This section provides a discussion of many key factors that contribute to fracking economics. Such factors include: state taxes, bonds, damages, impact fees and future implications resulting from the hydraulic fracturing process. Much of fracking’s appeal comes from the money that can be made throughout the processes. First, a brief history of fracking economics will be discussed. While hydraulic fracturing itself is still a relatively new phenomenon, researchers have been tracking the economic impacts for several years. Table ES1 in “The Pennsylvania Marcellus Natural Gas Industry: Status, Economic Impacts and Future Potential” shows the development of economic impacts of the Marcellus Shale regions in Pennsylvania since 2009. The “Added Value” column represents the amount of the regional equivalent of gross domestic product. Added value has increased each year since 2009, as have tax collections and employment opportunities (Considine et. al, 2011). There is no denying that fracking has contributed increased revenue for the Commonwealth of Pennsylvania over the past few years, but other implications exist that will be explained later in this section which may reduce the value of these numbers.
Taxes
One major component of economic impacts is the collection of state taxes. One type of tax is the state sales tax, which marks the level of retail activity occurring within a county. Higher retail sales result in higher sales tax collection. According to a report released in March 2012, “state collections in counties with 150 or more Marcellus wells drilled between July 1, 2007 and June 30,2011…experienced an average increase of 23.8% between these years…compared to an average decrease of 5.1 percent in counties with no Marcellus activity” (Costanzo & Kelsey, 2012: 3). The following graph compares average statewide sales tax collections from 2008 to 2010 with counties grouped by number of wells drilled in the Marcellus.
As illustrated in the graph above, counties with more fracking activity experienced smaller declines in sales tax revenue than counties with no wells. Additionally, counties with more than 100 wells saw an increase in sales tax revenue. These results suggest fracking may have indirect economic implications such as increases in retail sales. Through the increased amount of activity and personnel necessary for fracking, more people contribute to the retail industry, leading to increased sales tax collections.
A second type of state tax is the realty transfer tax. In Pennsylvania, this is a 1 percent tax on the sale of real estate. As a result of the collapse of the housing bubble in 2008, realty transfer tax collections suffered throughout Pennsylvania. However, realty transfer tax collections in counties with “150 or more wells on average increased 4.3 percent between 2007 and 2011, compared to an average 33.4 percent decline in counties with no Marcellus drilling” (Costanzo & Kelsey, 2012). In the midst of the worst economic downturn since the Great Depression, counties with Marcellus drilling activity fared better with real estate action occurring during those years than counties without drilling.
A third type of tax affected by fracking is the state personal income tax. Included in personal income are wages and salaries, interest, investment income, and leasing and royalty income. In counties with the most Marcellus drilling, total taxable income surpassed the state average. These counties experienced a 6.3 percent increase on average, while the state average was a 5.5 percent decrease in taxable income at the county level (Costanzy & Kelsey, 2012). The difference in taxable income partially results from leasing agreements and royalties received by landowners in counties with high Marcellus activity. Leasing agreements are arrangements made between landowners and drilling companies that grant the companies the right to drill on that specific plot of land. The companies pay the landowners an amount agreed upon by both parties. Additionally, drilling companies pay the landowners royalties, which is a percentage of the amount of total gas production resulting from the drilling. Due to the lease agreements and royalties paid in counties with Marcellus activity, personal incomes for residents of those counties increased, resulting in increased personal income tax collections. “In counties with 90 or more Marcellus wells, the number of returns reporting royalty income increased 55.5 percent, incomes is another way to measure economic impacts of hydraulic fracturing in Marcellus Shale regions.
One very important type of state tax is the severance tax, a tax that Pennsylvania does not employ. A severance tax is a levy on nonrenewable natural resources, such as oil and gas. It is important to note that all other fracking states have a severance tax; Pennsylvania is the only state with fracking that does not. If Pennsylvania did have a severance tax, drillers would be taxed for the extraction of shale gas. These severance tax collections would add to the state revenue in addition to the types of taxes previously mentioned. Much controversy exists over whether Pennsylvania should start implementing a severance tax. Many argue that a severance tax would destroy the fracking industry because companies would refuse to pay. Others argue the tax would help protect those people who suffer consequences such as property damage and health issues as a result of fracking.
Sales, realty transfer, and personal income tax collection data are all vital parts necessary to evaluate the economic impacts of hydraulic fracturing. This section has shown that tax collections have increased in counties with high Marcellus drilling activity, indicating that those counties are experiencing an economic boom as a result of the presence of the fracking industry. The next section of this chapter will investigate bonds placed on wells.
Bonding Requirements
States apply bonding requirements, which are meant to protect the public by ensuring that financial resources exist to cover the cost of well plugging and reclamation. Unfortunately, “the amounts of those bonds are generally too low to pay for proper well closure, and state lawsgenerally do not require drillers to obtain bonds to cover the cost of off-site environmental remediation or compensation to victims” (Dutzik & Ridlington, 2012: 32). In Pennsylvania, drilling companies are required to pay $10,000 for each well deeper than 6,000 feet, and $4,000 for wells less than 6,000 feet deep (Dutzik & Ridlington, 2012). Pennsylvania also has a “blanket bond” requirement that covers all wells a company drills in the state. The blanket bond cost was recently increased from $25,000 to $625,000 (Hopey, 2012).
