Barring the imposition of a severance tax, Pennsylvania's Marcellus Shale basin will continue to be a hotbed of activity, pumping an estimated $14.17 billion into the state's economy in 2010 and creating more than 98,000 jobs, while generating $800 million in state and local revenues (minus royalties), according to an economic study by Pennsylvania State University that was released Monday.
The study, which was commissioned by the Pennsylvania House Oil & Gas Caucus and the Marcellus Shale Committee, expects a consistent increase in annual drilling in the Marcellus Shale and projects a $25 billion infusion into Pennsylvania's economy in 2020, as well as almost $1.4 billion in state and local tax revenue and more than 176,000 in new jobs.
Cumulatively, the producers will contribute $265 billion to the Pennsylvania economy by 2020, along with nearly $15 billion in state and local revenues, according to the study.
This revenue "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."
If Pennsylvania were to levy a severance tax on producers, it would curtail drilling activity and would cut state and local tax revenue by $1.4 billion between now and 2020, the study said. 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 authors of the study -- Robert Watson, emeritus associate professor at Pennsylvania State University, 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 thirdly, 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.
"It's time for the natural gas drilling industry and the legislature to step up to the plate. It's time to pass a severance tax on this enormously protifable industry."
The study estimated that the Marcellus Shale may contain 2,445 Tcf of natural gas reserves in place with recoverable reserves amounting to 489 Tcf -- or enough natural gas to last the entire United States for more than 20 years. It expects the Marcellus Shale to more than likely support Pennsylvania's economy for 100 years or longer.
If the Marcellus 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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