Pennsylvania s Marcellus Shale

By Katrina Currie Commonwealth Foundation

Introduction
The Marcellus Shale is a large and difficult-to-drill geological formation roughly a mile or more underground that contains natural gas.

The shale covers more than two-thirds of Pennsylvania. Recent estimates place the volume of recoverable gas in the entire formation (not just Pennsylvania) at 489 trillion cubic feet enough to supply all of America's natural gas needs for 20 years. This once unreachable gas is now recoverable, thanks to the combination of two previously existing technologies: horizontal drilling and hydraulic fracturing. Since 2005, approximately 7,500 Marcellus Shale permits have been issued and 3,030 wells have been drilled.

Economic Impact
Dozens of drilling companies are investing in Pennsylvania and boosting the economy by creating high-paying, permanent jobs.

More than 10,500 new jobs within Marcellus Shale related industries from 2009 Q4 to 2011 Q1, according to the Center for Workforce Information and Analysis:
This doesn t include indirect jobs that are being created by drilling, from railroad companies to manufacturing. Estimated average annual earning is nearly $70,000. Taking a more long-term view, from 2008 Q1 to 2010 Q3, employment in core industries increased by nearly 94 percent, while total jobs in Pennsylvania dropped 2 percent.

Since 2008, 7 out of 10 new hires in the industry are filled by Pennsylvanians, according to Marcellus Shale Coalition.

Economic Impact Cont.

Take Bradford County, for example: Two years ago it was economically struggling. Now, it is a state leader in Marcellus wells drilled and in job creation.
Bradford County now boasts the second lowest unemployment rate in the state. In one year added 2,500 new jobs that s a nearly 10% growth! Local hotels and campgrounds reported 100% higher sales in 2010, along with 50% of financial businesses, 35% of construction firms and nearly 30% of transportation firms seeing increases. Two new hotels being built in the community are already booked solid for two years. Jim VanBlarcom, a Bradford County dairy farmer, was able to double his dairy herd size, thanks in part to royalty money from leasing farmland.

Job Growth by County

Economic Impact Cont.

Below: Marcellus vs. non-Marcellus Wells Drilled in 2010 Upper Right: County Unemployment Rates Lower Right: Job Growth by County 2009-10
Department of Environmental Protection 2010 Wells Drilled

Job Growth by County, September 09-10

-2.09-0.69

0.7-3.47

3.48-6.25

6.26-9.01

A Real Stimulus
State and Local Tax Revenue

Drillers have already contributed more than $1.1 billion since 2006 in state and local taxes, according the Pennsylvania Department of Revenue.

Department of Revenue Data (analyzed by Penn State)

Pennsylvania counties with 150 or more Marcellus wells experienced an 11.36 percent increase in state sales tax collections between 2007 and 2010.
Counties with no Marcellus wells drilled experienced a 6.55 percent decrease in sales taxes during that same period.

Local Communities

In 2010, Bradford County received an estimated $1 million from the drilling industry through minor revenue streams like recording and copying fees.

Lease Holders

Since 2006, the industry is estimated to have paid out over $7 billion in lease and royalty payments, which are taxable by the state.

Environmental Impact

Oversight
Natural Gas Activities Must Comply With Nearly 20 State and Federal Acts/Laws Table 1
Federal Acts Pennsylvania Acts and Laws Monitoring Agencies
Pennsylvania Department of Environmental Protection (DEP) Fish and Boat Commission PA Department of Transportation County Conservation Districts:

Clean Water Act (CWA)

Oil and Gas Act

Safe Drinking Water Act (ADWA) Clean Air Act Endangered Species Act

Oil and Gas Conservation Law Coal and Gas Resource Coordination Act Clean Streams Law

Resource Conservation and Recovery Act (RCRA)

Solid Waste Management Act

Susquehanna River Basin Commission (SRBC)

Comprehensive Environmental Response Compensation and Liability Act (CERCLA)

Dam Safety and Encroachment Act

Delaware River Basin Commission (DRBC)

Emergency Planning and Community Right to Know Act (EPCRA)

Safe Drinking Water Act

PA Department of Conservation and Natural Resources.

Occupational Safety and Health Act

Water Resources Planning Act

Worker and Community Right to Know Act Vehicle Code Municipalities and Planning Code

Regulations
Highlights of State Oversight

Endangered species surveys must be conducted before drilling can occur. All wells are registered with bonds. All wells are subject to frequent inspections. After well completion, each company is required to return the drilling site to its original form, including ground cover within nine months. Drillers assume responsibility for surface or ground water pollution if it occurs within 1,000 feet of the well.

Above and Beyond Regulations

Drilling companies are looking at ways to use water impacted by AMD for hydraulic fracturing. The drilling industry is working with the Fish and Boat Commission to develop protocols to ensure invasive species aren t being transported between watersheds.

