Applied Energy 306 (2022) 118002

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Applied Energy
journal homepage: www.elsevier.com/locate/apenergy

Shale gas investment decision-making: Green and efficient development

under market, technology and environment uncertainties
Haomin Liu , Zaixu Zhang , Tao Zhang *
School of Economics and Management, China University of Petroleum (East China), Qingdao 266580, China

H I G H L I G H T S

• Propose a new real option model for China’s shale gas investment decision-making.
• Consider multiple uncertainties in market, technology and environment.
• Explore investment values and optimal investment timings under different scenarios.
• Study the impacts of changes in relevant factors on investment decision-making.

A R T I C L E I N F O A B S T R A C T

Keywords: The investment in shale gas green and efficient development in China faces many uncertain factors that affect the
Shale gas investment decision-making of enterprises, which contributes to China’s low-carbon energy transformation and
Investment decision-making national energy security. Based on the characteristics of China’s shale gas resource development and considering
Real option
the uncertainties in the aspects of market, technology and environment, this paper proposes a real option model
Shale gas price
Drilling and completion cost
to evaluate investment decision-making of China’s shale gas development and uses the Least Square Monte Carlo
Environmental benefit coefficients simulation to solve the investment values and optimal investment timings of shale gas low, moderate, high and
ultrahigh productivities under four combination scenarios of financial subsidy and/or carbon emission trading.
The results show that the current investment environment in China is not suitable for immediate investment in
shale gas development projects. Investors can invest immediately when the initial average daily production
reaches at least 30 × 104 m3. And financial subsidy and carbon emission trading help advance the optimal in­
vestment timings. According to a sensitivity analysis, appropriate increases in financial subsidy, shale gas price,
absolute value of the drift rate of drilling and completion cost and environmental external benefit coefficient are
found to improve the investment value and advance the optimal investment timing, while drilling and
completion cost and production decline rate have the opposite effect. Therefore, to stimulate the investment, the
government and enterprises should adopt some measures such as addressing key problems on technology and
equipment, flexibly adjusting subsidy policies and driving forward the carbon emission trading market.

1. Introduction
With the development of society and economy and the requirement
for clean and low-carbon energy transformation in China, the rapid
growth of China’s natural gas consumption has led to an increasing gap
between supply and demand of conventional natural gas. The foreign-
trade dependence of natural gas increased from 1.7% in 2006 to 45%
in 2020. At the same time, the remaining domestic conventional gas
resources are gradually reducing and becoming increasingly difficult to
extract. Driven by the double carbon targets, the unconventional
resource shale gas has attracted much attention because of its large re­
serves and low carbon emissions. The green and efficient development of
this resource is of great strategic significance to ensure China’s energy
supply, improve energy structure and promote energy transformation
[1].
To accelerate the green and efficient development of shale gas in­
dustry, the Chinese government attaches great importance to and pro­
vides strong support for the exploration and development of shale gas,
encourages all kinds of social capital to invest, and has successively is­
sued a series of supporting policies to stimulate the exploration and

* Corresponding author.
E-mail address: zhangtao@upc.edu.cn (T. Zhang).

