Study projects boost in Marcellus shale jobs, economy

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, July 22 -- Development of Marcellus shale natural gas could create 280,000 jobs and add $6 billion of federal, state, and local tax revenues over the next decade, a new study commissioned by the American Petroleum Institute concluded. But the growth could be less if state and local governments dramatically increase taxes or impose very restrictive regulations, its author warned.

“Striking the right balance involves looking at all the costs of production,” said Timothy J. Considine of Natural Resource Economics Inc. in Laramie, Wyo. “My recommendation is to get this industry established and let it grow. It will generate additional revenues for economic activity.”

There are many more shale gas plays worldwide as well as in the US, and producers are comparing their economics with those of the Marcellus as they make their exploration and production decisions, Considine warned in a July 21 teleconference with reporters.

“It’s a very different world in 2010. Gas companies can move their chips to other parts of the table,” Considine said. “If too many taxes are imposed, drilling moves elsewhere. We’ve seen this in the United States: Drilling is down in the Rocky Mountains, it’s falling in parts of Texas, and it’s growing in the Marcellus.”

State policies affect activity within the three-state Marcellus region itself, where most of the 57,000 jobs added in 2009 were in Pennsylvania and West Virginia, and not in New York, which has a de facto moratorium on horizontal drilling, he said. Growth was greater in Pennsylvania, which does not have a severance tax, than in West Virginia, which does, he indicated.

Second-largest
The report noted that some estimates place recoverable gas reserves in the formation, which extends from New York’s southern tier across Pennsylvania and into West Virginia, at 489 tcf, placing it second in the world only to the Pars field in Qatar and Iran.

“It’s an exciting development for East Coast energy. A lot of people from New York to Washington have no idea there’s a supergiant gas resource 150 miles west of where they live,” said Considine, adding, “Even under rapid development out to 2020, production would use up only 8% of the reserves in the region. The Marcellus is going to be around for years to come. I view it as a generational resource that will be around well into this century.”

The study is the first to examine Marcellus shale economics in all three states, he noted. It used an economic model developed by the Minnesota-based IMPLAN Group Inc. and produced low, medium, and high development scenarios ranging no change from current state policies to adoption of policies encouraging aggressive development.

Under the low development scenario, New York’s de facto horizontal drilling moratorium stays in place and drilling modestly expands in Pennsylvania and West Virginia from roughly 1,100 wells in 2010 to more than 1,700 wells in 2020, increasing production to 4 bcfd. This would generate $9 billion in value added and more than 100,000 new jobs in 2020, or roughly 12 jobs for every $1 million of value added, according to the NRE study.

In its medium development scenario, modest development begins in New York in 2011, reserves per well are higher, and the pace of future drilling is faster. This would push production to 9.5 bcfd in 2020, generating more than $16 billion in economic output, almost $4 billion of additional tax revenue, and more than 180,000 jobs.

Behind Texas
The high development scenario’s greater level of activity stays within the realm of possibilities based on recent experience in the Barnett shale play in Texas, the NRE study said. In this case, the level of activity could generate almost $25 billion in value added and more than 280,000 jobs. More than 18 bcfd of gas would be produced, making the Marcellus the largest US producer behind all of Texas, the study said.

Considine said the study considers New York development along the state’s southern tier only outside New York City’s watershed and the Delaware River basin. The counties are modestly populated, similar to those in Pennsylvania immediately south, where development of the Trenton deep gas formation already has produced economic benefits, he said.

“We only considered environmental cleanup costs to the extent that companies reported that in their cost data,” he said, adding, “In previous studies, we collected detailed information including collecting and disposing of recovered frac water. We did not consider costs in terms of environmental quality degradation. There are widely differing values you can place on these damages.”

Considine noted that in the Barnett shale play, there are thousands of wells in city parks, residential areas, and other places in the Dallas-Fort Worth region. “Part of the problem with the Marcellus is that people in those parts of Pennsylvania are not used to this level of development,” he said. “I think the industry needs to educate them to place this in perspective.”

API has been trying to do exactly that. “We’ve been going out and trying to get the facts out about this development to counter the misrepresentations other organizations have been making,” said John C. Felmy, its chief economist, who also participated in the teleconference. “We admit that incidents have happened, that any incident is one too many, and that we have standards and practices designed to avoid them.”

Local services
Impacts on demands for local governmental services won’t be as great as in several rural parts of the US West in the 1970s when several large electric utilities constructed coal-fired power plants, he and Considine maintained. “The comparison of size is important. The difference between building a 1,000-Mw power plant for billions of dollars and these gas wells in million-dollar terms is substantial,” Felmy observed.

“These wells are continuous economic contributors, with ongoing activity. It is qualitatively different,” Considine added. “That’s not to denigrate the difficulties and adjustment. But thinking of this in boom-town development terms is not quite accurate.”

He said the study forecast job growth through three different channels: directly in the oil and gas industry, indirectly from a chain of outlays in supporting industries, and economic growth from property owners’ royalties and new jobholders spending money from their paychecks and paying taxes.

“Maintaining production from these wells will be like running on a treadmill,” he predicted. “Slowing down drilling and production would negatively impact employment and economic growth. If governments pursue policies that encourage the development of natural gas, the ultimate benefits to the economy, the tax base, and society would be significant.”

Federal water regulation is not needed, added Stephanie Meadows, an API senior upstream policy advisor, who also participated in the teleconference. “The states are doing a proper job. We developed guidance documents to help them, but the states are acting on their own,” she told reporters. “Many members in the Marcellus are not API members, so our guidance documents are designed to help them. The events are few and far between. There’s no need for another layer of oversight.”

Felmy recalled seeing seismic crews collecting data when he was growing up in Pennsylvania and wondering what they were finding. “Now we know, and it was impossible to produce until recently,” he said. “There’s no question that the resource is a wonderful play. But developing the gas is only the first step. You still have to get pipes through those hills to the trunk lines, and you have to cross bodies of water. Pennsylvania has several major trunk lines already, but enough additional costs could tip the scales.”

Contact Nick Snow at nicks@pennwell.com.

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