Marcellus To The Rescue

November 2010 Vol. 237 No. 11

Jeff Share, Editor

Growing up in Pennsylvania, there was one thing you were sure of: you had to go elsewhere for a job that paid decently. I grew up in a small town in the once-bustling Lehigh Valley – an industrial powerhouse typified by its biggest employer, the now defunct Bethlehem Steel Corp.

For the past 60 years, the Keystone State has watched industries of all sorts moving south, then into foreign countries. Its cities and towns are shells of the thriving metropolises they once were. In Easton, once so prosperous that stores were always open late Tuesday and Friday nights, the major attraction is now the crayon museum. Bethlehem is trying to turn the old steel plant into a gambling casino. Allentown is coping with the loss of Mack Trucks. The Slate Belt where I grew up has never made up for the loss of thousands of textile-related jobs.

No jobs, no growth, no tax base – stagnation in a state where much of the terrain is too geographically difficult to develop. Now is all of this about to change because of our friend, natural gas? The Marcellus Shale may be unlike any other natural gas discovery this country or the world has ever seen. If the best minds in academia and business are correct, developing this resource will create tens of thousands of permanent well-paying jobs and generate billions in business and tax revenues, even exceeding the long-gone steel industry in its impact on Pennsylvania.

A landmark report by Penn State University’s Department of Energy and Mineral Engineering provides the best perspective of this “emerging giant.” The study notes the Marcellus is the largest unconventional natural gas reserve in the world with recoverable reserves of nearly 500 Tcf.

Natural gas production from the Pennsylvania Marcellus (the Marcellus also covers parts of New York, Virginia and Ohio) could rise to almost 4 Bcf/d by 2020 as the state becomes a net exporter of natural gas, maybe even higher as more states push legislation to reduce greenhouse gas emissions. Not only would natural gas be the best fuel to balance any renewable energy-based load system, but it could also be co-fired in coal-fired plants to reduce CO-2 emissions, thereby enabling the continued use of coal for electricity generation, the study notes.

By 2020 employment created could exceed 174,000 with state and local taxes exceeding $1.4 billion. The total number of jobs created this year is expected to pass 100,000. The present value of additional state and local taxes earned from Marcellus to 2020 is almost $12 billion.

There are several hurdles that have to be met, perhaps the most immediate being the drilling tax that has Democrats and Republicans predictably split along party lines. Gov. Ed Rendell, who is leaving office in January because of the two-term limit, is pushing for a severance tax on natural gas production that he claims is necessary to prevent taxpayers from being burdened with the cost of drilling operations. Faced with GOP opposition, he has threatened to sign an executive order to block any further leasing of state forest land for Marcellus drilling.

Now several GOP lawmakers are seeking a compromise, claiming the state can’t miss the chance to establish a reliable source of tax revenue. They suggest any final legislation include a “regulatory scheme that provides enhanced environmental and safety protections …while ensuring that we have a sustainable natural gas industry.”

Here again, the Penn State study offers some sage advice, noting that Rendell’s proposed tax would see drilling decline more than 30% and result in an estimated $880 million net loss in the present value of tax revenue through 2020.

“Imposing severance or property taxes on the Marcellus gas industry just as it is getting established will lead to tax losses for the state and could seriously undermine the future growth of the industry, especially given the possibility that producers could shift operations to developing promising shale formations elsewhere. The simple fact is that if you tax something you get less. In this case, you get less drilling and gas development.”

In this case, the numbers clearly speak for themselves.

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