https://doi.org/10.1016/j.apenergy.2021.118002
Received 11 May 2021; Received in revised form 29 September 2021; Accepted 1 October 2021
Available online 12 October 2021
0306-2619/© 2021 Elsevier Ltd. All rights reserved.
H. Liu et al.
investment of shale gas. However, China’s investment in shale gas
development still faces many problems. Although China’s shale gas re­
serves have great potential, compared with the United States, resource
endowment is poor, exploration and development start late, develop­
ment theory and technology lags behind, water resources are limited
and investment in environmental protection and treatment is large [2].
These adverse factors cause great difficulty in shale gas development
and high investment costs, which are 2–3 times that in the United States.
In addition, shale gas development projects have a long payback period.
Once an investment is made, it is a sunk cost and is regarded as irre­
versible. There are many uncertain factors in the market, technology,
environment and other aspects related to the investment of shale gas
development projects. For these reasons, investment in shale gas pro­
jects is characterized by high risk and uncertainty [3]. Therefore, it is
necessary to scientifically and reasonably evaluate the shale gas in­
vestment to prudently select investment strategies.
However, the current methods for analyzing shale gas project in­
vestment decision-making have some limitations, such as net present
value (NPV), internal return rate and payback period, and they do not
fully consider the effects of uncertainties, irreversibility and flexible
investment management [4], while real option methods can describe the
above features. Therefore, to provide a more scientific and realistic
evaluation, this paper proposes a shale gas investment decision-making
model based on real option theory to solve the following problems:
considering the uncertainties involved in shale gas development, what
time do enterprises invest in shale gas development projects to obtain
the maximum investment income and how much are their investment
values? How do subsidies or carbon emission trading affect the invest­
ment decisions under different productivities? How do the market,
technology and environment influence the investment value and
optimal investment timing of shale gas development projects?
The rest of this paper is organized as follows. Section 2 reviews the
relevant literature and introduces the contributions of this study. Section
3 establishes the real option model of investment evaluation of shale gas
development projects and introduces the solution process of the model.
In Section 4, we apply the established model to the empirical evaluation
and analysis of a shale gas development project and conduct a sensitivity
analysis on its influencing factors. Finally, Section 5 summarizes this
study and puts forward some relevant policy suggestions.
2. Literature review
As a clean, low-carbon and efficient unconventional natural gas
resource, shale gas has attracted the attention of many scholars in recent
years. Countries rich in shale gas resources are actively studying and
promoting its development. How to accurately investigate the eco­
nomics of shale gas development is the key for enterprises to decide
whether to invest. A review of the related literature found that economic
evaluations of shale gas development typically adopt the discount cash
flow (DCF) method, and the evaluation indicators frequently include net
present value (NPV) [5–8], internal rate of return (IRR) [9,10], dis­
counted profit to investment ratio (DPI) [11,12] and so on. Most re­
searchers included land acquisition fees, exploration costs, development
costs, operation costs, production, prices and taxes in their economic
evaluations to explore the economic feasibility of shale gas develop­
ment, and studied the impacts of relevant factors on the economic
evaluations. As countries pay increasing attention to the transformation
to clean and low-carbon energy, the environment has become an
important factor in determining the feasibility of investment in shale gas
development. Mallapragada et al. [13] estimated the life cycle green­
house gas (GHG) emissions and freshwater consumption of Marcellus
shale gas. Zeng et al. [14] investigated the economic and environmental
performance of shale gas in China with the consideration of GHG
emissions and water consumption. Liu et al. [15] took the environmental
benefits and costs into account when calculating the economic value of
shale gas. However, research on the economic evaluation of shale gas
2
Applied Energy 306 (2022) 118002
development that considers and quantifies environmental factors is
relatively limited, and the majority of these studies are characterized by
simple economic analysis or economic feasibility analysis rather than
detailed economic evaluation. The evaluation model used is often rela­
tively simple and does not consider the uncertainties and risks of shale
gas development. The proposal and development of real options provide
a more scientific evaluation method for investment evaluation under
uncertain conditions.
Since Myers introduced the financial option pricing theory into the
field of real investment in the 1980s [16], a large number of scholars
have used real options to study energy investment decision-making
problems in different real fields, such as renewable energy, oil and gas
[17–23]. In the field of oil and gas, Fan and Zhu [24], Guedes and Santos
[22], Tang et al. [23] evaluated the values of offshore oil resource
exploration and development projects by considering uncertain factors
such as oil price, exchange rate and environment. Lai et al. [25] studied
the value of LNG terminal gas storage under the uncertainty in the
natural gas price. Zhen et al. [26] and Chen et al. [27] evaluated the
underground gas storage value considering seasonal effects and natural
gas market reform, respectively. Bakker et al. [28] studied the problem
of optimal timing of investments in mature oil and gas field in the
presence of price uncertainty. Fedorov et al. [29] combined the real
options approach and decision analysis to identify the additional value
created by a sequential drilling strategy for field development under oil
price and resource uncertainty. However, few studies have used real
options to study investment decision-making in shale gas development.
Liu et al. [30] only considered the uncertainty of shale gas wellhead
price to build a real option investment evaluation model of shale gas
blocks and discuss the influence of uncertainty and output characteris­
tics on the investment timing. Bai et al. [31] maximized the long-run
expected return of shale gas investment while taking only production
uncertainties into account. Generally, the investment decision-making
related to shale gas development is affected by many uncertain fac­
tors, but existing research only considers single uncertain factor, which
is obviously insufficient.
To solve specific problems, the common real options methods
include B-S pricing model [32,33], binomial tree method [34–37], dy­
namic programming approach [38–40], finite difference method
[41–43] and Monte Carlo simulation [27,44,45]. Among them, the B-S
pricing model is suitable only for European call options, which are
exercised on the maturity date; the binomial tree method is used for
discrete-time options, but real events are often continuous; and the
dynamic programming approach and finite difference method cannot
deal with more than two uncertain factors [45]. The Monte Carlo
simulation method has the advantages of flexibility, easy implementa­
tion, fast convergence speed and less dependence on various assump­
tions and standard distribution probability, and it can deal with almost
any complex option pricing problems. Shale gas development is a
complex, continuous and flexible investment activity with many un­
certainties, but B-S pricing model, binomial tree method and finite dif­
ference method are suitable for solving simple shale gas investment
decision-making problems. Thus, when considering the influence of
multiple uncertain factors, it is more scientific and reasonable to use the
Monte Carlo simulation method to study the investment in shale gas
development.
The main contributions of this paper are as follows. (i) In contrast
with previous research, which considers only single uncertain factor,
this study considers shale gas price, drilling and completion cost and
environmental internal and external benefit coefficients to reflect mul­
tiple uncertainties in the market, technology and environment to
construct a real option model for the investment of shale gas green and
efficient development. (ii) This study takes multiple uncertain factors
into account, so it is more scientific and accurate to adopt the Least
Square Monte Carlo (LSMC) simulation to solve the investment decision-
making problem. However, previous studies just used relatively simple
real option methods to solve this problem because they only considered
H. Liu et al.
single uncertain factor. (iii) This study is conducted considering that
whether financial subsidy and/or carbon emission trading exist, and
compares and discusses the investment values and optimal investment
timings of shale gas four low, moderate, high and ultrahigh pro­
ductivities under portfolio scenarios. (iv) This study analyzes the im­
pacts of changes in subsidy level, shale gas price, drilling and completion
cost and its drift rate, production decline rate and environmental
external benefit coefficient on the investment in shale gas development
projects.
3. Methodology
3.1. Real option model
A certain oil and gas company has obtained the right to invest in the
development of a shale gas field with proven reserves and has no clear
regulation on when to invest and develop. For the convenience of
calculation and analysis, it is assumed that this shale gas development
project will be irreversibly invested in year t (t0 ≤ t ≤ tn), and after the
investment of this project is launched, according to the action plan
formulated by the oil and gas company, the life cycle of the project is
mainly divided into two periods: the exploration and construction
period Tc and then the production and operation period L. As the rev­
enues and costs of a shale gas project in its whole life cycle are influ­
enced by many uncertain factors, the project value is expressed by its
expectation. Therefore, the value of the shale gas project invested in year
t can be represented by the following:
∑
t+Tc +L
NPVt = E[ e− r(i− t)
(Ri + EEi − OPEXi − TAXi )
i=t + Tc +1
∑
t+Tc
r(i− t)
− e− (CAPEXi − EIi )]
i=t+1
where r is the discount rate; project total revenue Ri , environmental
external benefit EEi , operating cost OPEXi and tax expenditure TAXi
make up the cash flow of the shale gas project in year i; CAPEXi means
the investment cost in year i; and EIi expresses the environmental in­
ternal benefit in year i. The specific compositions of each parameter are
shown as follows.
(1) The total revenue of the shale gas project (Rt ) is composed of sales
revenue (SRt ) and financial subsidy revenue (FSt ). The level of gas
