Natural Gas: Valuation and Related Topics – “Facts” and Fracas
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1) The document discusses the scale of natural gas development from the Marcellus Shale formation and some of the economic impacts and considerations. It notes that the scale is large in terms of area, resources, and potential economic impacts for landowners, communities, and states. 2) It discusses factors that are critical to understand local and regional economic development impacts including the pace and location of drilling, gas prices, expenditures on landowners versus industry, and short-term versus long-term facilities. 3) It provides context on revenue streams for landowners including bonus payments, royalties over time, and notes that production and revenues decline quickly from initial high rates.
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Natural Gas: Valuation and Related Topics – “Facts” and Fracas
- 1. Natural Gas: Valuation and Related Topics – “Facts” and Fracas* David Kay, Senior Extension Associate, Community and Regional Development Institute Department of Development Sociology dlk2@cornell.edu *Fracas: noisy quarrel, uproar; from fracassare, to smash
- 2. Things to Think About Scale of Marcellus alone is BIG - though how big is debated, and NOT yet accurately known 84.2 Tcf of technically recoverable undiscovered reserves – USGS (2011) Compare: 24.4 Tcf US consumption (2011) Large area , much money in total, per well & per landowner ~100,000 surface square miles or 64 million acres (~ 15% in NY) ~$40 billion recoverable gas in NY (@$3/mcf) NY economy is ~$1.16 trillion as measured by gross state product (2010) ~$2 million ‘landowner’ share per well – typical for PA early on (80 acre well spacing, 12.5%+ share, higher prices than now)
- 3. More Things to Think About • Nonrenewable resource-based economic development When it’s “gone”, it’s gone BUT… The resource is rarely fully depleted physically Instead, it reaches a point that further extraction is impractical or uneconomic Technology (cost of extraction) and price of product (market forces) affect definition of “practical” and “economic” Geographies of depletion (pace and scale) The well, the property, the unit The community, the town The watershed, the region, the state, the Marcellus, all gas bearing shales…
- 4. Even More Things to Think About New ‘haves’ and ‘have nots’, new winners and losers Public discussion increasingly divided and antagonistic Many people have minds made up already, not open to new information “a man hears what he wants to hear and disregards the rest” Paul Simon Extractive energy economy historically volatile - multiple boom and bust cycles
- 5. “It is unlikely that new well construction would occur under a steady, constant rate… The actual track of well construction would likely be much more cyclical in nature than as described.” Revised Draft SGEIS
- 6. One more thing to think about “On a final note, the policy decisions and industry reaction must be considered in the context of a glut in the natural gas market that has reduced prices, lowered the amounts of lease payments and royalties to landowners, and eased political pressure to move quickly in New York. Natural gas prices move in cycles with demand, so that could change.” http://tomwilber.blogspot.com/
- 7. April 2011: My Impact Review: • Most critical factor affecting the economy (and valuation) – the uncertain pace, scale and location of drilling in NYS http://cce.cornell.edu/EnergyClimateChange/NaturalGasDev/Documents/Green%20Choices%20Papers/Marcellus_Kay.pdf
- 8. Location? - Marcellus Fairway Data source: Geologists at NYS Museum Data source: 9-2011 revised SGEIS
- 9. Critical Parameters for Local, Regional and State Economic Development Studies The pace, scale, and location of leasing The pace, scale and pattern of drilling – the driver of everything else The value of the gas taken out of the ground (price x quantity) The money industry spends on business versus the money spent on landowners (leases/royalties) The in-region vs. out of region expenditures of: Businesses (on materials, labor) Businesses (taxes, profits) Landowners Wage earners