In comparison, New York state’s bond requirements are much more specific. For wells less that 2,500 feet in depth, companies must pay $2,500 per well for the first 25 wells, $25,000 plus $2,500 per well if drilling between 26 and 50 wells, and $70,000 plus $2,500 per well for over 100 wells. Wells being drilled between 2,500 and 6,000 feet have higher rates per well. In New York, wells being drilled more than 6,000 feet deep have varying bond requirements depending on the anticipated costs of plugging and abandoning that well (NY Dept. of Environmental Conservation). The bonds are meant to ensure that if something goes wrong, there will be financial means to fix the problem. The bonds usually do not pay for complete repair, leaving citizens to pay the remainder. As a result of insufficient bonds, the areas where fracking occurs and residents of those areas often suffer damages. The next portion of this chapter will further discuss damages caused by hydraulic fracturing and their economic impacts.
Damages
The economic impacts of fracking expand far beyond taxes and bonds. The process creates stresses that many communities cannot prepare for or handle. As a result, counties with high fracking activity experience severe damage. One type of common damage due to fracking and its large industrial needs is road damage. Transportation of millions of gallons of water, sand, and fracking chemicals is necessary for fracking. Many of the roads that lead to drilling sites are in rural areas that were not built to support large, heavy trucks on a regular basis. Consequently, repairs need to be made more frequently. “A 2010 Pennsylvania Department of Transportation document estimated that $265 million would be required for repair of roads affected by Marcellus Shale drilling” (Dutzik & Ridlington, 2012: 25). Another type of damage seen in areas with drilling activity is property damage. Several private drinking wells have exploded due to methane build up and other contaminants that made their way to private wells from fracking sites. Methane can produce gas flares, which can be detrimental to residents’ water supplies, a damage whose economic impacts are unpredictable and difficult to calculate.
Impact Fees
While Pennsylvania does not employ a severance tax, the state does require drilling companies to pay impact fees. Impact fees are bonding requirements in place for drilling companies to cover the costs of road repairs and other damages. The current fee is $50,000 per well, one of the lowest prices in the nation (PA Budget and Policy Center). Act 13 is the piece of legislation that allowed the state to adopt impact fees. Act 13 is the first rewrite of the Oil & Gas Act since 1984. Under Act 13, a county has 60 days to pass an ordinance authorizing the fee. If it fails to pass, “50 percent or more of the county population or 50 percent of the municipalities in the county may override the county decision, and the fee will then be imposed” (Buchanan Ingersoll & Rooney PC). As of September 10, 2012, the Commonwealth of Pennsylvania had collected $197.6 million in Marcellus Shale impact fees (PA Budget and Policy Center). Failure to address and repair damages causes future issues. The next section will discuss future implications from hydraulic fracturing.
Future Implications and Recommendations
Fracking is an exhaustive process, a process that leaves a long-lasting effect on the communities in which it occurs. Some economic impacts of fracking do not cease to exist once the drilling companies abandon a well pad; implications exist far into the future. One negative implication is the decline in property values. The value of areas surrounding drilling sites decreases due to pollution and the stigma that might result from proximity to industrial operations. Odor, traffic, noise, and visual impacts can negatively affect residents’ enjoyment and use of their homes (Dutzik & Ridlington, 2012). Property damage, which was discussed earlier, is another contributor to decreases in value of areas close to drilling sites.
Additionally, properties near fracking locations can be more difficult to finance and insure, potentially affecting their value. Lenders and insurers are hesitant to issue new mortgages to homes and have started requiring large buffer zones around houses on land with gas leases (Dutzik & Ridlington 2012). Standard homeowners’ insurance does not cover damage related to fracking. Another indirect economic effect of the fracking process is health-related issues and costs, which are discussed in detail in a separate chapter of this guide. Health care costs may rise due to health issues from water and air contamination from fracking. Such consequences can have profound economic impacts on both individual and state levels. In order to minimize and potentially avoid some of these unfortunate outcomes, recommendations must be made. The first recommendation is that governments on the federal, state, and local levels should hold the oil and gas industry accountable for all costs of fracking. Bonding requirements should be increased so they are sufficient to cover the costs of plugging wells, paying for road repairs and other physical damage; correct environmental contamination; and fully compensate anyone harmed by fracking activities (Dutzik & Ridlington, 2012). Stronger regulation enforcement will also be necessary to reduce fracking effects.
This section has discussed long-term economic impacts resulting from fracking and recommendations on how to minimize those implications. The presence of fracking has provided monetary benefits to counties with high fracking activity. The data discussed are proof that the fracking industry can be extremely prosperous for states. However, consequences and indirect economic impacts from fracking have the potential to diminish this prosperity. Adequate bond requirements and strict regulatory enforcement is crucial if states want to experience economic gains from fracking. If hydraulic fracturing is ever to be truly economically beneficial, drilling companies must be held responsible for all impacts that
fracking activity may have on a community. Citizens should never suffer financially, physically, or emotionally due to fracking. The next section will contain a question and answer interview with an expert about the topic of fracking economics.