Professional Documents
Culture Documents
NaturalGasandCrudeOilExploration
andProductionIndustry
andtheEmergingUtica
GasFormation
EconomicImpactStudy
September2011
Preparedforthe
Contact:
OhioOilandGasEnergyEducationProgram
P.O.Box187
1718ColumbusRoad,SW
Granville,OH43023
(740)5870410
www.oogeep.org
rreda@oogeep.org
JackKleinhenz,Ph.D.
Kleinhenz&Associates
2602BerkshireRd.
Cleveland,Ohio44106
Tel.:+12163219522
Fax:+12163914767
Email:Jack@Kleinhenzassociates.com
Preparedby:JackKleinhenz,Ph.D.,RussSmith,Ph.D.
Kleinhenz&Associates
InAssociationwith:JimRobey,Ph.D.,MohrPartners,Inc.
BenjaminH.Thomas,Ph.D.,ThomasConsulting,LLC
Disclaimer:ThisreportwaspreparedbyKleinhenz&AssociatesfortheOhioOiland
Gas Energy Education Program with contributions from project team members.
NeitherKleinhenz&AssociatesnortheOhioOilandGasEnergyEducationProgram
makes any warranty or representation, express or implied, with respect to the
accuracy,completeness,orusefulnessoftheinformationcontainedinthisreport.
NeitherKleinhenz&Associates,norprojectteammembersassumeanyliabilitywith
respect to the use of, or damages resulting from the use of, any information
disclosedinthisreport.
TABLEOFCONTENTS
I.EXECUTIVESUMMARY.........................................................................................................2
II.INTRODUCTION..................................................................................................................5
III.METHODOLOGY.................................................................................................................8
MeasuringEconomicImpacts:Indicators.............................................................................11
EconomicImpactoftheDevelopmentoftheUticaFormation...........................................13
EconomicImpactsofPlannedDrilling..................................................................................13
DataRequirementsandAssumptions................................................................................13
Results................................................................................................................................17
EconomicImpactsofRoyaltyandLeasePayments..............................................................18
EstimationofRoyaltyPayments.........................................................................................18
EstimationofLeasePayments............................................................................................20
SummaryResults:EconomicImpactofUticaFormation..................................................23
EstimationofDirectTaxesPaidbyOhioOilandGasIndustryfromUticaFormation.........24
SeveranceTax.....................................................................................................................24
PropertyTax.......................................................................................................................25
CommercialActivitiesTax..................................................................................................26
IncomeTaxes......................................................................................................................26
SummaryResults:TaxesPaidbyOhioOilandGasIndustry..............................................27
TheEconomicImpactoftheOhioNaturalGasandCrudeOilIndustry...............................28
ModelingMethodologyandAssumptions.........................................................................28
SummaryResults:EconomicImpactofOhioOilandGasIndustry...................................29
EconomicImpactofNewWellsDrilledin2010...................................................................30
ModelingMethodologyandAssumptions.........................................................................30
Results................................................................................................................................31
V.VALUEOFLOCALNATURALGASTOOHIOCONSUMERS...................................................33
PriceReducingImpactofOhiosSupply...............................................................................33
PriceandMarketImpactsofVariousSupplyScenarios.......................................................35
AvoidedInterstatePipelineTransportationCostsintoOhio...............................................39
HowInterstatePipelineTransportationCostsareAvoidedtheIntegratedGathering
System..........................................................................................................................39
EstimationofAvoidedInterstatePipelineCosts................................................................41
SecurityorUnInterruptabilityofSupply.............................................................................48
PriceVolatility.......................................................................................................................50
