CEPM Report on the Shale Development Economic Impact 2015

WASHINGTON & JEFFERSON COLLEGE CENTER FOR ENERGY POLICY AND MANAGEMENT

An Analysis of the Economic Impact of Unconventional Shale Development in Washington County, Pennsylvania (2011 to 2013)

Š 2015 Southpointe Telecom Aerial

An Analysis of the Economic Impact of Unconventional Shale Development in Washington County, Pennsylvania (2011 to 2013) Prepared by Yongsheng Wang, Ph.D. Associate Professor of Economics Washington & Jefferson College Diana Stares Director, Center for Energy Policy and Management Washington & Jefferson College Corey Young, Research Fellow, Center for Energy Policy and Management Washington & Jefferson College Acknowledgements The authors of this report thank Dr. William E. Hefley (University of Pittsburgh), Dr. Ilia Murtazashvili (University of Pittsburgh), and Dr. Thomas Tunstall (University of Texas at San Antonio) for their review of this report. They also thank the Pennsylvania Department of Revenue, Washington County Finance Department, Washington County Planning Department, and Cecil Township Tax Office for their assistance in providing data.

This academic project was made possible by the support of the Center for Energy Policy and Management at Washington & Jefferson College, the MSC Foundation, and the Washington County Energy Partners.

All views are those of the authors, and do not necessarily reflect the views of the reviewers or institutional sponsors.

An Analysis of the Economic Impact of Unconventional Shale Development in Washington County, Pennsylvania (2011 to 2013) Š 2015 Washington & Jefferson College, Washington, PA. All rights reserved.

TABLE OF CONTENTS Executive Summary……………………………………………………………………………….4 I. Introduction……………………………………………………………………………….....7 II. Shale Resource Development in the United States…………………………………………10 Expansion of Development…………………………………………………………………10 Uses of Expanded Natural Gas Supply……………………………………………………..11 III. The Marcellus Shale Play…………………………………………………………………..12 Development of the Marcellus Shale in Pennsylvania……………………………………..12 IV. History of the Washington County, Pennsylvania Economy………………………………18 The County’s Location……………………………………………………………………..18 Growth of the County’s Economy………………………………………………………….20 Development of Southpointe Business Park………………………………………………..22 Washington County As An Energy Hub……………………………………………………24 Development of the Marcellus Shale in Washington County………………………………25 V. Direct Payments to Local Government and Municipalities………………………………...29 Unconventional Gas Well Fees…………………………………………………………29 Collection and Distribution of Impact Fees…………………………………………….29 Expenditure of Impact Fees by Counties and Municipalities…………………………..32 Marcellus Legacy Fund Distributions……………………………………………………...37 Leasing and Royalty Program……………………………………………………………...37 VI. Data and Methodology for Estimating the Total Economic Impact of Drilling, Production, and Midstream Activities………………………………………………………………….38 VII. Research Findings…………………………………………………………………………43 VIII. Other Changes in Local Economy…………………………………………………………49 Hotel Occupancy………………………………………………………………………..50 Housing Prices and Real Estate Taxes……………………...…………………………..51 Retail Sales……………………………………………………………………………...54 Financial Services………………………………………………………………………56 IX. Conclusion…………………………………………………………………………………59 X. References………………………………………………………………………………….60

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LISTS OF FIGURES Figure 1: Economic Impacts in Washington County (2001-2013)………………………………..5 Figure 2: Natural Gas Production in Pennsylvania in Comparison to Condensate and Crude Oil Production…………………………………………………………………..13 Figure 3: Daily Production by Shale Plays (Mcf/day)…………………………………………...14 Figure 4: Proved Reserves of Natural Gas for Highest Reserves States (Tcf)…………………..15 Figure 5: Proved Shale Reserves of Natural Gas for Highest Reserves States (Bcf)……………16 Figure 6: Production of Unconventional Wells in Washington County…………………………26 Figure 7: Number of Unconventional Wells Spudded in Top Pennsylvania Drilling Counties…27 Figure 8: Total Natural Gas Wells Spudded in Washington County…………………………….28 Figure 9: Categorical Spending of 2012 Impact Fees by Washington County…………………..33 Figure 10: Categorical Spending of 2013 Impact Fees by Washington County…………………34 Figure 11: Categorical Spending of 2012 Impact Fees by Washington County Municipalities...35 Figure 12: Categorical Spending of 2013 Impact Fees by Washington County Municipalities...36 Figure 13: Income from Rents, Royalties, Patents, and Copyrights (RRPC)……………………42 Figure 14: Gross Output of Washington County………………………………………………...46 Figure 15: Employment of Washington County…………………………………………………47 Figure 16: Hotel Occupancy Tax Revenue Collected by Washington County………………….50 Figure 17: Local Housing Prices of Washington County………………………………………..51 Figure 18: County Real Estate Tax Revenue Collected by Washington County………………..52 Figure 19: School Tax from Southpointe at Cecil Township……………………………………53 Figure 20: Sales Tax Revenue from Washington County Collected by Pennsylvania…………..55 Figure 21: Bank Deposits in Washington County……………………………………………….57 LISTS OF TABLES Table 1: Unconventional Gas Wells Permitted and Spudded in Pennsylvania………………….12 Table 2: Southpointe Survey Responses………………………………………………………....23 Table 3: Unconventional Gas Wells Permitted and Spudded in Washington County…………...25 Table 4: Shale Gas Revenue for Washington County…………………………………………...30 Table 5: Impact Fee Revenue for All Municipalities in Washington County…………………...31 Table 6: Top Ten Washington County Municipalities with Impact Fee Revenue………………31 Table 7: Total Impact of Unconventional Gas Development on Output in Washington County…………………………………………………………………...43 Table 8: Total Impact of Unconventional Gas Development on Employment in Washington County…………………………………………………………………...44 Table 9: Total Impact of Unconventional Gas Development on State and Local Taxes Collected from Washington County………………………………………………………………...45

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EXECUTIVE SUMMARY The development of the Marcellus Shale has changed the landscape of Pennsylvania. There are many dimensions to understanding and evaluating this changed landscape. One of the most critical dimensions is to understand how this new industrial development impacts the economy from a county perspective.

Washington County, situated in the southwestern corner of the state, is the site of the first well in the Marcellus Shale formation, completed in the early 2000’s. In the following years, the county has hosted a significant amount of shale resource development, particularly since 2010. The county is unique among the Pennsylvania counties that have been heavily developed to date because of the size and diversity of its economy, its historical association with fossil fuel development and heavy industry, and the way in which the county has re-envisioned itself in the past decade as an energy hub. Given the size and significance of Marcellus Shale development in Washington County, it is important that its impacts on the local economy be fully assessed.

This study, which estimates the economic impact of the upstream (drilling1 and production) and midstream (gas gathering and processing) activities of shale resource development in Washington County from 2011 to 2013, fills the research gap for county impact analysis of shale gas development in southwestern Pennsylvania. This study does not attempt to evaluate costs associated with environmental or other impacts of shale resource development or to balance the public funds received by local governments against the impacts that their communities experience. Those questions are important but outside the scope of this research and will be considered in subsequent studies.

The study findings reflect that during 2011-2013, shale development has had a significant impact on the economy of Washington County. The findings are that:

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The total county economic output impact increased from approximately $1.7 billion to $2.4 billion, which represents 15% to nearly 20% of total county output during those years.

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The total labor force impact expanded from approximately 8,000 to more than 10,000, which is equivalent to 7% to 9% of total county employment.

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The total state and local tax revenue impact increased from around $90 million to $160 million.

The term “drilling” is defined in Section VI.

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The governments of Washington County and its municipalities received more than $24 million in impact fees, and the county received over $900,000 in Marcellus Legacy Fund distributions and over $10 million in lease/royalty payments during 2011- 2013.

