Guest Post: Pennsylvania Drilling Moratorium – Good or Bad?

Chris AckerBefore Pennsylvanians head to the polls in November to elect a new governor and new legislators, they may want to consider the consequences of installing Democrats to re-assume power in the state. Specifically, Democrats have vowed to slap an ongoing moratorium–essentially a ban–on Marcellus Shale drilling should they regain control. MDN has been one of the few places in the media to even cover this story, and we’ve called it just what it is: economic insanity (see PA Democrat Party Votes to End Marcellus Shale Drilling Statewide).

MDN friend and contributor Chris Acker, a Pennsylvania property owner and geological engineer with an MBA, does a deep dive into the issue to explore what would happen should PA slap a moratorium on new shale drilling. Hint: It’s like experiencing someone’s worst nightmare…

By Christopher Acker

Some in Pennsylvania are in favor of a moratorium – in effect a ban – on shale drilling within the Commonwealth, asserting this would be in the best interests of its citizens. Is it? What would be the consequences if drilling were banned? Would the benefits of a ban outweigh the disadvantages? Have those who oppose drilling carefully thought through the far-reaching consequences using logic and facts? These important and weighty matters should be of concern to all Pennsylvania residents.

Following I present a case that a statewide ban on natural gas development would lead to massive economic disruption at all levels – personal, local, regional, national and even international. I further argue that health and environmental effects would actually be negative, largely due to coal and petroleum products being consumed instead of cleaner-burning natural gas. Renewable energy sources such as wind and solar will be unable to fill the gap for years to come. But could a drilling ban in just one northeastern state really generate significant economic and environmental consequences? To show why the answer is a resounding “yes,” we must review some statistics, history and forecasts which allow us to place the Marcellus Shale in a national and global context.

First and fundamental is the fact that the Marcellus Shale formation, which underlies half of Pennsylvania, is the single largest known natural gas reservoir in the Western Hemisphere. Indeed, the only field considered larger is located in the Middle East. Rapid advances in all aspects of drilling technology – coupled with the sheer scope of the Marcellus opportunity – have propelled Pennsylvania, in the course of a just few short years, from an inconsequential producer to the number two state today, recently surpassing Louisiana and second only to powerhouse Texas. This unprecedented, exponential increase in volume has exceeded all forecasts.  Veteran industry participants with decades of experience remain incredulous, hailing Marcellus wells as some of the most prolific in the world.

Pennsylvania now produces 12 billion cubic feet of natural gas daily. To place this in perspective, the State currently supplies nearly 20% of national demand. In the next few years, the Commonwealth will likely account for 25% or more of U.S. output. Based on confirmed geological parameters, these levels will be sustainable for decades. To again emphasize the magnitude of these volumes, consider this: If “Marcellus” were a separate country, its natural gas production would rank number three in the entire world, surpassed only by the U.S. and Russia.

Lastly, the State’s current natural gas production, on an energy basis, converts to 2 million barrels of crude oil per day. This volume is more than the U.S. imports from any single overseas nation, about equal to all our imports from the Middle East and half of what we import from the twelve OPEC members combined. In fact, 2 million barrels per day would allow Pennsylvania, based on volume, to become a solid member of OPEC, with only Saudi Arabia and a few others registering higher production.

Pennsylvania’s energy output is now on a global scale. Those favoring a drilling moratorium deserve to ponder long and hard on their position. Some believe the environmental costs of extraction are too high and drilling should be prohibited no matter what the economic costs. This position is based on misinformation – flawed studies, hearsay, fraudulent flaming water faucets and the like – or just a plain disdain of our carbon-based economy. For the sake of this analysis, however, we will impose a ban. What would likely ensue? I use hard data, documented facts, vetted studies and simple logic to make my case. Here is my list of “top ten” consequences – arranged roughly in ascending order of disruption.

#10. Shell’s Pennsylvania Ethane Cracker – DOA

  • Who gets hurt? Construction workers do not get hired, no long-term operator jobs created. Consumers.

Wave goodbye to this $2 to 3 billion project under consideration – which, by the way, would generate additional billions in related economic activity. The whole point of constructing this facility in Pennsylvania is to take advantage of a steady, long-term supply of feedstock, in this case ethane. Ethane from the Marcellus and Utica formations would be economically converted into ethylene, the building block for most plastics and thousands of products. Revitalization of the tri-state area of PA/OH/WV would be impaired.

#9. Industry Suppliers Shutter Businesses

  • Who gets hurt? Local and national workers.

