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Cascade: No. 77, Spring/Summer 2011

Economic Implications of Natural Gas Drilling in the Marcellus Shale Region

The recent onset of drilling for natural gas in the Marcellus shale region is having a major impact on businesses, residents, and communities in Pennsylvania. According to Pennsylvania’s Department of Environmental Protection, since 2007 approximately 2,400 wells have been drilled in Pennsylvania to extract natural gas from the Marcellus shale formation, with the number expanding exponentially every year. More than 100 energy companies and related subcontracting firms have moved to Pennsylvania and are now active within the Marcellus shale region, bringing significant employment and business opportunities for the foreseeable future. However, along with these opportunities, development of Marcellus shale is also bringing some significant challenges, including environmental and social impacts. Most of the development is occurring in relatively small communities that lack the infrastructure and support necessary to accommodate rapid, intense population growth and economic and workforce expansion.

Advanced drilling technology was recently deployed at a Marcellus shale development site in northeastern Pennsylvania.Advanced drilling technology was recently deployed at a Marcellus shale development site in northeastern Pennsylvania.

The Marcellus shale region of Pennsylvania extends from the northeastern to southwestern corners of the state and includes some of the commonwealth’s most rural counties. With the exception of three counties along the New Jersey border, the communities that reside miles above the Marcellus shale formation have been struggling economically and have seen a decline in population over the past two decades. Therefore, many people in the region view the drilling activity in the Marcellus shale as a potential economic lifesaver. Drilling activity so far has been concentrated in two general areas of the state: Bradford, Susquehanna, and Tioga counties in the northern tier; and Fayette, Greene, and Washington counties in the southwestern portion. However, there has been an increase in drilling activity between these two areas.

The development of Marcellus shale natural gas is still very young; therefore, little is known about its future implications. Experts predict that the drilling activity could last 30 to 50 years or more. In addition, there are at least four other strata of deep shales above and below Marcellus in Pennsylvania that could become commercially viable once the natural gas development infrastructure is in place, further extending the development activity. The onset of development has been very rapid, as has the scaling up of production, catching many communities (and some would argue the state) by surprise. Many communities have felt they are playing “catch up” rather than being able to anticipate and plan for the changes that are occurring.

Economic Implications

Marcellus shale is a nonrenewable natural resource; therefore, the economic development opportunities will fade as the resource is extracted. It is critical that policymakers, businesses, and communities plan for how this economic opportunity can be used to benefit their communities over the long term, rather than just focusing on more immediate gains. The economic implications from the development of Marcellus shale arise from several factors, including: (1) the gas industry’s spending on subcontractors, workers, and local goods and services; (2) increased spending by landowners who are receiving leasing and royalty dollars from gas companies in exchange for access to their property; and (3) the relocation and/or expansion of industries with high energy use or similar firms to the region because they want to benefit from the ample gas supplies with more predictable energy cost models.

Current estimates indicate that about 489 trillion cubic feet of gas can be recovered from the Marcellus shale formation in Pennsylvania, for a total gross value of $1.46 trillion. The Pennsylvania economy in 2008, by contrast, was $499 billion (as defined by total personal income). The relative local economic impact will be larger than this, however, because counties with Marcellus are a relatively small share of the commonwealth’s economy, accounting for only $207 billion of this total. State law requires that gas rights owners be paid a minimum of one-eighth of the value of production from gas wells, which means a significant amount of the value will go directly to them.

About 2,400 wells have been drilled in Pennsylvania since 2007 to extract natural gas from the Marcellus shale formation.About 2,400 wells have been drilled in Pennsylvania since 2007 to extract natural gas from the Marcellus shale formation.

The landowners’ estimated share of royalty value per well, which typically drains 80 acres, is around $2.5 million and will be paid out over the lifetime of the well. This could lead to Pennsylvania landowners receiving an estimated $200 billion over the life of the Marcellus shale development.

Experience with gas development in other states indicates that economic benefits are also being obtained by other sectors of the economy, not just the oil and gas sector. Most economic sectors report increased business activity and employment due to spending by the drilling industry as well as by the mineral rights owner. Some concerns have been expressed that certain sectors in Pennsylvania, such as the tourist sector, may be harmed, but such impacts have not yet been documented due to the young age of the development. The anecdotal evidence from the counties in the Marcellus shale region suggests that a broad range of businesses are experiencing significant new activity — even sectors that are not traditionally aligned with the gas industry, such as laundromats, sign makers, and jewelers.

