Pennsylvania Rising: Study Shows Positive Impact on Regional Economy

Nothing breeds success more than success—and Pennsylvania is having one heck of a run thanks to the Marcellus Shale.  The Commonwealth is on track to become “the second largest producer of natural gas behind Texas,” according to a new Penn State study released today.  The report—called The Pennsylvania Marcellus Natural Gas Industry: Status, Economic Impacts and Future Potential—indicates Pennsylvania could produce over 12 billion cubic feet (bcf) of gas per day by 2015 and upwards of 17.5 bcf/day by 2020—or about a quarter of U.S. demand.  The best part is:  Pennsylvania’s Marcellus Shale is yielding jobs, economic opportunity, higher tax revenues, lower electricity costs and many other benefits.  So, let’s take a look at several key facts from this study:

Higher Than Expected Growth in Production – Marcellus natural gas output at the end of 2010 was nearly 2 bcf/day. The production levels are substantially higher than previous projections because Marcellus producers employ advanced well stimulation techniques that dramatically increase well productivity.  The increase in drilling activity occurred during an economic recession—and at a time when natural gas prices were relatively low.  Production from the Pennsylvania Marcellus will likely average 3.5 bcf/day in 2011 and could exceed 6 bcf/day in 2012.  With such expanded production, Pennsylvania is now self-sufficient in supplying itself with natural gas.  The study projects that Marcellus gas production could expand to over 17 bcf/day by 2020, which would make the Marcellus the single largest producing gas field in the United States.

Higher Than Expected Spending by Industry within Pennsylvania – The study reveals large increases in Marcellus Shale related economic activity, with total spending increasing from $3.2 billion in 2008 to nearly $5.3 billion in 2009—which is up from $4.5 billion in 2009.  Surveys taken in the study indicate producers spent $11.5 billion in 2010, which was higher than the $8.8 billion producers planned to spend that year.  The current survey finds companies want to increase their investments to $12.7 billion in 2011, with $14.6 billion expected in 2012.  These numbers omit investments in interstate gas transmission pipelines, development of shale formations above and below the Marcellus, or investments by natural gas consuming industries.  The increase occurred due to higher investments in exploration, drilling, pipelines and processing plants.  Lease and bonus payments were $2.06 billion in 2010, and a good amount of this money went to landowners who kept up their farms with the extra income. The largest investment category was upstream drilling and well completion, which amounted to $7.377 billion in 2010—up from $2.15 billion in 2009.  Mid-stream expenditures on gathering, intrastate pipelines and natural gas processing plants accounted for investments of $695 million in 2009.  This statistic grew to $1.3 billion in 2010. Planned expenditures for upstream and mid-stream segments are expected to double yet again in 2011 and 2012. Marcellus Gas exploration, in three short years, emerged as a major industry in the Commonwealth.  It is also a significant producer of natural gas and petroleum liquids in the United States.

Higher Numbers of Marcellus Wells – The number of operating wells increased steadily since 2008 when an estimated 280 wells were actively producing natural gas. One year later, 595 wells were operating—and 1,055 wells were producing by the end of 2010.  When more wells went into production, total natural gas output steadily increased.  In the last quarter of 2009, the Marcellus gas industry produced approximately 544 million cubic feet (mmcf) of natural gas. Total production accelerated sharply, exceeding 1.1 bcf /day by July and almost 2.0 bcf/day by the end of the fourth quarter of 2010.  The average annual production of dry natural gas was 311 mmcf/day in 2009 rose to 1,353 mmcf/day in 2010. The following chart tells the story in detail:

Higher Economic Benefits – The Marcellus gas industry provides a direct economic stimulus of $10.4 billion to Pennsylvania’s economy. This leads to subsequent rounds of capital investment by other producers on goods and services—which adds another $4.3 billion to the Commonwealth’s total gross output. Such direct and indirect business activity generates additional income in the region, which induces households to purchase $5.7 billion in additional goods and services. The sum of these direct, indirect, and induced impacts is more than $20.46 billion in 2010.  The results imply that for every dollar that the Marcellus industry spends in the state, nearly two dollars of total economic output is generated. Among the segments with above average ripple effects throughout the economy are:  information services, finance and insurance, real estate and rental, health and social services, recreation and hotel and food services.