- 10. Long vs Short Run – not everything happens at once • “Long Run” facilities Being Active Well Planned Being Fracing Active Well Planned Fracing – Drilled Well Being Active Well Planned Drilled Staging areas Fracing Well Drilled Well – Worker housing – Office areas – Pipe, sand and other Being Active Well Planned Fracing storage Drilled Well – Maintenance facilitiesPlanned Long Run Being Fracking Support – Compressor stations Drilled Well Facilities – Water withdrawal sites – Being Planned Water treatment Fracking Drilled Well – Etc. Being Active Well Planned Fracing • “Short run” facilities Drilled Well Being Active Well Planned Fracing Being Active Well Planned Being Planned – Well pads Being Active Well Planned Fracing Fracing Drilled Drilled Well Drilled Well Drilled Well Well Simple Example Development
- 11. Decline Curves and Production Steep decline Most gas is from initial produced in production first few years
- 12. Workforce Timing Jonah Anticline, Wyoming: Shown to illustrate phasing only Data source: Ecosystem Research Group/Jacquet
- 13. About the Money: A Well Owner’s Perspective Revenues: Bonus payments up front, royalties only for producing wells… Only the latter have DIRECT impact on the assessment rolls Law requires that landowners receive royalties of at least 12.5 percent... Representatives of the companies interviewed for this piece said royalties these days average around 15 percent. Range Resources: typical predicted 4.4 billion cubic feet of natural gas during a well’s lifetime, which can be 50 years or more. Assume average $5 per thousand cubic feet during the well's life Production worth $22 million, landowner's share $3.3 million… But the money will not come all at once, nor will it even come in a steady stream About half of total production happens within the first two years (eg. $1.65 million for landowner). Multiple landowners per well typical (spacing units, compulsory integration important here) • … Elwin Green, Pittsburgh Post Gazette, March 28 2012 http://www.post- gazette.com/stories/business/news/marcellus-shale-could-be-a-boon-or-bane-for-land-owners-235675/
- 14. Economic Impact – Lease and Royalty Payments • Lease and royalty payments related to Marcellus shale development in Pennsylvania in 2010…. – Accounted for about one third of gas industry spending in Pennsylvania between 2008 and 2010 – What do they spend on? Is it local spending? Considine, Watson and Blumsack, 2011
- 15. 2009 Economic Impacts of Marcellus Shale in PA: Best Study Based on “Real Data” So Far Kelsey et al 2011 see http://www.msetc.org/docs/EconomicImpactFINALAugust28.pdf
- 16. Tax Impacts The only real way local government can affect the taxes raised from natural gas operations is by deciding what tax rate they should set. Annual additions to the tax base from gas properties must be taxed at the same rate as other taxable real property
- 17. Revenue Issues Note that the addition to the tax base from each well is calculated each year Because production from a single well declines very rapidly from initial high rates of production, tax base will likely also increase dramatically as production begins, then decline steeply How will town officials respond to significant increases in the tax base? Typically, tax relief and lower rates? What’s the best response if large addition to tax base is only temporary?
- 19. Thank you! For further information contact: David Kay, CaRDI Department of Development Sociology Cornell University 607-255-2123 dlk2@cornell.edu Darrick Evensen Department of Natural Resources 518-339-0685; dte6@cornell.edu
- 20. Tax Impacts – The UPV formula Local assessors will add assessed value to tax roll annually based on amount of gas produced locally per well and UPV. Final factor affecting revenue raised: local tax rate
- 21. Effects on Property Values: DEC and… “Significant increases in property value are expected where the subsurface mineral rights and land are held jointly with land ownership... Properties where the mineral rights are not held jointly with land ownership, or where there is some restriction on drilling, would not experience this increase in value.” It is possible that… various impacts, particularly those associated with the construction phase, could reduce the value of properties close to the wells relative to similar properties not located close to wells. Conclusions based on literature review, not new studies
Hinweis der Redaktion
- Presentation adapted from one to NYS Assessors. Facts in quotes - because many are still contingent, much left to learn. Fracas because of polarization of issue. Goal is to fairly, appropriately assess risks, and choose a wise, well informed path forward wherever that leads.
