Monday, August 29, 2011

A tale of two economic impact reports

Well, let's wake Wiz up.

Now we have two specific numbers, both by Penn State researchers, with comprehensive economic impact analysis of the development of Marcellus Shale in Pennsylvania.

Just out and dated August 2011

Economic Impacts of Marcellus Shale in Pennsylvania: Employment and Income in 2009, by Timothy W. Kelsey (Penn State), Martin Shields (Colorado State), James R. Ladlee (Penn State), and Melissa Ward (Penn State), in cooperation with Tracy L. Brundage (Penn College), Jeffrey F. Lorson (Penn College), Larry L. Michael (Penn College), and Thomas B. Murphy (Penn State)

and this from last month, dated July 20, 2011:

The Pennsylvania Marcellus Shale Gas Industry: Status, Economic Impacts and Future Potential, by Timothy J. Considine, Robert Watson and Seth Blumsack

The former said the 2009 employment impact in Pennsylvania was 24,000 net new jobs while the latter says 44,000. Future projctions are always fraught with uncertainty, but with this being late 2011, these are both ex post numbers for the most part.  Both use the same economic model (IMPLAN) and they both state they attempt to capture direct, indirect and induced economic impacts of all known Marcellus Shale related activity.  It goes without saying that the differences must come from variation in what numbers are fed into the model to begin with.

Just  one of the differences between the two studies is the attempt in the more recent one to account for out of state ownership of Pennsylvania's Marcellus resources.  If you doubt how big a deal that is, note how the recent revision in shale gas resources has made news in India.  It impacts the supply chain as well which you can see how news from last year on pipeline manufacturing for shale gas demand actually made news in Russia.


Anonymous BrianTH said...

Yep, the "leakage" issue is obviously a significant one, and it clearly strengthens the case for a reasonable extraction tax. But the public already supports one anyway, as does the legislature, which just leaves . . . .

Tuesday, August 30, 2011 9:04:00 AM  
Anonymous The Wiz said...

Well, I guess nap time is over.....

Lots of reasons for this study's results, the foremost being the inaccurate science of it all. Just too hard to get solid numbers with any high level of confidence.

Another is the low gas prices partially due to a slow economy but mainly because of the huge production numbers in Marcellus gas. Seems the infamous oil/gas boom bust cycle is still alive and well, even in Pa. If natgas were to go $6/MCF you'd see a large pick up in activities.

And for another cause of declining numbers, just look west. Many companies have quickly moved into Ohio after the Utica Shale. Chesapeake announced last year they were going to exit dry gas areas like Pa and pursue wet gas/oil due its better ROI. They have several rigs there and announced they are moving more to Ohio. There are many companies now leasing land and drilling away in Ohio, having moved rigs from Pa.

And look further west to the Eagle Ford, the Bakken, and a few others heavy with oil and wet gas.

There may have been some activities in New York in anticipation of the lifting of the moratorium. I know several landowner groups have formed there and are actively working towards leases.

BrianTH; I have no problem with an extraction tax as long as it is reasonable and the monies well spent. After all, we have been paying income taxes for Texas residents for decades. Hows 5% with 25% of that going to help municipalities convert vehicles to CNG? And to help add in CNG stations along the turnpike and interstate highways? That would support the industry, raise more tax revenue, create jobs, reduce the balance of trade imbalance, and clean the air.

Tuesday, August 30, 2011 6:01:00 PM  
Blogger C. Briem said...

Wiz.. your comments all seem to imply that the difference between the two reports is resulting from changing circumstances over time. Yet both reports were completed contemporaneously and the numbers I cite refer to the same year. So none of that matters when it comes to explaining the differences in the two reports.

The $6 price you throw out there is interesting. This seems to be the only industry that claims a big new disruptive supply is coming online at the same time planning for significant price increases. Given the notional state of all the demand increases (CNG cars for example) it just does not seem a rational expectation.

Tuesday, August 30, 2011 6:13:00 PM  
Blogger C. Briem said...

and if all the activity is moving into Ohio, does that mean you are losing out by not signing any leases yet on your property?

Tuesday, August 30, 2011 6:15:00 PM  
Anonymous The Wiz said...

Chris, well then I guess the only difference is that data input/analysis is the only reason. I thought being a changing industry would contribute to some inaccuracy but maybe not. And since this data is from 2009 when the economy went through some dramatic gyrations, the data may be really suspect.

Here is an interesting fact pulled from the study. Twenty-five percent is owned by residents living elsewhere in Pennsylvania, and nearly 8 percent is owned by out-of-state landowners. The remaining 17 percent is owned by the public sector, primarily the state. So many areas of the state are getting benefits even though there is no drilling activity in their area. Maybe people in Pittsburgh that own farmland or hunting clubs in the region. And with 17% is owned by the public, mainly the state so that the state is receiving substantial direct revenue from the gas already.

The $6 that I through out is not an industry expectation or prediction. I was just pointing out that a jump in price would have a dramatic impact. Gas futures for August 2013 are around $4.90/MCF.

As for me, no, the Utica wet gas enters into Pa along the Beaver County/Ohio border and runs northwest through Lawrence and Mercer as best is known. But the Utica is much more of a mystery than the Marcellus was as there are very few holes poked through it as of yet.

Tuesday, August 30, 2011 6:39:00 PM  
Blogger C. Briem said...

So its not all Pennsylvania gas that is losing out to Ohio these days.. only some Pennsylvania gas. You did not make that distinction in your earlier comment.

Last I checked $4.90 is a big percentage lower than $6.00. That being said, I can't claim to have been an energy trader, but I did like talking with the energy derivative guys at Lehman when I was there. Few folks (industry wide) have been as wrong over the years as energy futures analysts. It still is an outstanding question how such a big supply increase can be coming online yet the future markets remain in contango... or how much longer that will remain the case.