ResearchStudiesonPriceVolatilityanditsImportance....................................................50
PriceVolatilityinOhio..........................................................................................................52
VI.OHIONATURALGASANDCRUDEOILINDUSTRYOUTLAYS..............................................62
ii
VII. CAPITAL REINVESTMENT OF OHIOS NATURAL GAS AND CRUDE OIL PRODUCING
INDUSTRY......................................................................................................................63
AnalysisofExploration,DevelopmentandProduction(Lifting)Expenditures....................64
AnalysisofOhioDrilling,CostsandPrices............................................................................67
VIII.ROYALTIES,FREENATURALGASANDTAXES.................................................................70
Royalties................................................................................................................................70
FreeNaturalGas...................................................................................................................72
TaxesPaidbyOhiosNaturalGasandCrudeOilIndustry....................................................72
IX.BENEFITSOFRESERVES....................................................................................................76
IX.APPENDIX........................................................................................................................77
REFERENCES.........................................................................................................................82
iii
LISTOFTABLES
Table1:NumberofOhioNaturalGasandCrudeOilIndustryEstablishments,2009....................6
Table2:UticaWellGrowthandExpendituresinOhio,20112015...........................................16
Table3:EconomicImpactsofUticaExpendituresinOhio...........................................................17
Table4:NetEmploymentImpactsbySelectedSectorsDuetoUticaWellDevelopment...........17
Table5:RoyaltyPaymentsforaSampleUticaWellDrilledin2011............................................20
Table6:EstimateRoyaltyPayments,AllOhioUticaWells20112015.......................................20
Table7:EstimatesofRoyaltyandLeasePaymentsandExpendituresbyConsumers.................21
Table8:EconomicImpactsof$1MillionofConsumerExpenditures..........................................21
Table9:EconomicImpactsofUticaRoyaltyPayments................................................................22
Table10:EconomicImpactsofUticaLeasePayments.................................................................22
Table11:EstimatedCombinedEconomicImpact........................................................................22
Table12:PublicRevenueImpactsofConsumerExpendituresfrom...........................................23
Table13:CombinedEconomicImpactsofSpendingonUticaGasFormation............................23
Table14:SeveranceTaxesForaSampleUticaWell....................................................................24
Table15:Property(AdValorem)TaxPaidforaSampleUticaWell.............................................25
Table16:EstimatedCommercialActivityTax..............................................................................26
Table17:EstimatedIncomeTax...................................................................................................26
Table18:SummaryofEstimatedTaxes,SingleUticaWell...........................................................27
Table19:SummaryofTaxPayments,OhioUticaWells20112015..........................................27
Table20:BaselineEstimateofOhioNaturalGasandCrudeOilEmploymentandWages.........28
Table21:SummaryImpactEstimatesofNaturalGasandCrudeOilExtractiononStateofOhio,
2010..............................................................................................................................................29
Table22:NetImpactsofSelectedSectorsfromLossofNaturalGasand...................................30
Table23:Impactof2010DrillingActivityontheStateofOhio..................................................31
Table24:NetImpactsbySelectedSectorsfrom2010DrillingActivities....................................32
Table25:NaturalGasSupplyScenarios.......................................................................................35
Table26:CalculatedPriceResponseofShaleGasProduction.....................................................37
Table27:OhiosContributionofU.S.Supply...............................................................................37
Table28:PercentChangeinSupplyxPriceResponse=OhiosPriceImpact..............................37
Table29:CostsavingsEffectofOhiosProductionontheU.S.MarketasaWhole....................38
Table30:SavingstoOhioansDuetoOhiosPriceDampeningSupply........................................38
Table31:NaturalGasTransmissionExpenditures,WellheadtoCitygate...................................44