- NOTE AS OF 2013, ALL THESE ESTIMATES MAY WELL HAVE BEEN SUPERCEDED BY “THE LATEST”, BUT THE EXACT NUMBERS ARE NOT THE POINT: In 2011, the USGS estimated a mean of 84.2 Tcf of technically recoverable undiscovered natural gas reserves (2011) Doesn’t include Utica Shale at all, or other gas deposits This is much smaller than the estimates that came from Terry Engelder (more than 500 Tcf) and other sources like the EIA – though USGS and Engelder weren’t measuring exactly the same thing. However, it was actually a huge increase from previous USGS estimates. The USGS estimate is the most official estimate based in geology, and EIA has also adopted it. The press about the EIA reducing its prior estimates can be misleading unless you understand that there was somewhat of an apples and oranges issue involved. Terry Engelder estimated in his work that about 15% of the Marcellus was in NY (I’m not sure if it’s based on surface acreage? Or did he include productivity estimates too? I haven’t verified 15% elsewhere) NY estimate is based on simple math: 84.2*15%*$3/mcf Price of Henry Hub Spot on January 3 was 2.98/mcf; NYMEX Henry Hub future was 3.00 source http://www.bloomberg.com/energy/ State Domestic product from EIA via wiki - http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP#cite_note-2 The price of gas is very low now. It is likely to go higher, and be volatile to some extent in any event, but the quantity of shale gas in many different states and countries is large enough to limit price increases for some time to come. Range Resources spokesman Matt Pitzarella said a live well would typically produce about 4.4 billion cubic feet of natural gas during its lifetime, which can be 50 years or more. If the wholesale price of natural gas were to average $5 per thousand cubic feet during the well's life, that production would be worth $22 million, making the landowner's share $3.3 million. http://www.post-gazette.com/stories/business/news/marcellus-shale-could-be-a-boon-or-bane-for-land-owners-235675/ Marcellus shale could be a boon or bane for land owners March 28, 2012 10:11 pm 1/3 Michel Sauret/Post-Gazette This location is the first Marcellus Shale well set up by CNX Gas in Rogersville, which taps roughly 8,000 feet down into the ground and 2,700 feet laterally to draw from a shale of natural gas. PreviousNext Loading Click image to enlarge Share with others: 0 inShare Related Media: PG: Natural gas workers boost real estate market By Elwin Green / Pittsburgh Post-Gazette When CNX Gas Corp. was spun out of Consol Energy Inc. in 2005, the infant company began life as a coalbed methane producer with tens of thousands of acres of land. Only later did it realize it held 161,000 acres that could produce natural gas from the sprawling geographical formation called the Marcellus Shale. Not having to sign a lease or to pay third parties for the right to drill that acreage gave CNX Gas a nice start on its move into shale, but the company has moved aggressively to bulk up. CNX Gas now holds lease rights to the gas underlying 250,000 acres, and is aiming for 400,000, said spokeswoman Laural Ziemba. But even hitting that mark would leave CNX Gas far from being the biggest swimmer in the Marcellus pool. That would be Oklahoma City-based Chesapeake Energy, with 1.6 million acres. Range Resources, of The Woodlands, Texas, has rights to 1.4 million acres. Other local companies in the Marcellus include Atlas Energy, with offices in Moon, which has rights to 519,000 acres, and Downtown-based EQT Corp., with 400,000-plus acres. The Marcellus Shale measures more than 95,000 square miles, or 60.8 million acres. The competition for natural gas in the shale is a competition for land. And where there is competition in business, money flows. The rush by gas producers to tie up that land has left some landowners confused by the process, while others worry that they may not be getting the full value for the rights to their land. Meanwhile, some elected officials see reasons to consider setting up new rules to protect landowners. Residents of rural areas are not the only ones affected. If the land rush plays out as it has in other regions, at least one observer said natural gas wells could eventually pop up in Downtown Pittsburgh. For landowners, signing leases granting a gas company rights to the gas under the land can profit them in two ways. First, when they sign the lease, they receive an upfront payment of rent for the term of the lease (commonly five years, with options to extend), often referred to as a bonus payment. That payment is stated as dollars per acre, and can vary widely. Second, there is a continuing flow of money based on how much gas a well produces, stated as royalty of a certain percentage of the value of the gas. Pennsylvania law requires that landowners receive royalties of at least 12.5 percent, or one-eighth, of a well's production. Representatives of the companies interviewed for this piece said royalties these days average around 15 percent. Figuring out what those numbers can mean to a landowner requires adding a few more numbers to the mix. Range Resources spokesman Matt Pitzarella said a live well would typically produce about 4.4 billion cubic feet of natural gas during its lifetime, which can be 50 years or more. If the wholesale price of natural gas were to average $5 per thousand cubic feet during the well's life, that production would be worth $22 million, making the landowner's share $3.3 million. But the money will not come all at once, nor will it even come in a steady stream. Gas production is a matter of diminishing returns: A well's output begins with a rush, then declines into a