Marcellus Myths
Myth #1: Hydraulic Fracturing is a new technology. Fracking has been used for over 60 years. It was first used in PA in the 1950s and since 1980s nearly all wells in PA have been fracked.

Myth #2: Fracking requires massive amounts of water.

While a single well takes approximately 3 million gallons of water to fracture, the majority of drilling companies are reusing the wastewater produced from hydraulic fracturing, reducing the amount of water used. In perspective, the quantity of water used for drilling is not significant. According to Susquehanna River Basin Commission (SRBC), the gas industry uses about 2 million gallons of water per day from the Susquehanna watershed. In comparison, the recreation industry, such as ski resorts and golf clubs, use 50 million gallons a day. Thermoelectric power plants are by far the largest users of water in Pennsylvania at 6.43 billion gallons per day.

Marcellus Myths Cont.

7,000,000,000

Pennsylvania Surface and Groundwater Withdrawals by Industry Gallons Per Day

6,000,000,000

5,000,000,000

4,000,000,000

3,000,000,000

2,000,000,000

1,000,000,000

Source: Pennsylvania Fish & Boat Commission, Pennsylvania Angler & Boater, January/February 2011

Marcellus Myths Cont.

Myth #3: Water withdrawals have serious negative consequences on our waterways.

The Department of Environmental Protection (DEP) requires a water management plan with drilling applications, which identifies where water would be withdrawn and the volume of water. This ensures water consumption does not exceed water supply. DEP works closely with SRBC. SRBC tightly regulates water use within the watershed; water withdrawal permits can take up to a year.

Myth #4: Groundwater is in danger of contamination caused by fracking chemicals. Since the 1950s, thousands of wells have been hydraulic fractured in Pennsylvania, and according to the DEP the process has never led to groundwater contamination. This is because thousands of feet separate the water table from Marcellus Shale drilling and the geology in the Appalachian Basin prevents fluids from migrating into aquifers. Myth #5: The chemicals used in fracking are dangerous and a secret. The chemicals used in fracking aren't a secret. The DEP's Web site lists the chemicals used during hydraulic fracturing. In addition, the gas companies are required to have a Material Safety Data Sheets, toxicology data, waste chemical characteristics, and clean up protocols in case of an accident at every drilling site.

Marcellus Myths Cont.

Myth #6: Fracking and wastewater aren t well regulated. Pennsylvania has some of the most stringent regulations on fracking. For example, the drilling industry is held to Total Dissolved Solids (TDS) standards that are 300% more stringent than other industries in the state. Three options for wastewater in PA: it can be recycled and reused by drilling companies; it can be taken to a licensed treatment facility, such as Eureka in Williamsport, where its treated to meet drinking water standards; or it can transported to other states with geology that allows for underground storage.

Some state s geology, like Ohio s, allows for deep underground injection wells that can store wastewater, preventing it from entering groundwater. This is not an option for most of Pennsylvania.

Landfill waste such as drill cuttings, soil and containment liners can be taken to licensed municipal landfills at the drillers expense.
For example, in 2010, Wayne Township Landfill received $1.7 million in fees from drilling companies that allowed it to expand its operations, upgrade equipment and purchase more properties.

Myth #7: Drillings causes radioactive waterways. There is no radiation above background levels in Pennsylvania s waters.
This has been confirmed by more than four independent water surveys by groups such as the Pennsylvania Department of Environmental Protection, the Pennsylvania American Water Company, and the Pittsburgh Water and Sewer Authority.

DEP Protection

The DEP has firmly stated that it is adequately funded and staffed right now to monitor the drilling industry and hold it accountable. The DEP S Bureau of Oil and Gas Management is entirely funded through natural gas permits.
The DEP increased permitting fees from $100 to more than $5,000, which is estimated to have brought in $11 million in FY 2009-10 a 1,600% increase in revenue from the previous year.

Impact and Risks

Risks associated with drilling include spills, leaking pits or tanks, and methane migration. The drilling industry is being held accountable for any damages it causes not simply to mitigate damages but also to cover the cost of environmental cleanup and make whole any person or entity harmed by the accident.
For example, when EOG Resources failed to have a backup pressure barrier at their well and fracking fluids spilled in Clearfield County, the company paid eight times in fines the cost for the investigation and cleanup.

Understanding Methane Migration

Naturally-occurring methane gas can seep into water wells if during drilling the well a pocket of methane is encountered and the well is not properly cased. Methane migration is a legitimate concern, and the state responded promptly to update drilling standards in Feb. 2011 to require more stringent casing layers to prevent methane migration. Many of Pennsylvania's drinking wells were already contaminated before drilling. It is imperative that water be tested to ensure that residential water wells are protected from any potential contamination, and that residents be made aware of any existing impurities in their water. Where there has been demonstrated contamination caused by natural gas drilling, gas companies have installed safer, higher-quality drinking wells.