Table32:EstimateofMaximumStorageCostsAvoided..............................................................45
Table33:StorageandInterstatePercentagesofOhioResidentialBills......................................46
Table34:TransmissionandStorageSavingsEstimates...............................................................47
Table35:TotalNetSavingstoOhioansin2010,AvoidedTransmissionandStorageCosts........47
Table36:WinterMonthsPriceComparison:DTI1stofMonth,Chicago,NY...............................55
Table37:SummerMonthsPriceComparison:DTI1stofMonth,Chicago,NY............................56
Table38:2010EstimatedOhioNaturalGasandCrudeOilExploration&Development............65
Table39:Production(Lifting)Costs..............................................................................................66
Table40:TotalExploration,DevelopmentandProductionCostsforOhio.................................66
iv
Table41:OiltoGasPriceRatio,1998to2010.............................................................................67
Table42:DrillingCostandPricingHistory,Ohio20062010........................................................69
Table43:NaturalGasandCrudeOilProduction,19972010......................................................70
Table44:AverageWellheadPrice................................................................................................71
Table45:CalculationofIndustryRoyaltyPayments....................................................................71
Table46:FY2011SeveranceTaxesPaidforCrudeOilandNaturalGas......................................73
Table47:CommercialActivityTaxesPaid,FY2010......................................................................74
Table 48: Income Statement for Major Crude Oil and Natural Gas Companies and Census' All
ManufacturingCompanies,2009.................................................................................................75
Table49:SummaryofTaxesPaidbyOhioNaturalGasandCrudeOilProducers.......................75
Table50:UticaEmploymentImpactAnalysis:IndustriesinOhiowithatLeast10Employees...77
Table51:UticaOutput(Sales)ImpactAnalysis:IndustriesinOhiowithatLeast10Employees 78
Table52:UticaGRPImpactAnalysis:IndustriesinOhiowithatLeast10Employees.................79
LISTOFFIGURES
Figure1:OhioNaturalGasandCrudeOilIndustry........................................................................6
Figure2:ResearchDesign:ProjectFlowChart...............................................................................9
Figure3:CountieswithInitialUticaDevelopment.......................................................................16
Figure4:ValueofOhioNaturalGasProduction:U.S.Market.....................................................34
Figure5:TheBasis:OhioNaturalGasPriceMinusGulfPrice,January15,20012011...............43
Figure6:HowOhiosLocalProductionReducesVolatility...........................................................52
Figure7:WinterPrices20002001...............................................................................................53
Figure8:Katrina&RitaSpike.......................................................................................................56
Figure9:PriceSpikesandNearbyHubs20002007..................................................................58
Figure10:PriceSpikesandNearbyHubs2008toCurrent...........................................................59
Figure11:PriceSpikesandNearbyHubs,Winterof20102011..................................................60
Figure12:NaturalGasandCrudeOilIndustryOutlaysasaPercentof.......................................62
Figure13:CycleofReInvestment................................................................................................63
Figure14:OhioNewWellDrillingCostsandNaturalGasPriceAnnualizedfor20062010......68
Figure15:WorldwideUpstreamCapitalCostIndex....................................................................69
Figure16:OhioNaturalGasProductionbyDecadeWellWasDrilled.........................................76
Acknowledgement
Kleinhenz & Associates and the Ohio Oil and Gas Energy Education Program wishes to thank
Ohios natural gas and crude oil industry for their cooperation in completing various surveys,
multipleinterviewsandotherkeyinformationforthisstudy.Notablecontributionsweremade
fromtheProjectCommitteeMembers.
OhioOilandGasEnergyEducationProgramOperatingBoard
EricSmith,OOGEEPChair
President,MaricDrillingCompany
MartinMiller,OOGEEPViceChair
VicePresidentOperations,AlliancePetroleumCorporation
WilliamSiskovic,OOGEEPBoardandEconomicImpactStudyCommitteeChair
President,EverflowEasternPartners,LP
RonGrosjean
FieldSuperintendent,Kenoil,Inc.
RalphTalmage
President,NorthwoodEnergyCorporation
SarahTipka
LandManager,A.W.TipkaOil&Gas,Inc.
RonWhitmire
VicePresidentofPublicAffairsandOfficeAdministration,EnerVestManagementPartners,LTD.