Higher Value Added – The estimated value added to the Pennsylvania economy in 2010—after subtracting inter-industry purchases from gross output—was over $5.3 billion. Also, there were indirect and induced impacts that increased the total value add generated in the Commonwealth to $11.16 billion in 2010.  This means the Marcellus Shale added $11.6 billion on a net basis to the Pennsylvania economy just one year. The indirect and induced impacts were strong throughout the economy, but especially pronounced in real estate, professional services and health and social services.

Higher Job Numbers – Goods and services purchased by the gas industry, royalties to landowners and direct tax payments created more than 67,000 jobs in Pennsylvania.  When indirect and induced impacts are considered, the study estimates the total employment impact associated with Marcellus development amounts to almost 140,000 jobs, which represents the total number of jobs supported by the Marcellus industry. It is estimated 23,730 jobs were created in the construction trade, 16,581 in retail trade, 14,886 in mining, 12,815 in health and social services.  Also, 11,042 jobs were created in professional services, 9,974 in wholesale trade, and 7,767 in hotel and food services. The study indicates that 6.8 jobs are supported for every $1 million created in gross output by the regional gas industry.

Higher Tax Revenues – Higher economic output and greater employment in Pennsylvania’s gas industry generates additional tax revenue for federal, state and local governments. It is estimated that state and local tax revenue for the Commonwealth increased to slightly over $1.084 billion in 2010—with $802 million coming from indirect business taxes. Federal taxes paid increased by an estimated $1.44 billion—all due to Marcellus development.  Most of this tax revenue came from higher social security and personal income taxes paid by the expanding regional workforce.

Lower Prices for Energy – Well, not everything can be higher.  Some things had to be lower—and consumer energy prices dropped significantly as a result of Marcellus gas production. In 2010, the increase in Marcellus Shale gas production reduced natural gas prices by an estimated 12.6% versus projected natural gas prices in a Commonwealth that would have never experienced Marcellus exploration. This reduction in natural gas prices suggests total energy expenditures declined by $633 million in 2010. In other words, without the Marcellus, consumers would pay more than $633 million in additional energy costs. Residential customers enjoy electricity and natural gas bills that are $245.1 million lower due to regional gas production. A good chunk–$217.4 million—comes from reduced costs in natural gas bills and the other $27.7 million is due to cheaper electric bills. Commercial and industrial customers pay lower bills of $190 million and $198.3 million respectively, all thanks to the Marcellus.  In regard to household bills, reductions in consumer energy expenditures stimulate Pennsylvania’s economy.  This helps increase the value added by $170 million, as well as creating $18 million state and local tax revenue. Now comes the best part: 2,200 regional jobs are created as a result of the greater prosperity brought by natural gas exploration.

Lower Unemployment – As of April 2011, Pennsylvania had an average seasonally adjusted unemployment rate of 7.5%, which was 1.5% below the national average of 9.0% as reported by the Bureau of Labor Statistics. Roughly half of the counties in Pennsylvania have some level of Marcellus drilling activity.  However, it is in counties where higher drilling activity occurs that the reduction in the unemployment rate is most apparent and measurable. The study examined six counties with the largest number of Marcellus wells drilled. In 2007, five of the six counties had unemployment rates above the statewide average—by 2011, four of the six counties had unemployment rates below the statewide average. Bradford County—and area with high gas drilling activity—had an unemployment rate of 8.33% in 2007.  By the end of April 2011 it had an unemployment rate of only 5.95%.

Higher Tax Revenues – Pennsylvania imposes a 6% sales tax on all non-essential items including lodging—so visiting workers will almost inevitably add extra revenue to a local economy. With the large number of workers required for shale gas production, this means significant additional sales tax revenue can be generated. Areas where heavy drilling activity occurs have seen a higher positive change in tax revenue.  For example, from 2009 to 2010, Bradford County saw an increase in tax revenues of 13.22%, while Pennsylvania as a whole saw tax revenues decline (on average) by 2.26%. In counties with no Marcellus drilling, sales tax revenue declined 2.5% from 2008 to 2010. In counties with up to 100 Marcellus wells, sales tax revenue declined by only 0.6%.  Counties that had more than 100 wells drilled experienced a 0.6% increase in sales tax revenue.  The increase in sales tax revenue and higher levels of drilling activity is most apparent in northeastern Pennsylvania, where—no surprise here—most Marcellus wells are drilled.

Rather amazing, isn’t it?  The Commonwealth is in an enviable position today because of the tremendous opportunities created by drilling in the Marcellus.  Pennsylvania’s rising higher and higher—we can only hope New York will join in and experience a similar economic renewal.

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