Energy Tomorrow Radio: Episode 113 - Recent Study Shows Economic Benefits of the Marcellus Shale

Jane Van Ryan
Posted July 27, 2010

In today's episode, I interview Dr. Tim Considine of the University of Wyoming about his recent study that quantifies the economic impact of developing natural gas in the Marcellus Shale formation, which stretches beneath large portions of New York, Pennsylvania and West Virginia. His study also looks at state policies that could hinder natural gas production in the region and slow economic opportunities.

Use the audio player below to listen to information about the article and follow along with the show notes. I hope you find the podcast informative.

00:17 One of the most significant energy developments in recent years is the production of natural gas from shale rock formations. Technological advances such as the combination of horizontal drilling and hydraulic fracturing have made it possible to produce natural gas from formations that didn't lend themselves to energy production just a few years ago. Today, natural gas from shale is greatly increasing U.S. natural gas supplies and creating economic opportunities. A new study quantifies the economic impact of just one of those new natural gas fields, the Marcellus Shale formation, which lies beneath a large swath of New York, Pennsylvania and West Virginia. The study's author, Dr. Tim Considine of the University of Wyoming, is on the telephone with us today. Tim, could you first describe the Marcellus Shale formation? How big is it, and what could it mean for U.S. energy supplies?

01:13 Dr. Considine: The Marcellus Shale is a layer of shale rock that underlies most of West Virginia; southwestern, central and northeastern Pennsylvania; and upstate New York, where it actually reaches the surface in Marcellus, N.Y., which is just southwest of Syracuse.

01:40 How important would you say it is to U.S. energy supplies?

01:43 Dr. Considine: Very important. Professor Terry Engelder at Penn State estimates that the formation could contain up to 489 trillion cubic feet of natural gas. That would make it the second largest natural gas field in the world.

01:59 Does your study examine only the value of the natural gas itself, or does it look at all of the economic benefits that producing natural gas in the Marcellus Shale could bring?

02:10 Dr. Considine: The study does look at the economic benefits of developing the Marcellus Shale. Because it's so large, it would take decades recover this natural gas, and at current prevailing natural gas prices, the value of the natural gas in the ground is $2 trillion. That's a very large amount of money, but as I mentioned it would take many years for the drilling to proceed. The study looks at the economic benefits that this drilling activity provides to the economies in the region.

02:48 How would you describe those potential economic benefits, in terms of jobs and government revenues for services?

02:56 Dr. Considine: In the study, we estimated the economic benefits in 2009. Based on our estimates of industry's spending, and using a standard so-called input-output model to estimate the economic impacts, we find that the activity in 2009 generated $4.8 billion in value added or gross product in the region, more than 57,000 jobs, and contributed $1.6 billion to federal, state and local taxes.

03:33 And you anticipate that this would continue and there would be increased economic benefits beyond that?

03:39 Dr. Considine: It's likely to continue. We created three development scenarios in the study, looking out to 2020. Under the high development scenario, we found that the industry could be large enough to generate more than 280,000 jobs and more than $24 billion in economic output. That really puts it on the map as a major industry in the Northeast and Mid-Atlantic region.

04:10 Those are very significant numbers, but I'm sure there must be obstacles that could inhibit the economic growth. For example, I know that Pennsylvania is talking about a severance tax that could add costs to natural gas production.

04:23 Dr. Considine: There are risks below and above the ground. There are geological risks. You never know how these wells will operate and whether reserves are there, however, it's likely that the reserves are there. The economic and political factors are important. You mentioned the severance tax. Pennsylvania is debating the merits of a severance tax. And one of the insights I obtained after looking at this industry is that the natural gas from the Marcellus Shale is unique because it has a very steep decline curve. In other words, the natural gas comes out of the ground very fast, but then output drops. This means that the industry has to keep on drilling to keep production growing in the future. Now a severance tax could run the risk of diverting capital away from Pennsylvania and would have an impact on long-run state revenues. Policymakers need to weigh the benefits of the tax in terms of additional revenues with the potential cost of raising production costs in the region, and the potential of making Pennsylvania less attractive relative to other shale plays.

05:52 Are there obstacles to Marcellus Shale production in other areas too? What obstacles exist in New York?

06:00 Dr. Considine: The obstacles in New York are real and binding right now. Currently there's an effective de facto moratorium on Marcellus drilling. The government there has imposed a limit on the amount of water that could be used for horizontal fracturing and this limit is well below the amount of water that's necessary to make a well economically feasible in that region. As a result, while there has been a number of pilot wells drilled in the area, there is virtually no drilling. In the study, we developed a fairly modest scenario for future development where we envisioned drilling to occur west of Broome County in New York, located outside the Delaware and New York City watersheds. Even under this modest development from 2011 to 2020, New Yorkers would pass up about $11 billion in economic output by following this moratorium.

07:13 The Marcellus Shale is also beneath portions of West Virginia. How would you describe the natural gas business climate in that state?

07:22 Dr. Considine: In our study, we found that the natural gas business climate is falling in West Virginia and booming in Pennsylvania. There are a lot of factors that may account for this, including differences in costs. One of the factors that raises the cost in West Virginia is the severance tax and their treatment of natural gas properties for property tax valuations. The bottom line is that there is some limited evidence that the policies in West Virginia, vis-a-vis taxation, are having a deleterious effect on growth of Marcellus drilling in that state.

08:20 The Marcellus formation isn't the only large shale natural gas formation in the United States. Overall, how would you assess the combined importance of all of these new shale formations to American's energy future?

08:35 Dr. Considine: The shale formations are very important and coming at a very opportune time. The Marcellus is one among several shale plays that are emerging. The largest natural gas field in the United States is a shale field, the Barnett Shale formation, which is located in the Dallas Fort-Worth, Texas area. The Marcellus has the potential to be much larger than the Barnett. There's also the Haynesville Shale and the Fayetteville Shale, as well as emerging oil and natural gas shale plays in Texas, Wyoming, Colorado, Nebraska and Kansas. These shale formations really opened up a new vista for the natural gas industry and will greatly expand our reserve base well into this century, and probably into the next. These shale plays are going to be around for a while and they'll play a pivotal role in supplying energy to the United States of America.

09:52 Wonderful, Tim. Thank you so much for all of this information.