Every day an assortment of companies announce expansion of regional operations intended to serve Pennsylvania’s core drilling industry. These include capital-intensive projects, such as the manufacture of drill pipe and other durables, as well as labor-intensive operations such as surveying and environmental analysis, to name a very few. A drilling ban would force many of these companies out of business in Pennsylvania and other states.

#8. World-class Petrochemical Projects Cancelled

  • Who gets hurt? Regional and national workers, American consumers.

The expectation of low natural gas prices for years to come – in large part brought about by ample Marcellus supply – has led to over $100 billion in announced projects nationwide. Projects sure to be cancelled under a drilling ban: the Sunoco refinery upgrade in Philadelphia; the regional LNG export facility in Cove Point, Maryland; dozens of projects which manufacture the building blocks for thousands of products used in everyday life, for example: plastics, fibers, paint and fertilizer.  Prices of these products would rise, too, due to supply constraints.

#7. Billions of Dollars in Pipeline Infrastructure Become Pipedreams

  • Who gets hurt? Thousands of local and national workers, suppliers.

According to the authoritative Marcellus and Utica Shale Databook, regional pipeline-related expenditures will exceed $40 billion over the next five years. No gas – no projects – no employment.

#6. Pennsylvania Impact Fees Disappear – $200+ Million Lost Each Year

  • Who gets hurt? Local communities throughout the Commonwealth.

No drilling, no impact fees. Severance tax instead? No gas to tax, unfortunately.

#5. Royalties to Landowners Evaporate

  • Who gets hurt? Current and future lessors, local economies, charitable organizations, Pennsylvania and Federal treasuries., which tracks all things gas, estimates that Pennsylvania landowners have already received over $2 billion in cumulative royalty payments through the middle of last year. With the dramatic ramp-up in natural gas production, lessors throughout the State can now expect to receive $2 billion per year and more as time goes on. In all drilling regions, local spending and charitable giving are up dramatically. Ask the many thousands of individuals and their families receiving payments if they think banning development is a good idea. Royalty related income taxes paid to the Pennsylvania and Federal treasuries would cease.

#4. Coal, Diesel and Fuel Oil Conversion to Natural Gas – Story Ends, Badly

  •   Who gets hurt? All Americans, Pennsylvanians in particular.

The natural gas “revolution” in our Commonwealth has generated massive supply, and in turn, low prices. This provides compelling economic incentives for the power industry to switch from coal to cleaner-burning natural gas. In Pennsylvania alone, more than half a dozen generating stations are planned or under construction which rely exclusively on local Marcellus supply. These plants will be some of the most cost effective in the nation with savings passed on to the local consumer. Obviously, no supply, no plants. On a household level, the Northeast is heavily reliant on fuel oil for domestic heat. Conversion to natural gas is accelerating, lowering heating costs dramatically while simultaneously reducing our dependence on petroleum. Local, inexpensive supply is allowing Pennsylvania gas utilities to service many additional residential, commercial and industrial customers. A ban would certainly discourage these conversions.

In the transportation sector, cars, trucks, locomotives and vessels are being converted from diesel fuel (and some gasoline) to compressed or liquefied natural gas. Not only is natural gas less expensive and cleaner-burning, it reduces U.S. reliance on foreign oil. Billions of dollars are already invested in conversions and infrastructure, with more on the way. Arbitrarily taking away 20% of the nation’s gas supply would doom these conversions. Transportation costs would remain high, or possibly increase, with additional costs passed on to the consumer as usual.

Numerous studies conclude that switching from coal and petroleum products to cleaner-burning natural gas improves overall air quality and significantly lowers atmospheric carbon emissions. A case can be made that natural gas is a bridge to renewable energy sources such as wind and solar, which all agree will take years to come to fruition. These topics are complicated, often contentious, and far-reaching. There is no question, however, that a Marcellus drilling ban would lead to greater consumption of fuels that are more carbon-intensive.

#3. Many Billions Evaporate in Market Capitalization

  • Who gets hurt? Individual stockholders, retirement plans, pension funds, all Americans.

Often overlooked is the enterprise value created by the thousands of companies associated with the Marcellus Shale. A drilling ban would have a devastating effect on many players. A public company’s worth, for example, is indicated by market capitalization (shares outstanding times share price). A case in point is Cabot Oil and Gas, which generates the bulk of its revenues from production in Susquehanna County. Its current market capitalization is $16 billion. A drilling ban would cause share prices to plummet, taking with it perhaps $10 billion or more in value. Multiply this many times over for exploration and production companies, pipeline operators, hundreds of other public and private concerns, and I would be hard-pressed to accept anything less than $100 billion in lost market value – perhaps far more. As individual stock prices plummeted, financial harm would be collectively dealt to individual shareholders, IRA and 401(k) plans, and pension funds. Privately held firms would similarly suffer. None of this would be good for the U.S. economy.