long tail so that about half of total production happens within the first two years. Thus, about half of a landowner's payments will come within the first two years. Using the above numbers, that would add up to $1.65 million. All of that assumes that a single landowner receives all the royalties from a particular well. In reality, a company must often negotiate leases with several landowners to assemble enough land for a "drilling unit" -- 640 acres, or one square mile. How much the companies offer depends largely on how much they expect to get for the gas they find. In the summer of 2008, Gene Partin joined with two of his Cecil neighbors, owning a total of approximately 100 acres, to bargain with Range Resources. In July, the wholesale price of natural gas approached the record set in 2005, post-Katrina. Range offered the trio $4,000 per acre, with a 17.5 percent royalty. "I thought a higher amount was realistic," Mr. Partin said, and he pushed for $5,000 per acre with a 20 percent royalty. "But my neighbors were very eager to sign for that amount. My wife was, too." So sign they did, in August. Which turned out to be not a moment too soon. Natural gas prices plunged that month, and in September the collapse of financial markets helped to send them even lower. The crash of 2008 delayed the Partins' payment; they received their $200,000 in January 2009. And there is still no well to generate royalty payments, nor have they heard from Range about any definite plans to drill one. But Mr. Partin seems content; he and his wife used the bonus to help pay off their home, and are living mortgage-free. While the Partins joined with only a couple of neighbors, some landowners have found it advantageous to form larger groups, both to share knowledge and to negotiate as a unit with gas companies. One such unit known as The Friendsville Group brought together some 900 landowners holding a total of 35,000 acres in Susquehanna and Bradford counties in northeastern Pennsylvania and neighboring Broome County in New York. In September, the group struck a deal with Fortuna Energy (now Talisman Energy USA Inc.), in which the company agreed to bonus payments of $5,500 per acre and royalty payments of 20 percent. A day later, Chesapeake Energy countered with an offer of $5,750 per acre and the same royalty. But even the Friendsville Group lease pales in comparison to a deal recently announced between two companies, Houston-based Anadarko Petroleum and Mitsui E&P USA LLC, an affiliate of Tokyo's Mitsui & Co. Ltd. Mitsui is paying $1.4 billion for about 100,000 acres in a joint venture with Anadarko, primarily in north-central Pennsylvania. That works out to $14,000 an acre. In a conference call with analysts following Wednesday's release of Range Resources' fourth-quarter results, Range chairman and CEO John Pinkerton said that if Range were offered $14,000 an acre, he would not sell. Kris Vanderman, a Charleroi attorney who specializes in oil and gas leasing, does not expect companies to offer as much to southwestern Pennsylvania landowners as they have in the northeastern part of the state. Mr. Vanderman said local deposits of Marcellus gas are thinner than those in northeastern Pennsylvania, so bonus payments here tended to be in the $2,000 per acre range for the first five years. That may be changing. While several individual landowners contacted by the Post-Gazette did not wish to publicize details of their negotiations with gas companies, e-mails received referred to offers of up to $3,000 per acre. And postings on a website for landowners describe recent leases for as much as $5,750 per acre, with 21 percent royalties. The website, www.pagaslease.com, was created by Web developer Ron Stamets, of Lakewood, a small town in the northeastern corner of the state, as a cure for his own frustration when he was negotiating a gas lease in 2007, and could not find information online about how to do it. "We had no idea that it would take off," he said. Now the site receives between 500,000 and 800,000 hits a month. Mr. Vanderman said it was only a matter of time before wells appear inside the city of Pittsburgh, and that they could even appear Downtown. "I would see no reason why that is not a possibility, if it is in the interest of those who own the gas rights to develop them as much as has been done in other areas." Residents of communities such as Lawrenceville, Lincoln Place and Saxonburg already have reported receiving inquiries about leasing their gas rights. Councilman Doug Shields, representing District 5 in the city, said that while landowners could benefit nicely from leasing their land to gas companies, more consumer protections were needed. "Everybody's talking about what a boon the Marcellus Shale is, but there is nothing out there from the consumer side," he said. "It's caveat emptor." For one thing, he said, signing a lease does not guarantee that a company will drill. "They can segregate that portion of the land and never pump it, but keep it as an asset." Mr. Shields said the commonwealth should protect consumers with legislation that requires advisories "on the face of the contract," similar to truth-in-lending provisions. Gas company spokespeople themselves acknowledge the inherent imbalance created when, as Mr. Shields said, "A sophisticated buyer is dealing with a very unsophisticated seller." "An educated property owner is the best property owner for us," said Dave Spigelmyer, spokesman for Chesapeake Energy and vice chairman of the Marcellus Shale Coalition, an industry group. "We encourage them to seek counsel before signing any legal instrument to convey their rights." A gas company does it own