Directional drilling and hydraulic fracturing have unlocked vast new reserves of natural gas in the U.S. Development of these resources is now well under way in Pennsylvania and West Virginia.

Unlike their neighbors to the south, however, New York residents are not directly benefiting from natural-gas development as the result of a government-imposed moratorium, itself a response to environmental concerns surrounding hydraulic fracturing.

The Economic Opportunities Of Shale Energy Development study, recently published by the Center for Energy Policy and the Environment at the Manhattan Institute, analyzes the economic and environmental impacts of shale-gas drilling in New York and finds the net economic benefits to be significantly positive.

Specifically, an end to the moratorium would spur over $11.4 billion in economic output. Some 15,000 to 18,000 jobs could be created in the southern tier and western New York regions, which lost a combined 48,000 payroll jobs between 2000 and 2010.

Another 75,000 to 90,000 jobs could be created if the area of exploration and drilling were expanded to include the Utica shale and southeastern New York, including the New York City watershed. (This assumes a regulatory regime that protects the water supply but permits drilling to continue.)

And localities and the state stand to reap $1.4 billion in tax revenues if the moratorium is allowed to expire.

Cost versus benefit

The key question is whether the cost of the environmental impacts exceeds these economic benefits.

To answer that question, we assess the environmental track record of the shale-gas industry operating in Pennsylvania and estimate the economic cost of its impact on the environment. Such an analysis provides an estimate of the net benefit-cost ratio for shale-gas drilling.

This study carefully reviewed the public records of environmental violations reported by the Pennsylvania Department of Environmental Protection (DEP) for the period 2008 to 2010. Of a total of 1,924 violations, 152 were serious, involving 72 cement and casing violations, 8 blowouts, 56 major spills, and 16 cases of stray gas. The study discusses some of these incidents in detail, including their impact on land and water.

The study also quantifies the impacts of natural gas development on air emissions. The values of these environmental impacts are then estimated on the basis of estimates of the value of environmental amenities reported in the economic literature.

Our main finding is that the value of these environmental impacts is far smaller than the economic benefits of the activities that caused them. A typical Marcellus shale well generates about $4 million in economic benefits while generating only $14,000 in economic damages from environmental impacts.

The expected environmental costs are so low because the probability of an environmental event is small, and those that do occur are minor and localized in their effects. Those environmental problems that have arisen in connection with hydraulic fracturing in no way call into question the soundness of that procedure. In reality, they result from improper drilling and well-casing technique and defective formulation of cement.

Such errors and flaws allow wells to penetrate shallow gas deposits, permitting the gas within them to escape and enter groundwater supplies. Marcellus gas resides far below these deposits and any aquifers. More stringent design standards should be adopted, and more active regulatory oversight should be exercised. These steps would reduce the incidence of such problems.

Our findings suggest that the current shale-gas drilling moratorium imposes a significant and needless burden on the New York State economy. In short, the economic benefits of developing shale-gas resources in New York State are enormous and could be growing, while the environmental costs of doing so are small and could be diminishing, if the moratorium is lifted and if proper policies are put into place.

Continuous benefit

The continuity of drilling effort and the economic activity that it generates set shale-resource development apart from other energy development activities. Developing coal mines, wind turbines, hydroelectric resources, and solar energy involves significant job creation during construction. Once the facilities are in place, however, their operation requires relatively few workers.

In contrast, the labor-intensive aspects of shale-gas development accelerate over time and can persist for decades if the reserves in place are large enough. Transportation costs are high for key materials used in exploration, drilling and the construction of gas-processing plants and pipelines. Therefore, support industries, including well support, steel, sand and gravel, concrete, trucking and scientific and engineering services, often arise locally. Most of these support activities are not easily outsourced to foreign suppliers.

And in regions with private mineral rights, shale-gas development requires lease and bonus payments to landowners, who in turn pay taxes and spend this income on local goods and services. While the footprint of a shale-well site is small, the shale deposits occupy an extensive geographical area, necessitating the leasing of large tracts of land.

Economic-impact studies have been conducted for the Barnett, Fayetteville, Haynesville and Marcellus shale-gas plays. These studies employ input-output models to estimate the direct, indirect and induced impacts on regional value added (the regional equivalent of contribution to the nation's gross domestic product), employment and tax revenues.

Direct, indirect and induced benefits

Direct impacts constitute the purchases by natural gas companies from other sectors of the economy.

Indirect impacts refer to the supply chain. For example, a natural gas company contracts with a drilling supply company, which then hires workers and other companies to supply it with materials, equipment and services.

Induced impacts constitute the rounds of transactions throughout the economy set off by the spending of workers, hired directly or indirectly, on goods and services. Induced impacts also result from landowners' spending of lease, bonus, and royalty payments.

Numerous studies (Table 1) show the benefits of shale-gas development. The Perryman Group (2008) found that Barnett drilling activity generated 132,497 jobs.

A study by Loren and Associates (2009) found that the Haynesville shale generated more than 57,000 jobs, almost the same number found by Considine, Watson, and Blumsack (2010) for the Marcellus play.

A study by Collins and Deck estimates that development of the Fayetteville shale in Arkansas could generate more than 9,600 jobs. Each of these studies employs input-output models to estimate these impacts.

To accompany the analysis of the environmental impact of developing the Pennsylvania Marcellus shale, the economic benefits that its development is expected to yield are in Table 2.

The total economic output generated by a typical Marcellus well is $5.46 million, which can be considered the gross economic benefit before any deductions for environmental damage. In addition, economic activity associated with Marcellus development generates over $2 million in federal, state, and local taxes, plus 62 jobs per well.

Conclusion

It goes without saying that drilling companies should do all they can to avoid environmental violations, but in any industry, accidents occur.

In developing the Marcellus shale in Pennsylvania, the industry has taken steps to avoid these events, and when a violation has taken place, it has remediated the pollution and made efforts to compensate those harmed by the incident.

The Pennsylvania Marcellus industry is experiencing significant and justifiable scrutiny by both the state DEP and private environmental-interest groups.

Many of the latter oppose natural gas development under any circumstances and have pressured both state and federal government agencies to bring it to a halt. They seem to overlook the fact that gas burns cleaner than many other fuels and that extracting it from the earth is far less invasive than, for example, coal mining.

Despite the opposition of such groups, Pennsylvania and the industry are working together to develop regulations and protocols that will minimize drilling's environmental footprint and any long-term impacts that it might have.

New York State currently has in place a moratorium on shale gas development. Our analysis of Marcellus development in Pennsylvania suggests that environmentally safe development is possible in New York.

Our study finds the net economic and environmental benefits from shale gas development to be considerable, suggesting that the current moratorium is far costlier than its proponents, or even its opponents, realize. n

Timothy J. Considine is the School of Energy Resources professor of Energy Economics and director of the Center for Energy Economics and Public Policy at the University of Wyoming. Robert W. Watson is the chairman of the Pennsylvania Department of Environmental Protection's Oil and Gas Technical Advisory Board. Nicholas B. Considine is an analyst at Natural Resource Economics Inc., a position he has held since 2005.