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Feature- Balancing Dollars With Sense: As Natural Gas Drilling Intensifies, State Eyes Tax
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The following is a guest essay by Jill Ercolino, Managing Editor of Pennsylvania Township News, published by the Pennsylvania State Association of Township Supervisors. This originally appeared in the April 2010 issue of their publication, Pennsylvania Township News. As Pennsylvanians and its government leaders consider the pros and cons of allowing more drilling for Marcellus Shale in Pennsylvania, the Susquehanna Valley Center presents this article for all to consider.
For 70 years, Choconut Township supervisor Bill Stewart has lived in Susquehanna County, just a hop, skip, and a jump away from the New York border.
And as fate would have it, Stewart’s nearly 100-acre farm sits atop a subterranean pot of gold: the Marcellus Shale, which holds a dense and expansive natural gas reservoir and is one of the most — if not the most — important energy finds in the nation’s history.
The shale blankets much of Pennsylvania, Ohio, New York, and West Virginia and is believed to hold about 50 trillion cubic feet of natural gas. That’s enough to supply the entire United States for two years. Its value: $1 trillion.
People are deeply divided about the shale, which has triggered a frenzied gas rush and raised all sorts of environmental concerns, particularly about the potential impact on water supplies.
“The drilling that is going on in the shale is like gas well drilling on steroids. Everything is bigger — the rigs, the wells…,” says Bryan Swistock, a water resources specialist with the Penn State Cooperative Extension. “And everyone has an opinion about it. You find very few people in the middle.”
Bill Stewart falls into the group that is happy to have something this good so close to home. Their excitement is fueled by the promise of riches, a plentiful supply of good-paying jobs, and a booming industry that will resuscitate regions of Pennsylvania that had become economic dead zones.
The folks in New York? Well, they’re a different story, the supervisor says.
“They’re fighting it,” Stewart notes, “but let them fight it and let them keep drilling here.”
Economic Development Opportunities
Unlike its northern neighbor, Pennsylvania has taken a different approach to the natural gas industry, and since it issued the first Marcellus Shale permit in 2005, interest here has exploded.
Companies from as far away as Texas and Oklahoma, encouraged by advances in horizontal drilling and soaring energy prices, have staked their claim, looking for a piece of the profits. In 2009, shale drillers were granted 2,000 permits, but that’s nothing compared to forecasts for this year when the state expects to issue a record 5,200.
Still, some environmental activists, landowners, and lawmakers worry that Pennsylvania may end up paying a hefty price. People fret about ruined landscapes and roads, polluted streams and water wells, and illegally dumped drilling waste.
“I just feel like they’re coming in and grabbing what they can and getting out,” a Susquehanna County resident told the Philadelphia Inquirer.
Aware of these worries, the state Department of Environmental Protection, the main agency overseeing the industry, is taking a hard line with drillers.
“This is a game-changing industry for Pennsylvania and the rest of the nation, and we’ve made it clear that we welcome it, but it must follow our regulations,” DEP Secretary John Hanger says. “We’re not a hear-no-evil, see-no-evil agency.”
In addition to stepping up enforcement and tightening regulations, DEP is pushing for a new tax that will help the commonwealth and its municipalities, where drilling is taking the heaviest toll, better manage the short- and long-term impacts. And there are plenty.
Rigs, Wells And Change
These days, drilling is most intense in “the fairway,” a swath that cuts from the northeast to the southwest and encompasses various counties, including Susquehanna, Bradford, Tioga, Lycoming, Greene, and Washington.
There, companies, including Exxon Mobile, Range Resources, Chesapeake Energy, Chief Oil and Gas, East Resources, Talisman Energy USA, and Cabot Oil and Gas Corp., are investing millions to create an energy network — much of it in scenic, untouched rural areas — that will provide the nation with natural gas for the next several decades.
“The industry has spent $6 billion in the Marcellus Shale to date, and that number will probably increase to $55 billion by 2014,” says Tom Murphy, an educator with Penn State’s Cooperative Extension.
Along with the cash, rigs, and wells, drillers have brought something else: change.
Marvin Meteer, a member of the PSATS Executive Board and a supervisor for Wyalusing Township in Bradford County, sees the physical manifestation of that change as he travels Route 6 on the way to work in downtown Wyalusing.
“As I head down Route 6, I can see at least four drilling rigs,” he says, “and I can see two more from my house. And that’s just a little bit of it.”
Twenty-two wells have sprouted up in Bradford County since 2008, Meteer says, and that number will likely climb to more than 100 in the next two years. “The industry is growing,” he says, “and it’s growing by leaps and bounds. We’re beginning to realize that this whole gas business is going to be here for quite awhile.”
