FRACKING FINANCES by Mike Bernhard
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://bit.ly/15IXnTK
OR
http://maps.fractracker.org/latest/?appid=a134a591b16141b387552dacbef52d5f.
http://bit.ly/15IXnTK
OR
http://maps.fractracker.org/latest/?appid=a134a591b16141b387552dacbef52d5f.
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).
***
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.
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.) are independent 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.
***
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.
*****
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, benefiting 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.
***
“In planning the recovery of our local economy, we should rely not
on subterranean fracking fantasies, but on making the most of sustainable
economies on the surface.” B.Brock
