Natural-gas fee may be too late

Posted: February 13, 2012

By Arthur Sterngold

With natural-gas drilling booming in Pennsylvania's Marcellus Shale region, state lawmakers might seem to have chosen the perfect time to impose an impact fee on gas producers. The new fee has been projected to generate $191 million in retroactive 2011 fees, $220 million in 2012, and larger amounts over time.

Unfortunately, though, the legislature may have procrastinated for too long. Natural-gas prices have plummeted from their lofty levels of a few years ago, squeezing industry profits and forcing producers to start scaling back their activity. As a result, the impact fees may generate less revenue than expected and induce some cash-strapped drillers to shift resources to other states.

After years of avid promotion of natural-gas development by the Marcellus Shale Coalition, the industry's chief lobby, it's hard to imagine a slowdown in drilling. As part of its campaign to win public approval, the coalition funded a series of economic impact studies by Penn State researchers. The three studies, released in 2009, 2010, and 2011, forecast increasingly larger jumps in employment, incomes, and tax revenues as a result of shale exploitation. In the most recent study, released last summer, the authors concluded that "the outlook for Marcellus production is remarkable."

While the Penn State researchers were preparing their reports, however, evidence was mounting that the industry was in trouble. From an average of $8.85 per million British thermal units in 2008, natural-gas prices fell sharply to $4.39 in 2010, and $3.94 in 2011. Last month, prices dropped below $2.50, and they are expected to stay under $5 for another decade.

Signs of a slump

Lower gas prices mean smaller profit margins. So it's no surprise that gas producers are scaling back their Marcellus Shale drilling, putting growth on hold, or moving resources to states with lower costs and more deposits rich in oil and other liquid fuels. The companies doing so include Talisman Energy, EQT Corp., Consol Energy, and Occidental Petroleum Corp. Chesapeake Energy, which has the largest Marcellus Shale holdings in the state, has announced the most drastic cutbacks in Pennsylvania and elsewhere.

In a recent Inquirer op-ed, Louis D. D'Amico, president of the Pennsylvania Independent Oil & Gas Association, explained that "low natural-gas prices are bad for producers, many of whom can't continue to spend money on wells that aren't profitable under current and foreseeable conditions. In the coming months, Pennsylvanians can expect to see fewer ... wells drilled."

There have been signs of a coming correction for years. In May 2010, energy consultant Andrew Weissman observed in the American Oil and Gas Reporter that falling natural-gas prices had already caused markets to tumble, warning: "Current price levels will inevitably lead to further cutbacks in drilling." A year later, the Wall Street Journal reported, "With natural-gas profit margins all but disappearing, companies are cutting back on new gas drilling."

The 2009 Penn State study noted that "a prolonged slump in prices could dampen" Marcellus Shale activity. By the time last year's report was released, the slump was obviously in progress, but the researchers made their most optimistic forecast to date. They should have made the possibility of a lull clearer - even if that's not what the Marcellus Shale Coalition wanted to hear.

Boom and bust

It's too early to say how long a gas slowdown could last or how it will affect drilling impact fees. But even if natural-gas development grows at a slower rate than anticipated, people may suffer from having overinvested. Rural residents who decided to fix up family farms rather than move to smaller homes may be hard-pressed if their gas leases aren't renewed. Small-business owners who expanded their operations to serve gas companies may find they can't pay their bills. Let's hope the Marcellus Shale Coalition's relentless boosterism didn't exacerbate a climate of overspeculation and make the pain worse.

In the long run, natural-gas development may be good for Pennsylvania, especially compared with the economic stagnation we lived through before the drilling started. But industries that grow too quickly and then pull back painfully create a toxic boom-and-bust cycle. Pennsylvania needs an energy industry that is economically and environmentally sustainable, guided by academics who provide prudent advice and careful analysis. That would do more to safeguard our communities and natural resources than any amount of impact fees.

Arthur Sterngold is an associate professor of business and the former director of the Institute for Management Studies at Lycoming College.

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