price and the amount of production determine sales revenue.
Financial subsidy revenue is calculated by subsidizing every
cubic meter of shale gas produced. The subsidy level is adjusted
by the Ministry of Finance and the National Energy Administra­
tion according to industrial development, technological progress,
cost changes and other factors. Therefore, the total revenue of the
shale gas project in year t can be expressed as follows:
Rt = SRt + FSt = Qt Pt r3 + Qt s
where Qt denotes the shale gas production of year t, Pt denotes the shale
gas selling price in year t, r3 means the commodity rate of shale gas, and
s expresses the subsidy level for shale gas exploitation.
The production decline law of shale gas wells is different from that of
conventional gas wells, which is determined by their internal production
mechanisms. There are three prediction methods for shale gas single-
well production: numerical simulation method, analytical method and
empirical curve method. Of these, the empirical curve method is widely
used because of its simple and effective operation with only production
data. The commonly used empirical production decline curve models
include Arps model, PLE model, SEPD model, Duong model and LGM
model [46]. Due to ease of data acquisition and calculation, the expo­
nential decline model in the traditional Arps model is adopted to express
the production decline law of shale gas single well:
Applied Energy 306 (2022) 118002
qt = qi e− Di t
(3)
where qt denotes the production at time t, qi means the initial average
daily production, Di denotes the production decline rate, and t is the
production time.
(2) The investment cost (CAPEXt ) primarily consists of royalty of
mining rights (Cl ), exploration cost (Ce ) and development cost
(Cw ), which is composed of three parts: drilling engineering cost
(Cde ), fracturing engineering cost (Cfe ) and surface engineering
cost (Cse ). In China, the royalty system of mining rights is calcu­
lated by the exploration year and paid yearly by the block area.
The exploration cost includes direct costs, such as seismic
exploration and exploration wells, and indirect costs, such as
comprehensive geological research and auxiliary engineering in
the process of exploration. The exploration cost is closely related
to the block area, geographical location, topographic feature,
geological complexity, etc. In this paper, this cost is simplified for
calculation. Thus, the investment cost of shale gas development
projects can be expressed by the following formula:
CAPEXt = Cl + Ce + Cw = C1 ⋅La + C2 ⋅La + Cde + Cfe + Cse (4)
where La is the land acquisition area, C1 denotes the royalty of mining
rights per unit area, and C2 is the exploration cost per unit area.
(3) The operating cost (OPEXt ) is an important expenditure in the
production and operation period of shale gas development pro­
jects, and it mainly includes production and operation cost, sales
expense, management expense, etc. There are many methods for
(1)
calculating the operating cost of shale gas, such as accounting by
various expense items, unit area cost, unit operating cost, pro­
portion of annual sales revenue, fixed part plus variable part, and
probability method [47]. Investors can choose the appropriate
accounting method according to the available data and the situ­
ation of the project itself. The two main driving factors of shale
gas operating cost are the number of drilling wells and the pro­
duction level. Therefore, this paper uses the fixed part plus var­
iable part method to calculate the operating costs of shale gas
development projects:
OPEXt = Cf ⋅Nt + Cv ⋅Qt (5)
where Cf denotes the fixed operating cost related to the number of
drilling wells, Nt means the total number of drilling wells in the whole
block, and Cv expresses the variable operating cost associated with
production.
For the number of drilling wells, the prescribed single-well produc­
tivity method is applied to roughly estimate the number of drilling wells
based on the geological characteristics of shale gas blocks:
(2) G⋅Vg
Nt = × 104 (6)
360η⋅q
where G is the geological reserves of the shale gas block, Vg indicates the
average annual gas production rate, η denotes the comprehensive uti­
lization rate of the shale gas well, and q means the average daily pro­
duction of a single well.
(4) Taxes (TAXt ) in China generally include five main types: corpo­
rate income tax, value-added tax, urban maintenance and con­
struction tax, education surcharge and resource tax. Therefore,
the taxes paid for shale gas development projects in year t can be
expressed as follows:
TAXt = (Rt − OPEXt )r4 + SRt r5 + SRt r5 r6 + SRt r5 r7 + SRt r8 (7)
3
H. Liu et al.
where r4 is the corporate income tax rate, r5 denotes the value-added tax
rate, r6 denotes the urban maintenance and construction tax rate, r7 is
the education surcharge rate, and r8 denotes the resource tax rate.
(5) Environmental pollution problems inevitably occur in the process
of shale gas development, but shale gas has a positive impact on
the environment because of its alternative value to coal and other
energy sources. Therefore, the impact of environmental benefits
should be considered when making investment decisions in shale
gas development projects. Specifically, environmental benefit
(EBt ) has four parts: environmental internal revenue (EIRt ),
environmental internal cost (EICt ), environmental external rev­
enue (EERt ) and environmental external cost (EECt ). Environ­
mental internal revenue (EIRt ) refers to revenue from enterprises
taking relevant environmental protection measures to reduce
energy consumption and recycle waste; environmental internal
cost (EICt ) means the total cost of enterprises spending on pre­
venting the pollution and protecting the ecological environment,
such as drilling wastewater treatment and utilization cost, the
harmless treatment cost of fracturing flowback fluid, and drilling
cuttings and precipitated sludge treatment cost; environmental
external revenue (EERt ) is the relative revenue of shale gas ob­
tained from reducing the emissions of CO2, SO2, nitrogen oxides
and smoke dust compared with coal, petroleum and other fossil
energy; environmental external cost (EECt ) mainly includes water
consumption and pollution cost, carbon dioxide emission cost,
methane leakage cost, noise pollution cost, human health loss
caused by environmental pollution and so on. Among them, the
water consumption cost has been included in the development
cost in the form of the water resource cost, so it can no longer be
calculated when accounting for the environmental external cost.
The water pollution cost, noise pollution cost and human health
loss are ignored because they are difficult to quantify. Therefore,
the environmental internal benefit (EIt ) and environmental
external benefit (EEt ) of shale gas development are expressed by
formulas (8) and (9), respectively:
( )
∑ ∑
EIt = EIRt − EICt = Nt pEIRm − pEICn = Nt ⋅EI coe (8)
m n
∑ ∑
EEt = EERt − EECt = QERn PERn − PCO2 ⋅(QCO2 + KCH4 − CO2 ⋅QCH4 ) =
n n
[ ]
∑ (9)
= Qt ⋅ kERn PERn − PCO2 ⋅(KPCO2 + KCH4 − CO2 ⋅KPCH4 )
n
= Qt ⋅EE coe
where pEIRm denotes the revenue generated from the mth environmental
protection measures taken by enterprises; pEICn denotes the cost of the
nth measure taken by enterprises to deal with environmental pollution
during shale gas development; QERn denotes the emission reduction of
the nth gas; PERn means the emission trading price of the nth gas; kERn
expresses the emission reduction of the nth gas per 1 m3 shale gas
generated by the replacement of coal with shale gas; PCO2 is the emission
trading price of CO2; QCO2 and QCH4 are, respectively, the amount of CO2
emissions and CH4 leakages; KCH4 − CO2 represents the conversion coeffi­
cient between CH4 and CO2; KPCO2 and KPCH4 represent the amount of
CO2 emissions and CH4 leakages generated in the process of producing 1
m3 of shale gas, respectively; and EI coe and EE coe are defined as the
Applied Energy 306 (2022) 118002
environmental internal benefit coefficient and environmental external
benefit coefficient, respectively.
Based on the real option method, the investor has the right to delay
the investment. Compared with the traditional DCF method, delaying
investment can enable enterprises to obtain more new information
about the market, price, policy and environment or implement the in­
vestment after the investment risk is effectively controlled. Enterprises
can choose the optimal time to implement investment decision-making
and obtain the maximum investment value of the project:
F = max(NPVtopt , 0)⋅e− r⋅(topt − t0 )
, t0 ⩽topt ⩽tn (10)
where topt is the optimal time to invest during the valid investment
period.
3.2. Uncertainties
The shale gas industry has high investment costs and long payback
periods and is easily affected by resource endowment, market, tech­
nology, environment, policy and other factors. Thus, there are a variety
of uncertainties in investment decision-making of shale gas development
projects, including fluctuations in the shale gas wellhead price caused by
uncertainty in market demand, fluctuations in the development cost
caused by uncertainty related to technological progress, and fluctuations
in the environmental benefit coefficients as a result of environmental
uncertainty.
(1) Shale gas price. With the acceleration of China’s natural gas
market-oriented reform process, the upstream link relaxes access
to the market, and the competitive transfer of mining rights is
comprehensively promoted to stimulate the vitality of shale gas
exploration and development. The natural gas price gradually
changes from government pricing to market pricing. To
encourage the development of unconventional natural gas, the
National Development and Reform Commission has issued a se­
ries of documents since 2011 that emphasize deregulating the
factory-gate prices of shale gas, coalbed methane, coal gas and
LNG and implementing market regulation. Therefore, this paper
assumes that the domestic shale gas price has been marketized
and uses the factory-gate price (wellhead price) of shale gas to
express the sales (market) price of shale gas.
(2) Drilling and completion cost. Although the shale gas develop­
Qt kERn PERn − PCO2 ⋅(Qt ⋅KPCO2 + KCH4 − CO2 ⋅Qt ⋅KPCH4 )
ment cost is associated with reservoir geological condition, burial
depth and so on, it is primarily affected by the level of develop­
ment technology. The two key technologies used in shale gas
development are hydraulic fracturing and horizontal drilling. In
the past 10 years of shale gas exploration and development in
China, although drilling and completion costs have decreased
from 100 to 120 million RMB to approximately 60 million RMB,
there is still a great gap compared with the advanced technology
in the United States. The key technical equipment represented by
rotary steering tools and special bits for ultralong horizontal
drilling has not been localized, and the introduction cost is high.
However, with the continuous technological progress of China’s
shale gas development, economies of scale and learning effects
4
H. Liu et al. Applied Energy 306 (2022) 118002

