Economics of Fracking in New York State

Financial and political implications of fracking in New York
Both pro-drilling and pro-environment camps should appreciate the statistical analysis, done by systems manager Jerry Acton and geologist Brian Brock, which projects potential production of Marcellus Shale horizontal wells in New York. By correlating recent production of Pennsylvania shale wells with the thickness and depth of the Marcellus Shale in both states, they have supplied credible production projections that can replace the industry’s hype that every town in the Marcellus fairway can frack its way past its financial problems, personal and communal. An easy-to-understand map is at http://TinyURL.com/NoShaleGasInNY .
Essentially, where the shale is thickest, the wells produce the best: the volume of rock fracked around horizontal wellbore varies with the square of the diameter of the frack, which is limited by the thickness of the shale. Thus, a 300’-thick layer of Marcellus shale can produce nine times as much gas as a 100’- thick layer. In addition, pressure increases directly with depth: a shale layer 7,000’ deep can produce twice as much as a 3,500’-deep layer. The combined effect is that towns in Chenango would see, on average, about 5% of the production of towns in the “sweetspot” of Pennsylvania (Susquehanna and Bradford counties).
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Drilling advocates claim that any level of gas production is “free money” to leased landowners who receive royalties and to the community-at-large, whose local governments, schools and fire departments receive wellhead tax revenues.
In fact, leased property-owners do face costs that reduce their bottom line. Leases constrain the surface use of the leased property. Homeowner’s Insurance doesn’t cover industrial operations. Banks won’t extend mortgages to buyers of leased properties. These costs, reducing the market value of leased – and adjacent -properties are fixed. They are independent of the level of royalty income, and they are borne before compensatory royalty income becomes available. (These problems are discussed at length at www.TheAftonVision2013.blogspot.com)
This reduces market value assessments on some parcels – notably residences on small properties with water wells – shifts the tax burden to others parcels, if town, school and fire department are to make their budgets. Like royalties, wellhead tax revenues depend on production levels and gas prices, while costs faced by communities (road damage, emergency services, displacement of renters, a rise in the cost of labor, etc.) areindependent of production/revenue levels, depending generally on the number of wells. Wellhead tax revenues will also lag behind these community costs. And these revenues, being based on a three-year sliding scale on historically-low wellhead profits, will under-reflect gas prices at the time of “sale”.
In Pennsylvania, royalties, based on wellhead prices, are being reduced by drillers subtracting unspecified “post-production” costs from the sale price. And, unlike any other state, New York State accepts production reports from companies without any attempt to verify production figures.
To evaluate these costs to individuals and to the whole community, it is important to determine whether actual gas production, as a determinant of the levels of royalties and of ad valorum tax revenues, will be high enough to compensate for those costs.
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Petroleum geologists use the concept of Initial Production (IP), the production rate six months after fracking, to evaluate gas well productivity. Since all Marcellus wells share a common production “decline curve”, the lifetime productivity of the well (of which 80% occurs in the first two years) can be predicted by its IP. In Pennsylvania,
  • Very High Producing wells, with IPs between 7 and 24 million cubic feet per day (MmCF/D) are clustered where the Marcellus Shale is between 250’ and 300’ thick.
  • High Producing wells, with IPs between 4 and 7 million cubic feet per day (MmCF/D) are generally found in areas between 200’ and 300’ thick
  • Low-producing wells (IPs between 2 and 4 MmCF/day) are clustered in areas where the shale is 150’ -250’ thick.
  • Very Low-Producing wells (IPs between 0 and 2 MmCF/day) are clustered where the shale is 150’ to 200’
The geological fact is that 85% of Chenango County overlays a Marcellus formation that is less than 150’ thick and less than 4,000’ deep. Drilling into similar geological conditions in Potter and McKean counties in Pennsylvania has yielded only one well – out of 33 – that is High-Producing. This production data, overlaid on the depth maps of the Marcellus formation, suggests that wells drilled in Chenango County are likely to be low/very low producers.
If the production of gas wells in the town is low, and the price of gas is low, then the returns (royalties to landowners and the gas-tax revenues to the town government, school and fire department) will also be low. However, the costs to leased landowners and to those community institutions will be much the same whether the wells are high producers, or deep, dry holes.
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Since profitability, rather than production levels, is gascorp’s bottom-line concern, they will only be drilling here if they can off-load production costs onto the public: reducing landowner royalties and ad valorum taxes by deducting undocumented “downstream” expenses, spreading gaswell wastes on local roads, paving over dirt roads that towns will be stuck maintaining, making liberal use of taxpayer-funded first-responder services, and doing unmonitored wee-hours waste disposal.
But every well drilled, gusher or dud, is guaranteed income for local providers of the large quantities of gravel that are used building pads and access roads. Each new well, requiring as it does about 500 water-truck trips, and roughly 250 toxic-waste disposal trips, guarantees income to trucking companies. As does the hauling of drill cuttings to the Pharsalia landfill and the transloading of silica fracking sand at nearby railway depots. The largely-imported workforce will drive up rents levels, benefitting some landlords even as displaced low-income renters become a burden on the public purse.
While landowners and taxpayers will, in general, suffer financially from low-production wells, such businesses will profit from gas drilling regardless of whether well productivity is high or low. These businesses have a financial interest in “holding the door open” for the drillers, even though low well productivity, at low prices, will be to the detriment of most lessors, property-owners and our community institutions.
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On Wednesday, October 30, 7:00 pm, Hollister Hall Auditorium (B-14), Cornell University, Acton and Brock will be joined by veteran industry technical and finance specialists Lou Allstadt and Chip Northrup, presenting their findings on “Marcellus and Utica Shale Potential in New York State”,
For more information: northrup49@gmail.com  or cell (214) 502-6464.