Oct 6 2010

Shale Gas Economic Impact?

Shale Gas Boom?

Promises are Global; Even Rival ‘World Peace’

But Plummeting Property Values & Competing Income

Sources Not Considered

If it sounds too good to be true — it probably is

See subhead below titled, "Economic Impact?" (Click to Enlarge.)

See subhead below titled,"Economic Impact." (Click to enlarge.)

The gas industry and its acolytes promise untold benefits from a shale gas boom – a new world that is breathtaking in scope.  This must be Oz.

For example, Amy Myers Jaffe, a scholar in energy studies at the James A. Baker III Institute for Public Policy at Rice University suggests that the global shale gas boom could help achieve the following:

  • “… prevent the rise of any new [energy] cartels”
  • Perhaps “lead Tehran to tone down its nuclear efforts.”
  • “… domestic shale gas for China may help integrate Beijing into a Pax American global system.”

In the words of a blunt colleague, “Somebody in this room is smoking dope.”

The New Oz

In places like Pennsylvania and New York, the gas-rich Marcellus shale is the “new Saudi Arabia,” the “new steel,” the new Oz.  There are only upsides, no downsides.

Pass the bong please.  In real life, of course, sometimes your dreams are just that.

By the way, Ms. Jaffe of Rice University published her rosy, expansive view in a special Energy Section of The Wall Street Journal under the title, “Shale Gas Will Rock the World.”1 Read it and tremble.

In her essay that runs more than 2,000 words, however, environmental risk is dismissed in 129 words.  Amazing scholarship.

  • And none of these scholars deal with the collapse of property values.
  • None of these scholars identify gas industry executives – senior managers – who live the shale gas dream by putting hydraulic fracturing drill rigs on their property, near their homes.  Gas industry execs are the ultra NIMBYs in today’s world.

Perhaps Ms. Jaffe and her colleagues at Rice could talk to Texas Landowners like Tim and Christine Ruggiero of Decatur, Texas.  After all, Jaffe says she has studied energy markets for 30 years.  Does she talk to property owners dealing with the adverse effects?

The Ruggiero family has two shale gas drilling rigs 200 feet from their back door.  You can read about it here: http://www.spectraenergywatch.com/blog/?p=605

They have had numerous leaks and thousands of gallons of chemical spills on their property.  The videos of these events are staggering.  As Ruggiero tells folks, “I am not opposed to drilling.  I am opposed to being poisoned.”

Perhaps Ms. Jaffe could talk to victims of that rockin’ shale gas world and advocate solutions to the environmental risks and the implosion of property value.

Property Values Collapse

For example, property value for the Ruggiero’s home officially plummeted 70%, one year after drilling rigs showed up on their property.  After a two-hour hearing on Sept. 16, a county review board agreed the value of the Ruggiero’s home and 10-acre horse farm has dropped 70% from $257,330 to $70,240.

As the Denton Record Chronicle reported:

“The Wise County Central Appraisal District Appraisal Review Board – five community members with varying expertise in real estate – agreed that the drilling company’s use of the Ruggieros’ land warranted the extraordinary reduction.” (Refer to footnote #2 under “Links & Resources” below to review the news article.)2

So much for economic value – not to mention a geopolitical windfall with Iran, China and the US sitting in the hot tub singing “Pax Americana.”

Back on Planet Earth, Dr. William Podulka, a physicist from Ithaca, NY, and chair of Residents Opposing Unsafe Shale-Gas Extraction (ROUSE), has looked at several models of economic value.  His geographic focus is Upstate New York

Economic Impact?

He analyzes potential Marcellus shale royalties and compares this to other Upstate New York income sources over 20 years. These other land uses include tourism, agriculture, wineries, dairies, hunting and fishing.

As the chart indicates, the income from these other land uses dwarfs potential Marcellus shale income by a factor of 20 times.

According to this analysis, the potential Marcellus shale royalties will yield $16 billion versus $350 billion from other land uses over a 20-year period.

Podulka explains:  “The data showing the relative size of incomes from other land uses such as tourism, agriculture, hunting and fishing versus gas royalties was first put together by Dr. John Schwartz, a retired professor from Ithaca College.”

“The gas revenue total is mine and is based on somewhat different assumptions about the size of the gas resource and price of gas than Dr. Schwartz originally made, mostly due to the benefit of another year-and-a-half of commentary on the Marcellus Shale since Schwartz originally pulled the numbers together,” Podulka added.

Royalty & Productivity Drop

On the subject of royalty income from Marcellus or other shale gas wells, folks who have had experience with shale gas wells in Texas and in Pennsylvania say that production drops off quickly.  From multiple sources — including the gas industry — it is said that the production will drop roughly by half after the first year. And it continues to drop after that.  Royalty checks, of course, will likewise drop.

That is, if you get much.  In August, Range Resources – called the King of the Marcellus in Pennsylvania – sent letters to lease holders in western PA stating it had overpaid them in royalty checks over “several production periods.”  This happened, the company said, because it incorrectly read its production volumes from the wells.

