AN ANALYSIS OFTHE ECONOMIC POTENTIALFOR SHALE FORMATIONS IN OHIOPREPARED BY FACULTY AND STAFFFROM THE FOLLOWING UNIVERSITI...
Research Team:Andrew R. Thomas, Principal Investigator, Executive in Residence, Energy Policy Center,Maxine Goodman Levin ...
AcknowledgementsMany people and companies provided a great deal of help to the Study Team in collectingdata, developing as...
Table of ContentsI. Executive Summary .......................................................................................
I. Executive Summary                               in the last several years, and ongoing land                            ...
and $6 million each to drill and complete.              railroad loading terminals. Most of this willDrilling started off ...
drilled and midstream facilities areThe output measures the total value added                                             ...
due to the development of the Utica              purchase of foreign oil, 1 and Ohio, whichformation as an energy resource...
formerly were too expensive to exploit.         Understanding the economic impact of aThis is because shale is both deep a...
Figure 1: Geographic extent of the potentially productive areas in Ohio for the Utica and Marcellus Shale formations (cour...
These     formations     remained largely               prices, Federal Reserve Chairman Alanundeveloped as recently as 20...
longer result in comparable increases in the     represent an       unqualified     gain      forprice of gas. To the cont...
Figure 2. Map of the geographical extent of the major shale formations in the United States                               ...
easternmost suburbs, among other places.C. Development of the Utica Shale                          In late July, Chesapeak...
not just as a source for dry gas, but for               elsewhere in North America. 18 Althoughliquids as well. Peak daily...
reliable supplies of gas from wells nearby                long-term, inexpensive source of naturaldiminish the need for ga...
state, where the formation becomes both                      part of the state, where formationshallower and thinner. The ...
A. Reservoir Characteristics of theUtica ShaleAt the time of the release of this report,seven wells had been drilled and c...
Table 1. Average Anticipated Annual Production Per Well (after processing)                             Year               ...
current permitting protocols, one can                     that drilling activity will move forwardexpect to see for this p...
Table 3: Projection of Wells Drilled                                                                             Total Wel...
Figure 3. Permitting activity for the Utica Formation in Ohio (Courtesy of the Ohio             Department of Natural Reso...
out of a midstream infrastructure. 35C. Anticipated Throughput                                  Accordingly, even though b...
terms, such as a city, a state, or perhaps an   cannot account for substitution effects andentire nation. These linkages c...
in a published review of the MSC study,               assumption that affected estimates ofexpenditures data (complete wit...
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
Research Study: Economic Potential for Shale Formations in Ohio
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Research Study: Economic Potential for Shale Formations in Ohio

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A study prepared by researchers from Cleveland State University, Ohio State University and Marietta College and commissioned by the Ohio Shale Coalition. The study, released in Feb 2012, predicts the economic impact of Utica and Marcellus Shale oil and gas drilling will reach $9.6 billion by 2014 and provide over 65,000 new jobs for Ohioans at an average salary of more than $50,000 per year.

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Research Study: Economic Potential for Shale Formations in Ohio

  1. 1. AN ANALYSIS OFTHE ECONOMIC POTENTIALFOR SHALE FORMATIONS IN OHIOPREPARED BY FACULTY AND STAFFFROM THE FOLLOWING UNIVERSITIES SPONSORED BY
  2. 2. Research Team:Andrew R. Thomas, Principal Investigator, Executive in Residence, Energy Policy Center,Maxine Goodman Levin College of Urban Affairs, Cleveland State University, Cleveland, Ohio.Iryna Lendel, Ph.D., Co-Principal Investigator, Assistant Director, Center for EconomicDevelopment, Maxine Goodman Levin College of Urban Affairs, Cleveland State University,Cleveland, Ohio.Professor Edward W. Hill, Dean, Maxine Goodman Levin College of Urban Affairs, ClevelandState University, Cleveland, Ohio.Professor Douglas Southgate, Department of Agricultural, Environmental, and DevelopmentEconomics, The Ohio State University, Columbus, Ohio.Professor Robert Chase, Chair, Petroleum Engineering and Geology Department, MariettaCollege, Marietta, Ohio.Address Questions to:Andrew R. Thomas, Executive in Residence, Energy Policy Center, UR 132, 2121 Euclid Avenue,Cleveland, Ohio 44115-2214. Telephone: (216)-687-9304. Emailaddress: a.r.thomas99@csuohio.eduLinda Woggon, Executive Director, Ohio Shale Coalition, C/O Ohio Chamber of Commerce, 230East Town Street, Columbus, Ohio 43215. Telephone: (614) 228-4201. Emailaddress: lwoggon@ohiochamber.com Page i
  3. 3. AcknowledgementsMany people and companies provided a great deal of help to the Study Team in collectingdata, developing assumptions, and generally understanding the oil and gas industry. TheStudy Team drew on insights and expertise from professionals involved in all aspects of the oiland gas industry, from production to service to midstream companies. Because of theconfidential nature of many of these discussions, none of the industry contributors areacknowledged by name herein. The Study Team also relied upon the expertise of executivesfrom industry and labor trade associations. The Study Team would like to thank the followingState of Ohio officials for their help in providing data, ideas, and editing: Larry Wickstrom,Ohio Geological Society; Stan Dixon, Deputy Tax Commissioner; Fred Church, Deputy TaxCommissioner; and Sarah O’Leary, Administrator – Commercial Activity Tax Division, and MikeMcCormac, Oil and Gas Permitting Manager, Ohio Department of Natural Resources.The Study Team would like to specifically thank the following individuals for their significantcontributions to the study: David Mustine, General Manager for Energy, Jobs Ohio, for hisongoing guidance, insight and identification of sources of data; Linda Woggon, ExecutiveDirector for the Ohio Shale Coalition and Executive Vice President, Ohio Chamber ofCommerce, for her leadership and for her organizational and strategic support; and JimSamuel, Capitol Integrity Group, not only for his work throughout the past 8 months inproviding direction for the study, but also for his critical role in its inception. The Study Teamwould also like to thank the Chamber of Commerce for providing valuable media andpublication consultation and Sunjoo Park, graduate research assistant at Cleveland StateUniversity, for her help with research and editing.Finally, the Study Team would like to thank the many companies, organizations and individualswho made this study possible through their generous contributions to the Ohio Chamber ofCommerce Educational Foundation, on behalf of the Ohio Shale Coalition. Page ii
  4. 4. Table of ContentsI. Executive Summary ............................................................................................................1II. Introduction.......................................................................................................................4III. Shale Development and the Hydrocarbons Sector ..............................................................6 A. Supply and Price Impacts to Date .......................................................................................... 7 B. Market and Price Adjustments to Come ................................................................................ 8 C. Development of the Utica Shale Formation ........................................................................ 10 D. Impact on Fossil Fuel Prices in Ohio .................................................................................... 11IV. Geology and Reservoir Characteristics of the Utica Shale in Ohio ..................................... 12 A. Reservoir Characteristics of the Utica Shale ........................................................................ 14 B. Anticipated Drilling Activity in the Utica .............................................................................. 15 C. Anticipated Throughput ....................................................................................................... 19V. Methodological Strategies and Literature Review ............................................................ 19VI. The Economic Impact of Shale Formation Development in Ohio ..................................... 24 A. The Research Question and Approach Taken ..................................................................... 24 B. Gathering the Information: Business Factors Leading to the Production and Spending Assumptions .............................................................................................................................. 25 C. Economic Impact Modeling Methodology ........................................................................... 28 D. Data Assumptions Made ..................................................................................................... 30 E. The Model Results and Interpretation ................................................................................ 41 F. Tax Assumptions Made and Estimations of Taxes ............................................................... 62VII. Impacts of Shale Development on Downstream Industries .............................................. 65 A. Oil Refining ........................................................................................................................... 66 B. Nitrogen Fertilizer Production ............................................................................................. 68 C. The Chemical and Polymer Sector ....................................................................................... 68VIII. Future Considerations: Challenges for the Natural Gas Industry ................................... 71X. Bibliography ...................................................................................................................73 Page iii