are expected to gradually emerge, and the development cost of Step 3: Assuming that there is no investment decision in the early
shale gas in China will continue to decline. Therefore, the drilling period, the final decision point (t = tv ) per path during the valid in­
and completion cost of shale gas is regarded as an uncertain vestment period has
technological factor in this paper, and it decreases with the { }
Ft,j = max NPVtv ,j , 0 (15)
progress of technology.
(3) Environmental benefit coefficients. Environmental factors are {
1, NPVtv ,j > 0
also an important problem in shale gas development. This paper Γt,j = (16)
0, otherwise
analyzes the environmental benefit at two levels. One is the
environmental internal benefit, which is related to the costs paid
where Γt,j = 1 and Γt,j = 0 respectively mean immediate and deferred
by enterprises for pollution treatments and the revenues gener­
investment.
ated from taking relevant environmental protection measures,
Step 4: Discount the investment value corresponding to the final
and the other is the environmental external benefit, which is
decision point forward to the former point to obtain the holding value of
associated with pollutant emissions. In recent years, against the
deferred investment at this decision point, conduct the least square
backdrop of carbon emission reduction and carbon neutrality,
regression to holding value and executive value to obtain the conditional
enterprises have fully implemented the idea of green develop­
expected value function, and calculate the expected investment value of
ment, enhanced their awareness of ecological and environmental
deferred investment.
protection, actively promoted carbon emission reduction, and
Step 5: For each decision point (1⩽t < tv ) per path during the valid
constantly improved the measures of pollution treatments and
investment period, repeat Step 4 and make comparisons between the
the technology for environmental protection and emission
project value of immediate investment and the expected investment
reduction. Thus, this paper regards the environmental benefit
value of deferred investment pushing forward from subsequent decision
coefficients as uncertain factors; they are expected to increase
points to obtain the current optimal investment decision—immediate
with the enhancement of technology and awareness of environ­
investment or deferred investment, as given by:
mental protection and emission reduction during shale gas
{ }
development. Ft,j = max NPVt,j , e− r Et [Ft+1,j ] (17)
{
The stochastic process is usually used to describe the uncertain fac­ 1, NPVt,j ⩾e− r Et [Ft+1,j ]
Γt,j = (18)
tors. Similar to previous studies that used the Geometric Brownian 0, NPVt,j < e− r Et [Ft+1,j ]
motion (GBM) to describe the motion process for uncertain factors, this
Step 6: Determine the optimal investment timing and the corre­
paper adopts the GBM to characterize the uncertainties in the market,
sponding investment value of each path, in which the optimal invest­
technology and environment factors as follows:
ment timing is selected when the optimal investment decision is
dP = μP Pdt + σ P PdzP (11) immediate investment. The final optimal investment timing is the one
with the highest frequency, and the investment value is calculated by
dCD&C = μD&C CD&C dt + σ D&C CD&C dzCD&C (12) averaging the values corresponding to the optimal investment timings
over all paths, as shown below:
dEI coe = μEI coe EI coedt + σ EI coe EI coedzEI coe (13) { }
tj = inf t|Γt,j = 1, 1⩽t⩽tv (19)
dEE coe = μEE coe EE coedt + σEE coe EE coedzEE coe (14)

