Marcellus Shale (Hydraulic Fracturing
for Natural Gas Extraction in Pennsylvania
A Panel Discussion

Alanna Hartzok, Jan Jarrett, and Michael Wood

[Presentations at the annual conference of the Council of Georgist Organizations, held in Camp Hill (Harrisburg), Pennsylvania, 1 August 2012. Reported on by Nadine Stoner from an audio tape and notes. Reprinted from GroundSwell, September 2012]

About the presenters:

Moderator and presenter Alanna Hartzok, Scotland, PA, is the co-director of Earth Rights Institute, http://www.earthrights.net/, and a past president of the Council of Georgist Organizations. She is the General Secretary of the International Union for LVT; Internal Outreach Coordinator, R. Schalkenbach Fndn.; and recipient of the International Earth Day Award.

Jan Jarrett, Harrisburg, PA, has a 25 year career in public interest, environmental and clean energy advocacy in Penn. She currently is an environmental policy and outreach consultant. She works on policies and environmental issues. She worked for 10 years for the Penn. Chesapeake Bay Foundation where she was the Penn. grass roots coordinator. For two years she coordinated a coalition of consumers and environmental organizations in the Penn. Campaign for Clean and Affordable Energy which sought to gain consumer protection and clean energy. She worked for 13 years for Penn. Future where she helped develop a successful campaign by creating policies for renewable energy and energy efficient industries. The Pittsbugh Post Gazette named her one of the 10 most influential people for her work on Marcellus Shale gas.

Michael Wood , Harrisburg, PA, is the Research Director of the Penn. Budget and Policy Center. The Budget and Policy Center is a non-profit, non-partisan progressive research think tank in Harrisburg that works on tax and budget issues primarily at the state level. He has authored several research and policy briefs for the PBPC. Before joining that in 2007 he was the Budget Manager for the city of Harrisburg. He also spent a number of years with the Commonwealth of Pennsylvania as a Revenue Forecasting Analyst at the Dept. of Revenue.

JAN JARRETT:

You may know a lot about fracking but what might be useful for you to understand is how the issue really came to Pennsylvania in such a sudden and disruptive way. And how the state and advocates wrestled with the issues that swirl around fracking and all the turbulence and the changes in that context and the options we were faced with in the political sense within a fairly brief period of time. The story of the Marcellus Shale really starts 400 million years ago with an inland sea that was created as continents crashed into each other and then separated from each other. It was a time even before the dinosaurs. In the inland lake where the Marcellus Shale formation is, algae and other simple forms of life forms settled to the bottom of the lake and created this shale gas and enriched the compound trapping it in rock. That is well known that we have this deposit under much of Pennsylvania. It is usually found about 1,000 feet underground, and even though it was known that that deposit was there it was not able to be accessed with the technology over the 20th century. Some innovations in the late 20th century and into the early 21st century changed that. Shale gas and unconventional gas extraction was pioneered in Texas through a series of events. There was a company based in Houston, TX, Range Resources, and they had operations already in Pennsylvania in drilling shallow wells. Gas drilling has been done for about 100 years with vertical drilling. They also had some of the same kinds of problems and issues that hydraulic fracturing in the shale has lots of times. But nevertheless here in Pennsylvania it was well established with infrastructure to transport that.

That was already here to get our gas out and also the pipelines that ran across Pennsylvania getting gas from other areas south from the Gulf and Louisiana and Texas up to the market in the East. A geologist who worked with Range Resources was kind at the end of his career and with financial issues convinced the president of Range Resources to take a chance on using this hydraulic fracturing technique on the Marcellus Shale to see what they might get. These shale deposits typically are extremely productive right away though they level out after a few years. They tried the technique of hydraulic fracturing and hit the Marcellus Shale deposit and high producing natural gas blew back at them. It was a very vigorous type of natural gas. There are two kinds of natural gas. In the northern part of Pennsylvania we have a variety of gas that is so pure it can practically go right into the pipelines to send to marketing without hardly any processing. In the southwestern part of the state in the Pittsburgh region there is a wet gas. That gas contains other valuable resources like methane which is the stuff of creation – you can turn it into anything from tires to pantyhose. They take that methane and grind it, they crack apart the molecules and turn them into ethylene from which they can make a host of other products. So we have got two different gas deposits.