EconomicImpactStudyProjectCommittee:
WilliamSiskovic,OOGEEPBoardandEconomicImpactStudyCommitteeChair
President,EverflowEasternPartners,LP
TomBooth
President,BHI
Dr.BobChase
ChairandProfessor,DepartmentofPetroleumEngineeringandGeology,MariettaCollege
StevenDowney
VicePresident,BusinessDevelopmentandMarketing,EnerVestOperating,LLC.EasternDivision
vi
DanielDurfee
Professor,EngineeringandNaturalSciences,ZaneStateCollege
StevenGrose
Partner,ConcordParkEnergyDevelopment
DavidR.Hill
President,DavidR.Hill,Inc.
JerryJames
President,ArtexOilCompany
TimMcNutt
Director,Planning&AssetUtilization,DominionEastOhio
JoyPadgett
DirectorofGovernmentRelations,CentralOhioTechnicalCollege
Dr.DougSouthgate,Jr.
Professor,DepartmentofAgricultural,Environmental,andDevelopmentEconomics,TheOhio
StateUniversity
JohnW.Straker
President,TheOxfordOilCompany
LarryWickstrom
DivisionChief,OhioDepartmentofNaturalResourcesGeologicalSurvey,andStateGeologist
vii
I.EXECUTIVESUMMARY
The Ohio Oil and Gas Energy Education Program engagedKleinhenz & Associates to estimate
theeconomicimpactsofplannedindustryspendingforthedevelopmentoftheUticashalegas
formationandupdateits2008studythatexaminedtheeconomiccontributionandbenefitsof
thenaturalgasandcrudeoilindustrytotheStateofOhio.
Ohio producers provided the state with 78 billion cubic feet of natural gas and 4.7 million
barrelsofcrudeoilin2010.Ohioremainsinthetophalfofnaturalgasandcrudeoilproducing
statesandrankssixthinnumberofproducinggaswells.Since1860,Ohiohasproducedover
8.5trillioncubicfeetofnaturalgasand1.14billionbarrelsofcrudeoil,worthapproximately
$124.4billionat2010averagewellheadprices.
Kleinhenz&Associatesusedamultifacetedapproachtocompletethisstudythatincludedthe
useofaregionaleconomicmodelandextensiveeffortstogatherdatafromaliteraturereview,
primaryandsecondarydatacollection,interviewsandanalysis.
This report evaluates the value of Ohios natural gas and crude oil industry by examining the
following:
The current natural gas and crude oil industry and the potential Utica shale
developmentimpactsonthestateofOhioregarding:
o Jobs
o Income
o Taxrevenues
o Grossstateproduct
BeneficialeffectsofOhioproducednaturalgasintermsof:
o Pricereducingimpact
o Avoidedinterstatepipelinecosts
o Pricevolatilityreduction
o Securityofsupply
Royalties and free natural gas provided to mineral interest owners from Ohio natural
gasandcrudeoilproducers
Taxespaidbytheindustry
Findings
This report shows that the Ohio Natural Gas and Crude Oil Industry currently offers many
benefitstoOhioans.Italsoillustratesthattheprojectedimpactfromcapitalinvestmentsfor
the Utica shale development holds significant impacts on the Ohio economy. Specific
contributions and benefits that the industry provides to Ohio are presented across the
following:
EconomicImpactofOhiosNaturalGasandCrudeOilIndustry2010
Ohios natural gas and crude oil industry supports more than 4,490 direct jobs which
contributes to a total of 12,950 Ohio jobs due to the leasing, royalties, exploration,
drilling, production and pipeline construction activities in various geological formations
withinOhio.
Theindustry,viaitsexpenditures,isdirectlyandindirectlyresponsiblefor$988million
annuallyingrossstateproductandstatewideoutputorsalesof$1.7billionperyear.
The industry, via its multipliers, is responsible for $793 million per year in personal
incomeinthestateofOhio.
EconomicImpactoftheDevelopmentoftheUticaFormation
More than 204,000 jobs will be created or supported by 2015 due to exploration,
leasing,drillingandconnectorpipelineconstructionfortheUticaShalereserve.
With the substantial pace of development, economic output will increase by over $22
billionandwagesby$12billionby2015.