  5. 5. I. Executive Summary in the last several years, and ongoing land operations show no immediate sign of abatement. Lease bonuses have averagedFor the first time in over 100 years, Ohio around $2500/acre, and royalty rates havefinds itself on the threshold of not only averaged around 15%, although both havebeing self-sufficient in the production of oil been higher in the most prospective areasand gas, but also possibly even being a of Ohio.hydrocarbon exporter. This dramaticrenaissance in Ohio’s oil and gas industry The second major investment that will becomes courtesy of new drilling and made in Ohio relates to road and bridgecompletion technologies that has enabled upgrades associated with drilling wells. Theoil and gas producers to extract heavy equipment needed to bring in drillinghydrocarbons from shale reservoirs that equipment and to haul water and otherheretofore were considered uneconomical materials requires heavy-duty roads to beto produce, due to the impermeability of built and maintained. An estimated $1.1the shale formations. million dollars is likely to be expended, on average, by producing companies in roadThe new technologies that have enabled and bridge upgrades for each drillingthe rapid growth of shale development – location. Producing companies will usehorizontal drilling and improved hydraulic “pads” from which they will drill as many asfracturing techniques – will require six to eight wells each. Road upgrades willconsiderable investment by producing be required for each pad, and probablycompanies in Ohio. The first major multiple times. Construction jobs for roadinvestment to be made is the acquisition of upgrades are expected to go predominantlymineral rights. Mineral leases are currently to Ohio suppliers and laborers.being acquired with bonus and royalty ratesnever before seen in Ohio. Drilling and completing wells will compriseNotwithstanding these very high rates, the third, and most significant, expenditureleasing has been robust, with some 3 by oil and gas companies in Ohio. Wellsmillion plus acres of mineral rights acquired are expected to cost between $5 million Background Cleveland State University, Ohio State University and Marietta College (the “Study Team”) were jointly asked by the Ohio Shale Coalition, led by the Ohio Chamber of Commerce, to investigate the nature and amount of economic activity that is likely to be spurred by this development. The Study Team undertook to evaluate the economic impact by collecting data, preparing models, and implementing the most commonly accepted software in economic development circles for studying economic impact. Since drilling and production data from the Utica shale is at the time of this publication unavailable, the Study Team relied upon a combination of interviews with industry experts and executives, the examination of prior studies in other shale plays, and interviews with government executives to build a model for likely development scenarios in Ohio. The study looks at the economic impact of shale development for the years 2011 to 2014. Because data are just beginning to become available, the Study Team has generally been conservative in its estimates. As more and better data become available, the models can be updated, and a more accurate view of the economic activity associated with shale formation can be developed. Page 1
  6. 6. and $6 million each to drill and complete. railroad loading terminals. Most of this willDrilling started off slowly in Ohio in 2011, be done in Ohio. However only portions ofwith 33 total wells drilled, and only 4 placed the materials and labor for this constructioninto production. However drilling is will be Ohio-based. Only those portionsexpected to ramp up quickly, with over one that are estimated to be Ohio-based werethousand wells a year being drilled by 2014. used in the modeling. It was assumed forThis means that by 2014, over $6 billion estimating midstream build out that bydollars will be spent on drilling and 2014 there would be a need forcompleting wells in Ohio. Ohio’s service infrastructure sufficient to handle aindustry will need time to catch up with throughput of 1.5 billion cubic feet ofPennsylvania and other oil and gas natural gas per day in Ohio from the Utica.producing states, so Ohio will likely see no The Study Team modeled production ofmore than 50% of this investment stay in both liquids and natural gas produced atOhio during the early stages of the Utica the well for royalty and tax purposes.Shale development. Production was modeled based upon aThe fourth and final aspect of expenditure combination of estimates for drilling andin Ohio to be considered in this study was production rates for the Utica, relying uponfor the post-production stage of geological and petroleum engineeringdevelopment. Once the production is experts at Marietta College and from theplaced on line, there must be a State of Ohio Geological Survey. Estimates“midstream” infrastructure in place to were based upon an average of the likelytransport the hydrocarbons to a processing mixture of liquids and natural gas producedfacility, or directly to a market. One at the well, understanding that thesefeature of the Utica Shale is that, unlike the mixtures are likely to vary significantly fromnearby Marcellus Shale, it produces both well to well.liquids and natural gas. Even the natural Based upon the anticipated spending ingas produced contains large volumes of Ohio for leasing, road construction, drillingliquids contained in suspension in the gas and completing wells, and building of post-stream. These liquids are valuable and can production natural gas infrastructure, thebe separated from the “dry” gas (methane) Study Team modeled a likely economicthrough processing and fractionation development impact for the State of Ohioprocedures. All of this requires building an as a result of the development of the Uticaelaborate gathering pipeline system, Shale for the years 2011-2014. The resultscompressors, processing plants, of this model are set forth in the followingfractionation plants, storage facilities, and table: Economic Impact due to Increased Demand in Ohio as a Result of Utica Shale Development 2011 2012 2013 2014Value Added $162,030,036 $878,982,133 $2,980,378,198 $4,857,632,095Employment 2,275 12,150 40,606 65,680Labor Income $99,758,497 $571,543,463 $1,994,216,405 $3,298,757,195Output $291,574,770 $1,667,574,417 $5,823,268,396 $9,642,544,988Total State and Local Taxes $16,522,865 $73,422,148 $271,539,607 $433,528,922 Page 2
  7. 7. drilled and midstream facilities areThe output measures the total value added constructed. Nearly 11,000 localby increased economic activity as a result of construction jobs will be created as newthe shale development, plus the value of manufacturing facilities and otherintermediary goods. The output is the nonresidential structures are constructed,economic development number most policy which includes midstream infrastructure, asmakers look to for guidance as to the well as pipelines and roads and bridges.economic impact of a particular industry. These will pay an average of $48,000 perThe calculations include not only the direct position. Truck drivers will be in greateffects of the expenditures, but also the demand as servicing companies,indirect (subsequent business) and induced wholesalers, delivery services, and(household spending) effects. The models construction companies ramp up theirindicate that outputs are expected to employment to meet demand. Expectedamount to nearly ten billion dollars per year average labor income is nearly $53,000.by 2014, with another $500 million in taxrevenue generated. It is expected that The model estimates that by 2014 overthese numbers are likely to continue in this 1,500 jobs for engineers and architects willrange in the years following 2014, although be established, as will 1,000 environmentalleasing and midstream infrastructure compliance technicians. There will beactivity will significantly slow down. demand for more than 1,800 office workersThe $229.6 million investment in oil and gas along with nearly 500 technical consultants.development in the Utica play in 2011 had The leasing and contracting work will helpan immediate impact on Ohio’s economy, turn around a soft market