Gassers are Crying Whaaaaa

cryThe natural gas industry is crying in Pennsylvania over a proposed severance tax.   Spokespeople for the industry warn of dire consequences should such a tax be implemented.

They warn of job loss, economic hardships, power shortages, higher consumer costs, and have even threatened to leave Pennsylvania. These are the same whines heard during 2011-2012 of Severance Tax vs Impact Fee debates.

Prior to the impact fee, the industry had to negotiate with each and every community for such things as road and bridge repairs, maintenance and other items.  What repairs, maintenance etc. were covered, how much it would cost and who would actually do the work varied from community to community. The impact fee was a compromise of sorts, and actually works to the industry’s advantage by doing away with individual community agreements.   Additionally, because the impact fee is based on the amount of natural gas produced the monies collected will increase or decrease accordingly.

The Impact Fee has become a shining talking point for the industry, their trade organizations and front groups.

Who is Kevin Sunday?
In a Letter to the Editor, Kevin Sunday, identified as being with the Pennsylvania Chamber of Business and Industry, warns Tax, regulations threaten Pa. power portfolio.

Kevin Sunday went to work for Quantum Communications in August of 2013.   According to Quantum Communications press release:

Sunday served with DEP in a variety of senior communications roles since the inauguration of Governor Corbett. Sunday provided the state’s perspective on significant energy issues, including Marcellus shale and air quality, to national, statewide and regional media. He also helped plan and successfully execute strategic plans for a variety of policy matters for the agency and the Governor’s Office.

Prior to his service at DEP, he worked on the Governor’s campaign and assisted with planning and execution of the inaugural ceremonies.

Sunday will focus on strategy development, media relations, public affairs and crisis management.

 Quantum Communications is a PR and advocacy firm. They boast:

Our record of success with “grasstops,” grassroots and “netroots” campaigns is unmatched. Quantum has helped some of the nation’s largest corporations, advocacy groups and trade associations build winning coalitions and campaigns.

 …..and:

Quantum is unmatched in energy and environmental affairs in the Appalachian region.

Quantum has a long record of success working with energy producers, distributors and energy trade associations.

We assist energy companies with public affairs, help pipeline companies install new capacity, and help Americans understand the benefit of using American energy.

On the national level we have worked with clients on a range of energy and environmental issues. These include opposing Environmental Protection Agency rulemaking that would restrict American energy development and raise the cost of doing business on American energy production.

While Sunday was identified as being with the Pennsylvania Chamber of Business and Industry, he’s really a spokesperson for the industry via Quantum Communications.

Fear the Severance Tax
Sunday’s warning that Tax, regulations threaten Pa. power portfolio is a laundry list of the usual industry talking points from a severance tax crippling the industry to regulations being an impediment.

He raises the specter of the Polar Vortex, and how the lack of pipelines cost consumers more money.   We’ve heard the industry’s horror stories of the lack of pipelines resulted in heating and power hardships to people.

However per a 2014 Polar Vortex Review by North American Electric Reliability Corporation (NERC) the problems of supplying energy was due to equipment failures and lack of maintenance and repairs to existing infrastructure.   There was no lack of supply.

The term Polar Vortex is not new, nor is it a new phenomenon. As a set phrase, “polar vortex” actually goes back to 1853. The main gripe among meteorologists has been that “polar vortex” is getting overused to the point of meaninglessness, but the industry finds calling it a Polar Vortex scarier than calling it a cold snap.

The Impact Fee
Pennsylvania Impact Fee for each producer is based on:

– 15-year fee schedule in the law that is based on  average annual price of natural gas ajusted to reflect upward changes in consumer price index if total number of unconventional wells spud in a given year exceeds the number in the prior year

– Number of spud (drilled) unconventional gas wells for  prior calendar year. Self-reported by producers and compared by PUC to database maintained by Department of Environmental Protection (DEP)

 

Furthermore wells which produce less than 90 Mcf (thousand cubic feet) of natural gas per day on average are considered to be “stripper wells”. By statute, all horizontal wells must remit the impact fee for three years regardless of production levels. Following the three year period, horizontal wells that qualify as stripper wells are exempt from the impact fee. Wells that are spud but not completed or shut-in and do not produce are treated as stripper wells.