For details plus a copy of the letter sent to lease holders, check this post: ‘White Hat’ Gas Guys –  http://www.spectraenergywatch.com/blog/?p=742

As a consequence, Range is deducting the alleged overpayment from future royalty checks.  This raises lots of questions including the competence and financial reporting accuracy of a company that can’t read its own production volumes.

It’s the new Oz.

Links & Resources

1 Shale Gas Will Rock the World – Huge discoveries of natural gas promise to shake up the energy markets and geopolitics, by Amy Myers Jaffe, The Wall Street Journal, Energy Section (pp.  R1 & R3), May 10, 2010.  Note that this is a subscription site: http://online.wsj.com/article/SB10001424052702303491304575187880596301668.html?KEYWORDS=Shale+Gas+Will+Rock+the+World+

2 Drilling Can Dig Into Land Value - Denton Record-Chronicle (Texas) by Peggy Heinkel-Wolfe, September 18, 2010 – A sobering account from a shale gas state of what can happen to the value of your home and property one year after the drill rigs move onto your land:  http://www.dentonrc.com/sharedcontent/dws/drc/localnews/stories/DRC_DrillValues_0918.1046e9a00.html

Or here, pdf file:  drilling-can-dig-into-land-value-a-denton-record-chronicle-news-for-denton-county-texas-local-news

3 “Economic Impact?” Chart – Sources

(1) Following are the sources Dr. John Schwartz used, as he reported them with his original chart (provided by Dr. William Podulka):

(a) Farm Receipts:  National Agricultural Statistics Services.  See New York State and Cash Receipts link.   $3.65 billion annually over 20 years = $73 billion from Marcellus Shale region http://www.nass.usda.gov/Statistics_by_State/New_York/Publications/County_Estimates/index.asp

(b) Dairy:  Stuff about States.  All New York State, select dairy products.  $1.95 billion cash receipts in 2004. Over 20 years, that totals $39 billion for the whole state.  Assume half of that comes from Marcellus drilling areas.  http://stuffaboutstates.com/new.york/agriculture.htm

(c) For all of New York, annual total Hunting and Fishing income: $1.6 Billion, Wildlife Watching: $1.6 billion.  Source: U.S. Fish & Wildlife Service New York 2006 National Survey of Fishing, Hunting, and Wildlife-Associated Recreation.  Scale to 20 years and assume one quarter comes from Marcellus drilling areas.  http://www.census.gov/prod/www/abs/fishing.html

(d) New York Agricultural Statistics Service, op. cit: $3.4 billion annually: New York’s Grape, Grape Juice and Wine Industry Profile.   Source: NY Agricultural Statistics, 2007-2008 Annual Bulletin, Table 34.  Over 20 years, $68 billion from Marcellus Shale region.

(e) “Tourism Impact in the Adirondacks.” The Marcellus Shale counties constitute about 17% of the $51 billion spent in New York in 2007. That totals $173 billion over 20 years from Marcellus Shale region. http://www.adirondackbasecamp.com/2008/09/tourism-impact-adirondacks/Drilling for Natural Gas in the New York State Marcellus Shale

(2) For the Marcellus Shale royalty revenue, Dr. William Podulka assumes that, with a rate of around 2,000 new wells per year and using decline curves and well productivity estimates from Dr. Terry Engelder (Engelder, T.  2009. “Marcellus 2008:  Report Card on the Breakout Year for Gas Productivity in the Appalachin Basin,” Fort Worth Basin Oil & Gas Magazine.  August 2009, pp. 19-22.) that around 100 trillion cubic feet of gas can be extracted over the next 20 years.  Podulka makes the further assumptions of a gas price of $7.50/1,000 cubic yards (1.5x current price) and a 12.5% royalty rate.  For at least the next 10 years or so, the Energy Information Administration of the Department of Energy expects the price of natural gas to remain relatively flat, rising to $6/1,000 cubic yards or so.  Podulka bumped up that number to account for possible later price increases and to avoid being criticized for low-balling.  This does NOT include money due to signing bonuses.  Historically, he notes, (e.g. for leases signed even up through 2008) that is small number.  “If a lot of acres now get signed up for several thousand dollars per acre, that might be significant, but should still be small compared to the royalty income,” Podulka said.

Residents Opposing Unsafe Shale-Gas Extraction (ROUSE) – As the first sentence of its mission statement says, “ROUSE will advocate for and provide resources to residents who do not wish to be exposed to the negative health, environmental, economic, and societal impacts of extensive gas drilling.”  Link: http://rouse-tc.org/

Marcellus Accountability Project for Tompkins County (MAP – Tompkins) – Also known as Tcgasmap.org, this is a model for tracking gas drilling in the Southern Tier of New York State.  It includes a resources page with annotations and links to hundreds of articles.  It also provides information on events and calls-to-action.  While it focuses on more than 2,600 gas leases filed in Tompkins County, this approach could be extended to other counties as well.  Link: http://www.tcgasmap.org/

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