Friday, April 3, 2009

Marcellus Shale Gas Play: Part 3

The potential economic impact of the Marcellus Shale gas play is very significant, all the more so because of the current local, national, and global economic "recession". There is much talk, and activity concerning energy supplies, energy independence, carbon dioxide emissions as a cause of global warming and climate change, the environment, jobs, and taxes and of the economy. This makes the following discussion about the Marcellus Shale Gas Play all that much more important.

If our governmental leaders truly want to restore the American economy to health and vigor, they should do everything possible to encourage the development of the Marcellus Shale Gas Play.

Experience in Other States
Several other states have significant experience
with deep natural gas drilling, including Texas
and Wyoming. The experience in those states and
the more comprehensive time frame of activity
is a helpful indicator of the potential impact in
Pennsylvania and suggests the types of issues local
officials should be considering.

Experience in North Texas
The Barnett shale play in northern Texas, around the
Dallas/Fort Worth area, is very similar in geology
to the Marcellus, making it a good indication of
technological and industry needs
. Since the development
of the Barnett shale started in earnest in 2001,
employment and income impacts have been documented.

In 2008, the Perryman Group, a Texas-based
economic consulting group, conducted an economic
impact study of activity in the Barnett shale on Fort
Worth and the surrounding area. At the time of the
Perryman analysis, there were a total of 7,170 gas
wells across the Barnett shale region, 541 of them
within the Fort Worth city limits. Their findings should
help illustrate potential impacts in Pennsylvania.

The analysis includes an industry-by-industry
estimate for impacts on the gross product, permanent
income, and permanent jobs. The Perryman analysis is
specific to the local economy surrounding Fort Worth,
so the properties and numbers cannot be applied
directly to Pennsylvania. Extrapolating to Pennsylvania
is also particularly difficult because the oil
and natural gas sector and supporting infrastructure are
not as fully developed in some of the rural areas with
the Marcellus shale, therefore much of the economic
activity, at least initially, will have to be conducted
by firms and employees located outside the region,
which will lessen the local economic impact. Yet the
Perryman analysis does provide useful indications of
the general impacts that could be expected and which
Pennsylvania policy makers should consider.

Gas well frac job, showing some of the massive equipment used.

Overall Economic Impact
Overall, the Perryman Group report estimates that
Barnett shale accounts for $8.2 billion in annual
output (8.1 percent of total output in the regional
economy) and 83,823 jobs (8.9 percent of total jobs).

This is a significant number, particularly because the
Barnett shale region is predominantly an urban area
that already boasts a large and extensive economy.
In addition, experts suggest that the stability of the
natural gas economy has essentially shielded the
region from economic downturns. Potential impacts
in areas of Pennsylvania could be much higher on a
percentage basis considering that the local economy
is relatively smaller.

Where the Jobs and Income Are
As with most economic activity, the impacts of
natural gas affect more than just the specific firms
directly involved in the industry. There are also
important employment and income effects on local
businesses that supply the industry (such as oil field
service companies, local contractors, area surveyors,
attorneys, and local fuel and stone suppliers) and
effects that result from employees spending their
wages locally (local retailers and restaurants).

Leasing and royalty income, which is currently
of much interest in Pennsylvania, actually accounts
for a very small share of the economic impact. The
Perryman report identifies three separate types of
economic activities related to natural gas and outlines
their share of economic activity, including:

1. Exploration, drilling, and operations (67 percent
gross product, 62 percent personal income)

2. Leasing and royalties that go to landowners
(11 percent gross product, 12 percent personal

3. Pipeline infrastructure (22 percent gross product,
27 percent personal income)

The employment impacts related to natural gas in
the Perryman report show similar trends:

1. Exploration, drilling, and operations (58 percent
of new permanent jobs)

2. Royalty and lease payments (14 percent)

3. Pipeline infrastructure (28 percent)

As the industry expands within Pennsylvania
more of these jobs and revenues should be reaching
local residents, either as new hires or as the industry
employees relocate to the region. Communities can
increase the possible economic benefits of a growing
natural gas industry by planning ahead to respond to
the growing population within their areas.

Which Industries Benefit
As expected, the industrial sector with the largest
gain from the Barnett shale is the crude petroleum
and natural gas industry, accounting for about one fifth
(21 percent) of increases in personal income
and 7 percent of new jobs. Retail trade accounts for
about 16 percent of increased personal income and
27 percent of the new jobs, while new construction
accounts for 10 percent of increased personal income
and 9 percent of new jobs. Eating and drinking
establishments similarly benefit, accounting for 5
percent of personal income and 15 percent of new

For any individual industry the difference between
their impact on gross product and on employment
partially reflects wages and salaries within that
industry. Retail trade and dining establishments,
for example, together account for 21 percent of
new personal income but 42 percent of total new
employment, reflecting that many such jobs are relatively
low paying.

Experience in Sublette County, Wyoming
Sublette County is the largest gas-producing county
in Wyoming, accounting for 44 percent of the state’s
gas production in 2006. Unlike the North Texas play,
Sublette County is a very rural area with a population
of only 5,920 in 2000. The small population size
means that the impacts of natural gas development are
much more apparent than those of the Barnett shale.

Studies in the county have demonstrated that
gas exploration and drilling has had a direct and
significant influence on the county’s population,
affecting almost all sectors of the community,
including housing construction, the demand for
public services, and culture.

They found that much of
the oil and gas employment was transient (not local
citizens). For example, during development of the gas
fields, a little over half (53 percent) of the workers
were living in camps or motels. Housing needs have
proved to be a constraint on local hiring because
the high cost of living and saturated housing market
inhibits new employees from finding places to live.
Reports found that the availability of housing unmistakably
affects nonresident workers’ desire to move
into the county.

A wage and salary study in the county also found
that the highest paying jobs are gas field jobs, which
generate significant opportunities for employees. This
also creates challenges for existing businesses, which
must pay higher wages to keep their existing workers.
The gas field jobs offer nearly unlimited opportunity
for overtime along with substantial opportunities
for wage advancement. Seasonal fluctuations in
employment and unemployment have effectively
stopped due to the continuous nature of the gas

Natural gas drilling has had significant effects on
the local governments and school districts as well.
Due to the population increase, including a dramatic
increase in the number of school students, the county
government and schools have acquired major infrastructure
expenses. In addition to increased costs of
municipal infrastructure, the nonviolent crime rate
has increased in Sublette County, particularly for
driving under the influence, drug possession, and

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