#2. Soaring Natural Gas Prices Wound All

  • Who gets hurt?  All households that heat with natural gas, use electricity and use the hundreds of products made from natural gas.  Commercial enterprises.  Manufacturers.  Power plants.  Transportation.  U.S. global competitiveness.

Suddenly remove a 20% supply of anything and prices will soar. Natural gas has remained at recent historical lows, with industry forecasts projecting reasonable prices for years to come as a result of ample supplies.  Take away Pennsylvania and prices could easily double overnight, if not more.

Nearly all Americans would be adversely affected. Low natural gas prices have saved each household an average of $1,200 yearly – a national savings of $150 billion. Without Pennsylvania supply, these savings would immediately be lost. Alarming, too, would be the blow to American global competitiveness. Low natural gas prices are propelling a manufacturing renaissance in this country. Domestic and foreign investment is pouring in to take advantage of our relatively low energy costs. All these investments would be placed in jeopardy. Moreover, our energy competitiveness with foreign natural gas producers in the Middle East, Russia and elsewhere would be compromised.

#1. Massive Unemployment Inflicted Upon Pennsylvanians

  • Who gets hurt? Hundreds of thousands of Pennsylvania workers and their families.

State statistics place the number of core natural gas workers, those on rigs and in direct operations, at 38,000. Support industries generate as many as 250,000 additional jobs.  These job categories include trucking, repair, rentals, water treatment, hospitality and hundreds of others. The vast majority of these positions are held by recent and long-term Pennsylvania residents. Importantly, these are not “flash-in-the-pan” jobs. Rather, they are well-paying ones that will be around for decades since the Marcellus is an exceptionally long-term play. A drilling ban would place the 38,000 core workers out of work in short order. Another 100,000 in support industries would likely find themselves jobless, perhaps more. Any reasonable assessment of a drilling ban on employment leads to the conclusion of massive layoffs. According to the PA Department of Labor, November 2013 showed 5,988,000 Pennsylvanians working and 470,000 unemployed, yielding an unemployment rate of 7.3%. Add 140,000 people to the jobless pool, and the rate jumps to 9.4%, with well over 10% quite possible.

To add to these woes, soaring unemployment benefit claims could cost Pennsylvania an additional $50 million per week based on the State’s average compensation of $350. Recent balances in the PA Benefits Trust Fund suggest outflows of this magnitude would bankrupt the system in a few months. To add to the unhappiness, many small business owners and independent contractors are not eligible for unemployment compensation. So there you have it – prohibit drilling and inflict plenty of individual and family misery throughout Pennsylvania. For good measure, toss in a State financial crisis.

Bottom Line

In summary, a drilling moratorium in Pennsylvania would certainly prove massively disruptive at many levels. The financial damage would not be measured in billions or even tens of billions of dollars – but rather in staggering hundreds of billions of dollars. Of course, money cannot be the only measure. Emotional damage to the hundreds of thousands of Pennsylvania workers and their families adversely affected cannot be calculated. Moreover, the environment would suffer as more coal and petroleum is consumed rather than cleaner gas. As a further insult, the nation’s path to energy independence would be crippled. Squandered, too, would be any U.S. commercial and geopolitical advantages gained from domestic energy abundance.

Would anybody actually benefit from a drilling ban? Yes, but few in comparison to the overall damage. Natural gas producers outside the Marcellus would reap the benefits of higher prices. Coal companies would do better in the short run. Jobs in Ohio and West Virginia would gain as companies allocated resources there. The list is short.

With this in mind, ardent proponents of a Pennsylvania drilling ban – who believe it would benefit the lives of its citizens and the nation as a whole – should find it incumbent upon themselves to offer more than just platitudes, hearsay and staged flaming faucets. The negative consequences of a ban are massive and unambiguous. Those who propose one must present compelling, fact-based and irrefutable evidence to back their case.

Otherwise, the proud Commonwealth of Pennsylvania might just as well change its name to the Commonpoverty of Pennsylvania.

Christopher Acker, Geological Engineer with an MBA, grew up in the oil fields of Venezuela where his father, a petroleum engineer, was a drilling contractor for all the major players, onshore and off. Chris’ interest in energy economics and policy found him working for Exxon, Petroleum Industry Research Associates and Petroleos de Venezuela. He bought a parcel of land in the PA countryside twenty-five years ago and later semi-retired to work on antique pianos. A few years ago, it was established that Chris’ property in Susquehanna County sits atop one of the Marcellus shale’s most prolific areas. He is now happily engaged once again in energy economics, with emphasis, naturally, on gas.