In drilling hot spots, the sights and sounds of an industry breaking loose have become familiar. Hundreds of trucks, weighted down with water, wastewater, and drilling equipment, are lumbering over local roads. Construction crews are busy clearing trees and fields, building well pads and access roads, and installing pipelines. Workers are crowding local bars, restaurants, and convenience stores and taking over once-vacant hotels.
Companies that service the drilling industry are moving into Pennsylvania, too, and all of these dollars are giving local economies a boost.
“That money is going everywhere: to stores, to restaurants, to Walmart,” says Debbie Kotulka, secretary for Richmond Township in Tioga County, who believes that drilling’s short-term inconveniences are worth the long-term gains. “I don’t think people realize how much good can come from this.”
Money is flowing to landowners, too. Up and down the natural gas fairway, farmers, retirees, hunting buddies, and young families are getting rich — very rich — from leasing their property to gas exploration companies.
“People are making money here — more than they ever dreamed of,” Meteer says. “The gas companies are paying out millions and millions of dollars. Money plays a big role in this.”
Range Resources reported last year that it had turned seven Pennsylvanians into millionaires and paid out $20 million in royalties. A group of Wyoming County landowners, representing 37,000 acres, signed a five-year deal with Chesapeake Energy that netted them $5,750 per acre in sign-up bonuses and 20 percent in royalties. Similar agreements have been inked in Susquehanna County.
“The shale’s development is bringing change in a lot of different dimensions,” says Tim Kelsey, state program leader for the Cooperative Extension.
And, some say, it’s not all good.
Worries By The Dozen
A quick Internet search reveals just how controversial natural gas exploration in Pennsylvania has become.
In article after article, critics say the rush for riches has turned the commonwealth’s pastures and forests into industrial zones that produce unbearable noises and smells and questionable toxic fluids. They report that intense truck traffic, the likes of which locals have never seen, has disintegrated local roads, putting a strain on already tight township budgets.
Gas company workers and their demand for housing are also driving up rental prices and leaving locals without affordable options. In Bradford County, for instance, the price to rent a three-bedroom home skyrocketed from $600 a month in 2008 to nearly $2,000 today.
Worries about water have emerged, too.In Cooper Township, Clearfield County, where a handful of natural gas wells have sprouted up, supervisor Wayne Josephson has heard the horror stories about drillers contaminating groundwater supplies and drying up water wells.
This could happen in his community, and it bothers him.
“There was a lot of concern when the two [natural gas] wells went in here, and there still is a lot of concern,” he says “People wonder if this is going to damage our water. That would be catastrophic. “Some are looking at the money, but you have to look at the long term and you have to look out for your people,” Josephson adds. “If you don’t have good water, you don’t have anything.”
Much of the focus has been on horizontal fracturing, the process used to extract natural gas from the Marcellus Shale.
“Fracking” a well requires up to 5 million gallons of water, which one study indicates can be laced with at least 260 chemicals, some toxic, before being pumped into the ground. Once the extraction process is complete, some additives may be left behind, raising contamination concerns. Fracking also produces thousands of gallons of waste fluids, which must be trucked from the site for disposal, increasing the risk of leaks and illegal dumping.
Dimock Township in Susquehanna County, a rural community of 1,400 residents, has become the poster child of the ill effects of natural gas drilling. There, methane gas — later confirmed to be from drilling — seeped into 13 water wells. One exploded, and the water in the others turned orange and bubbly.
The state Department of Environmental Protection deemed Cabot Oil and Gas Co., which operates 63 wells in the township, responsible for the contamination. The agency also held Cabot accountable for spilling 8,000 gallons of fracking waste into Stevens Creek, a tributary of the Susquehanna River. The company, which has claimed that it wasn’t at fault, was fined nearly $200,000 for the incidents.
Community concerns like these have prompted Penn State researchers to monitor water wells in the Marcellus Shale region. The year-long project will determine what impact, if any, drilling has on water supplies, analyst Bryan Swistock says.
There’s a lot of opinion out there,” he says, “but we want to collect good, unbiased data to find out if there really is a problem.”
Up To The Challenge
The Dimock case also cast a shadow of doubt on DEP, which was criticized for not responding fast enough to residents’ complaints. In the same breath, environmentalists have wondered if DEP is up to the challenge of monitoring drillers.
Secretary John Hanger stresses that it is. The agency has stepped up enforcement and updated regulations, all in an effort to better manage the industry.
In 2009 alone, he says, DEP conducted more than 14,500 inspections of well sites and lodged 678 actions against gas exploration companies. In addition, by the end of this year, the agency will have 105 new employees in its Bureau of Oil and Gas Management — many of them inspectors. DEP is also opening offices where drilling is most prevalent.