Flaring off of a well in north-central Pennsylvania after the completion of the hydraulic fracturing process.Flaring off of a well in north-central Pennsylvania after the completion of the hydraulic fracturing process.

Some currently available secondary data sources are providing evidence that dollars and activity that are generated from the Marcellus shale are making a difference in Pennsylvania counties that have significant gas drilling activity. For example, counties with more than 100 wells in 2010 experienced larger changes in total employment than did counties with less or no Marcellus-related drilling activity.1 Likewise, the unemployment rates are lower in counties that have drilling activity than elsewhere in the commonwealth. State sales tax collections, which are an important indicator of the level of retail sales activity, are also increasing significantly in counties with major Marcellus-related drilling activity, up an average of more than 11 percent between 2007 and 2010 in Pennsylvania’s top five counties where Marcellus drilling is occurring. During this same period, counties with no Marcellus activity experienced an average 6.5 percent decrease in sales tax collections.2

Workforce and Business Implications

Workforce needs that are associated with natural gas development are particularly broad. A recent workforce study identified more than 150 different occupations that are directly associated with drilling a Marcellus well; more than 420 individuals are required, and the time commitments add up to about 12.9 full-time direct jobs per well drilled.3 Only about one-quarter of the jobs require a four-year degree or higher, with many of the remaining jobs requiring some specialized training or certification, such as a commercial driver’s license. Because the training requirements for most jobs are not overly restrictive, many of the positions are broadly available to the general workforce.

Many of the highly skilled jobs associated with drilling and completing a well are currently being held by workers from outside Pennsylvania who have moved temporarily into the commonwealth to give the companies time to develop and train a local workforce. As a result, hotel rooms and rental properties can be difficult to find in counties with high drilling activity. Many community colleges and worker training programs in Pennsylvania have been adjusting and expanding their programs in response to the growing demand for Marcellus-related jobs. It is difficult to determine how many workers are from out of state because available data sources do not provide state-of-origin information on employment.

With the exception of the skilled jobs on the rigs, anecdotal evidence is that Pennsylvanians will be hired for most of the jobs. In addition, anecdotal evidence strongly suggests that many small businesses in Pennsylvania are adjusting to the development of the Marcellus and have been expanding their business activity as a result. Net profits were up by an average of 10.8 percent in counties with high Marcellus activity between 2007 and 2008, for example, compared with only 1.7 percent in counties with no Marcellus activity.4

Phases of Natural Gas Development

The majority of the economic impact of natural gas drilling in the Marcellus shale will occur during the development phase, which is the most labor-intensive portion of natural gas activity. During this phase, the pipelines and well pads are constructed, and the wells are drilled. Once all the wells are developed, long-term workers will be needed to tend to and maintain the active wells along with the supporting infrastructure; however, these jobs are significantly fewer in number than those that are needed during the drilling and construction process. Royalty income similarly will be the highest during the development phase, since production from each individual well declines quickly over the first 24 to 30 months before it stabilizes at a slowly declining rate.

No one knows how long the development phase will last, since it depends critically upon how many drill rigs are operating in Pennsylvania, the comparative advantage of Marcellus shale to other natural gas developments, broader market forces, and the long-run plans of the drilling companies. The range expressed by experts typically varies between 30 and 50 years (and it could be longer if any of Pennsylvania’s other gas shales prove to be commercially viable). Similarly, no one knows precisely how long individual Marcellus wells will remain productive because there is a lack of long-term experience with the productivity of such wells.

The different phases of natural gas development have strong implications for the economic impact of Marcellus shale activity. The major difference in labor requirements between the development and later phases can create difficult policy trade-offs, particularly related to infrastructure needs. Housing is critical to ensure that the workers and their families live within the community and spend their dollars locally, rather than spending those dollars immediately after leaving. However, if housing is built to accommodate short-term needs (albeit potentially 30 to 50 years), the community may have a major surplus of housing after the development phase is over and most of the workers have left. It is important to understand that the major economic impacts will phase out as drilling ends; therefore, business owners and residents in these communities must act during this phase to capture the benefits and simultaneously plan for the long term when these benefits will no longer be available.

Other Implications

Much of the public controversy over drilling for natural gas in the Marcellus shale relates to potential environmental implications, particularly with regard to water use and groundwater contamination. Other concerns relate to forest fragmentation, invasive species, and air quality. Regulatory agencies are reviewing these issues and are encouraging methods that have minimal impact, but because some of the environmental risks are still unclear, advocacy groups are at odds over how much regulation is enough.