In the year 2015, local government wage tax revenues amount to $240 million. This
estimateexcludestheseveranceoradvaloremtaxeslevieduponproducersofcrudeoil
andnaturalgas.
EconomicImpactofNewWellsDrilledin2010
ThevalueofthatreinvestmenttoOhiothewelldrillingactivitiesinOhiothatisthe
portion excluding operation, maintenance and overhead, was modeled. The re
investmentportionoftheindustryaccountsfor2,249jobsand$135millionperyearin
grossstateproduct.
LocalNaturalGasandCrudeOilSupplyBenefits
Ohio keeps $718 million per year instate when it can buy locally produced natural gas
andcrudeoil.
Valueoflocalproductionissignificantbecauseitisdeliverableintimesofscarcity.Ohio
consumers need the commodity, not a hedge on the commodity, during peak times of
demand. Research found that there was a security or uninterruptability of supply
premiumimbeddedininterstatepipelinetransportcosts.Secondaryresearchfoundthe
quantityriskpremiumpaidbybuyersofnaturalgasduringtimesofgreatdemandtobe
ontheorderof3%perdollarofmovementofexpectedspotprice.
Ohioconsumerssave$9.2million peryearduetothepricereducingimpactthestates
supplyofnaturalgashasonthenationalequilibriumpriceofnaturalgas.Ohiossupplyof
naturalgastothenationalmarketissmallbutsignificantenoughtoaffectprice.
Ohioans save $30 million per year in avoided interstate pipeline transportation costs.
ThisavoidedcostisduetoOhioproductionnotrequiringinterstatepipelinetransmission.
This research does not attempt to allocate benefits to particular market participants;
rather, the gathering system and Ohio production are viewed as an inseparable entity.
Benefits are distributed in the competitive marketplace of DTI (Dominion Transmission,
Inc.)andotherhubs.
Localproductionprovidesanimportantstoragelikebenefitofreducedpricevolatility
orpeakshaving.DTIviedwithChicagoinofferingthelowestvarianceinpricingduringthe
winterfrom2000to2010.DTIwasfoundtohavethelowestmeanpriceinfouroutof11
yearsanalyzedandthelowestvarianceinpriceinsixoutofthe11yearsanalyzed.The
reduced price fluctuations benefited millions of Ohio natural gas users residential,
commercialandindustrial.
In the past 10 years, Ohio natural gas and crude oil producers generated royalty
paymentstotaling$1billion.In2010,royaltiesamountedto$90million.Mineralinterest
owners,typicallylandowners,receivetheroyaltypayment.
Ohio natural gas and crude oil producers provided free natural gas to mineral interest
owners,typicallylandowners,worth$61million,in2010.
In 2010, Ohio natural gas and crude oil producers paid an estimated $32.7 million in
federal,stateandlocaltaxes.
II.INTRODUCTION
The natural gas and crude oil industry in Ohio is mature and enjoys a welldeveloped
infrastructurethatprovideslocallyproducednaturalgasandcrudeoiltoOhioans.Theindustry
helped establish Ohio as an industrial base in the 1860s and continues to contribute to the
economy. Since 1860, Ohio has produced over 8.5 trillion cubic feet of natural gas and 1.14
billion barrels of crude oil, worth approximately $124.4 billion using 2010 average wellhead
pricesforover$125billionin2006dollars.1
Ohioproducersprovidedthestatewith78,122millioncubicfeetofnaturalgasand4.8million
barrelsofcrudeoilin2010.Thisamountedtoamarketvalueof$718millionworthofnatural
gasandcrudeoil,thelowestsince2003.2
Ohioremainsinthetophalfofnaturalgasproducingstates,andranksninthinthenumberof
gas wells drilled and fourth in number of total productive wells with 222,204 to date.3
Approximately 64,378 natural gas and crude oil wells are currently in operation and are
distributedamong5,664registeredwellowners(4,200aredomesticowners).4Naturalgasand
crudeoilhavebeenproducedinmostofOhios88countiessincetheindustryslaunch,though
muchofthecurrentactivityoccursintheeasternhalfofthestate.Manywellsproduceboth
naturalgasandcrudeoil.