Tuesday, August 30, 2011 6:49:00 PM  
Blogger C. Briem said...

and Wiz.. inaccuracy or other issues with 2009 data would also not be an issue in explaining the differences between the two reports. Would not any issues you raise apply to both reports? Both would suffer the same issues I would think.

Tuesday, August 30, 2011 7:00:00 PM  
Anonymous BrianTH said...

A CNG investment fund would seem like a good idea for how to use some extraction tax revenues, in part because it is a natural hedge. I have no idea what level of funding would make sense, but I could see it being substantial.

Tuesday, August 30, 2011 8:49:00 PM  
Anonymous The Wiz said...

Chris; Could inaccurate data may be part of the differences in the reports? Since the data is not exact, the researches may have different methods of gathering data and different criteria for how it is included or interpreted. Highly accurate data would lead to less interpretation and variation, I think. I am not a statistician or economist so I yield to your expertize on that.

Of course not all Pa gas is losing out. Companies are still drilling in Pa and will continue to do so. But they are not drilling as aggressively as before. The extreme western Pa border area is the edge of hot spot for Pa Utica wet gas from Beaver Co north, maybe a small part of Washington Co. A pretty small area relative to the Marcellus.

BrianTH; Chesapeake announced a couple of months ago they were forming a venture cap firm with a seed of $1 billion.....$150 million would be earmarked for helping Pilot and TravelCenters truck stops add CNG fueling stations. Imagine the affect if ten of the largest gas companies all did the same?

Tuesday, August 30, 2011 10:14:00 PM  
Blogger C. Briem said...

Wiz.. you sure sound like you are saying the Marcellus boom in Pennsylvania is ending. That would be news for sure.

Ohio gas would not be bad for Western PA.. all the benefits of cheap gas without all the angst over drilling. Could be win win don't you think?

You are correct that bad data could cause error. That is a tautology. Hard to compare the two reports since one is just a tad more explicative of its inputs than the other. I just never heard you bring up this bad data argument before. Why is it an issue now?

Tuesday, August 30, 2011 10:21:00 PM  
Anonymous BrianTH said...

Philosophical note: imperfect information tends to lead to roughly symmetric probability distributions around best-guess estimates. So merely pointing out the new study relies on imperfect information means it could just as well be estimating too much impact as too little.

Wednesday, August 31, 2011 7:29:00 AM  
Anonymous The Wiz said...

Chris; far from it. The mad rush has calmed down but the boom will continue to echo across the state.

I've always held the position of "bad data" otherwise we wouldn't have the fun of repeatedly debating these issues. But in this case, I mentioned it because we have two scholarly studies conducted over the same period with vastly different conclusions.

If you say that getting all the gas from Ohio is a win-win then I guess you don't care about jobs, a huge cash inflow of bonus and royalty payments, and tax revenue. If cheap gas is the main positive derivative, then it wouldn't matter what state it came from as long as it were in large enough quantities to oversupply the market.

BrianTH; I agree completely with your last point...which is why I take all these scholarly reports with a huge grain of salt.

Wednesday, August 31, 2011 8:33:00 AM  
Blogger C. Briem said...

Wiz... I am just reading your own comments where you say clearly investment was clearling leaving PA for Ohio. You said:

Many companies have quickly moved into Ohio after the Utica Shale. Chesapeake announced last year they were going to exit dry gas areas like Pa and pursue wet gas/oil due its better ROI. They have several rigs there and announced they are moving more to Ohio. There are many companies now leasing land and drilling away in Ohio, having moved rigs from Pa.

Sounds like you are arguing both sides.

You even said this: Seems the infamous oil/gas boom bust cycle is still alive and well, even in Pa.

So you are arguing the bust is here or coming? Sure sounds like it... but then you say the opposite.

Anyway.. we can argue 'bad data' if you really wish. If you actually take the time to read the reports you will see they start from remarkably similar data so it really does not buy you much in explaining their differences.

Wednesday, August 31, 2011 9:07:00 AM  
Anonymous The Wiz said...

I'm saying things have slowed down in Pa, not that it is over. Low prices have slowed development and the area has spread out to include Ohio. The play will continue to develop but at a more reasonable rate. That will allow regulations to be better developed and enforced.

Natgas will be a major force in Pa for the foreseeable future, IMO. And as transportation and power generation expand their use of such a clean and cheap fuel, the impact will be dramatic. It just takes time.

Wednesday, August 31, 2011 10:43:00 AM  
Blogger Unknown said...

Major difference between the two studies: Considine/Watson believe that all lease/royalty income is spent in the year received in PA; Kelsey et al do not.

Friday, September 02, 2011 5:49:00 AM  
Blogger C. Briem said...

Ha.. I missed that. So nobody at all is saving any of their windfall payments. That's great.

Wiz.. do you agree with that? You are on the cutting edge of studying lease payments. Is all the money coming in all quickly being spent?

Friday, September 02, 2011 5:53:00 AM  
Anonymous The Wiz said...

I don't know that many that are already leased as Lawrence Co has been behind in that. But from what I hear, the first thing people do is pay off all credit cards and home loans and other debts. Then if they are farmers, they invest in new equipment or fixing up gets written off as business expenses that if done the same year. They say some of implement dealers in Washington and Green Counties are having trouble keeping the yard stocked with equipment.

Others get a new car or new pickem up truck. Then they will invest a portion and use some for home improvements or a big dream vacation. (I have one "financial consultant"..... errrr.... insurance salesman after me already)

And don't forget all those lawyers, estate planners, and financial advisers that are getting paid for their wise council.

I'm sure a lot of it depends on their prior financial situation. And on how much land they own and thus the size of their bonus/royalty payments.

Friday, September 02, 2011 2:55:00 PM  

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