for attorneys,resulting in the state’s Gross Product, as with nearly 841 positions expected to open.measured by Value Added, increasing by The highest paid in this sector are the$162 million in that year. This translated managers, with average labor income ofinto 2,275 jobs, and nearly $100 million in $109,000, followed by those who provideincreased labor income. By 2014 the consulting services at $75,000. A relatedincremental economic activity in the state source of employment will be of “landmen,”of Ohio from that year’s expected a career unique to the oil and gas andexpenditure of $6.4 billion in oil and gas mining industries. More than 2,100 peoplefield development is expected to result in in the real estate industry, with average65,680 jobs and $3.3 billion in labor income, incomes of nearly $70,000, will be engagedor an average income of $50,225 per job. as a result of the Utica development.The model shows average labor incomerising over time as the work shifts from The development of the Utica formationleasing and road construction to drilling and will also result in increased land andinfrastructure maintenance. property values throughout the region. This will not only be due to the direct economicNearly 17 percent of the increase in the activity triggered by drilling and building outnumber of jobs triggered by the supporting infrastructure, but will also bedevelopment of Ohio’s Utica Shale deposits due to the increased value of housing andwill come from oil and gas field service general commercial structures throughoutcompanies, with employment doubling the eastern half of the state as employmentbetween 2013 and 2014. The average increases and wages and incomes rise.earnings for this group are $69,000 per year.The largest growth in employment will be in Gross State (or Domestic) Product isconstruction-related trades as wells are expected to increase by $4.9 billion in 2014 Page 3
  8. 8. due to the development of the Utica purchase of foreign oil, 1 and Ohio, whichformation as an energy resource. This is reached peak oil some 50 years beforeequal to a 1 percent increase in the real Texas and Louisiana, is responsible for avalue of Ohio’s Gross State Product – nontrivial share of this deficit.greater than the average annual growth This may be about to change. For the firstrate in Ohio for the past 13 years (0.6%). time in over 100 years, Ohio finds itself onThe oil and gas “downstream” industry – the threshold of not only being self-that industry that relates to the sufficient in the production of oil and gas,consumption of hydrocarbons -- was not but it may even become an exporter. This ismodeled in this study. However the Study because thousands of feet below theTeam did examine generally downstream eastern half of the state lies a shaleopportunities for Ohio as a result of the formation, commonly called the UticaUtica Shale development, and includes Shale, 2 that promises to be a major sourceherewith a discussion. of hydrocarbon production for the next 30 plus years. This formation containsBecause Ohio’s shale industry is in its early reserves of as much as 5 billion barrels of oilstages, data is incomplete. It is expected and 15 trillion cubic feet of natural gas.that as data becomes available, the models Moreover, another shale layer beneath themay be updated to reflect the better data Utica – the Lower Huron formation – mayand to provide a more accurate picture of also be capable of producing fossil fuels inthe economic impact the development of commercial quantities. 3the Utica Shale in Ohio. It is also importantto note that the study term only goes to Shale strata such as the Utica and the2014, at which time the industry will likely Marcellus, which extends into Ohio fromyet be growing in Ohio. Accordingly, a Pennsylvania and West Virginia, have longsignificant part of the economic been known to be organically rich, yetdevelopment growth may occur after the 1study date conclusion. “America’s Trade Deficit: Oil and the Current Account, “ The Economist, February 10, 2010, http://www.economist.com/blogs/freeexchange/201 0/02/americas_trade_deficit.II. Introduction 2 In Ohio the Utica Shale coexists with the Point Pleasant formation, another organic rich shaleOil and gas exploration in Ohio dates back formation. It is believed that the latter formation willto the late 1800’s, when John D. Rockefeller be the more productive of the two shale formationscreated the first major integrated oil firm, in Ohio. However since the Point Pleasant formationthe Standard Oil Company, originally is principally found only in Ohio, and the Utica is the better-known formation, the Utica and Point Pleasantheadquartered in Cleveland. formations will hereinafter be referred to jointly asNotwithstanding its lead role in founding the “Utica.” The Marcellus Shale formation, whichthe oil and gas industry, Ohio has since produces natural gas economically in Pennsylvaniaplayed a far less significant role in and West Virginia, also exists in Ohio, but is generallyhydrocarbon exploration and extraction – considered too shallow and/or too thin to be economically productive, except in the most easternsimply because Ohio was not rich in readily counties of Ohio. See Figure 1 for a map showing theaccessible reserves. Ohio imports a high geographic relationship of the likely productive areaspercentage of its oil and gas, and has done of the Utica and Marcellus shale in Ohio. 3so for a long time. In the process, it exports “Natural Gas, oil reserves Are Big, Ohio Is Estimating,“ Ohio.com, November 2, 2011,a good deal of its wealth. Over half of the http://www.ohio.com/news/local/natural-gas-oil-American trade deficit is generated by the reserves-are-big-ohio-is-estimating-1.243256 (quoting reserves estimated by the chief geologist for the Ohio Geological Survey). Page 4
  9. 9. formerly were too expensive to exploit. Understanding the economic impact of aThis is because shale is both deep and potential new source of hydrocarbons inimpermeable (i.e., incapable of flowing Ohio is complex, particularly in light of thehydrocarbons trapped in its pore spaces speculative nature of the early, butinto a well bore). Historically, shale has promising, production numbers.been looked upon by petroleum geologists Nevertheless, certain assumptions can beprincipally as an impermeable “cap rock” made and estimates of the oil and gasthat serves to trap hydrocarbons found in production potential can be calculated.more permeable sandstone or limestone Those assumptions and estimates are setreservoirs. Conventional oil and gas forth in this report. The focus for thisexploration has targeted sandstone or report has been on the following economiclimestone formations for this reason. impacts resulting from oil and gasHowever recent advances in drilling and production from the Utica Shale:completion techniques have resolved the 1. The development of a service industryimpermeability problem, enabling associated with exploration, drilling,organically rich shale formations to produce completion, and production ofhydrocarbons in commercial quantities. As hydrocarbons from shale formations (i.e.a result, Ohio now finds itself positioned to the “upstream” aspects of the oil and gasonce again become a major oil and gas business);producing province. The potentialeconomic impact of this development is the 2. The development of the service industrysubject matter of this report. associated with the gathering, transportation and distribution ofAt the time this report is being published, hydrocarbons (i.e. the “midstream”only a handful of wells have been aspects of the oil and gas business); andcompleted in the Utica Shale in Ohio,although many more have been permitted. 3. Specific cases of Ohio industries that willFew production numbers have been made be affected by shale formationpublicly available. Accordingly, projections development, including those industriesfor oil and gas production to be realized in that consume oil and gas in theirOhio from shale formations are at best operations as either a feedstock or as aspeculative. Nevertheless, flow tests and source of fuel or power (i.e. thepublic announcements suggest that early “downstream” aspects of the oil and gasprognostications of significant potential for business).oil and gas production are on target. In addition, the economists and otherFossil fuels comprise the most basic and professionals from Cleveland Statecritical energy resource that fuels the Ohio University, Marietta College, and The Ohioeconomy. But oil and gas provide more State University (hereinafter, the “Studythan the energy that powers our Team”) have considered likely taxmanufacturing, heats our homes and drives generation scenarios based upon projectedour transportation. Hydrocarbons also production and commercial activity in Ohiocomprise the principal feedstock for the associated with the Utica Shale formationpetrochemical industry, which plays a key development. The sections herein discussrole in the day-to-day functioning of society the history of the Utica Shale developmentand represents a significant portion of the in Ohio and the impact this development isOhio economy and key to our likely to have relative to the Ohio economy.manufacturing and agricultural sectors. Page 5