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The total number of shale wells spudded2 during the three year period in Washington County represented 7.9%, 14.4%, and 18.2% of the total number of wells spudded in Pennsylvania respectively, reflecting the growing role of Washington County in Pennsylvania’s shale resource development.

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In addition to total output and employment, shale drilling activities indicated association with other economic activities of Washington County which is reflected in the following economic indicators: income from rents, royalties, patents, and copyrights, hotel occupancy tax revenue, housing prices, real estate tax revenue, sales tax revenue, and financial service activities.

A spudded well is a well at which drilling has commenced.

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It will be important to continue to monitor the economic impacts of this still young industry in the Appalachian Basin. Both upstream and midstream companies are taking measures to enhance their productivity and ability to get the gas to market. Also, another shale formation, the Utica Shale, is in the early stage of development and can amplify the productivity of the region.

With continued growth, industries related to the surrounding shale development, such as manufacturing, construction, engineering/environmental services, and legal services, are likely to expand. The low cost natural gas condition could be especially beneficial to the manufacturing industry, which could produce additional employment opportunities for Washington County and the region. It is also important to develop a diversified local economy to support sustainable economic growth and overcome cyclical changes in the future.

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INTRODUCTION The development of the Marcellus Shale has brought many changes to Pennsylvania over the past decade. Following development of the first economically productive wells into the Marcellus formation in the early 2000’s (Dept. of Energy, 2013), leasing, permitting, and drilling accelerated rapidly in Pennsylvania. The new industry generated much activity throughout the Pennsylvania counties where well drilling and production activities have been conducted, creating both opportunities and challenges.

One of the key opportunities is in the employment arena. To bring a Marcellus well online requires the work of many and many different types of laborers. Apart from the workers at the well sites and those involved with the processing and transmission of the natural gas, the industry generates many other types of employment, e.g. landmen who negotiate leases with property owners, geologists who determine appropriate well locations, engineering and environmental professionals who interpret regulations and obtain permits, and administrative employees who maintain offices.

In addition to creating new employment opportunities, the industry generates new income streams to property owners who lease their natural gas reserves in exchange for royalty payments. New public funds also arise, from the payment of royalties to government bodies that own and lease natural gas reserves, the various taxes generated by the shale gas development, and the unconventional gas well fees created to address impacts of the new industry.

Finally, new and increased uses to be made of natural gas have the potential to produce important economic and social benefits. These include the use of natural gas as a transportation fuel, to fuel electricity generation, and as a feedstock for various manufacturing processes.

These uses collectively have the potential to increase the nation’s energy independence and security, lower consumers’ energy costs, create employment opportunities in manufacturing, and prompt growth in the U.S. economy.

Balanced against these significant opportunities are a variety of challenges presented by the new industry. These challenges relate to the availability of the new employment to Pennsylvania residents who often lack the necessary skills to perform the job duties; strains on hosting communities that have experienced the influx of many workers, industrial equipment and processes, and extensive vehicle traffic; inadequacy of infrastructure to get the produced gas to market; and concerns as to the adequacy of Pennsylvania’s environmental regulatory requirements for shale resource development.

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In 2011, an appointed commission of stakeholders and experts, the Marcellus Shale Advisory Commission (MSAC), produced a lengthy report that outlined its assessment of and recommendations as to infrastructure; public health, safety and environmental protection; local impact and emergency response; and economic and work force development (Governor’s Marcellus Shale Report, 7/22/2011). The MSAC’s recommendations as to community strains (that a new source of public funds be created for local governments to enable them to mitigate the impacts of the development) and as to the adequacy of Pennsylvania’s environmental regulatory framework to address unconventional well development (that new legislation be enacted) led to the passage of Act 13 (58 P.S. Section 2301 et seq.) in February of 2012. Act 13 was designed to comprehensively regulate both conventional and unconventional oil and gas development in Pennsylvania. It created new operational provisions for unconventional well development, expanded distance requirements for wells, expanded liability for water supply impacts, and created the unconventional gas well fees.3 Following the enactment of Act 13, there has been much debate about shale gas development.

Central to the discussion is how Pennsylvania can fully realize the benefits of this new industry.

Challenges include addressing associated costs, mitigating impacts upon hosting communities, assuring the workforce has sufficient training to avail itself of the employment opportunities, and developing infrastructure that fosters the best uses of the gas. One of the first steps in evaluating these challenges is to understand the economic impacts of the development. That is the purpose of this study.

Specifically, this study examines the economic impacts of upstream (well drilling and production) and mid-stream activities associated with the Marcellus Shale play on Washington County between 2011 and 2013. Statewide studies on the economic impact of Marcellus Shale development on Pennsylvania have been completed (Kelsey, et al., 2011), as have studies of impacts on several of the more heavily drilled and rural northeastern counties in Pennsylvania (Kelsey, et al., 2012). However, to date, no such studies have been conducted of any of the southwestern counties where shale resource development is occurring. This study fills this research gap.

It is particularly important to study the economic impact of this new industry on Washington County because it differs from the other Pennsylvania counties that have been heavily developed.

Washington County’s economy is larger and more diverse than those of the more rural Pennsylvania counties where development has occurred, and the county has had a long 3

Act 13 also included a provision preempting local zoning in regard to oil and gas operations. This latter provision was invalidated by the Pennsylvania Supreme Court in December of 2013, in the case of Robinson Township et al. v.

Commonwealth et al. 83 A.3d 901 (Pa. 2013).

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relationship with fossil fuel development and heavy industry. Moreover, many of the shale gas producers have established headquarters and branch offices in Washington County, creating additional economic impacts and laying a foundation for the county to serve as a regional energy hub. A careful examination of Washington County’s economy vis-à -vis this industry during the years of 2011-2013 is important to fully understand and assess the development.

This study does not attempt to evaluate costs associated with environmental or other impacts of the shale gas development or to balance the public funds received by local governments against the impacts that the communities of those governments experience. Those questions are important but outside the scope of this research and will be considered in subsequent studies.

To provide a backdrop for the discussion of the impacts of the shale development on Washington County, the report begins with an evaluation of shale resource development in the United States and of the Marcellus Shale play in Pennsylvania. To frame the discussion of Washington County the report provides a short historical view of the county and its economy and how they have adapted to the shale industry in the past decade. In its discussion of the economic impacts, the report first evaluates the special public funds created by the shale gas development, the Act 13 Impact Fees and Marcellus Legacy Fund monies, and the leasing/royalty payments on county government lands. Next, it uses the input-output model to analyze upstream and midstream activities based on data from surveys and public information in order to estimate total economic impacts on output, tax revenue, and employment. Finally, the report discusses the changes in a variety of local economic indicators during the shale development years: taxable income from rents, royalties, patents, copyrights; hotel occupancy rates, local housing prices; county real estate tax revenue; sales tax revenue; and financial services activities.

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II. SHALE RESOURCE DEVELOPMENT IN THE UNITED STATES The development of shale resources in the United States over the past decade has revolutionized the nation’s energy landscape. Shale resources are generally referred to as unconventional resources because of where they are located and the difficulty of extracting them from the rock formations where they reside. They are located in sedimentary rock that has extremely low permeability, i.e. low connectivity of the pores holding the oil or gas. Shale resources differ from conventional oil and gas resources which are found in rocks with high permeability and from which the oil or gas can be relatively easily extracted. The U.S. is particularly rich in shale deposits and there are many shale formations found across the nation. However, for many years, recovery of the hydrocarbons from these reservoirs was deemed uneconomical because of the difficulties of extracting the oil and gas from the low-permeable rock. Beginning with the Barnett Shale in Texas, advances in extraction technologies, specifically the combined use of horizontal drilling and high-volume hydraulic fracturing, has enabled the industry to economically access the oil and gas reserves (Dept. of Energy, 2013).

