Energy Success Story for the Economy

Sometimes one just needs to step back to gain, or regain, perspective.

We hear about how the Marcellus Shale natural gas field, covering parts of Ohio, Pennsylvania, West Virginia and New York, has changed the energy equation in the U.S.  A look at the latest numbers and projections drives home the point.

In an August 5 Associated Press story, it was noted, “In 2008, Marcellus production barely registered on national energy reports. In July, the combined output from Pennsylvania and West Virginia wells was about 7.4 billion cubic feet per day, according to Kyle Martinez, an analyst at Bentek Energy. That's more than double the 3.6 billion cubic feet from last April, and represents over 25 percent of national shale gas production.”

The report goes on to note that experts estimate that Marcellus has passed the Haynesville region in Arkansas and Texas as the top natural gas producing region.

For good measure, there are plans for Shell Oil to “build a petrochemical plant to turn Marcellus gas into other consumer and industrial products including plastics,” and several pipeline expansions in the region will allow for increased production and easier transport of gas to other parts of the northeast.

That’s good news for the region’s economy, as well as for energy costs. The AP noted: “The current wholesale price of natural gas is about $3 here, but $12 or more in Europe and Japan.”

And the U.S. Energy Information Administration (EIA) points out, “Of the natural gas consumed in the United States in 2011, about 94% was produced domestically; thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil, and the delivery system is less subject to interruption. The availability of large quantities of shale gas should enable the United States to consume a predominantly domestic supply of gas for many years and produce more natural gas than it consumes.”

Indeed, looking ahead, the EIA “projects U.S. natural gas production to increase from 21.6 trillion cubic feet in 2010 to 27.9 trillion cubic feet in 2035, a 29% increase. Almost all of this increase in domestic natural gas production is due to projected growth in shale gas production, which grows from 5.0 trillion cubic feet in 2010 to 13.6 trillion cubic feet in 2035.” Also, keep in mind that, as the EIA points out, “Many shale formations, particularly the Marcellus, are so large that only a limited portion of the entire formation has been extensively production-tested.”

What about the impact on the economy, industries and jobs? In a March 2012 report, API summed up: “Development of shale resources supported 600,000 jobs in 2010. The number of direct and indirect jobs is constantly increasing. Affordable, domestic natural gas is essential to rejuvenating the chemical, manufacturing, and steel industries. The American Chemistry Council determined that a 25 percent increase in the supply of ethane (a liquid derived from shale gas) could add over 400,000 jobs across the economy, provide over $4.4 billion annually in federal, state, and local tax revenue, and spur $16.2 billion in capital investment by the chemical industry. They also note that the relatively low price of ethane would give U.S. manufacturers an essential advantage over many global competitors. Similarly, the National Association of Manufacturers estimated that high recovery of shale gas and lower natural gas prices will help U.S. manufacturers employ 1,000,000 workers by 2025 while lower feedstock and energy costs could help them reduce natural gas expenditures by as much as 11.6 billion by 2025. America’s Natural Gas Association (ANGA) estimates that lower gas prices will add an additional $926 of disposable household income annually between 2012 and 2015, and that the amount could increase to $2,000 by 2035.”

Small businesses across industries, obviously, benefit from enhanced economic growth and lower natural gas costs. But the small business role in specific energy industries should be noted as well.

For example, according to the latest Census Bureau data, 55% of employer firms in the “pipeline transportation of natural gas” industry had fewer than 20 employees, and 69% less than 500 workers.

In the “natural gas liquid extraction” industry, 53% of firms had less than 20 workers, and 70% fewer than 500 employees.

And among “natural gas distribution” firms, 65% had less than 20 workers, and 84% fewer than 500 employees.

So, the natural gas business is, to a significant degree, about small businesses.

The recent, dramatic and beneficial change in shale gas production has been due to advancements in technology, specifically, the combination of horizontal drilling with hydraulic fracturing.

Of course, though, environmental activists who do not like the use of any kind of carbon-based energy have opposed expanded natural gas production. It is important that policymakers in the states and at the federal level keep their focus on regulations that are rooted in sound science, rather than based on mere assertions, and that do not impose unnecessary burdens.

For example, questions loom large on the regulatory situation in New York. Consider the following points made by the Independent Oil & Gas Association of New York: “The New York Times published an article on June 13 quoting a senior official within the Department of Environmental Conservation (DEC), who said Governor Cuomo’s administration planned to limit the initial permitting of horizontal gas wells to select communities in the Southern Tier. Further, the article noted that local municipalities would initially have control over whether to allow natural gas development within their communities.” The New York IOGA has said that “any progress is a positive step forward. And while we stand by that position to a certain degree, we also have an obligation to share the viewpoint that such limitations, which are not based on scientific data, is inappropriate and not in the best interest of our members, the Southern Tier economy and the entire state.”

The New York IOGA added, “The administration, including the DEC, is well aware that we will accept reasonable regulations and permit guidelines, but we also want state leaders to understand that a plan such as the one outlined in various follow-up reports is unsustainable on a large scale.” Quite simply, the IOGA was spot on in pointing out that developers “will not invest in a state where there is: regulatory uncertainty; an inconsistent patchwork of local laws; and unreasonable and expensive obstacles.”