  10. 10. Figure 1: Geographic extent of the potentially productive areas in Ohio for the Utica and Marcellus Shale formations (courtesy of the Ohio Department of Natural Resources, Division of Geological Survey)III. Shale Development and the Regulatory Commission (FERC). This deregulation encouraged energy companiesHydrocarbons Sector to seek out and extract gas from resources such as low permeability sandstones, coalWere it not for the Natural Gas Policy Act seams, the Devonian shale formation, and(NGPA) of 1978, shale and other deep reservoirs. Even more consequential“unconventional” resources might still rest has been the development and adoption ofundisturbed today. Enacted a few years technology needed to exploit depositsafter Middle Eastern exporters shut off oil formerly regarded as economicallyshipments to the United States and other unfeasible, including shale formations. 4western nations, thereby causing energyprices to skyrocket, this legislation did away 4 Examples of technological advances includewith a comprehensive set of regulations improvements in hydraulic fracturing (“fracking”),governing pricing and production. In effect, which has been used since the late 1940s to extracta nationwide market for natural gas was hydrocarbons from impermeable geologic strata, ascreated largely by guaranteeing universal well as horizontal drilling, which is an alternative to the vertical boring that the oil and gas industry hadaccess to the interstate pipeline system at relied on since its earliest days in places like Ohio andfees approved by the Federal Energy Pennsylvania. There also have been great strides in Page 6
  11. 11. These formations remained largely prices, Federal Reserve Chairman Alanundeveloped as recently as 2001, when Greenspan spoke out in 2004 about thehorizontal drilling first jump-started the need that he and many others saw toextraction of natural gas from the Barnett construct a large number of coastal“play” in northern Texas. Since then, as terminals capable of receiving liquefiedhorizontal drilling has become natural gas (LNG) from other countries.commonplace and as hydraulic fracturing Along with other experts and policy-makers,methods have improved, other deposits America’s central banker was convincedhave been tapped, including the Haynesville that imports must go up, to make up forin Louisiana and Arkansas and the Marcellus dwindling domestic production. 9in Pennsylvania and neighboring states. Not only did real prices rise as the yearsShale’s share of natural gas production, passed, but markets for natural gaswhich was just 4 percent in 2004, currently occasionally suffered dramatic swings.is approaching 30 percent.5 All signs point With production and processingto continued growth in shale gas output for concentrated along the Gulf Coast, pricesdecades to come – growth that will more routinely shot up whenever a major stormthan make up for decreasing supplies from struck the region. For example, Hurricanesconventional fields, on land and offshore. 6 Katrina and Rita disrupted industryA. Supply and Price Impacts to Date operations during the latter part of 2005. causing prices to rise above $11.50 perAs long as declines in conventional supplies million British thermal units (MMBTU). 10were not being offset by increased gas Prices spiked again three years later –extraction from shale and other exceeding $10 per MMBTU during the firstunconventional deposits, inflation-adjusted half of 2008, when crude oil was changing(or real) prices were on an upward hands for as much as $146 per barrel.trajectory, as had been predicted in awidely-read report on energy published Shale gas supplies have increasedsoon after passage of the NGPA. 7 Real significantly in the past few years, both inprices rose during the 1990s, when drilling absolute terms and relative to totalin many places remained tightly restricted domestic production of natural gas. As aand when the production of electricity using result – and as a result of the recession thatgas-fired generators (which are highly has moderated demand -- prices have heldefficient 8) was rising at a fast clip. Also, steady at low levels, never exceeding $4 pernatural gas continued to grow more MMBTU since late 2008. This reflects theexpensive after the turn of the twenty-first overriding importance of continuing U.S.century. Reflecting on trends in supply and shale development on the decoupling of gas and oil markets. Spikes in oil prices noseismic reflection technology, which uses sound 9waves to locate promising resources with great “Greenspan: Natural gas imports must grow,”precision, as well as micro-seismic technology, to Associated Press, April 17, 2004,guide hydrocarbon extraction from those deposits. http://www.msnbc.msn.com/id/4845905/ns/busines5 “The future of natural gas: Coming soon to a s-oil_and_energy/t/greenspan-natural-gas-imports-terminal near you,” The Economist, August 6, 2011. must-grow/. 10http://www.economist.com/node/21525381. Consumers are accustomed to volumetric pricing of6 U.S. Energy Information Agency, Annual Energy natural gas, rather than pricing based on energy-Outlook 2011 with Projections to 2035,Washington, p. content. However, this content varies, from 1.01 to3. 1.07 MMBTU per thousand cubic feet. A price of $47 Bupp and Schuller (1979), Natural gas: How to slice per MMBTU is equivalent to $3.88 per thousand cubica shrinking pie. feet for gas with 1.03 MMBTU per thousand cubic8 Ridley (2011), The shale gas shock. feet. Page 7
  12. 12. longer result in comparable increases in the represent an unqualified gain forprice of gas. To the contrary, natural gas consumers.has remained consistently inexpensive By no means have gas prices finishedduring the last three years, irrespective of adjusting to improvements in thewhat has happened in the oil market. technology for finding and extractingDuring this period, the ratio of oil prices to hydrocarbons from shale and othergas prices has consistently stayed at unconventional geologic formations.elevated levels – levels not seen since the Incentives to produce electricity at gas-firedlate 1970s and early 1980s, when oil prices generators are strengthening. With addedsurged in the wake of the Iranian post-production infrastructure, homesRevolution. currently heated with fuel oil will switch toB. Market and Price Adjustments to natural gas. The same is true of the rewards for running fleet vehicles – forCome example, buses and mail trucks that canInvariably, consumers gain much more than return regularly to central facilities foranyone else when resources become less refueling – on compressed natural gas. Asscarce due to technological improvement, firms, households, and public agenciesespecially if market forces guide the respond to incentives to use more naturalimprovement. The agricultural economy is gas, prices should begin to firm up, andillustrative in this regard. Since the middle eventually increase.of the twentieth century, better ways have There are also potential sources of upwardbeen found to raise crops and livestock. pressure on prices from outside the UnitedWith food supplies increasing faster than States. Except for coal, this country has notfood demand – during a period when been a net exporter of hydrocarbons forhuman numbers have gone up at years. Yet foreign sales could approach orunprecedented rates – prices have gone even outpace imports in the future if U.S.down, much to the relief and benefit of gas production continues to increase and ifconsumers around the world. Cheaper food investments needed for the production andhas provided an enormous stimulus to export of LNG are made.economic development as well, above andbeyond the benefits of improvedagricultural technology captured byfarmers. 11Market-guided technological improvementhas had analogous consequences in thenatural gas sector. Deregulation hasstimulated technological advances neededto make natural gas much more plentiful.To be sure, energy companies, which arelargely responsible for these advances, havebenefited insofar as costs of productionhave declined. However they also haveseen the price of their output fall.Meanwhile, the same price reductions11 Southgate, Graham, and Tweeten (2011), TheWorld Food Economy. Page 8
  13. 13. Figure 2. Map of the geographical extent of the major shale formations in the United States (Energy Information Agency)Shale formations, which appear to be contracts at prices pegged to the marketwidely distributed throughout the world, value of crude oil – the most remunerationare now being exploited, or are about to be, that a monopolistic supplier could hope toin a handful of other nations such as Poland receive. Increased LNG availability has(which may have Europe’s largest reserves), enabled some European customers to winSouth Africa, and China. 12 But even though agreement from Gazprom to use spot-drilling in these countries has yet to add market prices for LNG when calculating thesignificantly to energy supplies, U.S. value of up to 15 percent of the gasextraction of natural gas from shale is delivered via the Russian firm’s pipelines.having noticeable effects in foreign markets This represents an important saving for thealready. customers since spot-market prices are considerably lower than oil-referencedIn particular, the LNG formerly slated for prices. 13delivery to this country is instead goingelsewhere. One consequence of this hasbeen to diminish Europe’s dependence onRussia´s Gazprom, which in the pastsupplied energy only under long-term12 13 The Economist, August 6, 2011. The Economist, August 6, 2011. Page 9