EXPANSION OF DEVELOPMENT Success in the Barnett Shale led to the development of numerous other shale plays, including: • Marcellus (Pennsylvania, West Virginia, Ohio, Maryland and New York), • Eagle Ford (Texas), • Haynesville/Bossier (Texas and Louisiana), • Woodford (Texas and Oklahoma), • Fayetteville (Arkansas), • Bakken (North Dakota and Montana), • Niobrara (Colorado, Wyoming, Nebraska and Kansas), and • Permian (Texas) (Dept. of Energy, 2013).

This development has resulted in the growth of reserve estimates and production rates of both oil and gas in the United States. An important measure for assessing the extent of such natural resources is ‘proved reserves,’ defined by the U.S. Energy Information Administration (EIA) as “estimated volumes of hydrocarbon resources that analysis of geologic and engineering data demonstrates with reasonable certainty are recoverable under existing economic and operating conditions.” Between 2012 and 2013, proved reserves of crude oil and lease condensate in the U.S. increased from 33.4 billion barrels to 36.5 billion barrels. In this same time frame, proved

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reserves of total natural gas in the U.S. increased 31 trillion cubic feet (Tcf) from 322.7 Tcf to 354 Tcf. In 2013, shale gas accounted for around 45% of the natural gas supply in the U.S. (EIA, U.S. Crude Oil and Natural Gas Proved Reserves, 2013, 2014).

Corresponding production increases were documented. In 2013, the United States produced an estimated 2.7 billion barrels of crude oil and lease condensate. Production of total natural gas in the U.S. in 2013 is estimated at 26.5 Tcf. Also, in 2013, the nation produced an estimated 11.4 Tcf of shale natural gas. During 2013, imports of crude oil declined by nearly 10% and natural gas imports declined by 8% (EIA, U.S. Crude Oil and Natural Gas Proved Reserves, 2013, 2014).

USES OF EXPANDED NATURAL SUPPLY The increased production of domestic natural gas reserves allows for its greater use in several sectors. Relatively low natural gas prices as well as relatively low construction costs for natural gas plants (as compared with other energy sources) have made the resource an excellent fuel for meeting increased load in electricity generation (EIA, Annual Energy Outlook 2014; Breeze, 2014).

Natural gas is increasingly used as transportation fuel. A majority of natural gas vehicles on the market are compressed natural gas (CNG)-powered heavy-duty, commercial, and transit vehicles (California Energy Commission, 2012). Switching heavy-duty and commercial vehicles to CNG has proven advantageous because of the large volume of fuel they burn. By using CNG, organizations with large fleets of heavy-duty vehicles have realized significant cost-savings as the current price equivalent of CNG to a gallon of gasoline is about $2.10 (Dougherty and Nigro, 2014). Firms using natural gas-powered vehicles should be able to save on annual transportation costs which may translate into lower prices for consumers.

The abundance of natural gas liquids (NGLs) from certain shale formations, such as the Marcellus Shale, has changed opportunities for industrial chemical processing The NGLs are separated from methane and transported to various industrial consumers to be used in the production of chemicals, pharmaceuticals, and plastics (EIA, Annual Energy Outlook 2014).

The fact that NGLs from shale gas are much cheaper than oil-based alternatives ((Ebinger and Avasarala, 2013) has particularly spurred production of industrial bulk chemicals, facilitating growth in chemical manufacturing. Also, byproducts are being exported to new markets (EIA, Petroleum and Other Liquids, 2015). Expanding networks of pipelines and transportation infrastructure to export facilities can enhance exports, creating the potential to boost the economy and facilitate growth in the chemical manufacturing sector.

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III. THE MARCELLUS SHALE PLAY Of the various shale plays in the U.S., the Marcellus Shale has emerged as one of the most important. The Marcellus Shale formation is a Middle Devonian–age black shale situated in the Appalachian Basin. In terms of geography, the Marcellus Shale formation is the largest shale gas play in the U.S. The reservoir spans a 100,000 square mile area extending across most of Pennsylvania and West Virginia, and parts of eastern Ohio, southern New York, and western Maryland (Dept. of Energy, 2013). To date, most of the development in the Marcellus Shale formation has been in Pennsylvania and West Virginia, as New York has a moratorium on hydraulic fracturing (Orden & Cook, 2014), Maryland has delayed development to evaluate how best to proceed (Phillips, 2014), and Ohio has focused its efforts primarily on the development of the Utica Shale, another shale formation underlying the Marcellus Shale (Dept. of Energy, 2013).

DEVELOPMENT OF THE MARCELLUS SHALE IN PENNSYLVANIA Of the five states overlying the Marcellus Shale formation, Pennsylvania has the largest share of the formation, approximately 35% (EIA, Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays, 2011). Pennsylvania has a landmass of approximately 44,743 square miles divided into sixty-seven counties (U.S. Census Bureau, 2010). The Marcellus Shale formation underlies approximately 75% of the state (Penn State Marcellus Center for Outreach and Research, Geologic Cross Section Map, 2015).

Drilling began in Pennsylvania in the early 2000’s, with the completion of the first unconventional well in the Marcellus Shale, the Renz well, in Washington County. Following development of this well, permitting and drilling in the Marcellus Shale accelerated rapidly in Pennsylvania. As reflected in Table 1, six unconventional wells were permitted and two unconventional wells were spudded in Pennsylvania in 2004. By 2014, those numbers had expanded to 3,202 permitted wells and 1,372 spudded wells.

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Production of natural gas from these wells has grown dramatically. Figure 2 reflects the production levels from Pennsylvania’s shale gas wells from 2010 through mid-2014. Of particular note are the significant annual increases between 2011 and 2013: in 2011 the wells produced a total of 1,066 million Mcf of natural gas, in 2012 production grew to 2,043 million Mcf, and in 2013 the wells produced 3,103 million Mcf. The rapid growth of the development is demonstrated by the fact that, by 2011, Pennsylvania became a net exporter of natural gas to other states by virtue of shale gas production (Penn State Extension, 2014).

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In addition to changing the dynamic at the state level, the Marcellus Shale output has been contributing to change at the national level as well. As noted above, U.S. production of total natural gas in 2013 was 26.5 Tcf, which constitutes an increase of 1.4% over 2012 production.

The Marcellus Shale was the largest contributor to U.S. production of shale natural gas in 2013 as shown in Figure 3. By producing 1.1 Tcf, more natural gas in 2013 than it did in 2012, which represented a 47% increase in output between 2012 and 2013, Pennsylvania was the state that had the largest increase in natural gas production in 2013 (EIA, U.S. Crude Oil and Natural Gas Proved Reserves, 2013, 2014).

As noted above, U.S. proved reserves of total natural gas increased from 322.7 Tcf in 2012 to 354 Tcf in 2013. The increase is attributed to exploration and development in the nation’s shale formations. The Marcellus Shale was the largest individual component of U.S. shale natural gas reserves in 2012 and 2013, and more than 70 percent of the change in shale gas proved reserves from 2012 to 2013 came from Marcellus Shale development in Pennsylvania and West Virginia.

Pennsylvania has seen steady increases in proved reserves of natural gas from 2008 through 2013 and is one of the top states for natural gas proved reserves.

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As of 2013, Pennsylvania trails only Texas in terms of total natural gas proved reserves, as shown in Figure 4. The gap between Texas and Pennsylvania is narrowed when looking at shale natural gas proved resources, as shown in Figure 5 (EIA, U.S. Crude Oil and Natural Gas Proved Reserves, 2013, 2014).

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IV. HISTORY OF THE WASHINGTON COUNTY ECONOMY To fully understand how the economy of Washington County has been impacted by shale gas development, it is helpful to understand the history of the county and its economy. Since its establishment, the county has shifted its focus from agriculture, to natural resources and manufacturing, to human services and retail, and now in recent years, back to natural resources.

