There will be Winners (and Losers)

Last Thursday and Friday the Finger Lakes Institute presented a conference focusing on proactive approaches to mitigating the impacts of Marcellus shale development. A number of sessions touched on economic development and impacts from the “boom-bust cycle” that accompanies extractive industries.

Timothy Kelsey, from Pennsylvania State University extension, emphasized that at some point gas activities go away. In the long run, he said, you need to ask how you make sure communities remain whole.  

There is a lot of uncertainty about the costs, risks and long-term implications, Kelsey said. But one thing is for certain: there will be “haves” and “have nots”. Communities are divided by development.

The biggest problem, though, is the rapid pace of Marcellus development in Pennsylvania’s northern tier. Kelsey believes that neither communities nor state regulatory agencies had time to adequately prepare for the rapid influx of drillers. “The timing, pace and scale of drilling drives the impacts,” he said. Although the overall impact might be felt by the state as a whole over the next 30 years, localized impacts would more likely reflect the short-term lifespan of the individual wells.

His remarks echo what Cornell professor Susan Christopherson says. She is an economic geographer with Cornell’s Department of City and Regional Planning. During a recent interview she highlighted concerns about the regional impacts of industrialized drilling.

Unconventional shale drilling and production activities depend on many ancillary services:

• pumping stations for water withdrawal
• waste disposal facilities
• temporary housing for large labor force
• gravel quarries
• staging sites and equipment storage

While the economic effects from drilling are unevenly distributed, everyone pays the costs says Christopherson. Some towns will experience an upswing in their economies during the boom part of the cycle, but the overall region will become industrialized to support the drilling, storage and transportation of gas. Counties that never see a penny of drilling-related revenues may still feel the impacts of heavy truck traffic, gas storage facilities or pipeline.

As for the gas industry’s promise of job creation, Christopherson noted that the actual numbers coming out of Pennsylvania’s Department of Labor are only a fraction of industry predictions. The problem, she said, is that economists making rosy predictions have been simply relying on input-output models – they haven’t been checking actual labor figures.

The numbers generated by models are not real job figures, Christopherson said. They’re just crude estimates of “job creation potential”. The numbers coming out of PA are inflated, she says, because both industry and media have concentrated on the number of “new hires”. That number, however, includes rehires of previously laid-off workers.

Once you take all the figures into account, Christopherson said the actual number of jobs created by Marcellus drilling is just under 10,000. More importantly, and what’s not reflected in those numbers, is that the high-paying corporate jobs end up in Texas, where corporate headquarters are located. “What we’ll get in NY is construction jobs, retail and hospitality.” You can find her most recent report (and some other interesting reading) here.

An Economic Perspective

During the April 1-2 Environmental Law Conference up at Cornell, professor of city and regional planning Susan Christopherson provided some economic perspective to the Marcellus Shale discussion. "Drilling affects everything in a community," she said, listing topics from traffic to housing to community health.

“There are so many uncertainties,” Christopherson said. “We don’t know what all the risks are, or who will bear them.” What we do know is that the roads will be heavily impacted by the increased traffic.

Shale drilling is driven by the market. The industry is debt-driven and looking for commercially viable wells and that will determine where they drill and how long they remain in a locality. Like the financial services, shale drilling is “a speculative bubble,” Christopherson said, “but one with serious environmental consequences.”

Drilling impacts are driven by the pace and scale of development. “We should plan for a short-term intensive boom/bust cycle, as well as the impact of building an infrastructure to get their [gas] product to market,” Christopherson said. She said municipal and state officials need to think beyond the well pad and consider cumulative impacts of industrialized drilling activity.

“There will be increased public safety costs,” Christopherson said, pointing to the correlation between the need for more police and shale gas drilling. Other community impacts include increased costs for health and education services, and increased demand on public administrative services such as permitting and zoning officers, and an increased need for environmental remediation and monitoring.

Communities that don’t experience drilling may still feel the impacts. Ithaca will see increased truck traffic, and Watkins Glen is already seeing development of an industrial site for storing liquefied gas and petroleum products. There will be more, she said: pipelines, man camps, water withdrawal sites, compressor stations, truck depots, rail spurs and “trucks, trucks, trucks!”

The big question: are we prepared for the bust? “It will surely come,” Christopherson warned, “because once the gas is gone, it is gone.” And the rural areas will be the ones hardest hit by the boom/bust cycle. The increased housing costs will push out traditional residents; the demand for truck drivers will push the cost of milk production higher as farmers compete with gas companies for drivers.

Resource extraction works against diversity in local economies, driving out small businesses that do not cater to the gas industry. Tourism, in particular, depends on availability of lodging and restaurants. There will be increased economic inequality, Christopherson said.

But communities can take steps to minimize these cumulative impacts. The most important thing, Christopherson said, is to slow the pace of development. That will allow communities to absorb and spread out the impacts. Communities also need to cooperate with each other. Christopherson also challenged the state to take the lead by establishing policy that regulates and monitors the gas industry. The state needs more transparency, too, regarding where drilling happens and when and where spills and incidents occur.

Economic Impact Studies on Marcellus May Have a Problem

According to Dr. Timothy Kelsey, who keeps tabs on economic and community development for Penn State Cooperative Extension, the problem with most of the studies on the economic impact of Marcellus shale development is that they only consider employment and income. "They don't usually look at the distribution of the money and who benefits in the community," he said during a webinar a couple weeks ago.

Throughout his presentation Kelsey emphasized that economic studies present only one piece of information - and "not necessarily the most important or most definitive piece,” he said. What do the studies ignore? Potential negative effects on other sectors of the economy; environmental costs and their implications; distribution of tax revenue; and the impact on local government services.

So it is very important that municipal officials put economic studies into context with other issues, Kelsey said. Numerous times. He then talked about how most economic studies are done.

 

They use computer models. That shouldn't be a surprise. But what is a surprise is that almost all the Marcellus shale studies are based on the same computer modeling software: IMPLAN. While IMPLAN may work for other areas, in the rural northeast it doesn't seem to be too accurate a predictor of economic outcomes because the rural northeast is ... well ... rural. Part of the problem is that economists are using IMPLAN to create models of areas that lack a large manufacturing and industrial sector.

“We need to already have a robust industrial relationship for the models to be accurate,” Kelsey said. Those relationships don’t exist yet in communities where Marcellus is being developed. 

To date, economic models haven’t considered issues such as road maintenance costs or health and environmental impacts. That’s because no one has plugged them into the model, Kelsey said.  

Economic Impact Studies 

A November 2008 study by the PA Economy League, funded by an industry association, showed that the industry contributed $7.1 billion in economic output and provided 26,500 jobs.

In July 2009 the same industry association funded another study. This study includes future production estimates in what Kelsey criticized as a "simplistic analysis".

A May 2008 study by the Joint Urban Studies Center figured that if landowners had 100 acres of land in a drilling unit, and if they received 15 percent royalties, and if the price of gas was at least $10/mcf (thousand cubic feet), then they might get $1 million a year.  

The 2009 Broome County  study developed scenarios in which either 2,000 or 4,000 wells were drilled over the next decade. Given these assumptions, total economic activity for the county could reach anywhere from $7 billion to $15 billion with up to 1620 jobs created just during the drilling.

It's worth repeating what Kelsey noted again and again throughout his webinar: An economic impact study may help municipalities identify potential financial gains from natural gas development, but because of their limitations economic studies cannot be the only thing that communities take into account when considering the economic impacts of Marcellus development.