homework before ever offering the lease, first by identifying parcels of land that hold production potential. That potential involves more than determining the likely presence of gas. Other factors that may be involved include access to water for use in the hydraulic fracturing process, and access to the interstate network of pipelines that transport gas across the country (which sometimes requires building new connecting lines). "When you're talking about $3 million to $4 million a well," Mr. Spigelmyer said, "you need to make sure that you can move that gas to market." Once they're sure the site is worth leasing, the companies call in the landmen -- agents to represent them in reaching out to landowners and negotiating leases. These can be either employees or outside contractors. Chesapeake relies heavily on contractor Dale Property Services, which set up an office in Cecil in March 2008, while Range and CNX Gas use a mix of employees and contractors. With the multitude of companies in the Marcellus, there is no fixed order for doing things, but the remainder of the process will include at minimum a title search, the signing of the lease and the issuing of the bonus payment to the landowner. Besides establishing a payment schedule and giving the gas company rights to the gas, the leases typically authorize companies to construct machinery such as wells and compressors, as well as pipelines and roads as needed to transport the gas and to move equipment. They also include provisions for reclamation, or restoring an area after a well has been drilled. Elwin Green: egreen@post-gazette.com or 412-263-1969. First Published February 28, 2010 12:00 am Read more: http://www.post-gazette.com/stories/business/news/marcellus-shale-could-be-a-boon-or-bane-for-land-owners-235675/#ixzz27t9Wpa10 Read more: http://www.post-gazette.com/stories/business/news/marcellus-shale-could-be-a-boon-or-bane-for-land-owners-235675/#ixzz27t8kE1fO
- “ Gone” - the resource is rarely fully depleted, but it reaches a point that further extraction is impractical or uneconomic “ Local” – community, municipality, county, substate region, watershed, airshed, commuteshed, state, country??? Geographies, pace and scale, can be framed in different ways. What you take into consideration, what you leave out, has potentially enormous impacts. A land owner might focus on the impacts of one well, eg. In backyard. But the timing and pace of development can look and be very different over different time frames and territorial boundaries.
- From Killing for Coal, Thomas G. Andrews, 2008, Harvard University Press: In the Rocky Mountain West, as in every other part of the world, fossil fuels and the energy they contained transformed environments, refashioned everyday life, and deepened divisions of wealth and status. P. 18 Paul Simon, The Boxer I am just a poor boy. Though my story's seldom told, I have squandered my resistance For a pocketful of mumbles, Such are promises All lies and jest Still, a man hears what he wants to hear And disregards the rest. First stanza of The Boxer
- From the SGEIS economic analysis. Note that while text warns the unreality of the assumption of smooth growth and decline used in the analysis, the analysts go ahead nonetheless. The warning is probably correct. This is an example of the caution that must be placed in interpreting models/analysis of all kinds. Would you be comfortable with an analysis of weather changes that only looked at average changes, and not years of flood and years of drought? For some purposes you would probably answer yes, for others no. Understanding assumptions is at least as important as understanding conclusions.
- This is a bit out of date now. But the point is that market conditions and policy on this issue have been changing dramatically.
- Slide shows key points from my 2001 background paper for Susan Christopherson. Just emphasis on earlier slides. Time machine again highlights how fast we are moving up a learning curve. Note that uncertainty is affected by MANY more things than just policy. Another point is that many impacts – environmental, social, economic – do in fact depend on policy. No specific outcomes are entirely inevitable. CF: How To Avoid The Oil Curse http://www.npr.org/blogs/money/2011/09/06/140110346/how-to-avoid-the-oil-curseCategories: Radio , Government One radical solution aimed at preventing the oil money from destroying Norway's existing industries: Limit the amount of money the country made from oil in the short term. Don't drill everything at once. "It was received with skepticism by the industry, who wanted Norway to go full-speed ahead," Al-Kasim said. Despite the industry pushback, Norway handed out just a couple drilling permits a year. In an even more stunning act of self-restraint, the Norwegians decided not to spend most of the oil money. Instead, they put it in an oil trust fund that's now worth hundreds of billions of dollars. The government only spends the interest that the fund generates. Perhaps most shocking: Norwegian politicians have largely agreed to leave the principal untouched. "The Norwegian miracle is that ... all the parties in parliament agreed on a policy, and they agreed among themselves that they will never use oil policy as a subject during elections," Al-Kasim says. So, that's Norway's secret: At every step of the way, do the opposite of basic human nature. Tell powerful oil companies, you can't get the oil right away. Tell taxpayers, you won't get the money from the oil right away. And tell campaigning politicians, you know that half a trillion dollars we have just sitting there in our oil fund? You're not allowed to talk about it.
