Lies and Broken Promises: An Emerging Giant
Pennsylvania State University’s economic report on gas exploration in the Marcellus Shale
The Pennsylvania State University has permitted two of its former professors to use its research reputation to give authority to a blatant piece of gas industry propaganda. The university’s apparent endorsement of this industry-sponsored paper has allowed the gas industry to gain national recognition for it. Using their extensive public relations network, this work has likely become the most recognized academic paper ever published with the Penn State logo on its cover. Given the wide distribution it has received, the university should, at very least, be embarrassed by its low quality.
When challenged, the dean of the sponsoring school at Penn State admitted that the authors, Tim Considine and Robert Watson, may have overstepped from research into advocacy. The university, however, through their spokesperson, refused to withdraw the university’s association.
Penn State took the position that the author’s opinions were shielded by academic freedom. The paper’s overstatements, and its misuse of statistics, I believe, reach beyond opinion to the level of dishonesty. The Penn State Report, as the industry has dubbed it, is the big lie that has put Pennsylvania citizens at a disadvantage when negotiating their future with this new industry.
Overstating their economic impact has been a very successful strategy for the gas industry. Trumpeting promises of jobs, tax generation, and economic development has stampeded our legislators into giving concessions. Expecting a “greater good”, our elected officials have become more willing to sacrifice the well being of the Marcellus region to what they believe is a coming bonanza for the entire state. The millions of dollars spent by the industry on lobbying and campaign contributions have helped to sell this proposition.
Almost nothing in the Penn State study can be objectively verified because it relies on industry-generated statistics. The authors then applied these statistics through an off-the-shelf statistical software program, Implan, which, by its maker’s own admission, is highly malleable to the user’s intent.
(From a Pennsylvania Budget and Policy Center report.) “According to an interview with the maker of Implan, users “can use Implan software and data to generate numbers that support any side of an argument – and get wildly varying results depending on who’s clicking the mouse.”
We can see the authors’ reliance on industry statistics and on the Implan program in this quote:
“During 2009, Marcellus gas producers spent a total of $4.5 billion to develop Marcellus shale gas resources. Using the IMPLAN modeling system, we estimate that this spending generated $3.9 billion in value added, $389 million in state and local tax revenues, and more than 44,000 jobs”
It appears that the authors simply take the number of gas wells and then multiply that by the industry’s figure for the average cost of a well. Then they plug that figure into the Implan software and it projects for them how many jobs such an expenditure would create and how much state and local taxes it would generate.
Never mind that most of the taxes the authors estimated don’t actually apply to this industry. Never mind that the large numbers of jobs the authors claim are already in place can’t be found in state employment statistics. The jobs that have been created inside the industry and its support companies are only a very small fraction of the total number of jobs claimed. In the paper’s summary, they represent figures they first presented as estimates now as proven fact.
“During 2009, the Marcellus gas industry increased Pennsylvania’s value added by $3.8 billion, generated $389 million in state and local taxes, and created more than 44,000 jobs.”
Notice that beyond what the industry reported to them and what the software predicted there is no evidence given that any of the results are real. The Pennsylvania Budget and Policy Center, a Harrisburg based economic policy think-tank was quick to refute the paper’s tax estimates as well as its employment claims.
“For instance, the industry counts local property taxes as the largest single part of the tax total, even though oil and gas reserves are not subject to property taxes in Pennsylvania, as they are in other states. Drilling equipment is not subject to the property tax, either.”
“The report also appears to overstate the amount of sales tax paid. Many companies drilling in the Marcellus Shale are based out of state and likely buy a large share of taxable goods from suppliers in their home states. Many items used directly in the drilling process are also exempt from sales tax.”
The Penn State authors:
“Our forecast presented below estimates that more than 3,500 wells could be drilled in 2020, which is about the same level of drilling currently taking place in the Barnett shale play in Texas,”
Here, the authors are using Implan to predict future drilling and corroborating it with misinformation they either made up or got from the industry. In the first week of August 2010, there were only 80 rigs working in the Barnett Shale, which indicates a drilling rate of less than 1000 wells this year. The scaling back of drilling activity in the Barnett has been widely reported within the industry.
Broken Promises, Employment in Pennsylvania:
The original report promised 107,000 new jobs in Pennsylvania by 2010. An “Up Date” released this May scaled that promise back to 88,000 new jobs. There were 590,000 people unemployed in Pennsylvania as of August 2010 and these 88,000 new jobs, if any large portion of them actually existed, should have had a significant impact.
Pennsylvania loses more jobs than neighboring states in the recession:
We are in a severe recession and so expect to see job losses but, if the gas industry was actually bringing large numbers of new jobs, we would expect to see less pain here in Pennsylvania than in the surrounding states. This is clearly not the case.
Pennsylvania Department of Labor and Industry’s most recent economic report compares the unemployment experience here with that in surrounding states. They give statistics from December of 2007, when unemployment was at its lowest, to July of 2010 for eight regional state economies: Delaware, D.C., Maryland, New Jersey, New York, Ohio, Pennsylvania, and West Virginia.