  14. 14. easternmost suburbs, among other places.C. Development of the Utica Shale In late July, Chesapeake Energy, which is theFormation second-leading U.S. producer of natural gas,Development of new markets of gas, both announced that shale deposits worth up toin the United States and in other countries, $20 billion underlie the 1.25 million acres itwill require time and a monetary has leased in the state. 15 Since thisinvestment. Before these markets announcement, articles about the Uticamaterialize, gas will remain cheap and play in Ohio have appeared frequently incompanies currently specialized in that fuel the local and national press.will have incentives to diversify output. The Permitting data issued by the Ohiodrive for diversification explains the Department of Natural Resources (ODNR)presence of these companies in the Eagle underscore the importance of shaleFord play of south Texas. This formation development in this state, particularly inyields ethane and other natural gas liquids the Utica play. As of early January 2012,(NGLs) 14, which the chemical industry uses five permits had been issued for verticalas a feedstock, and crude oil in addition to wells to be drilled into the Marcellusthe dry gas (i.e., primarily methane) used to formation. Operations were proceeding atheat homes and power generators. two of these five sites, mainly for the sakeLikewise, there is substantial interest in the of resource assessment. Permits also hadBakken formation of western North Dakota, been issued for 11 horizontal wellswhich is an important source of oil, as well penetrating the same formation. Actualas the portion of the Utica formation that production is under way at three of theselies under the eastern third of Ohio, which locations and there is active drilling atis expected to yield dry gas, natural gas another three. Most of the 16 Marcellusliquids, and crude oil. sites are on or close to Ohio´s border withNo more than a year ago, expectations of West Virginia, in Belmont, Carroll, Harrison,shale development in Ohio focused largely Jefferson, and Monroe Counties. 16on the Marcellus. However, it became clear Development of the Utica Shale got a laterin 2011 that Marcellus-related drilling is start than drilling into this state´s portion ofunlikely to happen very far west of the the Marcellus. However, more wells nowstate’s borders with Pennsylvania and West penetrate the Utica formation, with a largerVirginia. In contrast, drilling in the Utica area affected. All told, 143 vertical andShale is happening in a much larger area, horizontal wells have been permittedincluding around Canton, in northeast Ohio, (meaning more than 70 wells total),and even approaching Columbus’s although only four so far have been placed into production. Moreover, initial results14 that Chesapeake released in September Natural gas liquids (NGLs) are liquid hydrocarbons 2011 for three of its Utica wellscarried in suspension in the natural gas stream. Thesize of the hydrocarbon molecules found in an oil and demonstrate the formation’s importance –gas reservoir varies significantly within the reservoir,and from well to well. The smallest molecule, 15methane (CH4) is typically what is known as natural “Driller touts Ohio’s gas and oil,” Columbusgas. However heavier and more complex molecules Dispatch, July 29, 2011,can remain in suspension, even after the natural gas http://www.dispatch.com/content/stories/business/stream reaches atmospheric temperatures and 2011/07/29/driller-touts-ohios-gas-and-oil.html. 16pressures. These heavier hydrocarbons – such as Ohio Department of Natural Resources, “Oil andethane, propane, butane, and natural gasoline – all Natural Gas Well and Shale Development Resources,”have added value to the producer if found in http://www.ohiodnr.com/oil/shale/tabid/23174/Defasignificant enough volumes within the gas stream. ult.aspx. Page 10
  15. 15. not just as a source for dry gas, but for elsewhere in North America. 18 Althoughliquids as well. Peak daily production was this requires expenditures on transmission,reported at 3.1 million cubic feet (MMCF) of prices of crude oil in the state have beengas and 1,105 barrels of liquids (oil and lower during the past three years thanNGLs) at one of two wells in Carroll County prices along the coast, which are directlyand 3.8 MCF of gas and 980 barrels at the influenced by supply and demand in globalother. Peak daily output at another well, in markets. To be specific, prices charged inHarrison County, is appreciably higher at 9.5 Ohio were on average $1.21/barrel lowerMCF of gas and 1,425 barrels of liquid per than Gulf Coast prices in 2008, $1.42/barrelday. 17 lower in 2009, and $2.89/barrel lower in 2010, according to reports issued by theAt any oil or gas well, production drops Energy Information Agency (EIA) of the U.S.from the initial peaks, sometimes very Department of Energy. At the very least,quickly. This is certainly true of horizontal increased oil availability due to shalewells drilled into shale formations such as development in Ohio ought to prevent thisthe Utica. But even if the initial flow tests gap from closing. In other words, crude oilturn out to overstate likely production rates should remain relatively cheap in the statefor the first year (as they usually do), the thanks to hydrocarbon extraction from theinitial results appear to demonstrate that Utica Shale.Ohio´s gas and oil industry has embarked ona major expansion. As is the case with crude oil, moving natural gas from place to place is expensive, soD. Impact on Fossil Fuel Prices in Ohio being able to tap into local supplies hasAll else remaining the same, increased local important benefits. For example, gas pricessupplies of fossil fuels ought to reduce what in Ohio used to exceed the U.S. referenceOhioans pay for energy and other related price – charged at Henry Hub, Louisiana –inputs. This will not be because oil and gas by $1.00 per MMBTU or more, mainly dueextraction from the Utica and other to transmission costs. But according to dataformations will be sizable enough relative to on prices compiled by the EIA, the averageoverall supplies to have a significant gap during the past three years or so hasinfluence on reference prices in national been just $0.50 per MMBTU. As productionmarkets. Instead, prices charged in Ohio ramps up in the Utica, this gap might vanishwill be affected insofar as movement entirely.toward energy self-sufficiency for the state Energy buyers in Ohio will benefit in otherlowers expenditures on bringing in fossil ways from local hydrocarbon development.fuels from other places. Pipeline fees, which must be paid in orderAmong others, the President of BP-Husky, a to bring in gas from other states, arecompany that owns a pair of refineries in expected to decline by as much as $30Ohio (subsection VII-A), observed that a million due to shale development. 19 Also,sizable portion of the crude oil refined inthe state is piped in from coastal import 18 Mark Dangler, remarks as panelist during Ohioterminals or from producing areas st Governor’s 21 Century Energy and Economic Summit, Columbus, September 21, 2011.17 19 Ohio Manufacturers´ Association Energy Kleinhenz and Associates (2011), “Ohio’s NaturalManagement, “Initial Output of First Three Ohio Utica Gas and Crude Oil Exploration and ProductionShale Wells: Wow!” Industry and the Emerging Utica Gas Formation:http://www.ohiomfg.com/communities/energy/. Economic Impact Study,” prepared for Ohio Oil andThese are reports of flow tests, which generally are Gas Energy Education Program (OOGEEP),not reliable for projecting ultimate production. http://ooga.org/our-industry/economic-impact/. Page 11
  16. 16. reliable supplies of gas from wells nearby long-term, inexpensive source of naturaldiminish the need for gas reservoir capacity, gas and natural gas liquids to fuel the Ohiowhich is filled up during warm months economy.when demand ebbs and then depletedwhen demand peaks during the winter.Storage costs likely to be avoided in Ohio IV. Geology and Reservoirdue to increased gas extraction from the Characteristics of the Utica ShaleUtica Shale and other formations will beapproximately $35 million per year. 20 in OhioMoreover, local consumers will be The remnants of ocean-beds hundreds ofsomewhat insulated from some of the millions years old, shale formationsvariation in prices that occurs in national thousands of feet under the surface ofand international markets. They will not eastern Ohio contain vast amounts ofhave to pay as much for natural gas, for organic matter in the form of hydrocarbons.example, during episodes of spiking Over geologic time, some hydrocarbonsprices. 21 migrated into shallower more porous andFinally, natural gas liquid prices used to be permeable rock formations, primarilytightly linked to dry gas prices. However, sandstone and limestone, where they havethis linkage has weakened somewhat in been produced from vertical wells datingrecent years. 