“This is a world-class resource that requires world-class oversight, and we’re making changes to grow with the industry,” Hanger says, noting that DEP’s expanded presence is being funded by increases in permit fees, not tax dollars. The higher rates are likely to net the agency up to $13 million a year.
“At a time when most state government hiring has been curtailed, the hiring of additional inspectors by DEP demonstrates just how seriously the commonwealth takes its responsibility to protect the environment,” Gov. Ed Rendell says. “The rapid increase in drilling activity across the northern tier region makes it necessary for DEP to have a stronger presence on the ground, and these new inspectors will help us achieve that important goal.”
On the regulatory front, Hanger says, DEP is amending its oil and gas regulations to strengthen well construction standards. The new rules will also ensure that drillers take immediate action to address gas migration problems, like the ones in Dimock Township, and notify state and local authorities.
Still, he says, it’s unrealistic to expect the development of the Marcellus Shale to be problem-free. “There is no zero-impact way of drilling,” Hanger says.
But, he contends, there is a way to soften the blow.
Hanger, along with the governor, is advocating a natural gas severance tax, which would produce hundreds of millions in revenue for the state, townships, and other municipalities to meet the challenges ahead.
Money For Townships
Last year, Rendell shut the door on the severance tax proposal but reopened it during his February budget address. He called on lawmakers to make “big oil and gas” pay to do business in Pennsylvania, much like they do in 28 other states.
Under the proposal, modeled after one adopted in West Virginia, Pennsylvania would raise $1.8 billion over the next five years, with 10 percent, or $180 million, going to local governments dealing with drilling’s impacts.
The governor’s plan, however, does not specify how the local share will be divided or how the money may be spent. All of that will need to be worked out during upcoming budget negotiations, says Gary Tuma, the governor’s press secretary. “Those are discussions we intend to have,” he adds.
PSATS, guided by a resolution adopted at last year’s annual conference, supports a local share of the severance tax.
“Townships, many of them small and rural, are bearing the burden of natural gas production,” PSATS Executive Director David M. Sanko says. “It’s only fair and right that they receive money to prepare for and manage these costs. These dollars should not come from local taxpayers. The gas companies are creating the challenges; they should help townships overcome them.”
Mike Bertalino, a supervisor for Young Township in Indiana County, sums up the situation this way: “Everybody is getting rich except the townships where the gas is getting taken from. A severance tax — anything — would be welcome in our township. You can’t fix the problems without the dollars. I’m concerned that we’re not getting a dime, but we’re taking the brunt of the hammer.”
Pennsylvania is the only major fossil fuel producer that doesn’t impose a severance tax, and both Rendell and Hanger are urging lawmakers to move quickly to enact the levy.
“This tax is a way to make sure the impacts are dealt with, and there is a clear need to move forward with it as soon as possible,” Hanger says.
Rendell says that including a local share is the right thing to do.
“With the impact that stepped-up drilling activity will have at the local level,” he says, “my administration considers it important to provide a share of severance tax funds to local governments so they have additional money to protect their communities and share in the returns from resources extracted in their area.”
An Investment In The Future
Only time will tell if lawmakers will support the severance tax. If they do, townships should be wise about spending this money, plus what they receive from leasing municipal land to gas companies, Penn State’s Tim Kelsey says.
Natural gas is a finite resource. One day, possibly a few decades from now, the gas companies will pull up their stakes and move on — a lesson learned many years ago with coal mining. Townships should start planning for that day now, Kelsey advises.
“There will be an end to this boom. Maybe it won’t be for another 50 or 100 years, but it will end,” he says. “Townships have to ask themselves: ‘What are we doing to make sure this opportunity leaves our community at least as well off as it is now?’ ”
Kelsey says that townships should resist using new tax dollars, lease bonuses, and royalties to lower taxes, a move that will only benefit the current generation, not future ones, which will have to live in a township changed by drilling, too.
“Think long term, not short term, and use the dollars to do things you couldn’t do before,” he says, adding that smart investments include buying equipment, paving roads, and improving parks.
Westmoreland County’s Salem Township earns an additional $100,000 a year from leasing land to a gas company. Supervisor Ron Martz says the money is being used to develop a 50-acre park, which will eventually have an amphitheater, trails, pavilions, a campground, and ball fields.
“It’s a big project and will probably take 30 years to finish,” Martz says, “but we’re doing something that’s good for the community, and the gas companies are helping us.”
Salem Township is on the right track, Kelsey says. “Clearly, natural gas presents both tremendous opportunities and significant challenges. Done right, this could be very good for townships and their residents.”
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4/19/2010 |
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