Taxing shale gas: A boon for Pennsylvania governments
By Chris Faulkner Breitling Oil & Gas Corp.
Forget the burbling pool of “Texas tea” that sent the Clampetts to a life of luxury in Beverly Hills. Pennsylvania is sitting on top of a sea of natural gas that has already lifted the state out of the recessionary funk still bogging down the rest of the nation. The drilling promises to become an economic boom of historic proportions for Pennsylvania and its residents, as well as the entire nation.
According to a July 2011 study by Pennsylvania State University, the natural gas production from the Marcellus Shale reserves that span several states but lie primarily beneath Pennsylvania created $1.1 billion in much-needed tax revenues for the state in 2010 alone.1 The study estimated that Marcellus gas producers would generate value-added revenues of more than $12.8 billion in 2011 and another $14.5 billion in 2012, creating more than 300,000 direct and indirect jobs and $2.6 billion in state and local taxes for Pennsylvania in 2011 and 2012.2 Authors of the Penn State study say the Marcellus Shale could become the single-largest-producing gas field in the United States.
The Marcellus Shale could become the single-largest-producing gas field in the United States, according to a Penn State study.
Clearly, the Marcellus Shale gas industry has and can continue to fill local and state coffers with much-needed tax revenues, but residents of Pennsylvania benefit directly, as well. For example, gas companies reportedly are paying $1,000 an acre as a bonus at signing plus royalties for leases allowing them to dig.3 This steady and sustainable income is a windfall for many struggling families, farms and ranches. The Penn State study found that in 2008, gas producers paid more than $1.8 billion in leases and bonuses to landowners in Pennsylvania, $2.17 billion in 2009 and $2.6 billion in 2010.
In addition to these lucrative leases, the Marcellus natural gas industry is creating well-paid jobs. The average oil worker’s salary is $70,000.5 Estimates of the number of jobs created by the Marcellus Shale gas industry vary, with an August 2011 Pennsylvania College of Technology study putting the number of direct and indirect jobs as high as 23,844 in 20096 and the July 2011 Penn State study citing 67,000 in 2010.7 What these and other studies agree upon is that the Marcellus Shale gas industry creates jobs.
According to Penn College’s study, each well sustains about 150 different occupations, from roustabouts to welders, title searchers and maintenance.8 The good news about these jobs is that, contrary to what some critics are saying, they’re not temporary. In fact, most are generational, creating steady employment for decades.
As indicated by these employment statistics, the natural gas industry creates jobs directly and indirectly, sending beneficial economic ripples throughout the region. Consider, for instance Penn State’s estimates that “23,730 jobs have been created in construction trade, 16,581 in retail trade, 14,886 in mining, 12,815 in health and social services, 11,042 in professional services, 9,974 in wholesale trade, and 7,767 in hotel and food services.”
Pennsylvania’s leaders are touting this ripple effect in their state. While touring U.S. Steel’s Irvin plant in March, Pennsylvania Lt. Gov. Jim Cawley said: “If you’re going to drill for gas, you’re going to need steel. Steel for drilling rigs, steel for platforms, steel for pipelines. Clearly, this is a great opportunity for Pennsylvania.”
According to Scott Buckiso of U.S. Steel, mills are now running 24 hours a day to keep up with the demand for steel tubing. Buckiso estimated that about 20 percent of the Irvin mill’s production is dedicated to the gas industry, more than double what it was a few years ago.
Cawley also noted the impact on other industries related to the steel mill, such as Dura Bond Pipe, which is now building a $12 million steel pipe coating facility to handle the extra work from Pennsylvania’s steel mills.
The result of this ripple effect has been to help Pennsylvania achieve an unemployment rate below the national average for the last several years. As of January, the state’s unemployment rate was 7.6 percent, as compared with the national average of 8.3 percent.
The positive economic ripples created by the Marcellus Shale gas industry travel far and wide, boosting local businesses along with tax revenues. The Pennsylvania College of Technology estimates that for every dollar spent by a drilling company, another $1.80 to $1.90 is spent by a consumer or a business.
Penn State’s study estimates that the Marcellus development has created more than $500 million in added value in the retail trade, finance and insurance, health, and social services industries, with another $200 million in the transportation, information, administrative services, and hotel and food services industries.
The Marcellus Shale Coalition has even created an online directory of local businesses, manufacturers and other professionals to help gas producers “buy local” and to make oil companies more accessible to individuals and businesses interested in becoming part of the supply chain. According to the coalition’s website, Marcellus on Main Street is a business directory “designed to support responsible shale gas development by connecting the natural gas industry, and its employees, to local vendors, suppliers and services — no matter how small a business may be.”
Total spending by the Marcellus gas industry for 2008, 2009 and 2010 came to more than $21 billion, at least 95 percent of which occurred in Pennsylvania.
Job creation, increased consumer and business spending, and additional tax revenues aren’t the only beneficial ripples from increased Marcellus Shale gas production. As Marcellus natural gas production rises, natural gas prices fall. This doesn’t mean lower prices only for household use of natural gas; it also means lower prices for electricity. Lower gas and electric prices, in turn, increase consumer spending power.