22 Further weakening might back to the late 1800’s. However the vastoccur during the years to come as shale majority of the hydrocarbons remaindevelopment increases the availability of trapped in the shale, in microscopic andethane, which is costlier to transport than interconnected pore spaces of such lowmethane. In places such as Ohio where permeability that they could not beethane will become relatively abundant as produced by conventional oil and gas wellthe Utica is developed, NGL prices could fall drilling techniques. Horizontal drillingnoticeably below local methane prices as technology and multi-stage fracturingwell as NGL prices in other parts of the methods, however, have provided the keysUnited States. As discussed in subsection to unlocking the potential for producing oilVII-C, this could provide a boost for Ohio´s and gas in commercial quantities frompetrochemical and polymer industries. shale.Projecting the effects of the development The Utica Shale is found approximatelyof shale formation on Ohio industries is not 2,000 feet below the Marcellus Shale inpart of this Study. 23 However there can be Ohio, with depths to the base of thelittle doubt that what may well prove to be formation ranging from 3,000 feet in thethe most important economic impact central part of the state to 9,000 feet in thederived from the exploitation of shale eastern part. The thickness of the rockformations will be the development of a ranges from 200 to 400 feet across the areas currently targeted for exploration. The Utica Shale in the areas where it is20 Kleinhenz and Associates (2011), p. 45. expected to be productive is an organically-21 Kleinhenz and Associates (2011), pp. 50-61. rich and thermally-mature dark grey shale.22 American Chemistry Council (2011), “Shale Gas and Production from the shale at this point inNew Petrochemicals Investment: Benefits for the time is thought to range from dry gas in theEconomy, Jobs, and U.S. Manufacturing,” p. 14.23 Kleinhenz and Associates (2011) did undertake an deeper eastern portion of the state, to wetanalysis of the likely affects that lower and more gas moving west towards the center of thestable natural gas prices will have on Ohio industries, state, to oil in the central portion of thepp. 33-61. Page 12
  17. 17. state, where the formation becomes both part of the state, where formationshallower and thinner. The production pressures should be higher, but where thepotential of the shale west of the center of cost of drilling deeper into the earth tothe state is thought to be low. reach the Utica formation will be higher too. Deeper wells require more time toThermal maturity of the shale formation drill, more materials such as drill pipe andcontrols the nature of production as gas or casing, and higher costs for processes likeliquid. The more mature the shale, the hydraulic fracturing, all adding significantlymore likely that the shale will yield dry gas to the cost of drilling and completion(i.e., methane) instead of oil. Accordingly, operations.the less mature western side of the Utica,which is shallower and has not baked under Other variables affecting production includehigh temperatures and pressures for as long unit thickness and the organic content ofas has the eastern side, is expected to be the shale formation. The thicker the unit,rich in oil and natural gas liquids. The oil the greater the volume of oil and gasproduced is expected to be a light, sweet potentially present in the reservoir, and thecrude, which is the easiest to transport and more likely commercial quantities ofrefine and considered to have the highest hydrocarbons can be recovered from avalue among the forms of oil produced. 24 horizontal well bore. The potential forWhile liquids generally have more value commercial oil and gas production is,than does natural gas, liquids are more accordingly, favored on the eastern side ofdifficult to produce from impermeable Ohio, where the Utica is generally thicker.rocks. Finally, production capability may beOil has no energy of its own to drive controlled by the organic content of theproduction, but rather derives the energy Utica Shale. The greater the organicfrom natural gas dissolved in it under content (i.e. the amount of hydrocarbonpressure. Typically, the deeper the rock material present in the pore spaces of theformation containing the oil and gas, the rock), the greater will be the potential forgreater will be the pressure in the reservoir. oil and gas production from the shale. It isAs the Utica Shale gets shallower moving believed that the organic content of thefrom east to west across Ohio, pressures shale generally decreases to the north. 26may become insufficient to produce However, there is still considerablecommercial quantities of hydrocarbons. 25 uncertainty as to what will be found in wellsThis is in contrast to drilling in the eastern drilled as far north as Ashtabula County, and this will remain a question until wells24 The crude it estimated to have an API degree rating are drilled and better reservoir data isof 40 to 41 (based in principal part upon viscosity), obtained and analyzed.which is considered to be in the range of the mostvaluable crude oil. (Interview with Larry Wickstrom).25 It is believed that pressures will be sufficient if the 26Utica is at least 3500 feet deep or more. (Interview The Utica Shale has a total organic content ofwith Larry Wickstrom). The 4000-foot depth approximately 3-6%. See “Rex Energy to Purchasecontour runs roughly north to south through much of Utica Shale Leases in Ohio,” Utica Shale, August 2,Ohio along the Interstate 77 corridor, with the Utica 2011,dipping to the east. See “Structure Map on Top of the http://shale.typepad.com/utica_shale/porosity/.Ordovician Shale in the Appalachian Basin,” Ohio This is comparable to other shale formations thatGeological Survey, have been productive. The Barnett Shale, forhttp://www.ohiodnr.com/OhioGeologicalSurvey/tabi instance shows a typical TOC of between 3-4%.d/23014/Default.aspx): Bruner and Smosna (2011), A Comparative Study ofhttp://geology.com/articles/utica-shale/ (Geological the Mississippian Barnett Shale, Fort Worth Basin,Society of America). and Devonian Marcellus Shale, Appalachian Basin. Page 13
  18. 18. A. Reservoir Characteristics of theUtica ShaleAt the time of the release of this report,seven wells had been drilled and completedinto the Utica Shale in Ohio, four of whichhave been placed into production.However production data is proprietary atthis point, other than announcedproduction figures from initial flow tests –figures that may be unreliable as a tool forpredicting the expected ultimate recovery(EUR) from a given well. 27 Nevertheless,some credible estimates can be made as toEUR, and as to decline curves (the rate ofproduction decline in a well) based uponwhat we know about other shaleformations, such as the Marcellus Shale inPennsylvania and the Eagle Ford Shale inTexas. 28 Moreover, flow tests providesome insight as to the likely initialproduction expectations, at least insofar asthe mix of oil, condensate, natural gasliquids and natural gas, if not the actuallikely production volume itself. Thoseestimates are set forth in Table 1 as follows:27 Producing companies are required to report annualproduction figures to the State of Ohio as part of theircompliance requirements for paying severance taxes.The first Utica Shale production numbers areexpected to available in March 2012.28 The Study Team’s analysis of projected productionwas led by Dr. Robert Chase, chairman of thedepartment of Petroleum Engineering and Geology,at Marietta College, Marietta, Ohio. The analysisincluded, in addition to the reports about theMarcellus, Eagle Ford and other shale development,interviews with upstream and midstream companies,and with the Ohio Geological Survey. Page 14
  19. 19. Table 1. Average Anticipated Annual Production Per Well (after processing) Year Liquids (MBBL) Gas (MMCF) First Year Production 99 70 Second Year 69 49 Third Year 54 38 Fourth Year 45 33 Expected Ultimate Recovery 833 598However for severance and ad valorem tax natural gas is processed, it typicallycalculations, a determination of volumes of undergoes 33% shrinkage when the liquidshydrocarbons must be made at the are separated out. Accordingly, for thosewellhead. For this purpose, the Study calculations, the natural gas numbers setTeam’s experts estimate that the liquid forth in Table 1 will be increased by 50% tocontent (i.e. the hydrocarbons produced as estimate the volume of gas produced in thein a liquid form in the field) will be roughly field. Those numbers are set forth in Table90% of the numbers set forth in Table 1 for 2, below. The numbers from Table 2 areliquids. The other 10% will be produced as used for most of the projections in thisnatural gas and later recovered from that Study.gas stream in processing operations. When Table 2: Average Anticipated Annual Production Per Well (at the well head) Year Liquids (MBBL) Gas (MMCF) First Year Production 90 105 Second Year 62 74 Third Year 49 57 Fourth Year 41 50 Expected Ultimate Recovery 750 897 selected for the pad, some 3-5 acres of landB. Anticipated Drilling Activity in the is cleared for the ancillary equipmentUtica required for drilling. A typical well takesDrilling in shale formations is typically about two months to drill, depending uponconducted in a manner more similar to the vertical depth and horizontal outreach.offshore drilling than to traditional onshore It is not uncommon for a producer to firstdrilling. That is, drilling is conducted from a drill a vertical “exploratory” well so as tocentral location, called a “pad”, which obtain critical reservoir rock and fluidoperates like an offshore platform, and has property data necessary for planning andas many as 6 to 8 slots available from which constructing the horizontal wells.to drill new wells. Use of the central pad Accordingly, one might expect to see asreduces not only the cost of drilling, but many vertical slots for vertical sections ofalso the surface and environmental impact the wells as for horizontal. In this study sixbecause the number of traditional well sites wells are assumed as the average numberis reduced significantly. Once a site is of wells drilled from a single pad. Under Page 15