Of the eight, only New Jersey suffered a greater rate of job loses than Pennsylvania. New York, which has halted Marcellus Shale Drilling, actually had the lowest rate of unemployment increase at 3.5%. Pennsylvania suffered a 4.8 % unemployment increase from 4.5% in 2007 to 9.3 % now. Another way to look at this is to compare the 360,000 Pennsylvanians unemployed in 2008 and the 592,000 needing jobs now and ask if the 88,000 jobs the gas industry claims to have created would have made a difference in the 232,000 jobs lost in the state.
There are, of course, drilling jobs and also some multiplier effect, specifically in the hospitality sector. These two sectors, mining/logging and hospitality, both showed job gains from 2008 until now but not enough to be statistically significant in light of the 232,000 jobs lost in the state in the same time frame. Mining/logging was up 2600 jobs and hospitality 5300 jobs. The game changer promised by the Penn State Report simply isn’t happening.
Again from PBPC’s response:
“Finally, the report overstates the jobs created by Marcellus Shale drilling. In 2008, the industry directly employed 10,300 people in Pennsylvania, according to the U.S. Bureau of Labor Statistics, and the state estimates that number will grow to 12,400 by 2016. By comparison, Wal-Mart employed 48,800 people in Pennsylvania as of January 2010.
“The report claims industry growth will create 88,000 jobs in 2010 and 111,000 in 2011, which include jobs outside the natural gas industry in such fields as health services and wholesale suppliers. It is impossible to verify these numbers and their connection to the industry.
The Marcellus Shale Workforce Needs Assessment study made by Penn State Extension and the Pennsylvnia College of Technology put a figure on the number of jobs needed to drill a Marcellus well.Â The study found that each well used a large number of people and skills but factoring in their time on the job and the short duration of drilling activity, the cumulative result was 11.53 man years per well. Furthermore, these jobs aren’t cumulative but are dependent on the number of wells being drilled in any given year.
The total hours worked by these individuals directly needed to drill a single well are the equivalent of 11.53 full-time jobs over the course of a year.” Page 19.
In the first week of August 2010, there were 81 Marcellus drilling rigs in Pennsylvania. Optimally, each rig can drill a well a month or a projected yearly rate of slightly less than a thousand. At a thousand wells per year, the employment effect of 11.53 man years per well projected by the Needs Assessment Report, would be 11,530 jobs. This is in the range of the state and federal estimates.
The authors reported that 710 wells had been drilled in 2009 so 1000 wells in 2010 would be a logical up tick of that number. The authors, however, reported the industry’s projection of 1743 wells for 2010 and based their tax, value added, and employment estimates on that figure. Even at that, their estimates included a very large fantasy component.
A case of dishonesty?
Decline Curves below is a quick primer on decline curves from an industry analyst.
Shale Economics: Watch the Curve Posted on March 17, 2010 by Greg McFarland
The economics of a shale play are sensitive to certain criteria that may not be critical to a conventional type oil or gas play. One important criterion is the Initial Potential (IP) and the shape of the hyperbolic decline production curve. A hyperbolic decline curve is composed of an IP followed by an initial steep decline rate, transitioning into a later long term, shallow, stabilized decline rate Shale production is characterizes by a steep decline curve early in its productive life. The more oil and/or gas that you can make up front the better the economics.
As evidenced by the previous quote, the issue of decline curves are a critical component of the economic viability of shale gas exploration. Both the decline curve graphic in the Penn State Report and the description of it by the authors are inflated by a factor of four to five times. The production decline that the authors depict happening over two years, industry data reveals actually occurs in only five months. The authors’ version greatly overstates the production potential of a typical Marcellus gas well and by extension the whole play.
“The production decline curve used in this study is displayed below in Figure 6, which is the basis for the production forecast below. This curve is on the low end of publicly released decline curve information released by five major Marcellus Shale operators during the second half of 2009. The estimated production over the first 30 years is 2.8 billion cubic feet, after 50 years the yields is 3.5 bcf. Given this decline curve, average annual production from a Pennsylvania Marcellus horizontal well is over 500 mmcf during the first year, about 250 mmcf during the second, year after 8 years about 100 mmcf, and roughly 30 mmcf per year after 30 years of production.”
Completely false! Actual data from producing wells shows an early spike to 500 mmcf per day and then an approximate 60% decline in the first 4 months. Here, the authors take the original production figure and use it for the entire year thus greatly inflating production estimates.Industry data projects less than half the authors’ figure for the start of the second year followed by further declines during the year. See “Shale Play Comparison” graph below. There is only a couple of years of actual data of Marcellus gas well production. As for claims in the 8 to 30 year range, anything pastt two or three years is pure conjecture. Barnett shale wells are usually finished producing in 5 to 7 years.
The “type curve” describes a parabolic decline function that petroleum engineers use to compute total reserves based on historical production. Here’s a type curve from Ultra, another gas producer in the Marcellus.
These are actual production plots of 13 wells in southwestern Pennsylvania. Notice that the amount of decline here in 145 days is equal to what the authors claimed for a 2 year period. Also notice that the initial spike doesn’t continue for a year as the Penn State authors claim and use for their predictions.