That first Marcellus well was built in 2004. In 2012 that resource has continued to change the landscape in many areas of Pennnsylvania with drilling underway and changed politics and had an impact on the economy but it is also not the entire story of the economy. What is involved is they drill down in this deposit about a mile or more underground, and then they turn the drill bit horizontally into a seam of the Marcellus Shale rock formation. Then under very high pressure they pump five to six million gallons of water down into the pipe they drill and they also blow little charges in there for holes so water can crack open the formations. The formation holes are cut very tightly because they need to do this to free up the gas trapped in the rock. They put four to five million gallons of water down there that is laced with a whole bunch of chemicals to be sure that in the process the pipes don’t corrode. About 15-20 percent of that comes back as wastewater. That brew comes back through a host of geological formations. You can find all sorts of substances and it is really high salt. The very briny water is more salty than sea water. Then there is the problem of what to do with it. The problems that it presents to the environment are pretty substantial. With really vigorous oversight they can be manageable, but there are going to be accidents and mishaps that aren’t really under anybody’s control.

The key is that the industry needs to have really close oversight with no tolerance for any kind of violation of environmental laws. So in a perfect world it would be really well managed, but this is not perfect world. In some places it happens that nobody has a problem with it. In other places there have been serious kinds of problems out there. The costs that it brings to the environment are substantial. There is obvious risk of contamination of water supplies primarily through spills and blow outs, not necessarily through the fracking fluid itself. Mishandling of the fracking fluid or and inadequate or unwise disposal can cause problems. It disrupts landscapes. One of the big problems — and there is a lot of this going on in the rural areas – is where it has fragmented forests and they are cutting down trees. It allows erosion to vegetation and that is a threat to water quality. It causes air pollution because there are a host of machines and engines that are necessary to do all this intensive industrial activity where people live. When the first well was drilled in 2004, Range Resources realized they had to buy up leases. They started to amass as much acreage as they could so they started buying up mineral rights and assembling parcels of land. Other gas companies noticed this and other folks started sniffing around and pretty soon we had the entire world here at our doorstep going after this particular resource.

When the first leases were done people were signing away the mineral rights for as little as $25 an acre, and accepting 12 per cent (25 is the minimum required by law oil royalties) so that started in 2004 when this land rush was going on. 2008 as you recall was right before the crash – it looked like the economy was dwindling away – and gas and oil prices were sky high. Gas was selling for as high as $14 a 1,000 cubic feet. At that time gas and oil prices were kind of moving in tandem. By 2008 suddenly landowners were receiving $1500 – $3000 per acre and getting deals where the royalty payments were 20% higher. The companies ran out and they leased all this land.

In 2008 as that boom was getting underway the state was flat footed in terms of policy to address environmental protection required and any kind of fiscal policy that we were going to have around gas drilling. Immediately it came up as how does the state try go get some value out of this particular resource. There were a couple of attempts to do that with the severance tax. We got all kind of good information about what are the tax structures out there. And for a whole host of reasons, all of them political, some of them personal, some of them just crazy, that severance tax failed to pass. Then the politics turned over and what we ended up with after the election in 2010 was a governor who received more than a million dollars in campaign contributions from the gas industry. They spent millions of dollars lobbying and now it is in Republican control at the state house and senate. The debate started over again with some people still proposing a severance tax. At the end of the day what we got was a very limited impact tax fee that is assessed by the counties in which the drilling takes place and most of that money is returned to the counties where the drilling actually takes place. They have a pretty wide range of things that they can use that money for. It is not just a cost to natural resources, it is a cost to repair road damage and damage to bridges. There have been damages to housing stock, and impacts on low income people who were renters who are now priced out of the housing market. There is a strain on the government services, policing, emergency preparedness, drug and alcohol services, and a whole host of costs that are imposed on communities. An itinerant work force that showed up either need services themselves or they cause disruption themselves within the community that cause the residents to need services themselves, and that is a cost that is externalized by the gas industry.