It’s important to note the average productive life of a Marcellus natural gas well is about 4 years, and produces 67% of its reserve within the first 105 days of operation as cited in the Federal Department of Energy (DOE) report A Comparative Study of the Mississippian Barnett Shale, Fort Worth Basin, and Devonian Marcellus Shale, Appalachian Basin :

eia-barnett-marcellus

Treadmill and The Red Queen Syndrome
With steep decline rates it is necessary for drillers to keep drilling new wells to replace those that have petered out. To do this the drillers need money and investors and promise pie in sky production projections. To meet those projection numbers, drillers need to drill new wells.

red queenThe need to drill to drill more soon became a treadmill where the industry is running place to stay in place. Others have called it the Red Queen syndrome, a reference to Alice in Wonderland where the Red Queen tells Alice “My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.” 

The big payout of shale drilling failed to materialize for many investors, and after a few years of swallowing the hype, investors are looking elsewhere.

The industry has threatened to pull out of Pennsylvania if a severance tax is imposed. In a few areas, the industry is telling local residents they are leaving because of the severance tax, but drilling began declining in 2012.

The 2011-2012 Winter was unusually warm, demand for natural gas decline and the industry had created a glut.   Market prices and corporate profits declined. The drillers started moving their rigs in search of areas which produce natural gas liquids and soon produced another glut.   From there they moved rigs to areas of the Marcellus Shale in search of oil. Although these areas did produce shale oil, it was also “too gassy” to produce enough oil to make them feasible.

We are now seeing the next big hype to build pipelines, which according to the industry will go to homes for heating during the next “polar vortex”. Reality says otherwise as the industry is rushing to export.

Natural Gas market prices are also tied to the price of oil. This seemed like a good idea when oil was in the $90-100 barrel range and predictions of shortages leading to higher prices were dominating the headlines.   Over production by US drillers, OPEC refusing to reduce their production and a slowing of demand has created the oil glut and reduced market prices, dragging natural gas along with it.

Sunday’s letter to the editor mentions jobs, and how a severance tax and regulations would hurt those prospects.   Meanwhile… In recent months, Schlumberger, Halliburton, Baker Hughes and Weatherford, the world’s four biggest oil & gas tool providers, have announced plans to ax nearly 50,000 jobs, all told.   The energy industry’s job cuts reached 150,000 by the end of May, says energy recruiting firm Swift Worldwide Resources, and that figure had grown by a fifth since March.

These layoffs and reduction in drilling new wells have nothing to do with severance taxes and everything to do with market glut and investors reluctant to throw good money after bad.

If any new jobs are created in Pennsylvania as a result of the industry, these jobs will be in the healthcare field to care for people who have been adversely affected from exposure to the industry’s contamination of their water and air.

PA Governor Wolf’s severance tax proposal is dependent on drillers drilling more at a time when drillers are scrambling for cash and the oil and gas markets are glutted. While a severance tax is better than an impact fee, it will do little to address the emerging long term problems of pollution and health costs.

Wolf’s severance tax revenue is earmarked for education and reducing property taxes. We’ve heard the one about reducing property taxes with the casinos. Did your property taxes go up or down when a casino came to your town?

The severance tax is also being touted as “responsible growth”, yet there is nothing in there to address the thousands of families who now have no access to clean water because Pennsylvania will not hold the industry “responsible”. The impact fee similarly does not restore water to these families.

The real issue is not Impact Fee or Severance tax, the issue is the industry’s activities as a whole from drilling, fracking to pipelines and exportation. The issue is Pennsylvania giving the industry free rein to do what they want, where they want and not holding them responsible for the devastation they have created.

 

© 2015 by Dory Hippauf

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