By revisiting Washington County’s economic history, one can see how the mix of economic activity has changed over time.

THE COUNTY’S LOCATION Situated in the southwestern corner of Pennsylvania, Washington County was established in 1781 from land that originally constituted the western section of Westmoreland County. From its outset, location has distinguished Washington County. For several years, the county’s western border constituted a section of the frontier of the newly formed United States, positioning the county at the forefront of western expansion. The Monongahela River forms the County’s eastern boundary, providing an important transportation route to the Ohio and Mississippi Rivers (Washington County Planning Commission, 2005). When the National Road, the first federally funded highway, was built between 1811 and 1820 to create a stable pathway for trade and development, forty miles of the road traversed Washington County (Vivian, 2003).

The movement of people across the Appalachian Mountains vis-à-vis the new road connected the eastern and western sections of the new nation. Spurred by the growing use of automobiles in the 1920’s, the National Road was re-aligned and incorporated into U.S. Route 40, one of the first new interstate highways, and for several decades regained its position as a primary transportation route for the nation. With the construction of Interstate Highways 70 and 68 in the 1950’s, U.S. Route 40 became a local, or scenic, route and continues to link U.S. citizens with a transformative aspect of their national heritage (Vivian, 2003).

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Today, Washington County is part of the seven-county region that forms the Pittsburgh Metropolitan Statistical Area. Its enduringly valuable location is enhanced by modern transportation routes. Situated at the intersection of two Interstate Highways (I-70 and I-79), fifteen miles south of the Pittsburgh International Airport, the county has a comprehensive transportation system that consists of: • 2,875 miles of highway, 64.68 miles of Interstate Highways, 1,123 miles of state roads and 1,707 miles of local roads) • Two Class 1 railroads • Three airports • 40.5 miles of frontage on the Monongahela River • Two barge lines • Twenty-six terminals • Seven bus lines and • Three taxi companies (Washington County Official Website, 2015). The vast infrastructure of Washington County provides access to cities and markets in Pennsylvania, Ohio, West Virginia, and beyond. This accessibility undoubtedly is an important factor in the success and diversity of the local economy.

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GROWTH OF THE COUNTY’S ECONOMY For the first 100 years after its establishment, Washington County’s economy was largely agriculture-based, memorialized by the Whiskey Rebellion of 1794, the Washington County farmers’ failed attempt to defeat a federal tax on the sale of whiskey that they made from extra crops (Slaughter, 1986). For a short time in the early to mid-19th century, commercial development, in the form of taverns, inns, and stagecoach lines, flourished after the National Road was built and many citizens and goods traveled through the county. That development floundered in the mid-19th century after the advent of the railroad diminished travel along the highway (Vivian, 2003). The county’s economy experienced its most dramatic growth in the late 19th century through the mid-20th century as coal mines, iron and steel mills and related industries were developed in Washington County as part of the steel-manufacturing empire of western Pennsylvania (Hinshaw, 2002).

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Oil and natural gas also played a part in expanding the Washington County economy beginning in the late 19th century (Williams, 2008). From the 1880’s and continuing to the present, conventional oil and gas reserves underlying Pennsylvania were developed via more than 350,000 conventional oil and gas wells (PA DEP, 2013). In the early 1900’s, Washington County experienced an oil boom with the discovery and production of the McDonald Oil Field in the northern part of the county and the Washington-Taylorstown Field in the central part of the county (Pennsylvania Geologic Survey, 1967). During this time, Pennsylvania became the leading producer of oil in the U.S. (PA DEP, 2013).

Conventional oil and gas development continues in Washington County today, although at a much slower rate than the unconventional development. The conventional oil wells in Pennsylvania generally produce approximately a few barrels of oil per week and conventional gas wells produce less than 13 Mcf (thousand cubic feet) of natural gas per day. Between 2004 and 2012, the number of conventional wells spudded in Washington County declined. Since 2013, no new conventional wells have been spudded in Washington County. Although few new conventional gas wells are being spudded it is important to note that many existing conventional wells in Washington County continue to produce gas, albeit at a much slower rate than the unconventional wells (PA DEP, 2013).

As this discussion demonstrates, Washington County historically relied on its rich endowment of natural resources to power the local economy. The coal, natural gas, and oil extracted from Washington County’s reserves made several industries possible, including glass manufacturing in Washington County proper and steel manufacturing in nearby Pittsburgh. When steel and glass manufacturing waned in the 1970s and 1980s, however, the economy of Washington County suffered. In only a few decades, the County was forced to restructure its economic base.

In response to the erosion of its base, Washington County grew other parts of its economy, including the health and human services, retail, and leisure and entertainment sectors.

Consequently, Washington County saw a number of large-scale developments spring up over the past several years, including the construction of the Meadows Racetrack and Casino, expansions and renovations to local hospitals, and the establishment of the Tanger Outlets, a premium retail and outlet center.

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As a result of the growth and diversification of the local economy, Washington County has not maintained its population, but instead has grown. According to the U.S. Census Bureau, between 2000 and 2010, the population grew from 202,897 to 207,820—an increase of approximately 2 percent (U.S. Census Bureau, 2010). This growth rate, although modest, sets Washington County apart from its neighbors, as Allegheny, Beaver, Greene, and Westmoreland Counties all lost residents in the same period. As Washington County has expanded its population, it has also expanded its labor force. In January 2000, there were 97,530 workers in the labor force. By January 2010, that number had jumped to 106,085 and in January 2014 to 107,258—an increase of nearly 10 percent between 1990 and 2014 according to the Bureau of Labor Statistics (Bureau of Labor Statistics, 2014).

Given the number of firms that have been established or expanded in recent years, Washington County has also been able to reduce its unemployment rate. The county pared unemployment down from approximately 10 percent in February of 2010 to below 5 percent in September 2014 (Bureau of Labor Statistics, 2014).

DEVELOPMENT OF SOUTHPOINTE BUSINESS PARK One specific development that is emblematic of Washington County’s strong, diversified economy is the Southpointe Business Park. Located in Cecil Township, the Southpointe Business Park is a mixed-use park that combines office buildings, hotels, residences, restaurants, retail shops, and recreational facilities to offer a comprehensive work/life/recreation experience.

Southpointe is situated on land that was originally owned and used by the Pennsylvania state government for various facilities but was later abandoned. Beginning in the 1980’s several

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Washington County leaders collaborated with the Washington County Redevelopment Authority to transform the abandoned land into a business park.

A key factor in selecting the abandoned property for the Southpointe Business Park was its accessibility to travel routes and its proximity to Pittsburgh and the Pittsburgh Airport. Located along Interstate Route 79, approximately 12 miles north of its intersection with Interstate Route 70, Southpointe is easily accessible from many locations and travelers to and from it can take advantage of the Washington County transportation opportunities described above. To enhance its accessibility an exit from Interstate Route 79 to Southpointe was created.

The Business Park was developed in two phases. Southpointe I construction began in 1993 with one office building and grew until the park was filled in 2003. Because demand for space continued, additional land was dedicated to expanding the park, and the development of Southpointe II began in 2003. The closing on the sale of the last parcel of land in Southpointe II occurred in December 2014 and with the completion of the buildings planned for that parcel, Southpointe II will be filled. The two phases of Southpointe are contiguous and cover approximately 800 acres of land. The development consists of more than 70 office/commercial buildings, 200 homes and 360 apartments, numerous hotels and restaurants, and various recreational facilities, including an 18-hole golf course and clubhouse, the Iceoplex, and an indoor soccer field.4 Although the Southpointe Business Park was formed long before unconventional natural gas extraction commenced in Washington County, the burgeoning industry has had a significant impact on the development. At present, six gas producers have established headquarters or satellite offices at Southpointe. In addition, numerous related industries, including midstream companies, water treatment businesses, geotechnical/environmental/energy consultants, energy lawyers, landman service companies, well field service companies, and shale industry staffing businesses have established offices in Southpointe.