The Penn State study found a 12.6 percent reduction in natural gas prices due to higher output from the Marcellus Shale in 2010 — translating to a decline in total energy expenditures by $633 million. “In other words, without the Marcellus, consumers would be paying more than $633 million in additional energy costs,” notes the Penn State study.18
The study continues, “From the house-hold perspective, reductions in energy expenditures act like a tax cut for the Penn-sylvania economy, increasing discretionary income.”19
INCREASED PRODUCTION EQUALS IMPROVED INFRASTRUCTURE
Before wells can be drilled and natural gas from the Marcellus reserves can be transported, many Pennsylvania roads require improvement in order to handle the load of the heavy equipment and materials.
According to the Pennsylvania Chamber of Business and Industry, the Marcellus Shale gas industry has invested $411 million in road improvements since 2008.20 In February, Pennsylvania Gov. Tom Corbett, R, signed into law HB 1950, which allows counties to impose an impact fee on well drilling for up 10 years.
The Corbett administration estimates that the fee will generate up to $180 million in the first year alone,22 with money primarily earmarked for costs associated with regulating drilling and repairing and improving, roads and other infrastructure damaged or otherwise impacted by population growth, heavy machinery and truck traffic.
THE FUTURE IS BRIGHT
This is just the beginning. The Bipartisan Policy Center expects the Marcellus Shale to yield its reserves for the next 100 years.
In fact, because of new technologies allowing gas companies to access this formerly inaccessible shale gas reserve, the U.S. Energy Information Administration projects that the United States will become an exporter of natural gas by 2021.24 This bears repeating: The United States could soon be exporting natural gas.
As IHS Global Insight notes, improved shale gas recovery methods have dramatically changed the U.S. energy outlook in the space of only a couple of years. In 2010 shale gas already made up 27 percent of U.S. natural gas production. IHS Global expects shale gas to grow to 43 percent of U.S. natural gas production within the next five years, and to 60 percent by 2035.
The United States could soon be exporting natural gas.
The supply has been there all along, of course. As improvements in hydraulic fracturing, also called hydrofracking or fracking, improved the industry’s ability to tap those reserves, however, controversy over water contamination and environmental impact has kept drilling operations from reaching full potential.
What will change the debate is the aforementioned ripple effect. Lower prices associated with a domestic supply of natural gas and oil can have wide-ranging implications for energy prices and a variety of U.S. energy-intensive industries, from chemical, aluminum, steel, glass and cement to other manufacturing industries.
The key, of course, is for the United States to get out of its own way and allow gas companies to tap the vast domestic natural gas sources that are primarily reachable only through fracking.
OVERCOMING THE HYDROFRACKING MYTH
While some are still concerned about potential environmental impacts of fracking, the scientific evidence is cause for relief.
By far the greatest concern has been the effect of hydrofracking on the quality of groundwater, with claims of carcinogen-polluted water inflamed by dramatic accounts and misinterpretation of the data. The Energy Institute at the University of Texas at Austin in February published its findings from an exhaustive study of the claims versus the facts, concluding that there is little actual evidence of risk to aquifers.
“It appears that many of the water-quality changes observed in water wells in a similar time frame as shale gas operations may be due to mobilization of constituents that were already present in the wells by energy (vibrations and pressure pulses) put into the ground during drilling and other operations rather than by hydraulic fracturing fluids or leakage from the well casing,” the study said. “None of the water-well claims involve hydraulic fracturing fluid additives, and none of these constituents has been found by chemical testing of water wells.”
The study included a review of adverse health effects associated with the chemicals most commonly cited as potential pollutants due to hydrofracking. Interestingly, although fracking has been in use for more than 50 years, the studies have not found any direct evidence of health problems associated with these chemicals in gas and oil workers or people living near the drilling activity.
In addition, Aqua America completed independent testing of water near well sites in Pennsylvania and, as of March 2011, had found no evidence of any adverse impact on these water supplies.
A few facts about hydrofracking can go a long way toward countering the sometimes sensational (and unproven) claims:
• Fracking involves drilling down to levels of as much as 10,000 to 15,000 feet, far below the aquifer, which is only about 300 feet below the surface.
• Before any water, chemical and sand mixture is used to fracture the shale, a steel pipe encased in cement is laid through the well. This system ensures that the fracking mixture is delivered directly to the shale layers targeted for fracturing, 10,000 to 15,000 feet below the aquifer.
• The fracking mixture and the released oil or natural gas are then sucked back up through the protected wellbore and stored in surface reserve tanks. Some is filtered for reuse; some is disposed of at a regulated disposal center.
• The fracking mixture is 99.5 percent water, 0.5 percent chemical, and sand. Breitling Oil & Gas uses a chemical mix typically containing between 15 and 30 different chemicals, with an emphasis on chemicals that are considered safe for human consumption.
As in any human endeavor, there are varying levels of compliance with safety regulations, and human error can occur. Strict compliance with current regulations is sufficient to protect the aquifer while allowing American companies to tap into these rich U.S. reserves.
After years of high unemployment in Pennsylvania, the Marcellus shale gas reserves are turning the state’s economy around and creating a historic opportunity, the effects of which will reverberate in the form of increased prosperity for decades to come.