So we got a very limited impact fee tied to the price of natural gas that ranged from 1.3 percent to 2 percent of value of gas itself. Some of that money does return to the state and is used in statewide programs but it is really not a lot of money, and the programs in which it is used is directed to some environmental programs, particularly the Growing Greener program which funds environmental, conservation and restoration. But the amount of money going to this is negligible to the point that it really doesn’t compensate nor help restoration and conservation of natural resources which is exactly what it should be funding. The policies on environmental protection were modernized but still they don’t arrive at a place where environmentalists are comfortable that they can provide adequate environmental protection. The state raised the permit fee to apply for a gas drilling permit so those fees now can sort of pay for the agency which is the Department of Environmental Protection, the Bureau of Oil and Gas which is responsible for policing and monitoring the shale gas resources for the state. The whole debate over the severance tax and the impact tax fee was colored by the Republican Corbin administration opposition to any taxation at all. They passed the impact fee proposal around Grover Norquist’s office to make sure it was going to pass; you know Grover Norquist’s no tax pledge that Cobin has taken. That political atmosphere is not going away any time soon. It won’t go away while this governor is in office. However there is substantial public support for a severance tax. There are a whole host of other states where it is in force. For the state of Penn. it was a real eye opener as budgets for public education were slashed and budgets for our higher education system were savaged, and the gas industry sort of stayed away and we got money on the table that could have been put toward these other resources but that is not the choice that we made.

The advocacy community is keeping our powder dry now. In some areas we have got to wait until the politics change. We have got to make headway when those things are possible and lay out other policy options that work better for everybody. Right now in Pennsylvania the political power of the gas drilling industry and political power of the anti-tax zealots like Grover Norquists’ outfit have the reins of government. And we are going to have to wait until that passes to make some progress. I don’t know whether it will ever be ideal. The first well was drilled in 2004. In 2008 we started to grapple with these policy options when we were just hearing about Marcellus Shale. Now it is four years later and we got very intermittent solutions. That fight is not over. We have advocates like Michael Wood’s organization and environmental advocacy organizations to keep this fight up. A lot of other things are happening, including subsidization of the industry that just recently happened.

MICHAEL WOOD:

Particularly about fossil fuel extraction, people talk about externalities — things that happen in the process of taking these one time resources – the way they can end up end up being internalized and through taxation put it back on people that benefit from them. My talk is mostly about the tax situation in Pennsylvania and what ended up happening with Marcellus shale. The Pennsylvania Constitution has a section that is very explicit about the rights of Pennsylvanians in terms of the environment.

Section 27, Natural Resources in the Public Estate, says that people have a right to clean air, pure water, and the preservation of natural scenic historic and esthetic values of the environment. Pennsylvania’s natural resources are the common property of all people including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all people. It is pretty explicit about what Pennsylvanians think about our natural resources and how important they are to us, and not just today but looking forward into the future.

In terms of natural gas development, obviously it is a bounty that provides economic benefits for some but if we don’t tailor our laws in a way that helps broaden the benefits of this, everybody else ends up paying for some to benefit. As it happened, Pennsylvania had an opportunity to do something well, but unfortuntely we ended up in the not so well category. We unfortunately became a poster child for many states that are going to be giving away shale gas exploration and what things they really shouldn’t do. There is shale gas everywhere in many different places, and especially in particular areas. Michigan is starting to develop it. It is the same thing that goes on, like starting with a business ad campaign. We heard it in Pennsylvania. They are doing it in Ohio, and now they are doing it in Michigan. There is shale gas in Oklahoma. There is shale gas in Colorado. If you look at a map there is a pocket of the stuff all over the place. So if you don’t have it today, if the price of natural gas goes up to where they can develop it they will be doing the same thing.

There is an economics think tank out in Bozeman, MT that looks at energy issues and they came up with a set of principles that based on the experience that Montana and Wyoming were dealing with at the time with fossil fuel development. They came up with three principles. They just published that this year. The first one is Fossil fuel extraction pays its own way to effective mitigation The second is that fossil fuel extraction supports economic diversification and resilience. That means don’t become completely dependent on fossil fuel extraction when it goes away. Goal three is that fossil fuel extraction leaves a lasting legacy in some form of permanent fund.

Generally speaking, one way to think about taxation of oil and gas at the state and local level is as a three legged stool. One of the legs is a severance tax and another leg is property tax and the other tax is taxes the states and localities apply. Depending on how your state is set up, it is supposed to be a wide array of taxation of this resource so that state and local governments to get revenue to offset effect.

