marcellus_pres021711 - West Virginia Center on Budget & Policy

Marcellus Shale Gas Drilling: What
Does it Mean for Economic
Preliminary Findings
February 2011
Sean O’Leary
Ted Boettner
West Virginia Center on
Budget and Policy
Rory McIlmoil
Downstream Strategies
Key Questions
1. How will the pace and scale of drilling affect
2. How will drilling affect the economic
development of communities?
3. How can West Virginia benefit once the
natural gas resource is depleted?
Pace and scale are pivotal to the
impact of gas drilling
Pace refers to the time frame within which gas
extraction takes place.
Scale refers to the number of wells drilled in a gas
play annually.
Marcellus Shale drilling will be a
“front-end loaded” drilling cycle
• Annual production from a
shale well declines by about
50% in the first year.
• Economically recoverable gas
production is uncertain
beyond 5 years.
• Marcellus Shale permits in WV
increased from 1 in 2002 to
over 800 in 2008.
• A “boom” in activity has a
different impact than a slow
Drilling pace affects the flow of
royalties into a community
Source: Department of City and Regional Planning, Cornell University
We need to consider the cumulative
impact on communities.
• Initial boom will result in
spike in activity and income
into communities.
• Initial boom is not sustainable
and will quickly drop off.
Cost to communities include:
• Accelerated road maintenance
• Traffic congestion from trucks
• Higher public safety costs
• Increased demand for health
and education services
• New service requirements,
such as planning and zoning,
emergency response capacity,
and environmental monitoring
and remediation.
What do we know about the economic
development impacts of gas drilling?
Economic development is measured by:
• Population growth
• Income levels and growth
• Economic diversity
West Virginia’s gas counties
10 counties have dominated
natural gas production in WV,
accounting for more than 60%
of the natural gas produced in
the state since 2001.
Trends from WV gas counties
In West Virginia, when compared to adjacent
counties with below average gas production, and
counties with little to no production, the top 10
gas producing counties (2001-2009) are
characterized by:
1. Population loss
2. Lower incomes
3. Higher poverty
4. Less economic diversity
Gas producing counties have been losing population
Gas producing counties have lower median household incomes
Gas producing counties have lower per capita incomes
Gas producing counties have had average income growth
Gas producing counties have higher poverty rates
Gas producing counties have less economic diversity
Gas producing counties are becoming less diverse
• Revenues from boom cycle of development are
volatile, leading to poor planning in a time of
rising demands.
• Expectations of wealth from development works
against diversification and increases the costs of
doing business for other industries.
• After initial boom and construction phase, few
jobs remain.
Will drilling in Marcellus Shale
contribute to economic development?
• The production cycle will be accelerated and shortterm. The pace and scale of the drilling can
significantly affect the economic impact.
• The costs of development are significant, local
governments may not have the capacity to respond
to new demands.
• State policies that mitigate negative effects on local
communities and deal with environmental impacts
can make a difference.
Will drilling in Marcellus Shale
contribute to economic development?
• Long-term economic development is uncertain.
• Positive, long-term economic development will
depend on West Virginia’s ability to capture
private expenditures and public revenues.
• One Solution: Permanent Mineral Trust Fund
funded by severance taxes used to promote
economic diversification and development.
Permanent Mineral Trust Fund
• Revenue from an increase in the severance tax on natural gas
can be used to create a Permanent Trust Fund which can be
used to promote economic diversity and development. States
such as Wyoming and New Mexico both have about $4 billion
in their Mineral Trust Funds.
• A 1% increase in the severance tax on natural gas would result
in a trust fund balance of over $645 million by 2040, with
over $430 million in cumulative economic development
• Had a 1% increase in the severance tax on coal been enacted
in 1980 to fund a Permanent Trust Fund, the balance would
be over $2.1 billion today, with over $1.3 billion in cumulative
economic expenditures.
Permanent Mineral Trust Fund
Permanent Mineral Trust Fund
Key info and assumptions
1. Natural gas production for WV is projected as a bell curve based on a 2% rate of growth through
2025 and a 2% decline thereafter through 2040. This means that we assume an exhaustion of
natural gas reserves by 2040 (worst case scenario). The 2% rate reflects the average rate of growth
in natural gas production in WV from 2004-2009.
2. We use EIA projections for natural gas wellhead prices for the Northeast through 2035 to reflect
WV natural gas prices.
3. For natural gas production and prices for 2036-2040, we take the average rate of change for
projected Northeast prices for 2030-2035 and apply that rate of growth to estimate prices for
2036-2040. For gas production, we apply the same 2% rate of change used to project gas
production for 2010-2035.
4. For WV coal production, we use EIA projections for production through 2035 for Central
Appalachia and Northern Appalachia, and estimate WV production based on the northern WV
share of Northern Appalachian production and southern WV share of Central Appalachian
production for 2008 and 2009. We project WV coal production for 2036-2040 using the same
method as for estimating natural gas prices, described in #3.
5. For WV coal prices, we use EIA projected coal prices for Northern and Central Appalachia
through 2035, and for 2036-2040 using the same method as for estimating natural gas prices,
described in #3.
Key info and assumptions
1. For the creation and funding of the trust fund,
we assume a 1% increase in the severance tax
on natural gas/coal.
2. For the growth of the trust fund, we assumed a
8% return on investment.
3. For economic development expenditures, we
assumed an annual expenditure rate of 5%.
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