- A “fairway” is the area within a “play” (the whole area that can produce gas) that gas companies expect to be most profitable for gas drilling. The area in the fairway will probably see the most intense Marcellus drilling in New York. The extent and location of the fairway is an educated guess based on geological data including the depth of the layer, the thickness, and how much organic material is there (Total Organic Carbon, or TOC), along with other factors. The Marcellus tends to get thicker and deeper to the south and east portions of the play. Maps of the fairway will differ slightly from each other, but will cover similar areas. What the actual fairway is won’t be known until drilling is actually happening. Maps: Top: This was compiled by geologists at the New York State Museum. The rainbow area shows the Utica Shale. The yellow shaded area on the map is the Marcellus Fairway. Bottom: This is the map the DEC put in the revised draft SGEIS. It was developed by Alpha geoscience, who did most (if not all) of the geology data collection for them for the SGEIS. Something to keep in mind when talking about fairways and how much development any area will see is that what “kind” of gas is in an area will help determine when and how much development an area sees. “Dry” gas, is basically all methane, and is generally found in the eastern portion of the Marcellus. “Wet” gas contains other kinds of hydrocarbons and gas liquids (propane, butane), and is generally found in the western part of the Marcellus Shale. Depending upon the relative prices of dry and wet gas, development will be more heavy in different parts of the play. When the boom started in PA in 2008 and 2009, methane prices were relatively high, so most of the drilling was concentrated in the eastern part of the play, where this dry gas is. At the moment, methane prices are low. Development has moved west to make use of the other kinds of substances (propane, butane) that can be found in wet gas. If prices change again, the amount of development in different areas will likely change with it.
- Key points on pace and scale slides: Early assumptions were that development would be along the carpet/grid pattern shown in the assumptions in the first slide. This might be the eventual pattern in some places, but that is not the development pattern that has been in evidence or is likely across 100000 square miles of the Marcellus. The Table 2 slide is from Terry Engelder’s influential estimate of the overall size of the RESOURCE – note that he assumes 70% of the entire Marcellus region will be blanketed with wells. Unlikely in reality. The “Overall Gas Map slide” highlights the pattern of actual development SO FAR in PA in one county; much more linear pattern in many places, influenced by roads, pipeline access, which company owns which rights, etc. Barnett slide is from showing mature field development; intense clustering of wells in small areas called “sweet spots” or here “core areas”. Note the geographic scale of the cores restricted to a few counties. What do the economic impact analyses used to substantiate public benefit really tell us? What are their limits in understanding economic effects of drilling? (e.g. What are the likely costs of hydro-fracturing to local government?) What can we expect regarding long-term economic development in counties where drilling occurs? – meaning the prospects for economic diversification population growth an improved quality of life
- Here is an example of how an area might be developed for natural gas, with the staggering of activity on sites being supported by a larger staging area. Somewhat misleading slide insofar as most well pads actually have multiple wells – radiating horizontally from the same pad once they are at depth - drilled on them. For a variety of reasons (legal, economic, technical), a company will often not drill all the planned wells on the pad at the same time. Ie. They may or may not return to the same surface location to drill more wells at a later date. Number of wells on pads in PA seems to vary so far up to about 8 per pad sometimes, though up to 12 is possible. One major issue – when, in case of waiting for more wells, does pad get restored? Also, given that drilling/fracking is most disruptive stage, note that this phase may be more concentrated/longer at single pad, or more episodic, even at a single location; depending on market conditions, geology, lease terms, etc.
