gas through
special steel pipelines is less expensive than road, railroad, or vessel
transport.
  The downstream sector involves refining shale gas according to
the final consumers’needs. In this sector, through demethanization
shale gas is separated into natural gas and NGL. Natural gas is
mostly used as fuel for power generation, heating and transportation
whereas NGL is used as ingredients for chemical industries.
  Part V investigates the effect of U.S. shale gas development on
Korean exports through regressional analysis and presents policy
implications. We hypothesized that increased U.S. shale gas production
will lead to increase in Korean exports of machinery, special
steel and plants. To test this hypothesis, we set up an autoregressive
distributed lag(ARDL) model and performed the Granger causality
test using data from 2004 to 2012. Contrary to our expectations, U.S.
shale gas production does not seem to have affected Korean exports
of steel, machinery or facilities.
  There may be three reasons why increased U.S. shale gas production
did not result in increased Korean exports of related industries.
First, it is possible that Korean firms due to lack of awareness have
not developed shale gas-related products. Second, it is also possible
that Korean products have not complied with North American safety
standards. Most importantly, Korean firms may need to develop
optimal export strategies based on sound understanding of energy
resource development.
  Part V concludes by presenting strategies for Korea’s shale gasrelated
industries, namely the plant industry and the water industry.
The construction and plant market is expected to change as global
gas demand increases dramatically. Therefore, it may be possible
for Korean companies to participate in gas exploration, liquefaction,
power generation or chemical plants overseas. To that end companies
will have to build capacity and develop source technology as
well as applied technologies. Last but not least, this report presents
SWOT analysis of Korean water industry in light of shale gas revolution.
Wastewater treatment industry in Korea is still in its infancy.
However, investment in R&D together with localization strategies
may help develop a niche for Korean companies.
  The Korean economy, which has long been relying on energy

imports, is facing a new era thanks to shale gas development. This
report will be instrumental in predicting changes in international energy
markets and establishing energy-related industrial policies.