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Washington County Authority; Southpointe Chamber of Commerce

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The project team recently conducted a survey of the businesses located in Southpointe to assess what prompted them to move to and remain at the business park. The survey consisted of three questions: (1) When did your business open at Southpointe?

(2) Was the initial decision to locate in Southpointe influenced by the shale gas development in Washington County and the nearby region?

(3) Was the decision to remain at Southpointe influenced by the shale gas development in Washington County and the nearby region?

The paper survey was mailed to 268 businesses during December 2014. One follow-up reminder was sent in February 2015 to those who did not respond. Ninety-three of the businesses responded to the survey.

Even though the respondents were not required to identify themselves or the businesses with which they are affiliated, all but two respondents did so. Table 2 shows a breakdown of responses to the locational decision questions.

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Fifty percent of the survey respondents were influenced by the Marcellus Shale development to locate or stay located at Southpointe. Most of those who initially located at Southpointe because of the development are in businesses related to natural resource development; however, several of the initially influenced and many of those whose decision to stay was influenced by the development are in industries unrelated to natural resource development. The survey responses provide additional insight into the role of shale development in the Washington County economy. Spillover effects into service or construction sectors exist as more consumers are in the area, potentially with more money to spend and needs to be met. The survey responses and comments also further suggest that the Southpointe Business Park is an integral part of the Washington County economy both within the context of the Marcellus Shale development as well as independently of the development.

WASHINGTON COUNTY AS AN ENERGY HUB The centralized location at Southpointe of the various businesses involved in the shale resource industry not only helps to create an integrated business community but can also provide a catalyst and foundation for Washington County to serve as a regional energy hub. Creation of an energy hub can enable the region to remain competitive. The key to competitiveness in an economy is reliance on a multitude of economic activities. Also it is advantageous for regions to have a specialization, i.e. to be an eminent source of expertise in a particular industry or industries. However, the region also needs to be able to quickly adapt to changing circumstances.

Serving as an energy hub can accomplish these goals.

As the upstream, midstream, downstream and supply chain businesses in the shale gas industry work together they can develop a practical expertise that can be of great value to those interested in developing shale resources in other parts of the country and the world and which can be adapted to the development of other energy sources. These efforts also can drive the development of a skilled work force that can support both the shale resource industry and many other technology-driven business activities. A knowledge hub also emerges as experts in various fields, including engineering, geology, chemistry, information technology, law, finance, economics, and policy, research and resolve issues raised by this complex industry. The knowledge and expertise that these individuals develop is often transferrable to other fields and endeavors and can create an environment that fosters the development of new businesses and technologies. Overall, the development of practical expertise, intellectual expertise and a trained workforce that an energy hub can create can serve to diversify and broaden the economy where that hub is located (Environmental Law Institute and Washington & Jefferson College, 2014).

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DEVELOPMENT OF THE MARCELLUS SHALE IN WASHINGTON COUNTY As with most shale plays, productivity of wells is not uniform over the Marcellus Shale region.

Because of geologic variability in the shale there are “sweet spots” or areas that have the highest known production rates for the play (EIA, Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays, 2011). There are two known sweet spots in Pennsylvania – the northeastern counties of Bradford, Susquehanna, and Tioga and the southwestern counties of Greene and Washington (MSAC, 2011) Table 3 shows the tally of unconventional wells permitted and spudded in Washington County from 2004 to 2014. It reflects that unconventional wells spudded in Washington County accounted for 14% of all unconventional wells spudded in Pennsylvania from 2004 to 2014.

Not only is Washington County a sweet spot, or prime development area, the gas produced in this county differs from the gas produced in the northeastern sweet spot and further affects the rate of development in Washington County. The natural gas produced in the northeastern counties of Pennsylvania is deemed ‘dry’ gas because its composition is almost entirely methane.

The natural gas produced in a portion of the southwestern counties is deemed “wet” gas because it contains, in addition to methane, heavier hydrocarbons, including ethane, propane, butane, and other heavier hydrocarbons (Penn State Marcellus Center for Outreach and Research, Wet-Dry Gas Map, 2015).

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The heaviest of the gaseous hydrocarbons liquefy during production and are sold as liquid condensate at the well. A mixed stream of natural gas liquids (NGLs) is separated from methane at processing plants and the liquids are further separated into purity products at fractionation plants. The NGLs can be more valuable than the methane because of their higher British Thermal Unit (BTU) content. After the NGLs have been separated into individual purity products, they can be marketed for other uses. Although dry gas requires less processing before it can be marketed, the extra value added by the liquids makes it more profitable to develop the wet gas (EIA, High Value of Liquids, 2014). The production of condensates in Washington County accounted for more than 95% of the entire condensate production in Pennsylvania in 2012 and 2013 as shown in Figure 6. The annual unconventional natural gas production in 2013 in Washington County represents a 131% increase over the amount produced in 2011.

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The particular value of the Marcellus Shale resource in Washington County is demonstrated by the steady and continuous growth of new wells and the growth in productivity of the wells.

Figure 7 shows the trend of well development in six counties in the two known sweet spots of Pennsylvania (Bradford, Greene, Lycoming, Susquehanna, Tioga, and Washington). Washington County surpassed all of the other five counties to become the county with the most new wells spudded in 2013.

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Figure 8 reflects the steady growth of unconventional wells spudded in Washington County.

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V. DIRECT PAYMENTS TO LOCAL GOVERNMENT AND MUNICIPALITIES The financial impact of natural gas extraction on Washington County and the Commonwealth of Pennsylvania is most easily discerned in the arena of public finance. Through a newly established unconventional gas well fee program and public royalty/lease payments for drilling and production on government lands, local governments have received new funds.

UNCONVENTIONAL GAS WELL FEES The unconventional gas well fees are a new source of public funds created by Act 13 (58 P.S. Section 2301 et seq.). The statute provides for the collection of this new fee from unconventional gas producers and its distribution to various agencies and local governments (county and municipal governments) to compensate them for resource development impacts.

The statute further establishes limitations as to how local governments may spend the funds.

COLLECTION AND DISTRIBUTION OF UNCONVENTIONAL GAS WELL FEES The unconventional gas well fees paid by the shale gas producers are calculated each calendar year using a formula that takes into consideration the number and age of unconventional wells that the producer has spud and the average annual price of natural gas during that year (Act 13, Section 2302). The fees are paid for the first fifteen years of the well’s life. The fees are paid annually to the Pennsylvania Public Utility Commission (PUC), by April 1 of the year following the year for which the fees were calculated (Act 13, Section 2303)5. The PUC distributes the fees

by July 1, according to the following rules:

5

•

The first portion of the fees, approximately $25.5 million, is earmarked for several state agencies to offset statewide impacts of unconventional well development;

•

Sixty percent of the remaining fees, which represents the largest portion of the fees, is set aside for two purposes: 1) $5 million is deposited into the Pennsylvania Housing Affordability and Rehabilitation Enhancement Program to increase the availability of quality, safe low-income housing in counties hosting wells, and 2) the remainder is distributed directly to those counties and municipalities situated in proximity to well development, using a formula that considers number of spudded wells, location, population, and road miles of each local government; these funds become what are commonly referred to as ‘impact fees.’

The fees for wells spud before January 1, 2012 were due by September 1, 2012.

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•

Forty percent of the remaining funds (after removing the $25.5 million allocated for various agencies) is placed in the Marcellus Legacy Fund for use by all Pennsylvania counties to fund statewide environmental, infrastructure, and development initiatives with potential local value (Act 13, Section 2314).