According to the Center for Rural Pennsylvania more than 40% of drinking water supplies from wells in Pennsylvania do not meet safe drinking water standards, due to improper water well construction, wholly unrelated to oil and gas. Pennsylvania is one of four states with no standards on water well construction.

Severance Tax

Severance Tax / Impact Fee

Pay for the Government You Use.

The Commonwealth Foundation opposes any new tax on Marcellus Shale drillers that doesn t directly pay for unaddressed industry impact on the environment and infrastructure. To date, tax and fee proponents have not identified what impacts of drilling are not already being covered by current taxes, fees and road improvement spending of drilling companies. Environmental concerns should be and are being met by the state s current laws and regulations.
State law requires drilling companies to repair damaged roads. In 2010, the drilling industries paid out $200 million in road repairs.

Already Paying Taxes

Drillers already pay the other taxes common to every other business in Pennsylvania. There are no tax loopholes. Gas companies have already put more money into improving local communities roads than a severance tax could have generated over that same time.

Severance Tax Cont.

It is often said, Every other state has a severance tax, we should too. This statement ignores Pennsylvania s overall business climate. The severance tax cannot be looked at absent of other state taxes. States with natural gas taxes have friendlier business climates. For instance, Texas and Wyoming have neither personal income nor corporate income taxes.

Most states with difficult-to-drill shale formations, like Marcellus, have reduced their severance tax to encourage drilling. For example: Texas and Arkansas reduced their severance tax for high-cost gas wells by nearly 80%.

Oklahoma applies a severance tax of 7% on natural gas extraction, but exempts all horizontally-drilled wells until payback (when the company recovers its multi-million dollar per-wellhead investment). Louisiana suspends its severance tax for horizontally drilled wells until after they have been in production for two years or reached payback.

Severance Tax Cont.

The Inevitable Impacts. Companies can t pass the tax on through higher gas prices. While the drilling industry won t disappear if a severance tax is enacted, there will be an impact whether through reduced investment in the state, lower wages, reduction in job growth or a reduction in spending on things like road improvements. May Affect Landowners.

The tax will affect mineral owners as well; a typical Pennsylvania leasing contract has severance tax obligations split between parties.

It is not the gas industry or mineral owners responsibility to fill a state budget gap.

The Better Alternative.

Direct fees for services, improving road maintenance agreements and other agreements between local governments and the industry, requiring drillers to buy insurance against environmental costs, and improving the DEP fee and fine structure if costs are not being covered are proper ways of dealing with drilling s impacts.

Top Natural as roducing States

t r l roduci t t i 2007

Top

t t

r ce Tax on atural as
7.5% of market value

Severance Tax xemptions and Incentives for Unconventional ells

ate reduction appr. 2% for up to 0 ears

State & ocal Tax urden Top orporate as a ercentage of State et Income Tax Income/ National ank (Tax oundation 20 0)
0% 7.9% / 45

3 4 5

7.60% 8%

8.4% / 4

8.2% / 42

4.63%

8.6% / 39

6.50%

6.3% / 50

5%

9.7% / 20

8.84% 6.50%

11 12 13 14 15

Alabama Arkansas Michigan est irginia

4-8% of gross value 5% 5% 5% plus $0.047 per MCF No Tax 1.5% on new discovery wells for 24 months and on high cost wells for 36 months (can get extension)

8.5% / 40 9.9% / 14 9.7% / 21 9.4% / 27 10.1% / 10

6.50% 4.95% 8.50% 9.99%

ennsylvania

7.05%

9.7% /

0.6% / 6

6% of taxable value as transporation costs are (gross sales minus oming significant and are subtracted from certain processing and t e taxable value transportation costs) Exempt from severance tax for four 7% plus 0.095% excise ears or until gas production pays Oklahoma tax for the cost of the ell New exico 3.75% Severance tax suspension on ouisiana $0.03 - 0. 3 per horizontally drilled well for 2 years or until payback Allows producers to deduct 87.5% 2% to 5% based on Colorado of their property taxes paid to gov. gross income from severance tax to state. Reduction for all drilling in Cook Inlet basin and when gas is used Alaska 25% to 50% net value instate; result minimal tax (appr. %). State also gives certain tax credits for exploration 6 months exemption for 3% - 5% Utah development wells There is 3.67% tax credit for ad 8% on gross value valorem taxes paid, effectively ansas severed from earth reducing the severance tax to 4.33% California Less than 0.0 per mcf

Texas

0%

7.8% / 46

6%

8.7% / 37

Conclusion

The drilling industry is already paying its fair share through state and local taxes, road repairs and donations to local libraries and charities. Local communities are benefiting from the increased economic activity, and receiving revenue from processing fees and royalty payments. Pennsylvania laws ensure drilling companies, and not taxpayers, are held responsible for their environmental and infrastructural damages. While the drilling industry won t up and disappear if a severance tax is enacted, there will be an impact whether it s through reduced investment in the state, lower wages or a reduction in job growth.

Questions?