I want to talk about severance taxes. This happens on production coming out of the gas well. Rates vary significantly. Some states are very low, and some states are pretty high. Severance taxes range from: 4% in Louisiana, 6% in West Virginia, 9% in New Mexico, 5% in Arkansas but it has exclusions on it, 7.5% in Texas with certain deductions for high cost wells, and a reduced rate for the shale wells, so it ends up like 5% over life of well.

The impact fee varies based on the price of gas, and for a typical well over the life of the well an effective rate varies from about 1.4% to 2.5% depending on the price of natural gas. The higher the price of natural gas the lower the effective rate of the impact fees. So compared to every other producer that has natural gas, the Pennsylvania rate is just about the lowest. Pennsylvania did not do very well with that leg of the stool. Jan talked about the impact fee so I probably will not get into that very much. Right now the prices for the impact for this first year that will be collected for the first time next month will be around $310,000 per well. We looked at the numbers of county wells and it would bring in about $85 million total in 2012 and over the course of succeeding years amounts to about $200 million out of several billion dollars of equity. For 2012 there could be about 1900 wells that are going to pay the fee. Right off the top $20-23 million in the next three years comes the fee as collected by the state. That goes for natural gas marketing incentives, the county conservation districts, some funding for the Dept. of Environmental Protection which was given a $6 million earmark; their budget in the general fund support was cut by $35 million, and this is the 6th year in funding cuts. And then there are some other things like the Fish and Wildlife Commission, emergency management preparedness so the state can train local firefighters and local responders how to respond to natural gas issues.

Then the rest or the revenue comes in for 2012 at $64 million, split 60% to local governments and 40% statewide. The 60% for local governments goes only to those areas that actually have natural gas production. So the governments that don’t have producing wells don’t get any of this revenue. And if you do, all the municipalities within that individual county get some; several formulas have been used to count how the money goes out. A lot of it ends up going to the townships that have actual wells in their area but then some of it divided and distributed on population. And it makes sense from that standpoint as people who are working in this industry tend not to live where the wells are, even though a lot of them are mostly rural in the northeastern part of the state. There aren’t any wells in Williamsport and the south. Wells go two-three counties over sometimes. To get to the wells, Williamsport already has some established housing but they aren’t in use. So in that sense that is different from those other localities. As Jan said, they can use the money for a number of things and a lot of them have to do with specific impacts from natural gas.

40% ends up going for statewide uses. Some of it is for within areas where there is gas and oil and some of it is just state wide -— water and sewer projects, grants for finance authorities, scholarship fund, and a whole host of things for projects. Some goes for environmental protection. The Environmental Stewardship Fund receives money for hazardous sites. In the future many of these sites are probably going to end up being hazardous sites but only a sliver of money goes for environmental impact Looking at the impact fee local governments receive a sizable share and there is some modest environmental funding but insufficient to deal with the impacts -– to deal even with the issues that are known to the industry let alone down the road 10-30 years. It provides no revenue for communities for transition away from natural gas. So they are going to end up with places like Williamsport that built new hotels and all this new development. Once the wells are drilled the people who were doing that go away and so you have all these extra hotel rooms and things like that.

The people who operated these businesses while the well drilling was going on, once it goes away; they are still here and the developers move on to other things. You know, other states use a portion of their severance tax to set it aside and say hey let’s find better uses for this. Particularly in the northern tier of Pennsylvania tourism is something they are really trying to follow. Now with the gas development it is even worse. It is very difficult to promote tourism based on the natural ecology of the area at the same time you are developing it for industrial uses. There is nothing set aside for the future, just whatever we get now and spend and then it goes away.

I want to talk about property taxes. This is an area that local governments are able to raise revenue and that includes county governments, municipalities, and schools to help fund their operations with this increased property tax base. In Texas they raise as much locally from their property tax on oil and gas as they do on the severance tax, like $2 billion for each year. That is a lot of money. In Pennsylvania we don’t have property taxes on movable equipment. We do have taxes on office buildings and other permanent structures so there is some revenue that comes in from the headquarters and goes into the firms in Pittsburgh. But there is no property tax on reserves.