To date, the unconventional gas well fees have been collected three times – in 2012 (for 2011 well activity), 2013 (for 2012 well activity) and 2014 (for 2013 well activity). As shown in Tables 4 and 5, Washington County received more than $14 million in impact fees in this time period. In the same distribution periods, local municipalities received more than $25 million in impact fees. The ten Washington County municipalities that have received the largest amounts of impact fees are reflected in Table 6.

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EXPENDITURE OF IMPACT FEES BY COUNTIES AND MUNICIPALITIES The counties and municipalities that receive impact fees directly are authorized to spend them for the following thirteen purposes, as they are associated with natural gas production from unconventional gas wells located within the county or municipality: 1. Roadways, bridges, and public infrastructure 2. Water, storm water and sewer systems 3. Emergency preparedness and public safety 4. Environmental programs 5. Preservation and reclamation of surface and subsurface waters and water supplies 6. Tax reductions 7. Projects to increase safe and affordable housing 8. Records management, GIS and information technology 9. Delivery of social services 10. Judicial services 11. Deposit into the capital reserve fund for future use in one of the approved categories 12. Career and technical centers 13. Local or regional planning initiatives.

The local governments have broad discretion in spending the impact fees among the thirteen approved categories. They are required to report annually on how they have spent the impact fees received in the prior calendar year, and these reports are required to be published on the official website of the county or municipality (Act 13, Section 2314).

To date, records have been filed on the expenditures of the 2012 and 2013 distributions. The spending patterns of Washington County and its municipalities provide additional insight into the economic impacts of these public funds. As depicted in Figure 9, the county used its 2012 funds to address infrastructure needs (Roadways) and service related needs (Information Technology, Social Services and Public Safety), and placed roughly 28% into the Capital Reserve Fund.

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As depicted in Figure 10, the county spent its 2013 funds principally for service related needs (Public Safety, Information Technology, and Social Services), after placing roughly 19% into the Capital Reserve Fund.

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As depicted in Figures 11 and 12, the Municipalities’ spending in both years was similar. The two largest shares of funds in each year were allocated for Roadways (25.03% of the total fees in 2012 and 44.00% in 2013) and the Capital Reserve Fund (55.41% of the total fees in 2012 and 38.04% in 2013), with smaller amounts allocated for Public Safety, Social Services, Environment/Conservation, Water/Wastewater, and Planning.

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Overall, it is incumbent upon local governments to use their impact fees prudently so as to most effectively address shale gas impacts within, and to enhance the livability of, their communities.

Using the fees for planning and for infrastructure such as roadways or water and waste water facilities can present some communities with a valuable opportunity to explore changes that can attract more residents and/or businesses that can spur economic growth.

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MARCELLUS LEGACY FUND DISTRIBUTIONS The Marcellus Legacy Fund provides for the distribution of unconventional gas well fees to all Pennsylvania counties to fund environmental, infrastructure, and development initiatives (Act 13, Section 2315). As noted above, the final portion of the unconventional gas well fees is placed each year in the Marcellus Legacy Fund. For two key initiatives funds are distributed each year to all Pennsylvania counties. These initiatives are: the abatement of environmental and public health hazards and conservation of protected/recreational areas (addressed through the Rehabilitation of Greenways Account) and the repair/replacement of locally-owned deteriorated bridges (addressed through the Highway Bridge Improvement Account). These funds must be spent exclusively for the designated purposes of the specific accounts. Washington County received the following distributions from the Marcellus Legacy Fund in 2012-2014: • • •

2012: $176,315 (Greenways Account) and $293,778 (Highways Bridge Account) 2013: $172,415 (Greenways Account) and $291,049 (Highways Bridge Account) 2014: $200,005 (Greenways Account) and $332,441 (Highways Bridge Account)

LEASING AND ROYALTY PROGRAM A third new source of public funds is from leasing/royalty payments. The typical mechanism by which a well producer acquires the right to extract reserves is through a lease between the owner of the natural gas (the lessor) and the producer that allows the producer to conduct exploratory activities on the lessor’s property in exchange for a lease or bonus payment and the right to drill a well and produce gas from it in exchange for a royalty on production and/or annual rental payments to the lessor (Penn State Cooperative Extension, 2013). Although leasing and royalty payments are generally negotiated, the Pennsylvania Oil and Gas Lease Act, 58 P.S. Section 33 et seq., invalidates a lease that provides for a royalty payment less than one-eighth (or 12.5%) of all natural gas recovered from the lessor’s property. This leasing framework applies to both private property owners as well as public entities such as the Commonwealth, local governments, and public school districts that own properties that include natural gas reserves.

Washington County owns three properties that it has leased for natural gas development – Cross Creek Park, the Fairgrounds, and the Panhandle Trail.6 Between 2003 and 2014, Washington County received a total of $19,554,513 in leasing/royalty payments for these properties. Unlike the impact fees and the Marcellus Legacy Fund distributions, which are allocated for specific purposes, the county has the discretion to use the leasing/royalty funds as it deems appropriate.

6

Some Washington County municipalities and school districts also received leasing/royalty payments for leasing their properties for shale gas development. Because of difficulties in obtaining complete information about these payments they are not reported in this study.

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VI. Data and Methodology for Estimating the Total Economic Impact of Drilling, Production, and Midstream Activities The purpose of this study is to estimate the total economic impact of drilling unconventional natural gas wells, producing gas and related products from unconventional wells, and conducting midstream activities in Washington County during the sample years of 2011 to 2013. Drilling unconventional gas wells and producing gas and related products are the major activities of upstream shale gas companies. Midstream activities include gathering, processing, fractionation, and storage of gas, and transferring the gas from local pipelines to major state and interstate networks. Total economic impact means the combined total of direct impacts, indirect impacts and induced impacts of the drilling, production, and midstream activities. The direct impact is the direct production value and spending on upstream (drilling and production) and midstream activities in the county. The purchases of inputs needed to support these activities generate the indirect impact. The induced impact stems from household spending of wage compensation and royalty payments, i.e. how direct and indirect workers and royalty recipients spend their money. Â In order to calculate the direct economic impacts, the project team gathered information on total drilling costs, production value, and midstream revenue from companies through surveys and interviews, and from public records such as financial statements and the records of governmental agencies, including the Pennsylvania Department of Environmental Protection (DEP) and the Pennsylvania Department of Revenue. The producers that responded to the survey are responsible for more than 70% of the drilling activities in Washington County over the sample period. The annual total number of unconventional wells drilled in Washington County steadily increased between 2004 and 2014 (See Table 3, p. 25). In 2013, more wells were drilled in Washington County than in any other county in Pennsylvania (See Figure 7, p. 27). Between 2004 and 2013, unconventional wells became the dominant type of new well in Washington County. In 2013, no conventional wells were drilled, whereas 220 unconventional wells were drilled (See Figure 8, p. 28). In terms of products, unconventional wells produce natural gas, condensates, and crude oil. The production volumes of all three products of unconventional wells in Washington County increased between 2010 and 2014. In 2011, Washington County produced 112,260,435 million cubic feet (Mcf) of natural gas, 529,623 barrels of condensates, and 384,336 barrels of crude oil. There was a 59% increase in natural gas production in 2012 and a 45% increase in 2013. For the more profitable condensates, there was an increase in excess of 200% in 2012 and a 69% increase in 2013 (See Figure 6, p. 26).

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In order to calculate the indirect and induced impacts, the project team used the IMPLAN (Impact Analysis for Planning) data and software system for economic impact analysis that employs an input-output model.7 IMPLAN uses data from Bureau of Economic Analysis and several other federal and state agencies to provide specialized regional economic statistics, which can be used to measure the effect of a given event/industry on a regional or local economy.