where μP and σP denote the drift rate and volatility rate of shale gas Table 1
price; μD&C and σD&C represent the drift rate and volatility rate of drilling Basic parameters of shale gas block I.
and completion cost; μEI coe and σ EI coe denote the drift rate and volatility Description Variable Value
rate of environmental internal benefit coefficient; μEE coe and σEE coe
Block area La 41.58 km2
represent the drift rate and volatility rate of environmental external Geological reserve G 485.87 × 108 m3
benefit coefficient; dz represents increment of Wiener process, dz = Average annual gas production rate Vg 2%
√̅̅̅̅̅
ε dt, and ε is a normally distributed random variable with zero mean Comprehensive utilization ratio of gas η 96%
well
and unit standard deviation, namely εÑ(0, 1). Royalty of mining right C1 0.05 ten thousand RMB/
km2
Exploration cost C2 44 ten thousand RMB/km2
3.3. Solution Surface engineering cost Cse 700 ten thousand RMB/
well
Considering the complexity of investment income and cost function Fixed operating cost Cf 9 ten thousand RMB/well
Variable operation cost Cv 0.26 RMB/m3
and the existence of many uncertain factors related to shale gas projects,
Producing days per year d 330d
this paper uses the LSMC method to solve the real option problem. Initial annual average daily gas qi 6.28 × 104 m3/d
Compared with other methods, the LSMC method can effectively eval­ production
uate American options and complex investments with multiple uncer­ Production decline rate D 0.705
tain variables, depends less on various assumptions and standard Commodity rate r3 95%
Financial subsidy s 0.2 RMB/m3
probability distribution, and has the advantages of flexibility, easy
Corporate income tax rate r4 25%
implementation and fast convergence [44]. The specific solution process Value-added tax rate r5 9%
is as follows: Urban maintenance and construction tax r6 7%
Step 1: Apply the Monte Carlo method to simulate the paths of rate
Education surcharge rate r7 3%
random variation of uncertain factors and initialize M and N, which
Resource tax rate r8 6%
respectively denote the number of simulation paths and decision points The validity period of investment Tv 30 year
tv
of each path, where N = Δt and Δt is the step size. Exploration and construction period Tc 5 year
Step 2: According to equation (1), calculate the NPV of shale gas Production and operation period L 30 year
Discount rate r 9.24%
project investment at each decision point per path during the valid in­
vestment period. Sources: [5,15,48].