Back in 2002 there was a Pennsylvania Supreme Court decision that outlawed oil and gas reserves being taxed in the Commonwealth. When they outlawed that the Supreme Court didn’t say the Legislature couldn’t tax oil and gas reserves if we wanted a tax on oil and gas reserves. So the General Assembly came along and said you can tax these things. It would be a funding source for local governments and agencies. The interesting thing is that coal and gravel pits and things like that which are extractive industries of one time resources and those all pay property taxes on their reserves. So it is a very strange creep in oil and gas in one way. One thing that is interesting in this is because it is not subject to tax in terms of reserves and equipment and other things. They are putting industrial sites on the surface in many areas, so people are starting to see property values drop around these particular locations with pipelines and ancillary activities. If you are a homeowner your house is not going to be worth as much, and if you are a well owner there is contingent liability over time. So people have seen their housing values go down in some areas. What ends up happening is the tax base shrinking even with the new activity. With that, Pennsylvania property taxes on that activity are among the weakest in the United States.

And then there is the last leg of the stool, the other taxes that local governments can levy. Sales taxes are a typical one. Gas production is termed manufacturing by the State Dept. Of Revenue and with that it means that many of the materials in the line and supplies used in the fracking process and also equipment that they use are not subject to sales tax because they are used in the manufacturing process.

If you using supplies, like if you are buying sand and chemicals you are using in the fracking process or other things you are using as supplies in the product, in most states they try not to tax those because it is pyramiding and just increases the price. But they will tax you on buying computers and if buying pipes and things used in the pipelines and things like that. The Pennsylvania legacy with manufacturing and industrial and factories we have had and how that has developed over time –- everything is considered manufacturing. That is how things have changed over time. So in terms of sales tax there is not very much. If you buy office chairs, those are taxed. If you buy reams of paper, it is taxed. On the big ticket items much of that escapes the sales tax. They pay hotel taxes when people stay. A lot of times drilling companies will rent floors of hotels and have their people at those hotels. If it is a temporary stay they pay hotel taxes and the state gets 6% of that and the local governments get 3% of the value of the room. They get some revenues from that and some revenues from sales taxes. Things like restaurant meals are subject to sales tax. Over time the gas companies have moved away from renting hotel space per se and they set up their own version of quarters when they bring in their temporaries, and when they do that they don’t have to pay the hotel tax.

The final aspect is income taxes. With the gas industry at the federal level there are a lot of federal incentives for domestic energy production. In many cases the oil and gas companies end up with all the deductions they are able to get as long as they keep drilling and they end up having very little taxable income. Bloomberg Business Week looked at federal taxes paid by Range Resources from 2005 to 2009 and came up with an effective tax rate of .04% income tax. In Pennsylvania generally speaking our income tax is based on what you pay at the federal level on your federally taxable income with some adjustments to it and then you have your tax rate. If you are not paying at the federal level and don’t have any taxable income tax there is not going to be any taxable income in Pennsylvania generally speaking. A lot of states that have dealt with that, income taxes in particular, don’t have an income tax, and one of the reasons why is that it is very difficult to tax in the traditional way. Some of the other ancillary industries that are related to it pay income taxes. The argument in Pennsylvania was gas drilling companies pay lot of taxes themselves already. The argument is we can’t put a severance tax on them because it would be uncomfortable for them to drill here if had more taxes on them.

Our three legged stool hasn’t worked out very well.

ALANNA HARTZOK:

In an ideal world I believe what we would propose are significant fees, lease fees, and taxes would be collected and allocated for public services and for the legacy fund, which sometimes is called a permanent fund and would be pretty similar to Alaska Permanent Fund. Citizens would be able to make informed decisions regarding gas and mineral extractions and use of other local and regional commons based on facts and accurate information. There would be environmental protections built into contracts with the companies perhaps with a deposit held in escrow to pay damages if they did not restore the land and perhaps a contract that stated that they must be fully insured for damages to human and environmental health. Citizens would want to follow the ancient principle of first do no harm, and they would want to honor that precautionary principle to prevent that harm from the outset rather than manage it after the fact. A statement of values and activities raises threats of harm issues to human health and to the environment. Precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically. In common language this means better safe than sorry.

