Alex Levine: Economics

Economic aspects of hydraulic fracturing drive gas companies onto public lands. Once again, using Pennsylvania and Michigan as case studies, a comparison will be made of the economic benefits each state has received from leasing state lands. There are two ways that states can make money from the gas leases. The first way is through the initial investment of companies to secure the lease rights. The second way is through royalties that companies pay for the gas they extract from the wells. Some advocates of the gas industry oppose taxation of gas developments by the state claiming it would dissuade the industry from investing money into drilling (Cusick, 2013). But if the states are putting their parks and forests at an environmental risk, what type of economic benefits are the governments receiving and where is this money being allocated?
The one-time initial investments from companies looking to secure the leases can be very lucrative for state governments. In the spring auction of 2010, Michigan’s lease auction netted a record $178 million from companies eager for the gas leasing rights under public land (Moore, 2013). In 2013, Pennsylvania’s DCNR issued three shale gas-specific leases totaling 138,866 acres. Together the leases generated $413 million in revenue for the Oil and Gas Lease Fund (DRNC Statistics, 2013). In the past three years, according to the state budget of Pennsylvania, the money received in the oil and gas lease funds for leases in state forests has increased from $10,827,000 to $15,235,000 to $17,883,000 in the 2012- 2013 budget year (PA Budget Review, 2012-2013).
Looking at royalties, however, can provide a better idea of how these gas leases on state lands will affect the state economies in the long run. Michigan law requires a severance tax on the value of resources extracted through the fracturing process. In the most current lease agreements, the lessee is required to pay a royalty to DNR of $0.35 per thousand cubic feet or 18% of the market value, whichever is higher, for all marketable natural gas produced and sold from each gas well drilled on the leased land (DNR Lease Copy, 2013). Pennsylvania, on the other hand, has adopted an impact fee for any drilling operations that occur during that specific year. Pennsylvania have generated approximately $80 million in royalty revenue on state lands since 2008 (Brady, 2012).
Millions of dollars are being collected from these leases of state lands, but where exactly does this money go? Michigan’s state constitution requires that initial sale revenue goes into the Michigan State Parks Endowment Fund and the Game and Fish Protection Trust Fund, which allow for expansion and upkeep of recreational opportunities (MDNR FAQ, 2013). The severance tax is deposited into the state’s general fund and can be used to cover the costs of environmental protection measures and infrastructure maintenance (Moore, 2013). The revenue collected from Pennsylvania’s impact fee is split between the state and local governments that have drilling occurring in their jurisdiction. More specifically in 2011, “of the 40 percent allocated to the state, the money was distributed to fund infrastructure improvement projects such as bridges and sewer projects, environmental funds, and liquefied natural gas projects” (Brown 26, 2013).
The general economic influence of these gas leases must be taken into consideration as well. The state governments must hire forest managers, ecologists, botanists, foresters, geologists, inspectors and ecological planners to manage these leases to ensure that all the regulations and environmental codes are followed. That is in addition to the well pad and transportation workers that the companies must hire to do the actual drilling of the gas.