5
H. Liu et al. Applied Energy 306 (2022) 118002

Table 3
topt = {ts Fre(ts )⩾Fre(t), 1⩽t⩽tv } (20)
Parameters of environmental internal benefit.

1 ∑M Item Value (ten

F= ⋅ e− rtopt
Ftopt ,j (21) thousand RMB/
M j=1 well)

Environmental Drilling wastewater 94.5

4. Empirical study internal revenues Drilling cuttings 95
Waste oil 30
Household garbage and sewage 1.89
4.1. Data sources and processing Total 221.39

Environmental Drilling wastewater treatment and 22

As a demonstration area of shale gas commercial development in
internal costs utilization
China, the southwest region is the main area of future production Harmless treatment cost of fracturing 15
growth with abundant reserves. Therefore, shale gas block I in South­ flowback fluid
west China is selected for the empirical analysis of investment decision- Household garbage and sewage 3.3
making in this paper. The basic parameters and data of this block are treatment
Shock adsorption, sound insulation 10
shown in Table 1. The estimation processes of uncertain factors such as and other measures to reduce noise
shale gas price, drilling and completion cost and environmental benefit pollution
coefficient are described as follows. Drilling cuttings and precipitated 60
sludge treatment
Ecological restoration 12
(1) Shale gas price
Environmental risk prevention 12
Total 134.3
This paper refers to the gas price of Sichuan Province excluding
Source: [51].
value-added tax, pipeline network transportation fee, gas distribution
fee and sales expenses, and the drift rate and volatility rate of shale gas
price are set according to Liu et al. [49], as shown in Table 2.
Table 4
Parameters of environmental external benefit.
(2) Drilling and completion cost
Parameter Parameter description Value

With the continuous advancement of shale gas development in KPCO2 The amount of CO2 emission generated from 0.373
producing 1 m3 of shale gas
China, the cost of shale gas production in China has decreased signifi­
KPCH4 The amount of CH4 leakage generated from producing 0.0575
cantly after realizing a large number of technological breakthroughs and 1 m3 of shale gas
the localization of some equipment. The drilling and completion costs KCH4 − CO2 The conversion coefficient between CH4 and CO2 9.1
have decreased from 100 to 120 million RMB per well in the early stage PSO2 The emission trading price of SO2 6150 RMB/
of development in 2014 to 50–60 million RMB per well, and the ton
comprehensive cost of a single well has dropped by approximately 50%. PNOx The emission trading price of NOx 18,000
RMB/ton
Based on the continuous data of drilling and completion costs provided
PSD The emission trading price of smoke dust 5000 RMB/
by an oilfield company, the drift rate and volatility rate of drilling and ton
completion costs can be calculated by the following formulas [50], and kCO2 The emission reduction of CO2 per 1 m3 shale gas 1.74 × 10− 3
the results are shown in Table 2: generated by the replacement of coal with shale gas ton
kSO2 The emission reduction of SO2 per 1 m3 shale gas 8.78 × 10− 6
αt = In(CD&Ct /CD&Ct− 1 ) μD&C = α/Δt (22) generated by the replacement of coal with shale gas ton
kNOx The emission reduction of NOx per 1 m3 shale gas 1.65 × 10− 6
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅ generated by the replacement of coal with shale gas ton
√
√ ∑ kSD The emission reduction of smoke dust per 1 m3 shale 1.68 × 10− 5
l √̅̅̅̅̅
S = √(1/l − 1) (αt − α)2 σ D&C = S/ Δt (23) gas generated by the replacement of coal with shale ton
t=1
gas

where α is the average of αi , Δt is the length of the time interval with Sources: [15,51].
year as the unit, and l + 1 is the number of observations.
change in the range of 0 to 40 RMB/ton. In addition, according to the
(3) Environmental benefit coefficient actual situation, we set the drift rate and volatility rate of environmental
benefit coefficient as 0.005 and 0.01, respectively.
The specific data involved in calculating the environmental internal
and external benefits are shown in Table 3 and Table 4, respectively.
According to the K-line trend chart of the Chongqing carbon market 4.2. Main results
(Fig. 1), the emission trading price of CO2 is regarded as a random
4.2.1. LSMC simulation results
Table 2
Based on the established framework in Section 3, this paper uses
Parameters of shale gas price and drilling and completion cost. MATLAB to simulate and solve the investment value and optimal in­
vestment timing of shale gas development projects in China. First, it is
Description Variable Value
necessary to examine the robustness of the model to the number of
Shale gas price P 1.275 RMB/m3 simulation paths [52]. Fig. 2 illustrates the statistical convergence of
Drift rate of shale gas price 0.04
investment value depending on the number of simulation paths. It can
μP
Volatility rate of shale gas price 0.04
be observed that the solution is relatively robust when the number of
σP
Drilling and completion cost per well CD&C 50 million RMB
simulation paths is more than 8,000. Thus, we perform 10,000 simula­
Drift rate of drilling and completion cost μD&C − 0.065
tions in our solution process. Fig. 3, Fig. 4, Fig. 5, and Fig. 6 show 100
Volatility rate of drilling and completion cost σD&C 0.011
out of the 10,000 simulation paths of shale gas price, drilling and
Source: [49]. completion cost, environmental internal benefit coefficient and

6
H. Liu et al. Applied Energy 306 (2022) 118002

45
40

Carbon trading price (RMB/ton)

35
30
25
20
15
10
5
0
2014 2015 2016 2017 2018 2019 2020 2021 2022
Year

Fig. 1. K-line trend chart of the Chongqing carbon market (from http://www.tanpaifang.com/tanhangqing/guoji/).

Fig. 4. Simulation paths of drilling and completion cost.

Fig. 2. Statistical convergence of investment value.

Fig. 5. Simulation paths of environmental internal benefit coefficient.

Fig. 3. Simulation paths of shale gas price.

environmental external benefit coefficient over time, respectively,
which reflect the changes of uncertain factors involved in the investment
in shale gas green and efficient development described in Section 3.2.
Under the current financial subsidy (s = 0.2 RMB/m3) and initial
average daily production (qi = 6.28 × 104 m3/d), regardless of whether
financial subsidy or carbon emission trading exists, the investment value
calculated by the NPV method commonly used in the oil and gas

7
H. Liu et al. Applied Energy 306 (2022) 118002

oil and gas development is that a large oil and gas field often needs
20–30 years of continuous exploration and then more than 10 years of
development. Investment and development decisions that consider only
the economic value of shale gas will not be conducive to China’s energy
security. Therefore, within the framework of energy security strategies,
the investment decision-making of shale gas should be analyzed scien­
tifically so that the government can adopt measures from market pricing
mechanism, technological breakthrough, policy support, environmental
protection and other aspects to promote the green, efficient and large-
scale development of shale gas.