- Engelder presentation at http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&sqi=2&ved=0CB8QFjAA&url=http%3A%2F%2Fwww.bakerinstitute.org%2Ffiles%2Fdocuments%2Fevent-presentations%2Fnorth-american-energy-resources-summit-jan-18-2012%2FEngelder_Presentation_Secured.pdf&ei=qg5lUI0kybbRAf6QgPgL&usg=AFQjCNHSe_WdGtrKgl5_0JcqAp1QJ7T9rQ&sig2=Xpuj6moqAmdtFGY-zHvfow
- This is likely the most important info in this presentation… When thinking about the economic and employment impact of natural gas, its vital to keep in mind the varying labor needs throughout the phases of natural gas production. There are three distinct phases, which have very different impacts requirements. The numbers are not important here, this data is from Wyoming. The distinct phases in workforce size is the point.
- JURISDICTIONAL UNEVENNESS The impacted communities cannot actually control the development. INSUFFICIENT CONTROL OF LAND USE The local govt. cannot use zoning or siting arrangements to ease adjustment. (rewrite) NEW COMERS VS. OLD TIMERS Old residents resist changes and taxes needed to deal with growth. New residents demand services not traditionally needed. SEVERITY OF GROWTH Sheer numbers of people overwhelm public services and community life. VOLATILE PRODUCTION PATTERNS The boom-bust cycle forces local govt. to weigh immediate needs with unknown future. MONOPOLY OF INFORMATION The industry holds nearly all information and it’s often difficult or impossible for others to obtain it. RISK Uncertainty of future development caused hesitation in federal/state/local/private loans, grants, and support
- How money will flow into the local and regional economies – 70% (Considine) will come in the form of landowner payments in the EARLY YEARS. If these come in a short time frame they will be windfall and will be spent differently than money coming in at a consistent rate. It will also affect revenue s derived from the drilling. The Oil and Gas industry is recommending a slow ramp up over ten years. If 50% of gas is extracted in 4-5 years, the taxable gas will be a much smaller portion of the total gas extracted. Monitoring . The ability to: Construct baseline data eg. for road use agreements Monitor environmental impacts on water, air and public health; Establish accountability. Community capacity to plan for and deal with the costs of drilling road and traffic impacts, short-term population increases, impacts on public services including permitting/assessments, police/fire/emergency services, public health services, and schools; Effects on “adjacent industries” like tourism and agriculture. Capture. The ability to keep more expenditures in the region or state by, for example, local business creation and job training; long-term economic development effects. Together these factors will affect long term ED prospects.
- See http://www.marcellus.psu.edu/resources/PDFs/taxbase.pdf and http://marcellus.psu.edu/resources/PDFs/jacobson_fiscal.pdf
- See http://www.marcellus.psu.edu/resources/PDFs/taxbase.pdf and http://marcellus.psu.edu/resources/PDFs/jacobson_fiscal.pdf This slide makes KEY POINT ABOUT REVENUES - district officials in jurisdictions with wells should expect volatility, rapid rises and declines. Also
- Main point is that there is a lag between when the physical activity takes place and when the municipality or school district see the revenues. While this is to some extent true for all forms of construction, the scale of development/impact/revenues that are involved means munis and school districts should PAY CLOSE ATTENTION to this and think about the implications.
- Essentially, the UPV is a net cash flow calculation. The formula was set by the state legislature, so there is very little to no discretion at the agency or local government level on how it should be calculated or applied. From gas operator reports, the NYS ORPTS will estimate a generalized value of current and future revenues minus costs for typical drilling operations throughout the Marcellus. This is the numerator in the equation above. It then will discount this value with the “discount rate”, which is based on the factors shown in the denominator. ORPTS has not yet made this calculation for the Marcellus or Utica shales, and it will not have the information to do so until after reports on costs and revenues have been filed (ie after permits are issued and drilling starts). Existing wells in the Marcellus are assigned a generic UPV. Until the UPV’s are calculated, we can only guess at how large the UPV is likely to be. Note that the more profitable the operation (ie the greater the excess of revenues over costs), the higher the UPV, all else equal. Note further that the general logic of how this cash flow formula is calculated echoes other ORPTS calculations. For example, the value of tax exemptions associated with agricultural lands depends on similar calculations of productivity and revenues minus costs for production for different soil types.
- These findings make sense, but they are based on limited data/information to date.