  20. 20. current permitting protocols, one can that drilling activity will move forwardexpect to see for this pad six permits for quickly in the Utica, since prices for oil andvertical sections of the wells and six more natural gas liquids remain high.permits for horizontal sections of the wells, Two other factors that influence drillingwith the vertical permit usually obtained in activity are, first, the availability of rigs and,advance of the horizontal permits. It is second, the availability of midstreamcommonplace for producers to drill the infrastructure to transport and process thevertical and horizontal sections of wells natural gas, oil and natural gas liquids. Forseparately, thereby requiring two permits purposes of this study, drilling rigs arefor one well. 29 considered to be available to undertake aAnother characteristic of shale drilling is drilling program similar to those seen forthat, unlike conventional reservoirs, the the Marcellus Shale in Pennsylvania and theshale formations are ubiquitous, and Eagle Ford Shale in Texas. The lack ofproductive in some amount everywhere infrastructure in Ohio, however, may causewithin the basin. Indeed, the “success the drilling rates to be slower than whatrate” for shale drilling has been estimated might be normally expected for an oil-richto be approximately 98% 30 -- a remarkable play. In the Eagle Ford, another oil-richnumber for the high risk, high reward oil setting, drilling ramped up more rapidlyand gas industry. This also controls drilling than it did in the Marcellus. Texas hasstrategy, as the wells generally cost about more pre-existing infrastructure than doesthe same amount to drill (estimated to be Pennsylvania or Ohio, and the lack ofaround $5-6 million per horizontal well, infrastructure in Ohio may slow downincluding vertical section of the well and drilling activity in the Utica Shale. On thecompletion costs) and the anticipated other hand, the fact that the Utica is rich inrecovery can be reasonably well quantified. liquids, together with the fact that theThe price for the sale of the hydrocarbons, companies drilling in the Utica tend be veryhowever, is not so easily quantified, at least large, we might reasonably expect a morebeyond a few years. The recent drop in rapid development of midstreamprices for natural gas provides a reminder infrastructure and subsequent drillingof just how risky shale drilling can be, program in Ohio than that seen for thedespite the relatively low risk of a Marcellus. Moreover, with the recentmechanical or reservoir failure. Companies announcement from the Chesapeake onthat have invested heavily in leases may plans to redirect drilling towards morehave to defer drilling until prices improve. liquids-rich fields, Ohio might see moreIt is also why we might reasonably expect drilling rigs moving to the Utica development than was initially anticipated.29 The State of Ohio provides a well numbering All things considered, the Study Teamsystem whereby horizontal and vertical sections of estimated the following drilling activity forthe same well will have related permit designations, Ohio in the next several years:making it clear where two permits relate to the samewell. The State may change its permit numberingsystem to do away with multiple permitting of thesame well.30 Kleinhentz and Associate (2011), p. 14 (projecting a98% “completion rate”). Success, of course, is arelative term. Just because a well is completed doesnot make it necessarily “successful.” A successfuldiscovery of hydrocarbons may not translate to acommercial success when gas prices are depressed,as they have been in early 2012. Page 16
  21. 21. Table 3: Projection of Wells Drilled Total Wells in Year Number of Wells Production 2011 (actual) 33 4 2012 160 193 2013 650 843 2014 1,075 1,918 they may drill only one well (or even just aWhile speculative, these numbers are in vertical section of a well) on a pad initiallykeeping with other projections for Ohio. 31 to identify production sufficient to hold theThey are also more conservative than those unit rather than drill all six wellsseen at a comparable stage in the consecutively from the pad. They will thendevelopment of the Eagle Ford. 32 The time return later to drill all the other wells.frame contemplated in this study – 2011 to Moreover, producers do not always2014 -- will not likely see the peak of drilling assemble the acreage necessary to drill sixand production activity. If drilling follows wells from a pad. Accordingly, drilling unitsthe pattern of the Eagle Ford, it is likely to will likely be smaller - in the range of 640 tolevel off at between 1000 and 2000 wells 800 acres rather than the preferred size ofper year after 2014. Accordingly, this study 1280 acres. As a result, we are likely to seewill not likely capture the full economic fewer wells per pad during early stages ofdevelopment opportunity for Ohio, which is development.anticipated to happen some time after2014. 33 As additional data become Finally, projecting wells drilled is not theavailable, new iterations of the model can same as projecting wells producing. Asidebe undertaken, and the study can be from the projected 2% failure rate (which isupdated. A better understanding of the regarded as minimal in this Study), there iseconomic impact will be available when a delay between drilling and production.better data are available, and new models This is a result not only of the time requiredare generated. to complete a well after drilling, but also the time it takes to build post-productionAdditionally, one cannot simply divide the infrastructure. Accordingly, while some 33number of wells by six to estimate the wells were drilled in 2011, only seven wellsnumber of pads anticipated and the amount were completed, and only four were placedof site preparation work or the miles of into production. For the purposes of thisgathering lines built. Because producers Study, actual wells in production were usedneed to hold acreage to satisfy lease terms, for the first year in calculating volume of production; actual wells completed were31 Kleinhentz and Associates (2011), for instance, used for the expenditures on completions;projected 27 drilling wells for 2011 and ended with and actual wells drilled were assumed fordrilling 1,644 wells for 2015, p. 16.32 the expenditures on site preparation and The Eagle Ford saw the following drilling numbers drilling. Thereafter, it is assumed that allduring the first three years of development: 107, 230,and 918. Center for Community and Business wells were in production for the entire year.Research (2011), Economic Impact of the Eagle Ford This inevitably leads to a modestShale. University of Texas at San Antonio Institute of overestimation in production numbers forEconomic development. 2012-2014, since the delay is unaccounted33 Larry Wickstrom estimates the “take off” date to be for.in the 2014 to 2015 time period, by which time themidstream infrastructure should be well in place. Page 17
  22. 22. Figure 3. Permitting activity for the Utica Formation in Ohio (Courtesy of the Ohio Department of Natural Resources, Oil and Gas Division). Page 18
  23. 23. out of a midstream infrastructure. 35C. Anticipated Throughput Accordingly, even though by the year 2014,The throughput volume is determined by the natural gas portion of throughput ismultiplying the number of wells drilled in a projected in this study to be only about halfgiven year by average production for the a billion cubic feet per day (Bcf/day), foryear. For instance, if there are ten wells purposes of estimating midstreamdrilled in year one and twenty in year two, infrastructure build out, the Study Teamthe throughput for year two is: assumed a throughput in 2014 of 1.5 Bcf/day. This number was chosen to(10)(average second year production) + account for the expectation that(20)(average first year production) throughput will not likely peak until severalThroughput is normally expressed as a “per years after 2014, and that some build outday” volume, and is arrived at by dividing will occur in anticipation of later peakthe total production for the year by 365. So production. The higher number is alsoto arrive at the estimated second year conservative because liquid infrastructure isaverage daily throughput, you would divide not included in this study. Morethe result of the above calculation by 365. information acquired from drilling andThroughput is important for not only production reports will enable betterdetermining royalties and taxes, but also for modeling in the future.determining the likely midstreaminfrastructure build up. V. Methodological Strategies andUsing the average production scenariosfrom Table 2 at the well head and the Literature Reviewaverage drilling scenarios from Table 3 set With the fossil fuels sector expanding inforth above, the Study Team was able to various parts of the United States thanks toproject a likely throughput. The shale development, a number of studiesthroughput is useful for projecting have been undertaken to estimate theseverance taxes, since it reflects production resulting effects on employment andat the well. However using it to project economic output. Input-output (I-O)midstream investment this early in the models have been used in most of thesedevelopment of a reservoir requires some studies. 