These impacts on the regional economy are measured in terms of gross output, local government revenues, and employment. In IMPLAN, output is defined as the value of industry production plus any net inventory change. For service sectors, output is the sales value.

The size of the indirect impacts depends on the local availability of inputs, with greater local availability leading to greater indirect impacts. The size of the induced impacts depends on both the amount of income paid to employees and the amount of royalties paid to owners of natural gas reserves and the amounts both groups spend locally in the county. The more they spend locally (i.e. the less that leaks out of the local economy), the higher the induced impacts. In the context of unconventional gas development, royalty payments are a major source of income for natural gas owners that can have additional impact on the county economy if spent locally.

To fully understand the impact of economic development on a particular area, it is necessary to understand leakage, or what happens when spending is not localized. Leakage is the amount of income earned in a region and not spent in the region. It includes savings, taxes, and expenditures that occur outside the region. Shale gas development is a new industry in Washington County and although investment and spending have been growing over time, leakage occurs. Typically, a researcher using the IMPLAN system selects the sector that covers the activity under investigation to analyze the impact. However, the default setting in IMPLAN assumes that most of the activities being evaluated occur locally and that official data (e.g. the data of the Quarterly Census of Employment and Wages from the Bureau of Labor Statistics) for a specific sector accurately reflects these activities. This assumption is generally true when analyzing industries that are traditionally local or when analyzing a large geographical area that covers most activities of an industry, e.g. Halaby et al. (2011) and Higginbotham et al. (2010). It is not true for a new industry such as unconventional gas development in a locale like Washington County. Kelsey et al. (2012) reported a similar situation in Bradford County, another drilling county in Pennsylvania. Because many drilling activities are subcontracted to drilling companies from other parts of the country, their short-term activities are often reported to governmental agencies in the regions where their company headquarters are located instead of 7

Please refer to the following link from the Bureau of Economic Analysis for the details of the input-output model. http://www.bea.gov/papers/pdf/IOmanual_092906.pdf

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where the work was conducted. In such situations, using the traditional single sector method would miscalculate the impact. The project team’s interviews with shale companies reflected that many of the outside subcontractors ordered materials, stayed at hotels, and did their personal shopping both locally and outside the county.

In order to accurately capture these local impacts, this study used a method called analysis by parts with revised local purchase percentage (LPP) in IMPLAN.8 As indicated by the name, this method analyzes an industry input by input, based on its supply chain, and then combines the impact of each individual component with a separate analysis of the spending of employees’ wages to calculate the total impact of an industry. This approach allows input purchase amounts and locations to be specified by the analyst, and thus is often recommended as a way to incorporate the analyst’s knowledge of the local economy, as discussed in earlier input-output studies, e.g. Lazarus et al. (2002).

To understand the production process and supply chain of shale gas drilling, production, and midstream activities, and to compute the direct impact, the project team conducted numerous surveys and interviews with shale companies and was able to calculate the local purchase rate of these companies and to identify the residence rate of their employees. However, the local spending rate of royalty payments is not available. In order to provide a full picture and illustrate the potential of this new industry, this study calculates the total economic impacts based on differing rates of local spending of royalty payments.

For the purposes of this study, drilling an unconventional gas well was defined to include five major activities: site preparation, drilling, hydraulic fracturing, well completion, and production to gathering. This definition was derived from interviews, site visits and information from Hefley, et al. (2011). Site preparation involves leveling a site, implementing erosion control, mobilizing equipment, and constructing access roads. Drilling, well completion, and hydraulic fracturing require five common inputs: water, fuel, labor, specialized materials, and specialized equipment. Water is obtained locally or recycled; the main cost of obtaining the water is transportation. Equipment on the drilling site uses tax-exempt red dyed diesel as mentioned in Hefley, et al. (2011). Both fuel and specialized materials can be purchased either locally or shipped from outside. Specialized equipment is either purchased or rented. Installation of midstream infrastructure is the final step before production and involves the installation and operation of pipelines to transmit the gas from the wells to a processing plant or main transmission grid as well as installation and operation of gas compressor stations and processing 8

Local purchase percentage is defined as the amount of value that is considered to be having an impact on the local economy, according to IMPLAN. http://implan.com/V4/Index.php.

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facilities, which are generally required in wet gas areas. In addition to the costs of materials and labor, companies need to pay right-of-way easements to the owner of surface lands whose properties must be accessed to conduct these activities. The economic impact from drilling depends mainly on how much of the above activities are localized in the county.

For the purposes of this study, production consists of two major activities: extraction and well maintenance. Because these activities are performed on a long-term basis, most of the work associated with production activities is performed by local employees. Also, as noted above, many gas-producing companies in southwestern Pennsylvania have established either headquarters or branch offices in Washington County. These offices manage the operations of these companies in Washington County, nearby counties in the region, and in other areas related to gas development in the eastern part of the U.S. The final element of the production costs is the royalty payment. There are many factors involved in determining royalty rates, and they vary by properties/property owners. Key factors are the size of a property, ease of access, environmental constraints as well as potential production rates. Although royalty income amounts to private parties cannot be directly assessed from public information, they can be indirectly observed by reviewing changes in royalty income tax payments as shown in Figure 13. Pennsylvania tax returns group together the income from rents, royalties, patents, and copyrights (RRPC), which indirectly reflects changes in royalty income. According to the Pennsylvania Department of Revenue, there was a 341% increase in RRPC in Washington County between 2004 and 2012 as compared to the Pennsylvania state average of 92% during the same period (Pennsylvania Department of Revenue). The category of income that most likely caused this large difference between the county and state averages was royalty income. The correlation coefficient between RRPC income and the amount of unconventional wells spudded is 0.90 while it is 0.56 between non-RRPC income and unconventional wells spudded. Based on the project team’s interviews with shale companies, although owners of an ideal natural gas property could be paid a royalty as high as 18%, the common rate was 15% in Washington County. As mentioned earlier, the economic impact in the county of royalty payments derives from both the amount of royalty paid and the percentage of the royalty that is spent locally. The more local spending, the higher the local economic impact.

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The midstream sector is an important part of the shale gas industry. This sector processes and transports shale gas products through interstate pipelines and trucks to downstream customers.

In the past several years, the midstream sector of the industry in Washington County has attracted large investments to build local pipelines and construct processing facilities. These activities generated additional employment in construction and engineering and environmental services. A significant number of midstream workers reside in Washington County.

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VII. RESEARCH FINDINGS This section presents the findings of the input-output model. The economic impacts of the shale industry’s drilling, production, and mid-stream activities are displayed from three perspectives in Tables 7, 8, and 9 and Figure 1 (p. 5): • • •

total impact of unconventional gas development on output of Washington County; total impact of unconventional gas development on employment in Washington County; total impact of unconventional gas development on state and local taxes collected in Washington County;

In order to preserve the confidentiality of the data provided by the companies, this report shows only the results of total impact of all shale gas activities (upstream and midstream) combined.

Table 7 illustrates the economic impacts of drilling, production, and midstream activities on county output, while Table 8 shows the employment impact, and Table 9 shows tax revenue impacts, all from 2011 to 2013. Although the impacts are calculated and presented under differing local spending rates of royalty income (0%, 25%, 50%, and 100%), the results are relatively similar. Table 7 shows that the impact of the shale gas industry on total county output

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increased from approximately $1.7 billion to approximately $2.4 billion, which constitutes approximately 15% to almost 20% of the total county output, as indicated by Figure 1. This result is closely related to the fast growth of capital investment in drilling, processing, and infrastructure. Thousands of jobs are directly or indirectly impacted by this industry. The total employment impact expanded from approximately 8000 to more than 10,000 jobs, as shown in Table 8. Figure 1 shows that from 2011 to 2013, the impact increased from approximately 7% to more than 9% of the total employment. The shale gas industry also brought significant tax revenues to local and state governments. The total tax revenue impact increased from $90 million to approximately $160 million, as shown in Table 9. These tax revenues were collected from shale gas and related industry entities, their employees, and propriety income earners (e.g. royalty income earners). It includes sales tax, property tax, corporate profit tax, income tax, and other forms of taxes.

