By ARTHUR STERNGOLD
Much of what we have learned about the prospects for natural gas drilling in Pennsylvania has come from the Marcellus Shale Coalition (MSC), which represents the natural gas industry, and from a series of economic impact studies by Penn State researchers funded by the MSC. The reports, released in 2009, 2010 and 2011, forecast ever larger increases in Marcellus output and spending, and most important, in state employment, family incomes and government tax revenues. The most recent study, released on July 20, 2011, projected the Marcellus play would create 215,979 jobs in Pennsylvania by 2015 and 256,420 jobs by 2020 - estimates that were 30% and 50% greater than what had been predicted just two years earlier! "Looking beyond the planning horizon and employing some conservative assumptions about drilling and production profiles, the outlook for Marcellus production is remarkable," the authors wrote.
In the 2011 report, the Penn State researchers noted their projections were subject to uncertainties, such as government regulations or market imbalances. At the same time, they explained: "Other uncertainties may make our projections seem conservative," suggesting the benefits of Marcellus shale development might exceed their forecasts.
During the time the researchers were producing their studies, evidence was mounting that the natural gas industry was in trouble due to falling gas prices. After peaking at $8.85 per MMBTUs in 2008, gas prices dropped dramatically, averaging $3.89 in 2009, $4.39 in 2010 and $3.94 in 2011. By mid-January of this year, gas prices had fallen to below $2.50 and the U.S. Energy Information Administration expects prices to stay below $5 for another decade. These prices are much lower than what the Penn State researchers assumed when making their forecasts.
Lower gas prices reduce profit margins, and so it is no surprise that gas producers are announcing that they are scaling back their Marcellus operations, shifting resources to states that have more liquid-rich basins, or putting their expansion plans on hold. These include Chesapeake Energy, which has the largest Marcellus shale holdings by acreage, as well as Talisman Energy, EQT Corp., Consol Energy and Occidental Petroleum. Cabot Oil and Gas is expected to announce cutbacks soon in its Marcellus activities, even though analysts believe it can withstand low prices better than can its competitors because its well are so profitable.
Louis D. D'Amico, president of the Pennsylvania Independent Oil & Gas Association, explained that "low natural-gas prices are bad for producers, many of whom can't continue to spend money on wells that aren't profitable under current and foreseeable conditions. In the coming months, Pennsylvanians can expect to see fewer Marcellus Shale natural-gas wells drilled, along with a decline in the conventional natural-gas wells that have dotted the state's western counties for decades."
The evidence of this coming correction has been growing for some time.
In May, 2010, in The American Oil and Gas Reporter, Andrew Weissman, publisher of Energy Business Watch, observed that natural gas companies were already making cutbacks, and he predicted: "Current price levels will inevitably lead to further cutbacks in drilling." An article by Ruud Weijermars in the January 3, 2011, issue of Oil & Gas Journal said, "producers of unconventional and conventional gas have seen profit margins evaporate, due to depressed wellhead gas prices during the last two years." He added, "The slump in earnings of U.S. unconventional gas producers will result in a delay in drilling new gas wells." On May 23, 2011, an article by Daniel Gilbert in The Wall Street Journal pointed out that "a recent study by consultancy Wood Mackenzie found that 40% of U.S. natural gas produced last year didn't meet break-even prices for producers." "With natural-gas profit margins all but disappearing," Gilbert explained, "companies are cutting back on new gas drilling."
In the original 2009 study, the Penn State researchers warned that "a prolonged slump in prices could dampen activity substantially" from its projected levels of output and spending. By the time the 2011 report was released, this price slump was in full progress, and yet the researchers offered their most optimistic forecast to date and said the outlook was "remarkable." In each new report, the Penn State researchers acknowledged that falling gas prices could jeopardize industry growth, and yet, they did not heed their own warnings.
It's too early to know how industry cutbacks may affect our region's economy, or if the Penn State forecasts may prove to be valid in spite of falling gas prices. However, this is beside the point. At least in the most recent study, the Penn State researchers should have provided more cautious predictions and clearer warnings about a looming industry pullback, even if this is not what their client, the Marcellus Shale Coalition, wanted to hear.
Economists teach that individuals and businesses make decisions based on future expectations, and so even if natural gas development continues to grow but at a slower pace than anticipated, people may be suffer from having over-invested. Elderly residents who decided to fix up their family farms rather than move to smaller homes may be hard-pressed if gas companies don't renew their leases. Small business owners who started new ventures or expanded operations to serve gas companies or workers may find they can't pay their bills. I hope that relentless boosterism by the Marcellus Shale Coalition and one-sided impact studies by Penn State researchers don't exacerbate the coming economic correction, if there must be one.
In the long-run, I believe shale gas development is good for Central Pennsylvania, especially in comparison to the economic stagnation we lived through before the drilling started. At the same time, I'm aware that many places have suffered from destructive cycles of boom-and-bust due to the overly rapid growth, and then quick decline, of oil and gas drilling. Let's build a sustainable energy-based economy in Central Pennsylvania that thrives for a century or longer, guided by scholars who provide careful analyses and measured opinions.
Sterngold is an Associate Professor of Business at Lycoming College and a resident of Muncy. He has published several articles about the misuses of economic impact studies and marketing surveys. Before pursuing an academic career, he worked as a government economist and advertising account manager.
