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November 24, 2010

Marcellus shale:

Will the economic boom last?

MarcellusWill development of Marcellus shale resources bring a long-term economic boom to Pennsylvania? Cornell University city and regional planning faculty member Susan Christopherson isn’t so sure.

“I think there’s this idea that we’re going to have this 60-year play. Maybe so, but I think my message is: Don’t count on it. This may be quite a bit more condensed than we’re thinking of,” she cautioned.

“The oil and gas industry isn’t like a long-term slow, measured manufacturing industry. If anything, think financial services,” Christopherson said. “This is a very speculative high-risk, short-term industry. They’re not in it for the long term.

“When we think about this, we shouldn’t assume this is going to be some long, steady progress over a period of years,” she said. “If we just assume this is going to be long-term, I think we’re either fooling ourselves or not being good planners.”

Leaders need a better understanding of how the industry makes decisions and the factors that impact the pace and scale of drilling to better predict the economic impact, she said. “What are they thinking, what are the financial analysts saying?

“We need to adopt the uncertainty principle,” she said. “This is a very volatile industry. … We need to have policy makers who are going to be very savvy about what’s going on in the industry.”

Citing Pennsylvania’s increase in gas well permits, which rose from 71 in 2007 to approximately 2,000 two years later, she said, “That doesn’t sound like a slow measured ramp-up to me. That sounds like a boom.” Communities need to prepare for the possibility of a bust, she cautioned. “I’m not saying this is going to happen but I think we need to be prepared,” she said. “We should think about the fact that this may be an accelerated drilling cycle.”

The lack of a severance tax on gas drilling in Pennsylvania may be speeding the pace of extraction, she noted. Companies may be motivated to drill more now to avoid the potential cost should a tax be put into place later.

Commonly cited economic impact estimates portray “a very incredibly rosy picture,” but essentially are only snapshots, Christopherson said. “The job and revenue projections provided a certain kind of information, but I also knew these kinds of studies were limited in what they could tell us,” she said. “They could give us estimates of how mining investment coming into these counties will distribute itself across different sectors of the economy and what kinds and how many jobs might be created,” she said. However, questions remain:

• How will the pace and scale of drilling affect costs to the communities and the environment?

• What can be expected regarding long-term economic development?

• What kind of jobs will be created?

• What are the long-term expectations and what will the communities in which drilling occurs look like in 20 years?

Christopherson noted that approximately 50 percent of a shale gas well’s production comes in its first year, with production beyond five years uncertain. Most of the jobs related to that sector arrive early — when exploration and drilling is done. Production jobs that remain after a well is drilled are relatively few in comparison.

Whether regions rich in Marcellus shale formations will reap a long-term benefit remains to be seen.

In contrast to western states, where much drilling is on public land, Christopherson said that 70 percent of the money coming into the Marcellus shale counties is going into the pockets of private land owners.

How that money is used is important, because long-term economic development depends in part on capturing that income to build new business and industry.

However, people tend to spend windfalls differently than they would spend smaller amounts received over time. “If somebody gave you $5,000 a year for some period of years, think about how you’d spend it as opposed to someone giving you $500,000 all at once,” she said.

In the case of Marcellus landowners, “We all hope they use it to send their children to college. But they may spend it on an Escalade,” she said. “We all hope that they may spend it improving their farms. But they may spend it to move to Florida.”

Extraction of the gas comes at a cost to the communities in the form of road maintenance, traffic congestion and public safety needs, to name a few. “Who’s going to pay for this?” she questioned.

“Those costs will be higher if the boom/bust cycle goes in because you’ll get communities with very low capacity having to hire more teachers, more police — very fast, because the demand will come in [rapidly] instead of ramping up slowly.” Most areas can adapt to a 5 percent change, but a 15 percent increase can stress a community, Christopherson noted. “When the bust comes these communities are left with all that excess capacity. They’re left with too many policemen, too many schoolteachers.”

Long-term effects aren’t well known, but some information can be drawn from western regions that experienced resource booms in the 1980s, she said. Impacts in rural areas differ from regions that include cities.

“We’re talking about small communities with very low governance capacity,” she said — for example, communities in which local leaders are unpaid, or have no staff.

Christopherson noted that Marcellus shale drilling is concentrated in three counties in Pennsylvania and parts of four in New York, noting that Pennsylvania’s northern tier and the adjoining southern tier of New York make up a single labor market.

The southern tier communities of Elmira, Corning and Binghamton already are feeling the expansion, she said, in comparison to the Pennsylvania counties where there are no such cities.

Regions that have become dependent on natural resource extraction “very frequently have poor development outcomes, particularly if they’re rural and made up of small towns,” Christopherson said, noting that positive or negative economic impact is tied to the diversity of the region’s economy.

Evidence from western states shows a pattern of decreased economic diversity in areas dependent on natural resource extraction. “Natural gas isn’t adding in to the tourism and agricultural economy. It’s displacing it.”

A “crowding out” phenomenon also may occur. The cost of living — particularly in the form of housing — goes up, impacting workers in non-extraction jobs and the cost of labor increases, which tends to crowd out other investment, she said.

“I’m not saying there aren’t going to be jobs created,” Christopherson said. “There are going to be jobs created. The question is what sectors are they going to be in and how many of them are going to be good, well-paying jobs?”

If those jobs are in construction, retail or service sectors, for instance, “Are those going to be good jobs and how long are they going to last? I don’t think we know.”

Christopherson said drilling jobs initially go to experienced outsiders. Anecdotal information shows that local people also are being hired, “But they will also then have to become transient workers. They will have to go on to work in other shale plays to keep their jobs.”

Some of the good jobs will be in Pennsylvania, “but they’ll be at Southpointe,” she said, which is becoming a sub-hub for the industry. “Most of the good jobs are going to go to where the industry’s headquartered, i.e., Texas. That’s where the engineering firms are, that’s where the finance firms are, that’s where the consultants are, that’s where the media people are and the people who serve the industry,” she said.

“Every time the natural gas industry expands in the United States, Texas will get more jobs,” she quipped.

Christopherson reiterated that the long-term economic benefits will depend on figuring out how to capture revenues as they come in, ensuring environmental costs are remediated and taking advantage of the opportunity for tax revenues that can be invested in building up rural counties.

“We don’t want to leave these counties worse off,” she said.

—Kimberly K. Barlow

Filed under: Feature,Volume 43 Issue 7

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