The reality is this: secracy not transparency. The citizenry has not been able to make informed decisions and turn to information for help. The fracking companies refuse to tell the public the chemicals they use in the fracking process. There has been major political corruption and campaign contributions to members of Congress and there is even an 83 member Natural Gas caucus in Congress bought and paid for by the companies. There have actually been some millionaires created by this. That is pretty amazing, but look, it is divide and conquer. Hey, I am getting $5 million, you don’t have any, you are getting nothing. So how do you build a populist movement when you are dividing people between benefactors and losers. I know that of the early ones who signed contracts some have regretted it. Because they didn’t know they were not fully informed they thought it would be vertical drilling and not vertical and then horizontal, so some of the strongest advocates signed the contracts regretfully. And then you have oil and gas industry tax credits and these tax credits which amount to billions of dollars in subsidies. This has been going on for years but I started getting really into this because I have been to Nigeria and I have seen the gas flares and pollution and the resource curse in Nigeria. * And it seems to me the power dynamic here in Pennsylvania is quite similar to what I have seen in Nigeria. So the tax credits and subsidies are incentives in the industry for oil and gas. They are exempted from the Clean Air and Clean Drinking Water Acts. This is disavowing the municipalities of how to make decisions for their own land use. We came across this some years back in terms of hog farms. People in Pennsylvania townships do not want these big hog industries polluting their land and water. There has been quite a struggle for local communities to retain control of the use of their land and to establish and enforce zoning regulations. I think this is a really big political power issue. The power is concentrated on the state and then up to the federal level. So we need to talk about the need to decentralize the power structure to the localities. ( * See March-April 2005 GroundSwell, Fourteen Days in Bayelsa State, Nigeria.)

This is some information from Food and Water Watch which has offices in Washington, California and Brooklyn, NY. A few of the studies, 2010 to 2011 were reported in the NY Times. There can be hundreds of thousands of kinds of wastewater radioactivity. But the Environmental Protection Agency says drinking water may not solve this in Virginia and other places. The House Energy and Commerce Com. has investigated finding fracking fluids containing 750 chemicals some of which are very hazardous to the human health including benzene and lead. River Keepers have documented that in many states of Marcellus Shale there are well blow outs, surface water spills, groundwater contamination, air pollution, permanent violations of improper waste management. It seems to me like a really sloppy industry and I am glad to see a little tightening up. Sand formations release green house gases — methane and benzene. Benzene from a single fracked well can contaminate more than a hundred billion gallons of drinking water. First do no harm but we are shipping this stuff to Ohio from buried deep in the ground and that is causing earthquakes. That is like shipping all the waste from NYC to Pennsylvania landfills and that is OK for now but not when that starts leaking.

I think that these studies, and that is just a few of hundreds done and haven’t been well reported, would tell you that precautionary principle of first do no harm would say don’t do this industry. And I think that if we weren’t giving subsidies and tax breaks, if we were charging the full cost of this I don’t think it would be commercially viable. I think this has become a Ponzi scheme. I think that we could have been shifting to renewables and not to these dirty fuels. The oil industry started in Pennsylvania and I would like to see the whole thing die in Pennsylvania. I would like to see the fossil fuel industry end starting here ASAP. All of this is centered on bringing in jobs, but we find out it is not bringing in jobs; it is potentially ruining the farm land and all we can do is small organic farming. We see water problems and water problems going downstream.

The tourist industry: I talk to people in my community who always used to go up to northern Pennsylvania for beautiful holidays. They went up for the last time a couple of years ago to a farm house. All these huge trucks were passing back and forth causing noise pollution and air pollution. So now the tourism industry has really been dropping in these areas and we are saying where is the diversified economy?

I think the alternative economics movement has been clear on how to build local based economies and that having the proper taxation structure for incentives for local based economies, where people have fuller purchasing capacity, where they have available affordable land so we can really get and watch sustainable organic gardening and farming movement that has been amazing, but we have the tax structure that is a problem to be able to move that forward. Why are we importing from China or wherever when we could actually have a viable local economy here. I think we need these communities to say there is a lot better way to build your economy than big corporations that are going to come, rape your land, pillage your areas and put you in threat for the rest of your life and destroy your other industries of farming and tourism. There is a better way to build your economy.