Today, with shale gas drilling booming in 3 nearby counties, the mayor of Scranton, Pennsylvania and all city employees remain on minimum wages of $7.25 an hour as the city struggles with an estimated $17 million budget shortfall. The mayor, blocked by his city council from raising taxes now finds even though his city is near the state’s epicenter of shale gas operations, the state’s new impact fee formula does not allow Scranton to directly access any of these new found revenues. Scranton’s current budget stands at $78 million per year.
Based on how the new Act 13 impact fee formula works, new state fees levied on shale gas drillers primarily go to those counties which ‘host’ drilling wells. Not lucky enough to be sitting on its own shale gas reserves, Scranton now finds itself on the outside looking in as 3 of its neighboring counties of Bradford, Susquehanna and Tioga are all getting ready to receive millions in new found shale gas impact fees on top of an already rich flow of shale gas companies land lease royalty payments due to the intense industry drilling in those counties.
While the city has no doubt received indirect benefit from the nearby shale gas drilling boom in the form of increases in sales and tax receipts to its local businesses, hotels and restaurants, it has also had to shoulder the indirect costs over the last 5 years related to the boom in the form of essential government services. Among other issues, what is occurring in Scranton today, appears to beg the question as to how and why the economic benefits from shale gas drilling can be so uneven in areas of the state in close support proximity to successful drilling operations?
Scranton is located in Lackawanna County in the northeast corner of Pennsylvania and home to roughly 76,000 Commonwealth citizens and is the state’s 6th largest city. Its early history is one of coal production along with iron and steel works now virtually all gone. While the city has seen its share of hard times in the past, it has served as a major regional economic hub for many years. It has been the center for the majority of major manufacturing and related business and government services jobs along with retail shopping and entertainment to the benefit of its surrounding regional counties throughout its long history.
Its current infrastructure of police, fire, emergency services, roads, waste disposal and water resources have also played an indirect yet key role in supporting the intense shale gas drilling taking place within less than 60 miles from the city over the last several years.
Scranton is near the state’s shale gas development epicenter, yet so far away
Current state drilling records show that 3 of the top 5 producing shale gas counties are all within close proximity to Scranton:
• Nearby Bradford County about 60 miles from Scranton, has more than 1,500 operating shale gas wells which rank it first in shale gas drilling in the state in both number of wells and total production.
• Just 30 miles from Scranton is Susquehanna County with 240 shale gas wells and ranks second in the state in shale gas production.
• Tioga County ranks 5th in the state in production with more than 250 wells and like Bradford County, is only about 60 miles from Scranton.
But in the strange world of the Pennsylvania shale gas drilling tax revenue formulas, it appears the city of Scranton might as well be in another country when comes to sharing directly in the benefits of the state’s new impact fees from shale gas development.
Act 13 impact fees with qualifications
After several years of rancorous debate over taxing shale gas production, the Corbett Administration finally passed HB950 otherwise known as Act 13 which sets into motion an “impact fee” on gas drilling operations within the state. But it differs in comparison to traditional oil and gas state production/severance tax regulations found in other states throughout the U.S.
According to National Public Radio’s StateImpact Pennsylvania reporter Scott Detrow, “The legislation places an impact fee on every well drilling for gas in the Marcellus Shale formation. The levy will change from year to year based on natural gas prices and the Consumer Price Index, but in 2012, drillers will pay $50,000 per-well. (Smaller, vertical wells will pay $10,000 this year.)” Detrow further stated, “The bill’s authors estimate the fee will generate around $180 million, when payments are turned in on September, 2012. 60 per-cent of the revenue will stay at the local level, going only to counties and municipalities ‘hosting’ wells. The rest will go to various state agencies.”
This has turned out to be a huge win for the nearby counties of Bradford, Susquehanna and Tioga but not for Lackawanna County or it’s major city of Scranton as their physical locations do not host any significant drilling wells.