There has been less focus on the social implications of Marcellus shale development, but these may prove almost as important in the long run. The influx of new workers has the potential to change the communities and create conflicts between long-term and new residents about community needs. Anecdotes from local governments in Pennsylvania suggest that the development is affecting the demand and cost for local government services, such as emergency services, law enforcement and the courts, human services, and most particularly, roads and other infrastructure. Rising housing costs have already made it difficult for low-income households in several Pennsylvania counties to make ends meet, and these rising costs have the potential to become an effective barrier for such families to remain in those communities. Because the benefits and costs of development will not be distributed equally across all residents, there very clearly will be some “haves” and “have-nots” as a result of development, thereby increasing the potential for community conflict.

Of equal concern is the ability of local governments to influence what occurs within their jurisdiction. Local control of gas development is limited in Pennsylvania due to the state Oil and Gas Act, which specifically preempts local decision-making about key aspects of gas development. Much of the development is occurring in very small rural communities, and the governments in these communities have limited resources and, therefore, may lack the capacity to act even if the law allowed such control.

This well in Lycoming County, PA, is still in the early stage of Marcellus shale drilling.This well in Lycoming County, PA, is still in the early stage of Marcellus shale drilling.

Role of the Banking Industry

The banking industry can play important roles within the development of the Marcellus shale formation. Anecdotes from people in the communities in the Marcellus shale region indicate that some local businesses are trying to expand but are finding it difficult to obtain local financing. Local financing can help local firms successfully compete with newcomers from outside the region, keeping profits within the community. The banking industry can also assist with helping to attract or establish businesses that rely heavily upon natural gas as an input and that may find it profitable to locate within the state. Financing likely will be particularly important for exploring this opportunity.

Many of the gas rights owners who are receiving royalties have never handled such large checks and therefore are unfamiliar with the financial management tools and skills necessary for effectively managing their portfolios, including appropriate investment vehicles, risk management, and estate planning. The banking industry can assist owners in making appropriate financial management decisions and thereby help them manage their portfolios. The legal component of wealth management and the deployment of appropriate tax strategies will also be critical for landowners and their family members for several generations. The banks, which serve as trusted financial agents in these communities, will play an important role as the Marcellus shale is developed in Pennsylvania.

Summary

The development of the Marcellus shale natural gas resource in Pennsylvania has the potential to profoundly change the commonwealth. Over time, extraction of this energy resource will affect Pennsylvania’s economy, society, environment, workforce, businesses, and residents. In addition, these implications will be multigenerational in nature. Active participation by landowners, regulators, environmental advocates, academia, the broader business community, and a wealth of interested stakeholders is key to ensuring that the development of Marcellus shale has the most positive effects on the commonwealth. And most important to those pending discussions will be accurate, scientifically validated data that can be used to make strategic decisions, both at the individual landowner level as well as at the community and statewide levels. Marcellus shale development is having an impact on almost all aspects of life in communities in two-thirds of the geographic area of Pennsylvania, which accounts for half of the commonwealth’s population. Therefore, it is crucial to incorporate new information as the development evolves across the state over the next several decades.5

For more information, contact Timothy W. Kelsey at 814-865-9542 or tkelsey@psu.edu E-Mail Address, or Thomas Murphy at 814-865-1587 or tmurphy@psu.edu E-Mail Address; www.marcellus.psu.edu External Link; www.naturalgas.psu.edu External Link.

  • 1Pennsylvania’s Department of Labor & Industry, Pennsylvania Civilian Labor Force Data by County of Residence, 2009 and 2010.
  • 2Charles Costanzo and Timothy W. Kelsey, “State Tax Implications of Marcellus Shale: What the Pennsylvania Data Say in 2010,” Cooperative Extension, Pennsylvania State University, 2011, available at: http://pubs.cas.psu.edu/FreePubs/pdfs/ua468.pdf PDF Document External Link.
  • 3Marcellus Shale Education and Training Center, “Marcellus Shale Workforce Needs Assessment: Southwest Pennsylvania,” 2011, available at: http://www.msetc.org/docs/NeedsAssessmentwithcoverSW.pdf#zoom=75 PDF Document External Link.
  • 4See the article by Costanzo and Kelsey.
  • 5See U.S. Census of Population, 2011.