36difficult estimations, since the sorts ofinvestments that will be made will vary These models are designed to describedepending upon the nature of the linkages along the supply chain forproduction in addition to the volumes industries being studied in an economy – anproduced. 34 For purposes of simplicity, and economy that is defined in geographicbecause so little is known about what to 35expect in the way of post-production Part of the problem with estimating the requiredinfrastructure to deal with liquids in the liquids infrastructure is that, absent a pipeline, the liquids can be trucked. It is difficult to determinefield, the Study Team has considered liquids when, if ever, there will be sufficient liquidas if they were produced principally in the production in the field to justify the building of aform of natural gas to estimate a likely build pipeline. However Ohio’s trucking industry and its construction industry, at least for storage facilities, if not for pipelines, will be impacted by production from34 Kleinhentz assumed that only natural gas would be shale formations. The Study Team has notproduced from the Utica, but accounted for the attempted to separately estimate those impacts. 36additional value of the liquids contained in the gas Higginbotham, et al. (2010); Peach, et al. (2009);stream by multiplying the value of the production by The Pennsylvania Economy League of Southwesterna factor of 1.2 (Kleinhentz and Associate, 2011, p. 19). Pennsylvania, LLC (2008); Snead (2002), etc. Page 19
  24. 24. terms, such as a city, a state, or perhaps an cannot account for substitution effects andentire nation. These linkages comprise the possible supply constraints in the laborbasis for estimating: force due to the way these models are constructed. The third occurs when drillingdirect effects (or impacts), which relate to activity shifts from one state into another.the economic activity created as an industry From a national perspective there is no netbeing studied buys goods and services from increase in economic activity, just a shiftother sectors; form one place to another, from theindirect effects, which are registered as the perspective of the receiving state there arefirms that provide goods and services to measurable benefits.that same industry make their own Leakage can be understood with referencepurchases; and to those same workers. Particularly if theyinduced effects, which result as the have close relatives in their places of origin,industry’s employees spend some or all of they are apt to send large shares of theirtheir wages. earnings back home. This means that thoseAs they analyze each of these impacts, I-O earnings do not circulate in the localresearchers must deal with two basic and economy. Rather than creating inducedinterrelated issues. One issue has to do economic effects in the immediate region,with transfers, which can be inter-sectoral they comprise leakage, and so tend to beor inter-regional. The other relates to the ignored in an I-O study with a local focus.“leakage” of impacts, to places outside of a Leakage diminishes an industry’s regionalparticular municipality or state. multipliers. This is true of the outputTransfers refer to expenditures that are not multiplier, which indicates additions totrue economic impacts yet frequently output throughout the local economy thatpositively accounted for in studies result from a one-dollar increase in theconcerned with a specific economic locale. industry’s output. It is also true of theThere are three possible cases to be employment multiplier, which representsconsidered given an increase in drilling the gains in employment throughout theactivity in Ohio. The first occurs when local economy resulting from the same one-drilling attracts workers from outside of the dollar increase in the industry’s output.state who mostly reside out of state (as In one of the more widely cited studies offrequently happens with drilling crews). In shale development, which was sponsoredthis case Ohio will lose some of the direct by the Marcellus Shale Coalition (MSC) ineconomic benefits and will gain only a Pennsylvania, 37 leakage was determined onportion of the induced spending that takes the basis of detailed examination ofplace in the state. This relates to economic itemized expenditures made by seven shaleleakages that are discussed in the following gas producers. Although 36 producers wereparagraph. The second occurs when active in the commonwealth at the time ofworkers transfer into the industry from the study, the seven that provided dataother industries within the state. If so, accounted for 59 percent of all wells drilledemployment will have shifted from one in the Marcellus formation. As underscoredindustry to another, increasing labor costsfor existing employers as new workers are 37attracted into Ohio’s workforce, and muting Considine, et al. (2009), An Emerging Giant: Prospects and Economic Impacts of Developing thethe positive employment impacts from the Marcellus Shale Natural Gas Play,drilling. This is sometimes called a http://alleghenyconference.org/PDFs/PELMisc/PSUStsubstitution effect. Input-output models udyMarcellusShale072409.PDF. Page 20
  25. 25. in a published review of the MSC study, assumption that affected estimates ofexpenditures data (complete with names economic impacts. 40and addresses of suppliers) comprise Different conclusions about local spendingproprietary information, of the sort rarely of bonus payments have been reached inacquired by researchers who lack a direct other analyses of Marcellus Shaleconnection to the industry. 38 development in Pennsylvania. In one study,The authors of the MSC study apparently data on the ownership of surface land-counted a payment as leaked only if it went rights were collected, which revealed thatto an address outside Pennsylvania. the state government possesses nearly one-However, some out-of-state companies had sixth of total acreage and that people fromset up local offices to coordinate the outside the commonwealth hold anotheractivities of non-Pennsylvanian employees 7.5 percent. The disbursement of publictemporarily assigned to rigs and other monies differs substantially from thefacilities in the commonwealth. If a large consumption patterns of households. Inportion of the wages and salaries earned by addition, all but a fraction of the bonusesthese employees was being dispatched and royalties paid to the owners of sub-quickly from Pennsylvania, rather than surface rights who do not reside inbeing spent there, leakage probably was Pennsylvania is spent outside theunder-estimated, thereby leading to an commonwealth. Pointing out that many ofexaggeration of the economic impacts in these rights were severed from surfacethe commonwealth. rights years or even decades ago, the investigators posited that ownership of sub-During the early years of Pennsylvania’s surface rights is at least double the shareshale gas industry, bonuses received by for surface ownership, which implies thathouseholds that sold subsurface mineral 15 percent or more of bonuses andrights were the source of a large share of royalties constitute leakage. 41total economic impacts. These bonuses,like windfall earnings, are comparable to an Due to bonus and royalty payments from oilincrease in household wealth resulting from and gas producers, household incomes havea rise in the stock market. And as a rule, gone up substantially in some parts of Ohio.households benefiting either from the However, doubts have been expressedformer windfall or the latter capital gains do about the number of jobs likely to resultnot greatly alter their consumption from shale development. On the basis of adecisions. This is the reason why it was statistical analysis using data from a mix ofassumed (perhaps conservatively) that just counties in Pennsylvania, some with5 percent of bonus income would be spent elevated levels of gas drilling and othersin-state in an economic analysis of shale gas with little such activity, one pair ofextraction in Louisiana. 39 The authors of investigators concluded that employmentthe MSC study assumed that a much larger will grow modestly in Ohio as a result of theshare of this sort of income would be spent development of the Utica. 42immediately and within Pennsylvania – an 40 Kinnamann (2011). 41 Kelsey, et al. (2011), Economic Impacts of Marcellus38 Kinnaman (2011), The Economic Impact of Shale Shale in Pennsylvania: Employment and Income inGas Extraction: A Review of Existing Studies. 2009,39 Scott (2009), The Economic Impact of the http://www.msetc.org/docs/EconomicImpactFINALAHaynesville Shale on the Louisiana Economy in 2008. ugust28.pdf. 42http://dnr.louisiana.gov/assets/docs/mineral/haynes Weinstein and Partridge (2011), The Economicvilleshale/loren-scott-impact2008.pdf. Value of Shale Natural Gas in Ohio. pp. 15-16. Page 21

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