Of the estimated $180 million of impact fees which begin to arrive this September, those counties with active wells acting as ‘hosts’ receive 60% of the fees based on the production of shale gas within their physical boundaries. The state receives the remaining 40% to go to ‘state agencies’. But none of this necessarily means a guaranteed increase in revenues for Scranton even as its essential government services continue to play a role in supporting nearby drilling activity.
Industry successful in delaying impact taxes on its PA production
Although shale gas firms have been drilling in Pennsylvania since as far back as 2005, the state did not have a production tax often called a severance tax on shale gas production when the drilling boom began. Traditional oil and gas states such as Oklahoma, Texas, Colorado, Wyoming and West Virginia all had standing production or severance taxes in place when shale gas drilling took off. But during the Rendell Administration, the in state shale gas lobby was highly effective in arguing against such a tax on it’s Marcellus shale gas production.
Back in 2009, the shale gas industry front group, the Marcellus Shale Coalition and former Penn State professor Timothy Considine were at the forefront arguing against any production or severance taxes on shale gas. Considine published a report in support of the industry regarding estimated economic development while advocating a position the state not tax the industry gas production.
The professor and the Coalition argued placing a tax on in state shale gas production would discourage the industry from drilling in Pennsylvania thus running the risk of significantly decreasing the amount of estimated job creation. This struck a raw nerve of fear and negative emotion with many local Pennsylvania elected officials eager to help their depressed local economies attain more jobs.
It later turned out Considine’s Penn State work was paid for by the Marcellus Shale Coalition, a major shale gas industry PR front group. Back in 2009, neither Considine or the Coalition disclosed the industry was paying for his work until Penn State finally demanded the professor state his work was paid for by the Coalition in the form of a reissued report.
This occurred even as shale gas drilling companies such as Chesapeake Energy, Halliburton, Devon Energy, Anadarko Energy and other Texas and Oklahoma drilling firms were flooding into Pennsylvania in an aggressive shale gas drilling boom. Ironically this meant the very drilling companies use to paying a production tax in their home states might not have to pay such taxes in Pennsylvania or at least not right away.
Despite more than 5 years of active drilling and production in Pennsylvania, the Act 13 impact fees only begin arriving into the state coffers as of September 2012.
Scranton, unlucky in geology but with opportunities to take more industry wastes
So today there sits Scranton, Pennsylvania, the state’s 6th largest city and former industrial powerhouse now facing a $17 million dollar budget shortfall and slowly going broke. Its mayor, the new bad guy, is running out of viable options while millions of dollars start to pour into neighboring counties the city has supported for decades as a major regional economic hub. All because of some strange luck of the draw from eons old shale gas formations and an impact fee formula which looks to directly favor those counties with drilling but not the counties without drilling sites. Even if the ‘have nots’ counties have had to provide indirect support services to the shale gas industry through their larger cities such as Scranton.
On what might appear to be on the bright side for Scranton, there has been talk that several of its large municipal landfills might be able to accept even larger amounts of its neighboring shale gas counties drilling wastes. While some will tout this as more proof of ‘indirect economic benefits’, such trickle down revenues most likely will not improve Scranton’s financial condition anytime soon.
Direct versus indirect shale gas benefits
For the local Scranton police officer now working for minimum wage, standing outside in the sweltering summer heat yet again responding to another traffic accident involving shale gas industry trucks or protecting utility crews needing to move or raise power lines resulting from the shale gas industry’s reliance on massive heavy drilling equipment which needs to be moved constantly, it will be hard to measure the direct versus indirect shale gas benefits.
Many will say the impact fees were not designed for cities such as Scranton so they do not deserve to enjoy them. Others will argue Scranton’s political leadership is to blame for their own problems and ‘handouts’ along with no new taxes must become the new normal. Some will vilify the mayor for causing a huge ‘political stunt’. Yet still others will say Scranton is already receiving shale gas drilling benefits albeit those of an ‘indirect’ manner. Its city council members may just vote to borrow more money to resolve the current shortfall.
So as shale gas industry’s claims and estimates of benefits continue to be measured against actual reality and become recorded as history, the residents of the Commonwealth of Pennsylvania are experiencing yet again the strange, uneven and unusual economics of unconventional shale gas drilling.