That warning applies to New York, to other states and to the nation. The U.S. – particularly at the federal level – has done a great deal to undermine domestic energy production. Such misguided policymaking needs to be avoided. That goes for all production, from offshore oil drilling to natural gas production in areas like the Marcellus Shale.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

Negatives of Natural Gas Impact Fees

In the private marketplace, prices and profits provide critical information. Rising prices and high profits signal that suppliers should boost investment and production. On the flip side, falling prices and profits point to reducing investment and supply.

All of this is driven by the choices made by consumers, with businesses and investors making decisions and competing accordingly.

But suppliers have to consider future developments as well. That is, how the market changes, and investors, entrepreneurs and businesses that do well at figuring out where the market or industry is headed are better prepared than others.

Of course, though, misguided government policies distort and create problems in the marketplace for investors, business, workers and ultimately, consumers.

These economic facts of life are playing out in the natural gas market right now, with adjustments being made regarding production in Pennsylvania's Marcellus Shale region.

With natural gas prices at a decade low, Chesapeake Energy Corp. announced late last month that it would be reducing its natural gas production in the Marcellus Shale in terms of wells with higher costs and lower potential returns. Chesapeake is the nation's second largest natural gas producer.

At the same time, though, the longer run outlook for natural gas demand remains bullish for a variety of reasons. As noted in a recent NPR report, "Sara Banaszak, an economist with America's Natural Gas Alliance, an industry trade group, says other energy companies are doing the same [as Chesapeake], but they aren't likely to abandon shale gas. ‘Companies that are here to produce natural gas are here for the long term,' she says. ‘You know, there are micro-adjustments in the path along the way, but I think they've made their investments and I think they're going to pursue that path.' Banaszak says fracking operations are pretty flexible. ‘One thing that is good about a lot of the unconventional production is the ability to sort of scale it up and down with changes in demand and supply,' she says." For good measure, international demand exists, so U.S. firms have the option to liquefy gas and export it.

This is an excellent example of how markets work and adjust.

Unfortunately, Pennsylvania also might turn out to serve as an example of how government interference and costs can disrupt and reduce market-driven investment and production meant to meet the demands of consumers.

Legislation in being considered that could both help and hinder the natural gas industry, and the thousands of related jobs, in Pennsylvania.

On the positive side, Gov. Tom Corbett is pushing legislative leaders to make sure that any reforms limit local controls over the oil and gas industry, namely, putting in place uniform standards for when and where drilling can happen. A patchwork of regulations and requirements - not to mention local bans on natural gas production - will only limit investment, development, jobs and state economic growth. The governor is absolutely correct to insist on uniform standards, which will provide the certainty under which investment can flourish.

On the negative side, though, is the consideration of new taxes - labeled "impact fees" - on such energy production. An impact fee is an annual per well fee, with revenues presumably used to offset any drilling related costs on local government.

As reported by Stateimpact.npr.org, Governor Corbett proposed impact fees in October: "The Corbett fee would be imposed and collected by counties. It would place a $40,000 levy on wells during their first year of production. That number would drop to $30,000, and then $20,000, during the second and third years. From year four through ten, energy companies would pay $10,000 per well."

Such a tax is highly dubious, to say the least, especially given the added tax revenues generated from increased economic activity. And one of the dangers is that other elected officials will push such taxes even higher. And that is exactly what's going on. The Pennsylvania state senate has proposed impact fees equal to $360,000 per well over a decade. That's 125 percent higher than the governor's plan.

Recent reports point to a possible compromise at $260,000 per well over a decade - which is still 63 percent higher than what Corbett called for initially.

Jacking up fees quite simply means raising costs for producers, which in turn can mean reduced investment and production, and therefore, fewer jobs and less economic activity.

If Pennsylvania's elected officials want to see investment, the economy and jobs grow in the state, then the right reform combination is to create a stable regulatory environment with uniform drilling standards across the state, and either killing the idea of impact fees or capping them at very low levels.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

SBE Council Chief Economist on Importance of Natural Gas Development for New York

In anticipation of this week's hearings over pending natural gas regulations from the Delaware River Basin Commission (DRBC), Small Business and Entrepreneurship Council chief economist Raymond Keating warns how unduly onerous regulations would come at a high cost to the economic welfare of New York businesses and families:

"Excessive rules and fees would amount to a de facto moratorium on natural gas development. The maze of red tape proposed by the Delaware River Basin Commission would inhibit New Yorkers from taking advantage of the energy gold mine laying a mile beneath our feet.

"Safe development of the Marcellus Shale's vast resources through fair regulations would encourage commerce, entrepreneurship, and job growth throughout the region -- particularly good news for a state faced with a $9 billion budget shortfall and 8% unemployment.

"As our leaders, such as Governor Cuomo, face difficult decisions to ameliorate these financial woes, the jobs and investment available through natural gas production should come as a welcome relief."

It is important to note that on the Small Business & Entrepreneurship Council's "Small Business Survival Index 2010: Ranking the Policy Environment for Entrepreneurship Across the Nation," which ranks the states according to their public policy climates for small business and entrepreneurship, New York ranked 49th - or third worst - among the 50 states and District of Columbia. Keating added: "The state's economic environment needs to improve wherever it can, including in the area of energy development."

DRBC is a federal/interstate government agency responsible for the water quality and supply of the Delaware River basin. The agency's commission is comprised of representatives from New York, Pennsylvania, New Jersey, Delaware and the Army Corps of Engineers. DRBC has schedule public hearings this week to hearing comments from the community regarding the agency's proposed regulations on natural gas development projects.