4.2.2. Investment results under different scenarios

Generally, different reservoir properties and technological develop­
ment conditions of shale gas blocks in different areas greatly affect shale
gas production. Even in the same block, shale gas production can vary
significantly. According to the current production situation of shale gas
fields in China, the productivities of shale gas are divided into low
productivity (qi ≤ 6 × 104 m3/d), moderate productivity (6 × 104 m3/d
< qi < 10 × 104 m3/d) and high productivity (qi ≥ 10 × 104 m3/d). Thus,
Fig. 6. Simulation paths of environmental external benefit coefficient. in the horizontal dimension, we select four initial average daily pro­
duction from the above range to represent the low, moderate, high and
ultrahigh productivity of shale gas, as shown in Table 5. The Chinese
development industry is negative. This result indicates that the current
government has been providing financial subsidies to promote shale gas
investment environment is not suitable for immediate investment in
industry development. The initial subsidy for shale gas was 0.4 RMB/m3,
shale gas development projects, which is the direct reason that Con­
which was reduced to 0.3 RMB/m3 in the first three years and 0.2 RMB/
ocoPhillips, Shell and other international giant oil companies withdrew
m3 in the last two years during the 13th Five Year period. The policy of
from China’s shale gas development process. However, considering the
“more production more subsidies” was adopted until 2023. However,
uncertainties in shale gas development projects and the management
the resource endowment, development technology and comprehensive
flexibility of investors, the investment value calculated by the real op­
cost of shale gas cannot be compared with that of conventional natural
tion method is 226.4 million RMB, and the optimal decision is to invest
gas. Therefore, whether or not to obtain subsidies in the future is crucial
in 2037 rather than invest immediately. If the immediate investment
to the investment and development of shale gas. In addition, in the face
decision is made, the delay option value of 1436.9 million RMB (22640
of increasingly serious global problems such as climate changes and
+ 121050 = 143690) would be abandoned. Therefore, compared with
environmental risks, China actively participates in global energy
the result of the NPV method, investors should delay the investment to
administration and strives to promote green and low-carbon energy
obtain a higher investment value, which obviously does not conform
development. With the goal of achieving carbon peaking in 2030 and
with China’s energy security strategy. Although the economic value of
carbon neutrality in 2060, China’s carbon emission trading market has
shale gas development is not high at present, its strategic value in energy
gradually improved to promote carbon emission reduction. Thus, we
transformation and energy security cannot be ignored. Faced with the
design four scenarios in the vertical dimension based on whether there
increasingly high foreign-trade dependence on natural gas and the
are financial subsidy and/or carbon emission trading. In this section, we
substantial pressure to reduce carbon emissions, shale gas development
calculate the investment values and optimal investment timings of the
contributes not only to improving the supply scale of China’s natural gas
shale gas development project under different combinations of pro­
but also to the transformation of China’s energy structure in the direc­
ductivities, financial subsidy and carbon emission trading. The results
tion of clean and low-carbon emissions. Moreover, the regular pattern of

Table 5
Investment results of different shale gas productivities under four scenarios.
Scenarios Without financial subsidy With financial subsidy and Without financial subsidy and With financial subsidy and
and carbon emission trading without carbon emission with carbon emission trading carbon emission trading
trading

Low productivity (qi = 6 Investment value/ 1.6739 1.8901 1.8945 2.1604

× 104 m3/d) (108 RMB)
Optimal 2041 2040 2040 2038
investment timing/
yr
Moderate productivity (qi Investment value/ 2.0718 2.3922 2.3794 2.7492
= 9 × 104 m3/d) (108 RMB)
Optimal 2037 2035 2035 2033
investment timing/
yr
High productivity (qi = Investment value/ 2.3375 2.8149 2.7311 3.2710
12 × 104 m3/d) (108 RMB)
Optimal 2034 2032 2032 2030
investment timing/
yr
Ultrahigh productivity (qi Investment value/ 3.0352 3.6419 3.6272 4.4174
= 20 × 104 m3/d) (108 RMB)
Optimal 2030 2027 2027 2025
investment timing/
yr

