All things being equal the Marcellus Shale could meet the gas demands of the United States for 20 years all by itself, according to the most recent study by Pennsylvania State University (Penn State). But it may not get the chance if the state imposes an onerous severance tax, producers claim.

As much as 489 Tcf of technically recoverable natural gas resources may be held in the Marcellus Shale, according to Terry Engelder, a geosciences professor at Penn State. Engelder, who had estimated the Marcellus’ technically recoverable gas at approximately 392 Tcf as recently as last November, said his calculation was ratcheted up 25% as more production data became available in recent months.

“Before gas production occurs in any play the estimates are based on volume calculations,” Engelder told NGI. When he and Gary Lash, a professor at State University of New York at Fredonia, made their first Marcellus volume calculation of 50 Tcf in January 2008, “we purposefully made that extraordinarily conservative, knowing it was likely to be revised based on production data,” Engelder said.

Last fall Engelder revised that estimate, based again on volume calculations, to 392 Tcf — a figure he said was still on the conservative side (see NGI, Nov. 10, 2008). The revised calculation was based on data provided by Chesapeake Energy Corp. and included a new estimate for the thickness of the Marcellus rock, which Engelder initially believed to be 50 feet, but had decided could range up to 300 feet.

“After the breakout year, which was 2008, enough production data had become available that one could then go back and understand the potential for the Marcellus from a statistical point of view based on production data,” Engelder said.

Because Pennsylvania state law keeps production data proprietary for five years, Engelder said his estimate was based on information — generally initial production tests of the 24-hour variety — that operators place in public documents, usually associated with investor and analyst workshops and in quarterly calls to shareholders. Engelder’s latest estimate was published in Fort Worth Oil and Gas Basin magazine.

At present consumption rates, the Marcellus alone could meet the gas demand of the United States for more than 20 years, “if the gas could be produced fast enough — which, of course, it can’t,” Engelder said. Still, federal policy should recognize “the gift for America” that the Marcellus and other domestic shale plays represent, he said.

The Marcellus Shale stretches across Pennsylvania, West Virginia, Ohio, New York and Maryland.

In June legislation to impose a severance tax on growing gas production in Pennsylvania’s portion of the Marcellus Shale advanced to the state’s House of Representatives (see NGI, June 29). The bill would impose a “privilege tax” on all of the state’s gas producers at a rate of 5% of the gross value at the wellhead, plus 4.7 cents/Mcf. The tax is projected to generate roughly $600 million annually for state coffers by 2013-2014. If the bill is approved by the General Assembly, it would take effect Oct. 1. The legislation resembles an extraction tax implemented by West Virginia in 1987, which levies a 5% tax on the gross value of gas extracted and 4.7 cents/Mcf.

Producers, objecting to the tax, say that without it Pennsylvania’s Marcellus Shale basin will pump an estimated $14.17 billion into the state’s economy in 2010, creating more than 98,000 jobs, while generating $800 million in state and local revenues (minus royalties). This is according to an economic study released last week that was commissioned by the Pennsylvania House Oil & Gas Caucus and the Marcellus Shale Committee, and conducted by Penn State.

The study expects a consistent increase in annual drilling in the Marcellus Shale and projects it will contribute $265 billion to the Pennsylvania economy by 2020, along with nearly $15 billion in state and local revenues. This “does not include the royalties that would be payable to the state,” said Ray Walker, co-chairman of the Marcellus Shale Committee and vice president of Appalachia for Range Resources, a major Marcellus producer. He estimated that producer royalties were 15 cents on the dollar, which is “very, very significant.”

The math changes if Pennsylvania were to levy a severance tax on producers, the study said, by curtailing curtail drilling activity. This would cut state and local tax revenue by $1.4 billion between now and 2020. It also noted that the tax would result in less job creation and overall economic benefits in Pennsyvlania. No other mineral in the state is subject to such a tax.

The results of the study were released in Harrisburg, PA, by state legislators, industry executives and the two leading researchers on the study — Robert Watson, emeritus associate professor at Penn State, and Timothy Considine, professor of energy economics at the University of Wyoming.

“There are many, many companies moving into Pennsylvania for a variety of reasons. Number one is the fact that the tax climate appears to be positive…Number two, the Marcellus is super duper,” and third, the Marcellus Shale play is close to the Northeast for distribution purposes, Watson said. A severance tax, as favored by Gov. Edward Rendell, would reduce the play’s activity by a third, he noted.

“Every little piece of money that you carve off the top of our industry is less money that we put back in the ground drilling. And that’s the biggest impact of a severance tax…If you put a West Virginia-style severance tax on us, it will create less overall money for the state,” Walker said.

Producers already are spending more to drill in the Marcellus Shale because of the hilly terrain in Pennsylvania, said Considine.

“Pennsylvania by no means is flat as a pancake as things are down in Texas and Oklahoma…So it takes a little more time, a little bit more effort and a little bit more money to establish and develop these well sites,” he said. “On a good guess they’re probably spending a couple a million dollars more to $3 million more [per] well site” because of the front-end work (excavating) that needs to be done and the back-end work (treating the water), Considine estimated.

As a result, Pennsylvania is considered an “extremely high-cost environment” for drilling natural gas.

State legislators Tim Solobay and Brian Ellis, both chairs of the House Oil & Gas Caucus, consider Pennsylvania to be lucky that producers are still looking at their state in the current price environment, although they concede that producers are not running or jumping as fast as they did when natural gas prices were $14/Mcf a year ago. This is more reason for the state to not levy a severance tax on Marcellus producers, they said.

Citizens for Pennsylvania’s Future (PennFuture), a statewide public interest group, said the study’s findings were “replete with fuzzy logic and even fuzzier math” with respect to a severance tax. “No one doubts that drilling in the Marcellus Shale formation presents a tremendous opportunity for growing Pennsylvania’s economy. But without a severance tax, Pennsylvania taxpayers will get very little benefit, while they risk being stuck with the bill to fix the environmental damage the drilling causes. Instead, the only folks who stand to make really big money out of Pennsylvania’s natural gas assets will be the multinational corporations who are blocking the tax,” said PennFuture CEO Jan Jarrett.

If the Marcellus Shale activity continues as expected, the study said Pennsylvania could reverse its position as a major importer of natural gas to a net exporter by 2014. The state currently imports about 75% of the gas that it consumes.

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