WVU Study: Marcellus Shale Has Potential for 'Significant' Economic Development in West Virginia

WVONGA head says public policy needed to fully appreciate future economic impacts of the substantial natural gas footprint

Jan 25, 2011, 13:55 ET from West Virginia Oil and Natural Gas Association

CHARLESTON, W. Va., Jan. 25, 2011 /PRNewswire/ -- The development of the Marcellus Shale play in West Virginia has the potential for significant economic development for the state, according to a new report from the West Virginia University College of Business and Economics, Bureau of Business and Economic Research (BBER). The report also examines potential impacts associated with the development of the shale play from 2010 to 2015 as well as the legal, regulatory and environmental issues associated with further development.

"West Virginia's natural gas industry accounted for over $12 billion in business volume and created over 24,400 jobs in 2009," said Dr. Tom S. Witt, BBER director and co-author of the study. "Out of this total, our study estimates that the Marcellus Shale play accounted for the creation of 7,600 jobs and $2.35 billion in business volume, making it a significant contributor to the economic health of our state. The potential exists for upwards of nearly 20,000 jobs by 2015 if drilling grows at a 20 percent rate each year."

"This study documents the economic potential of the Marcellus Shale play. However, its potential contributions to our state will only be possible with well informed public policy related to the taxation, regulation and environmental impact affecting the industry in our state," said Corky DeMarco, executive director, West Virginia Oil and Natural Gas Association (WVONGA), which commissioned the report.

"Although the results of this study are encouraging, the general consensus throughout the industry is that the Marcellus only represents the tip of proverbial iceberg," said Jim Crews, Nisource/Columbia Gas Transmission and WVONGA President. "Horizontal drilling and hydraulic fracturing technology will be exported to other shale and unconventional hydrocarbon sources in the basin, including previously abandoned formations and the economic results will be exponential."

The report reviews the growth of the natural gas industry from 2001 through 2009 and estimates the total economic impact of the industry in 2009. While the bulk of the jobs created directly or indirectly were in the mining sector, there was significant job creation in other sectors of the economy.

With the development of new methods for the exploration and development of unconventional reservoirs such as those found in the Marcellus Shale formation, West Virginia, along with other states in the region, has seen significant increases in exploration permits since 2005. In fact, West Virginia Marcellus Shale permits issued through 2008 exceeded those of other Marcellus Shale states.

To estimate the economic impact of Marcellus Shale development in 2009, BBER researchers used information provided by drilling companies augmented by other data sources. Drilling costs in 2009 averaged $1.5 million per well while well completion costs averaged $2 million per well. In addition to location setup and drilling costs, the analysis also considered the costs of leasing, which averaged $914 per acre in 2009 in West Virginia. Using this information and the IMPLAN® input-output modeling system, BBER researchers estimated that the total (direct, indirect and induced) economic impact of the Marcellus Shale Development in West Virginia in 2009 was: business volume, $2.35 billion; employee compensation, $297.9 million; employment, 7,600; value added, $1.26 billion; and associated state taxes, $14.5 million. The study also estimates the future economic impacts of the development of this formation for the period 2010-2015 under different growth rates in drilling activity each year.

The study also examines tax policy issues facing the natural gas industry and the specific development of the Marcellus Shale play.  Major taxes affecting the industry in West Virginia include property and severance taxes. At the present time Maryland, New York and Pennsylvania do not have severances taxes on the value of natural gas drilling or production while West Virginia's severance tax rate is 5 percent of the gross value of natural gas production.  Ohio imposes a severance tax on natural gas drilling and production at a rate of 2.5 cents per thousand cubic feet with some exemptions. These taxes, as well as the overall regulatory environment, are continuing to evolve as states face increasing fiscal pressures as well as a recognition that continued development of this resource is important for economic development, particularly as it relates to downstream value added opportunities. Other policy issues addressed in the study include regulation and environmental policy at the federal and state level, permits and the permitting process, divided estates, road utilization and workforce development.  

The authors of the report are Amy Higginbotham, BBER economist; Adam Pellillo, BBER graduate research assistant; Dr. Tami Gurley-Calvez, BBER research assistant professor; and Dr. Tom S. Witt, BBER director and professor of economics. The report is available at www.wvonga.com and www.bber.wvu.edu.

SOURCE West Virginia Oil and Natural Gas Association