Marcellus Shale Gas Drilling: What Does it Mean for Economic Development?

1. Marcellus Shale Gas Drilling: What Does it Mean for Economic Development? Preliminary Findings February 2011 Sean O’Leary Ted Boettner West Virginia Center on Budget and Policy www.wvpolicy.org Rory McIlmoil Downstream Strategies www.downstreamstrategies.com

2. Key Questions • How will the pace and scale of drilling affect communities? • How will drilling affect the economic development of communities? • How can West Virginia benefit once the natural gas resource is depleted?

3. Pace and scale are pivotal to the impact of gas drilling Pace refers to the time frame within which gas extraction takes place. Scale refers to the number of wells drilled in a gas play annually.

4. Marcellus Shale drilling will be a “front-end loaded” drilling cycle • Annual production from a shale well declines by about 50% in the first year. • Economically recoverable gas production is uncertain beyond 5 years. • Marcellus Shale permits in WV increased from 1 in 2002 to over 800 in 2008. • A “boom” in activity has a different impact than a slow ramp-up.

5. Drilling pace affects the flow of royalties into a community Source: Department of City and Regional Planning, Cornell University

6. We need to consider the cumulative impact on communities. • Initial boom will result in spike in activity and income into communities. • Initial boom is not sustainable and will quickly drop off. Cost to communities include: • Accelerated road maintenance • Traffic congestion from trucks • Higher public safety costs • Increased demand for health and education services • New service requirements, such as planning and zoning, emergency response capacity, and environmental monitoring and remediation.

7. What do we know about the economic development impacts of gas drilling? Economic development is measured by: • Population growth • Income levels and growth • Economic diversity

8. West Virginia’s gas counties 10 counties have dominated natural gas production in WV, accounting for more than 60% of the natural gas produced in the state since 2001. Wyoming Harrison McDowell Doddridge Kanawha Mingo Logan Lincoln Lewis Ritchie

9. Trends from WV gas counties In West Virginia, when compared to adjacent counties with below average gas production, and counties with little to no production, the top 10 gas producing counties (2001-2009) are characterized by: • Population loss • Lower incomes • Higher poverty • Less economic diversity

10. Population Gas producing counties have been losing population

11. Income Gas producing counties have lower median household incomes

12. Income Gas producing counties have lower per capita incomes

13. Income Gas producing counties have had average income growth

14. Poverty Gas producing counties have higher poverty rates

15. Diversity Gas producing counties have less economic diversity

16. Diversity Gas producing counties are becoming less diverse

17. Explanations • Revenues from boom cycle of development are volatile, leading to poor planning in a time of rising demands. • Expectations of wealth from development works against diversification and increases the costs of doing business for other industries. • After initial boom and construction phase, few jobs remain.

18. Will drilling in Marcellus Shale contribute to economic development? • The production cycle will be accelerated and short-term. The pace and scale of the drilling can significantly affect the economic impact. • The costs of development are significant, local governments may not have the capacity to respond to new demands. • State policies that mitigate negative effects on local communities and deal with environmental impacts can make a difference.

19. Will drilling in Marcellus Shale contribute to economic development? • Long-term economic development is uncertain. • Positive, long-term economic development will depend on West Virginia’s ability to capture private expenditures and public revenues. • One Solution: Permanent Mineral Trust Fund funded by severance taxes used to promote economic diversification and development.

20. Permanent Mineral Trust Fund • Revenue from an increase in the severance tax on natural gas can be used to create a Permanent Trust Fund which can be used to promote economic diversity and development. States such as Wyoming and New Mexico both have about $4 billion in their Mineral Trust Funds. • A 1% increase in the severance tax on natural gas would result in a trust fund balance of over $645 million by 2040, with over $430 million in cumulative economic development expenditures. • Had a 1% increase in the severance tax on coal been enacted in 1980 to fund a Permanent Trust Fund, the balance would be over $2.1 billion today, with over $1.3 billion in cumulative economic expenditures.

21. Permanent Mineral Trust Fund

22. Permanent Mineral Trust Fund

23. Key info and assumptions • Natural gas production for WV is projected as a bell curve based on a 2% rate of growth through 2025 and a 2% decline thereafter through 2040. This means that we assume an exhaustion of natural gas reserves by 2040 (worst case scenario). The 2% rate reflects the average rate of growth in natural gas production in WV from 2004-2009. • We use EIA projections for natural gas wellhead prices for the Northeast through 2035 to reflect WV natural gas prices. • For natural gas production and prices for 2036-2040, we take the average rate of change for projected Northeast prices for 2030-2035 and apply that rate of growth to estimate prices for 2036-2040. For gas production, we apply the same 2% rate of change used to project gas production for 2010-2035. • For WV coal production, we use EIA projections for production through 2035 for Central Appalachia and Northern Appalachia, and estimate WV production based on the northern WV share of Northern Appalachian production and southern WV share of Central Appalachian production for 2008 and 2009. We project WV coal production for 2036-2040 using the same method as for estimating natural gas prices, described in #3. • For WV coal prices, we use EIA projected coal prices for Northern and Central Appalachia through 2035, and for 2036-2040 using the same method as for estimating natural gas prices, described in #3.

24. Key info and assumptions • For the creation and funding of the trust fund, we assume a 1% increase in the severance tax on natural gas/coal. • For the growth of the trust fund, we assumed a 8% return on investment. • For economic development expenditures, we assumed an annual expenditure rate of 5%.

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