8
H. Liu et al.
are shown in Table 5.
From Table 4, it can be seen that the investment value and optimal
investment timing of the shale gas development project with financial
subsidy and without carbon emission trading are basically the same as
those without financial subsidy and with carbon emission trading, which
indicates that the effects of carbon emission trading and 0.2 RMB/m3
subsidy are the same. The optimal investment timing of the shale gas
development project with financial subsidy and carbon emission trading
is 3–5 years ahead of that without financial subsidy and carbon emission
trading and 2 years earlier than that with financial subsidy or carbon
emission trading. The shale gas development project with carbon
emission trading has a higher investment value. It is indicated that the
implementation of carbon emission trading has a positive impact on the
investment value and optimal investment time of shale gas. When the
initial average daily production increases by 1 × 104 m3, the optimal
investment timing will be advanced by 1–2 years but the extent of the
advance will be increasingly smaller, and the investment value will be
increasingly higher but the rate of increase will decrease. Through the
simulation, we find that when the initial average daily production rea­
ches 30 × 104 m3 and 40 × 104 m3 with financial subsidy and carbon
emission trading and with financial subsidy or carbon emission trading,
respectively, the optimal investment timing is 2021 and investors can
invest immediately. This result is essentially the same as that of Bai et al.
[31], who thought that the net long-run expected return on investment
increases with production capacity and that a shale gas project is
feasible only when the production capacity is larger than 8.55 billion
cubic meters. However, Bai et al. did not include investment timing in
their study. Therefore, until shale gas production reaches a certain level,
it is worthwhile for investors to wait for better investment opportunities.
Investments in a large number of new production wells and capital are
prerequisites for achieving stable or even increased production of shale
gas. Considering the long investment payback period and the un­
certainties of future investment incomes, it is difficult for investors to
significantly increase their investment in shale gas in the short term,
which requires financial subsidies to motivate the interest of enterprises
to increase production. Therefore, the government can adjust the shale
gas subsidy standard in a timely manner based on the carbon market
trading situation and shale gas productivity to stimulate investment in
China’s shale gas development.
4.3. Sensitivity analysis
To further understand how to stimulate investment in China’s shale
gas development, this section conducts a sensitivity analysis on the in­
fluence of financial subsidies, shale gas prices, drilling and completion
costs, production decline rates and environmental external benefit co­
efficients on the investment value and optimal investment timing of
shale gas projects. Except for financial subsidies, other factors are car­
ried out when carbon emission trading exists and the subsidy is 0.2
RMB/m3.
14 Investment value Optimal investment timing
12
Value (102 million RMB)
10
8 2032
6 2028
4 2026
2 2020
0 2020
0 0.5 1 1.5 2 2.5
Subsidy level (RMB//m3)
Fig. 7. The influence of subsidy level on shale gas project investment.
Applied Energy 306 (2022) 118002
(1) Financial subsidy
The influence of subsidy level on the investment value and optimal
investment timing of shale gas development projects is shown in Fig. 7.
When the subsidy increases by 0.5 RMB/m3, the optimal investment
timing can be advanced by three years and the investment value in­
creases with an average growth rate of 35.2%. When the subsidy in­
creases from zero to approximately 3 RMB/m3, the investment value
increases from 199.2 million RMB to 1214.8 million RMB and the
optimal investment timing is advanced from 2039 to 2021, indicating
that investors can make an immediate investment decision. Bai et al.
[31] also contended that financial subsidies can significantly increase
the expected return on investment. According to the subsidy notices
issued by the Chinese government, the highest subsidy standard was 0.4
RMB/m3 from 2012 to 2015. The current financial subsidy is not enough
for the actual development of shale gas in China, and it is much lower
than the subsidy proportion in the United States. The subsidy granted by
the federal government of the United States to shale gas enterprises
during the exploration and development stage from 1980 to 2002 was
47% of the selling price, while the subsidy given by the Chinese gov­
ernment for shale gas exploration during the corresponding stage in
China was only approximately 15% of the selling price. However, this
does not mean that financial subsidies can be blindly increased, and
excessive subsidies will not only lead to an excessive financial burden on
the government but also may thwart the progress of enterprises, which is
not conducive for enterprises to actively carry out technological
innovation.
(2) Shale gas price
Fig. 8 shows how the investment value and optimal investment
timing of shale gas development projects vary with changes in shale gas
prices. With the rise in shale gas price, the investment value of shale gas
development projects increases rapidly with a smaller growth rate, and
the optimal investment timing advances increasingly slowly. This con­
trasts with the finding of Bai et al. [31] that the optimal investment
value seems to be robust against price variation. When the shale gas
price rises to approximately 6.5 RMB/m3, the optimal investment timing
is 2021, which means that investors can make immediate investment
decisions. In recent years, due to the impact of the “shale gas revolution”
in the United States, U.S.-China trade disputes, and high inventory in
Europe and COVID-19, the natural gas price has been relatively low.
China’s shale gas may have lost its historic opportunity for high oil and
gas prices, while the success of the “shale gas revolution” in the United
States started during a period of high oil and gas prices. Under low oil
and gas prices, investors cannot obtain stable profits for new develop­
ment, and the rapid reduction of capital investment will prevent shale
gas enterprises from developing large-scale mass production and
generating considerable profits. Consequently, shale gas enterprises
have to delay their investment to achieve more profit, with fewer en­
terprises participating in shale gas investment and development in
Investment value Optimal investment timing
2040
30 2055
2038
Value (102 million RMB)
2050
2036 25
2034 2045
20
2040
Year
Year
2030 15 2035
2030
10
2025
2024 5
2022
0 2015
3 0 1 2 3 4 5 6 7
Shale gas price (RMB//m3)
Fig. 8. The influence of shale gas price on shale gas project investment.
9
H. Liu et al.
Investment value Optimal investment timing
3.5
3 2042
Value (102 million RMB)
2.5
2
1.5
1 2032
0.5
0 2028
0 2000 4000 6000 8000 10000
Drilling and completion cost (ten thousand RMB/well)
Fig. 9. The influence of drilling and completion cost on shale gas proj­
ect investment.
Investment value Optimal investment timing
3 2052
Value (102 million RMB)
2.5
2 2046
1.5
1 2040
0.5
0 2034
0 0.02 0.04 0.06 0.08
Drift rate of drilling and completion cost (-%)
Fig. 10. The influence of drift rate of drilling and completion cost on shale gas
project investment.
China, resulting in a vicious cycle. Therefore, to maintain the sustain­
able development of the shale gas industry, in addition to the corre­
sponding financial support from the government, China’s natural gas
price mechanism should be continuously reformed and improved to
promote the large-scale development of the industry.
(3) Drilling and completion cost
High drilling and completion cost is one of the main factors that
hinder the large-scale commercial development of shale gas in China,
and it is closely related to shale gas development technology. Generally,
drilling and completion cost decreases as the progressing and updating
of technology; thus, the drift rate of drilling and completion costs is
negative. Here, we use the absolute value of drift rate to measure the
technological progress, and the larger the absolute value of drift rate is,
the faster the technological progress. Fig. 9 and Fig. 10 show the influ­
ence of drilling and completion cost and its drift rate, respectively, on
investment in shale gas development projects. Fig. 9 indicates that when
drilling and completion costs decrease by 5 million RMB, the optimal
investment timing is basically advanced by one year, and the investment
value increases by 4.9% on average with an increasingly smaller growth
rate. Fig. 10 demonstrates that every 1% increase in the absolute value
of the drift rate of drilling and completion costs will make the optimal
investment timing advance by 1–2 years, and the investment value will
increase by 11.2% on average. The main factors that affect drilling and
completion costs are well depth footage, proppant, fracturing fluid,
fracturing grade and so on. The impact of technological progress on
drilling and completion costs can be jointly achieved by increasing the
drilling rate, decreasing the unit footage cost, recycling water resources,
and reducing proppant and drilling fluid consumption, etc. The reservoir
properties of shale gas reservoirs in China are quite different from those
in the United States, especially in terms of burial depth. The burial
depths of shale gas reservoirs in the United States are 800–2600 m, while
those in China are mostly 2300–6000 m. The increase in shale gas
Applied Energy 306 (2022) 118002
reservoir depth not only increases the technological difficulty but also
2044 adds greatly to the development costs of shale gas, which makes in­
vestors unwilling or unable to actively participate in its exploitation.
2040 Therefore, to obtain the return on investment as soon as possible, we
2038 must strengthen scientific and technological research on deep shale gas,
Year
2036 achieve breakthroughs on key drilling and completion technologies, and
2034 realize cost reductions and efficiency enhancements.
2030 (4) Production decline rate
The sensitivity analysis of production mainly involves the initial
average daily production and production decline rate as two factors.
Because the initial average daily production has been examined above,
this section only analyzes the production decline rate. The reservoir
characteristics of shale gas determine that its production decline rate is
not very low, so we study the impact of the production decline rate
changing from 50% to 90% on the investment value and optimal in­
vestment timing of shale gas projects, as shown in Fig. 11. For every 10%
2050
increase in the production decline rate, investors may delay their in­
2048
vestment by one year, and the investment value decreases by 14.5% on
average as the extent of the reduction decreases. This trend is consistent
2044
Year with the results of Liu et al. [30], which indicated that the larger the
2042
production decline rate is, the smaller the project value. Because the
production decline rate of shale gas wells is closely associated with shale
2038
mineral compositions and gas reservoir pressure, it results in very large
2036
differences in recoverable reserves, implementation of later develop­
0.1 ment measures and production and operation time of different shale gas
field blocks, which cause great differences in the shale gas development
cost benefits of different blocks. Thus, it is necessary to identify and
screen high-quality shale gas blocks with high resource reserves and
relatively small single-well production decline rates in the early explo­
ration period to reduce the investment risk as much as possible.
(5) Environmental external benefit coefficient
Compared with development costs and investment costs, the costs to
enterprises for environmental protection and the incomes obtained from
taking relevant environmental protection measures account for a small
proportion. The change in the environmental internal benefit coefficient
in order of magnitude has little impact on investment in shale gas
development projects. Therefore, we focus on the sensitivity analysis of
environmental external benefits. Fig. 12 shows how the investment
value and optimal investment timing of shale gas development projects
vary with the changes in the environmental external benefit coefficient.
With every 0.1 RMB/m3 increase in the environmental external benefit
coefficient, the optimal investment timing will advance by approxi­
mately one year, and the increase in the investment value will be
increasingly larger with an average growth of 7.3%. As a kind of fossil
energy, shale gas itself does not generate environmental benefits. The so-
called environmental benefits are relative benefits generated from shale
Investment value optimal investment timing
3.5 2040
3
2039
Value (102 million RMB)
2.5
2038
2
Year
2037
1.5
2036
1
0.5 2035
0 2034
0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Production decline rate (%)
Fig. 11. The influence of production decline rate on shale gas proj­
ect investment.
10
H. Liu et al.
Investment value Optimal investment timing
4.5
4 2038
Value (102 million RMB)
3.5
3 2036
2.5
2 2034
1.5
1 2032
0.5
0 2030
0 0.2 0.4 0.6 0.8 1 1.2
Environment external benefit coefficient (RMB//m3)
Fig. 12. The influence of environmental external benefit coefficient on shale
gas project investment.
gas replacing coal to reduce carbon dioxide emissions. Methane leakage
is an issue that cannot be ignored in the process of shale gas develop­
ment and directly affects whether shale gas is a kind of low-carbon
alternative to coal. In recent years, research on methane leakage in
shale gas development in the United States shows that only when
methane leakage is controlled at a certain level does shale gas provide
certain advantages over coal in reducing greenhouse gas emissions. In
addition, shale gas production areas often experience water shortages
while this industry consumes significant water resources, forming a pair
of contradictions that makes rapid and unlimited shale gas production
impossible. Water pollution, soil pollution and other environmental
problems also hinder the development process of shale gas to a certain
extent. The above environmental problems, either directly or indirectly,
all affect the investment decisions of shale gas development in China.
5. Conclusions
As an unconventional natural gas resource, the investment in shale
gas green and efficient development faces many uncertainties. Whether
the investment value can be accurately evaluated is the premise for
enterprises to make scientific investment decisions. This paper in­
troduces real option theory into the investment decision-making of shale
gas development. Considering the uncertainties in shale gas price, dril­
ling and completion cost and environmental benefit coefficients, a real
option model is proposed to evaluate the investment decision-making of
China’s shale gas green and efficient development projects. This model
is solved by the LSMC simulation, through which the investment values
and optimal investment timings of shale gas low, moderate, high and
ultrahigh productivities with and without financial subsidy and/or
carbon emission trading are obtained. The impacts of financial subsidy,
shale gas price, drilling and completion cost and its drift rate, production
decline rate and environmental external benefit coefficient on invest­
ment value and optimal investment timing are then studied by sensi­
tivity analysis.
We obtain the following results from the research described above:
only from the perspective of economic value is the current investment
environment in China not sufficiently positive for immediate investment
in shale gas development projects. Considering the uncertainties, in­
vestors would be better off delaying investment decision-making to
obtain a higher investment value. However, from the view of China’s
energy security and energy transformation, it is necessary to carry out
green, efficient and large-scale shale gas development. When the initial
average daily production reaches at least 30 × 104 m3, investors can
invest immediately. The higher the productivity is, the greater the in­
vestment value, and the optimal investment timing is correspondingly
advanced. Under the conditions with/without financial subsidy and
carbon emission trading, the optimal investment timing with financial
subsidy and carbon emission trading is 3–5 years ahead of that without
financial subsidy and carbon emission trading and 2 years earlier than
that with financial subsidy or carbon emission trading, indicating that
Applied Energy 306 (2022) 118002
financial subsidy and carbon emission trading can inspire shale gas in­
2039 vestment in early stages. The investment effects of carbon emission
trading and 0.2 RMB/m3 subsidy are the same. According to the sensi­
2037
tivity analysis, appropriate increases in financial subsidies, shale gas
prices, absolute values of drift rates of drilling and completion cost and
2035
environmental external benefit coefficients can improve the investment
Year
value and advance the optimal investment timing, while drilling and
2033
completion costs and production decline rates have the opposite effect.
To promote the investment in shale gas green and efficient devel­
2031
opment in China, the following recommendations are proposed. First,
strengthening key technology and equipment research and implement­
ing special development management modes, such as encouraging
geology-engineering integration and large cluster horizontal wells to
increase production and reduce cost, can enable investors to obtain the
profits and promote the shale gas investment. Second, the intensity of
subsidies and tax exemptions for shale gas should be flexibly adjusted.
Based on China’s shale gas development status, the government should
continue to implement a high subsidy system and different subsidy
measures that consider regional differences, such as resource endow­
ment, production and development costs. Tax exemption policies such
as resource taxes and mining area use fees can also be implemented.
Regarding research and development (R&D) investment in key tech­
nologies, policies of credits for related taxes and fees can be adopted, or
enterprises can be directly subsidized. Third, given the goal of carbon
peaking and carbon neutrality, in the process of vigorously promoting
shale gas green development, it is necessary to constantly improve the
environmental regulation framework and tools, effectively combine a
variety of regulation methods and actively implement environmental
protection measures for controlling the environmental pollution in the
process of shale gas development and maximizing the clean character­
istics of shale gas. A nationwide unified carbon emission trading market
should be established as soon as possible, and the corresponding policies
and mechanisms of carbon emissions trading should be improved.
Although our proposed model considers China’s current shale gas
situation as much as possible, there are inevitably some limitations and
deficiencies due to the complexity of shale gas investment. Future
research can be carried out in the following directions. Due to the in­
dependence and continuity of each stage of shale gas investment and
because enterprises have the option to invest in each stage, compound
options can be used to discuss multistage investment decision-making of
shale gas green and efficient development. Moreover, with the contin­
uous improvement of China’s carbon emission trading market, it is
necessary to comprehensively and systematically explore the impact of
carbon emission quota, carbon trading mode and carbon capture and
storage (CCS) on investment decisions regarding shale gas green and
efficient development. Finally, the influence of energy substitution
caused by the rapid rise of renewable energy on investing in shale gas
green and efficient development is also worthy of further study.
CRediT authorship contribution statement
Haomin Liu: Methodology, Data curation, Writing – original draft.
Zaixu Zhang: Methodology. Tao Zhang: Conceptualization, Method­
ology, Data curation, Writing – review & editing.
Declaration of Competing Interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Acknowledgements
This work was supported by the National Natural Science Foundation
of China (No. 71801224) and the Fundamental Research Funds for the
Central Universities (No. 20CX04002B).
11
H. Liu et al. Applied Energy 306 (2022) 118002

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