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When estimating the economic impact of a new industry entering a local economy, there are at least two possible concerns regarding the magnitude of the impact: displacement and leakage, as discussed in Weinstein and Partridge (2011). The displacement effect means that the new industry could potentially attract workers from existing industries without contributing to overall local employment growth. Both local output and employment growth positively associate with the number of unconventional wells drilled before the 2007 economic crisis as shown in Figures 14 and 15. Following the crisis, the annual employment growth rate in 2011 doubled as compared to the rate in 2008, which coincided with a surge in the number of unconventional wells drilled. Although there is a positive impact in terms of total employment, there is no definitive answer regarding a displacement effect due to data unavailability, especially for employment created by supporting industries and subcontractors. Many people commute from surrounding areas to work in Washington County. A study of multiple counties would give a more accurate picture of job creation. A much larger impact would be expected due to the positive spillover effect from Washington County.

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Regarding leakage, it is hard to measure or predict the dynamic spending patterns of the employees and of royalty earners - their primary spending could be in Washington County or elsewhere. As explained earlier, the results showed minor differences at various levels of local spending rates. Of course, it is always wise to encourage local spending and retain as much economic benefit locally as possible.

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Although future development is hard to predict, the above results for the time period of 2011 to 2013 clearly indicate strong economic influence from various activities of unconventional shale gas development in all major economic aspects of the Washington County economy and present certain policy implications from an economics perspective. If Washington County wants to retain the benefit of this industry, it should provide opportunities and an environment that encourages individuals to spend money locally and unconventional gas producers to localize their operations. There are several ways to increase the county impact even further. The most important is to build a comprehensive local and regional supply chain. It is also important to encourage more shale gas and other related companies to set up their corporate or regional headquarters in the county.

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VIII. OTHER CHANGES IN THE LOCAL ECONOMY In addition to calculating impacts through use of the input-output model, the project team collected a variety of business and tax information from public sources, including hotel occupancy rates, housing market data, real estate tax revenue, local retail data, and financial services data to observe local economic characteristics in relationship to shale gas development.

Some of the information came from the Washington County government, which follows a calendar fiscal year, and some of it came from Pennsylvania state government, which follows a July-to-June fiscal year; the drilling information that was used was adjusted accordingly.

Together with the findings of the input-output analysis, these local economic indicators could help to provide a more complete picture of the changes in the local economy.

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HOTEL OCCUPANCY The study reflects that when out-of-state contractors moved into the county to work, their employees stayed in local hotels, rented apartments, and even purchased single-family homes – depending on how long they planned to stay in the county. As shown in Figure 16, the correlation coefficient between hotel occupancy tax revenue and unconventional wells spudded is 0.98. According to the Washington County Finance Department, there was a more than 200% increase in hotel occupancy tax revenue between 2004 and 2013. Washington County charged a fixed 3% tax on hotel services over the research period. The increase in tax revenue reflected directly the change in hotel revenue.

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HOUSING PRICES AND REAL ESTATE TAXES Housing prices and real estate taxes have increased since 2009, when the pace of drilling increased. Figure 17 shows housing prices since 2005. As expected, housing prices increased until the Great Recession in 2008. However, the local housing market recovered several months before the official ending of the crisis. The graph cannot provide the definitive description of this relationship. Gopalakrishnan and Klaiber (2012) and Muehlenbachs et al. (2012) give a more detailed analysis on housing prices and unconventional well development in Washington County.

Lipscomb et al. (2012) provides a general understanding of housing value and unconventional well development.

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Figure 18 shows county real estate tax revenue and Figure 19 shows school tax revenues collected by Cecil Township, the municipality in which the Southpointe Business Park is located.

County real estate tax revenues increased steadily also. Although there was a rate increase in 2009, for comparison purposes, this study used a constant rate over the research period. School tax revenue from Southpointe had a sharp increase (69%) between 2011 and 2013.

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RETAIL SALES Another area of interest is retail sales. Any local spending from an industry boosts the local economy even if it is only partially spent in local establishments. Figure 20 shows sales tax revenue collected from Washington County by the Pennsylvania state government, including both motor vehicle (MV) sales tax revenue and non-motor vehicle (NMV) sales tax revenue.

Washington County had a fixed 6% sales tax over the research period. The change in sales tax revenue directly reflects the change in sales. Sales tax in both the MV and NMV categories had sharp increases in the middle of the 2009 state fiscal year, which coincided with the end of the economic crisis and the increased pace in well drilling in Washington County. There was a more than 100% increase in the number of unconventional wells spudded during the 2009 fiscal year compared to the prior year. 2009 was the first fiscal year in which the level of drilling in Washington County reached 170 unconventional wells, and in the subsequent three fiscal years there were annual averages of more than 170.

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FINANCIAL SERVICES Financial services are important for industrial development and wealth planning. There are two major indicators of banking activities: loan amounts and deposits. Loan data is not available at the county level. There are thirty-three unique banking institutions in Washington County including national banks, regional banks, state banks, regional credit unions, and state credit unions. These thirty-three institutions have a total of eighty-seven branch offices. Out of the total eighty-seven financial branches of all the above financial institutions, the deposit data of seventy-eight branches are included in the sample based on data availability. The data was collected from Federal Deposit Insurance Company (FDIC) and National Credit Union Administration (NCUA). Figure 21 shows a steady increase of banking deposits from 2004 to 2013, even during the financial crisis years of 2008 and 2009. As of June 2014, the total deposit amount among all branches within the county was around $4.9 billion.

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IX. CONCLUSION Washington County is located in a key area of the Marcellus Shale formation and has experienced significant well development and production in the early years of the Marcellus Shale play. The findings in this study lay out the economic potential of Washington County and the region in the context of this development. The study evaluates the economic impacts of the development on Washington County during 2011-2013 by assessing upstream (drilling and production) and midstream activities of the unconventional shale industry in the county. To provide a context for the analysis, it identifies key information from prior years (beginning with the exploration of unconventional shale gas resources in the county). The findings show that: •

• •

the economic impact on total county output increased from around $1.7 billion to around $2.4 billion, which is approximately 15% to almost 20% of total county output during these three years, the labor force impact expanded from around 8,000 to more than 10,000 which is equivalent to 7% to 9% of total county employment, and the total state and local tax revenue impact increased from $90 million to around $160 million.

In addition, the governments of Washington County and its municipalities received more than $24 million in impact fee payments, and the county received more than $900,000 in Marcellus Legacy Fund distributions and over $10 million in lease/royalty payments from shale gas producers during 2011 – 2013, the years of the study.

This new industrial development is an historical moment for the county and presents both opportunities and challenges for economic development. The key to sustainable economic development for generations to come is to build an efficient and diversified economic environment and to retain the benefits of that development locally. The creation of an energy hub in the region has the potential to advance the diversification of the economy. The strategic and prudent use of the public funds generated by the shale resource development can further advance this goal. Recognizing that the Marcellus Shale formation encompasses numerous counties and multiple states and that the economies of different areas are intertwined, a coordinated regional development plan may provide a synergistic benefit to the economies of these areas.

In order for Washington County to retain the benefit of this industrial development locally it will need to provide opportunities and an environment that encourages unconventional gas producers to localize their operations and individuals to spend money locally. The localization of business

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operations can be enhanced by building a comprehensive local and regional supply chain and by having more shale and shale-related businesses set up corporate or regional headquarters in the county. To attract and encourage local spending, the most important thing to do is to assure that Washington County continues to be a great place to live and work.

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