This is from a Morningstar document dated July 23, 2009-
The biggest news of the day was the disclosure of a Marcellus production type curve based on production history from the 24 wells that have been producing for greater than 120 days and Range’s internal estimates. Based on the graphical presentation, it appears production declines are around 75% in year 1, 35% in year 2, 25% in year 3, 12.5% in year 4, and 10% in year 5. Range is also assuming a 40-year average well life and a 6% terminal decline. Other data points include: initial production rates of around 5 mmcfe/d; gross recoverable reserves of 4.4 bcfe; well costs of $3.5 million, and an average royalty of 15%. http://www.declineoftheempire.com/2010/04/a-miracle-in-the-marcellus-shale.html
So, was the Penn State Report’s depiction of well production just a unfortunate mistake? Not very likely. Considine has spent his career analyzing fuel markets and has an impressive resume in that field.
More misinformation to support the industry’s agenda:
“Higher gas development costs in Pennsylvania due to regulations, climate conditions, topography, labor costs, and other structural factors are partially offset by city gate prices higher than the national average and the absence of a severance tax in Pennsylvania.”
Again, we find them spinning the truth in the service of a gas industry goal. This time, to stave off a severance tax in Pennsylvania by claiming that high exploration costs would make the Marcellus non-competitive if a severance tax was added. The industry has a habit of saying one thing to investors and another to legislators, citizens, and environmentalists. Range Resources, in the graphic below, brags to its investors that its investments in the Marcellus are highly productive because of the low exploration cost and a high rate of return on capital investment. The lower cost of Marcellus exploration is well recognized in the gas industry and could be cited from a number of sources. There is no plausible excuse of ignorance for this misinformation by the authors.
“Unlike renewable energy, clean coal, and nuclear power, Marcellus natural gas producers create jobs without government subsidies. With rising levels of public debt, this ability to independently generate income and wealth is essential.”
This is another instance of misinformation to fit the industry’s spin. The gas and oil industry receives about 4 billion dollars a year in federal tax subsidies. This is especially true of the gas industry that is allowed to write off their drilling and exploration costs the year in which they occur. Both Range Resources and Chesapeake Energy only pay only a fraction of one percent of their income in federal taxes.
On the state level, unlike other industries, the gas industry is not taxed on their infrastructure improvements such as the wells they drill or their pipelines. The gas they extract is not taxed nor is the value of the recoverable gas in the leases they hold.
In the first edition of “Emerging Giant”, reported in the summer of 2009, the authors placed a value on the absence of taxes in Pennsylvania for attracting drilling activity.
“Pennsylvania has no severance or property tax, so wellhead revenue is about 11 percent higher. Pennsylvania’s 9.9 percent CNI (corporate net income) is not paid by many companies and limited liability corporations (LLC)’s only pay at the 3.07 percent individual tax rate. Additionally, many companies have sufficient deductions that they pay no CNI tax.”
A Serial Offender?
If it is offensive for a professor to receive compensation to use a public university as a platform to espouse narrow corporate interests, then Tim Considine is truly a serial offender. Below are two excerpts, a critical piece from the Philadelphia Energy Examiner and a supportive one from the Gillette News-Record.
Here again, the same pattern is repeated. An industry association pays Tim Considine to write a glowing report using figures the industry supplies. His academic position at the state university gives the paper authority, which the trade group then uses to influence legislators.
Ex-Penn State professor receives more oil & gas industry funding
August 17th, 2010 11:52 am ETÂ By Robert Magyar, Philadelphia Energy Examiner
In December 2009, the professor issued a highly positive economic report on Power River Basin coal mining which was paid for by the Wyoming Mining Association. The University of Wyoming, Considine’s current employer, issued press releases regarding his report while promoting the professor’s speeches at major oil and gas industry trade events.
Powder River Basin really is the energy capital of the world
By STEVE MCMANAMEN, News-Record Writer
Published: Saturday, January 23, 2010 11:37 PM MST
Dr. Timothy Considine was asked to research and write the report for the Wyoming Mining Association when he was hired at the University of Wyoming in 2008. Considine had done previous work on the coal industry at Pennsylvania State University, and members of the Wyoming coal industry approached him about doing an economic analysis on the Powder River Basin coal industry.
It took Considine about a year to collect and crunch the numbers from public data and surveys he conducted of major Powder River Basin coal producers. In the report, Considine shows two ways Powder River Basin coal affects the national economy:
In 2008, Powder River coal producers spent almost $2.3 billion buying supplies from other businesses in 46 different states. They also paid $1.7 billion in taxes and royalties and $601.7 million on payroll.
The study will help show how important the Powder River Basin is to other states, said Marion Loomis, executive director of the Wyoming Mining Association. “There are a lot of states that benefit from what the coal mines buy.”
The coal industry has been under pressure with looming carbon legislation and greenhouse gas restrictions. The report could help show what those regulations could mean for seemingly unconnected industries and distant states.
Loomis said a copy of the report has been sent to state legislators and Wyoming’s congressional delegation and hopes to get it into the hands of representatives of other states.Jon Bogle Board of Directors, founding member, Responsible Drilling Alliance Professor Emeritus, Lycoming College, Art/Sculpture