Clintonsandstonewellswerethemostactivelydrilled,accountingfor53%ofallwellsdrilled.
CuyahogaCountywasthemostactivein2010,with37wellsdrilled.
ManyofOhiosreservesoriginateinmarginalwells,wellsthatproducelessthan10barrelsof
crudeoilorlessthan60thousandcubicfeetofnaturalgasperday.Ohiohasthefourthhighest
numberofmarginalnaturalgaswellsandhasthefourthhighestnumberofmarginalcrudeoil
wells in the nation. According to national statistics provided by the Interstate Oil and Gas
Compact Commission (IOGCC) in 2008, marginal wells (sometimes called stripper wells)
accountfor19%ofnaturalgasand20%ofcrudeoilproducedintheU.S.5
Summary of Ohio Oil and Gas Activities Ohio Department of Natural Resources Division of Mineral Resource
Management,2010.
2
Summary of Ohio Oil and Gas Activities Ohio Department of Natural Resources Division of Mineral Resource
Management,2010.
3
U.S.EnergyInformationAdministration(EIA)http://www.eia.gov/oil_gas/natural_gas/data_publications
/natural_gas_annual/nga.htmlandSummaryofOhioOilandGasActivitiesOhioDepartmentofNaturalResources
DivisionofMineralResourceManagement,2010.
4
Summary of Ohio Oil and Gas Activities Ohio Department of Natural Resources Division of Mineral Resource
Management,2010.
5
MarginalWells:FuelForEconomicGrowth2009Report,InterstateOilandGasCompactCommission.
According to the U.S. Census Bureaus County Business Patterns Report (CBP), there are an
estimated 435 natural gas and crude oil establishments in Ohio.6 Since there is a certain
amountofundercoverageinemploymentestimatesreportedintheCBPreport,7theIndustry
and wage data from the Quarterly Census of Employment and Wages8 (QCEW) is used to
measure the economic impact of the Industry to the State of Ohio. According to the QCEW,
therewere4,490employeesfortheyear2010.(SeeTable20onpage28.)
Table1:NumberofOhioNaturalGasandCrudeOilIndustryEstablishments,2009
IndustryCode
21111
213111
213112
IndustryCodeDescription
OilandGasExtraction
DrillingOilandGasWells
SupportActivitiesforOilandGasOperations
Total
TotalNumber
of
Establishments9
203
78
154
435
Figure1:OhioNaturalGasandCrudeOilIndustry
NumberofEstablishmentsbyEmploymentSize,2009
300
NumberofEstablishments
260
250
200
150
75
100
56
50
36
6
0
14
59
1019
2049
NumberofEmployeesPerEstablishment
U.S.Census,CountyBusinessPatterns,2009.
U.S. Census, County Business Patterns for Ohio, 2009 reported only 3,365 employed in Industry Sectors 21111,
213111and213112whichunderestimatesemploymentduetotabulationandsurveymethods.
8
TheemploymentestimateisbasedontheBureauofLaborStatisticsQuarterlyCensusofEmploymentandWages
(QCEW)programwhichpublishesaquarterlycountofemploymentandwagesreportedbyemployerscovering98
percentofU.S.jobs,availableatthecounty,MSA,stateandnationallevelsbyindustry.
9
Anestablishmentisdefinedasabusinessorindustrialunitatasinglelocationthatdistributesgoodsorperforms
services.Itisnotnecessarilyidenticaltoacompanyorenterprise,whichmayconsistofseveralestablishments.
7
In spite of greater access to resources, costs of exploring, drilling and producing energy have
been increasing. Drilling and production firms innovate and invest in hightechnology
equipmentandsoftwaretoimproveproductivity.Firmsalsoinvestintheclassichardwareof
steel,pumpsandmotorsneededtoliftthenaturalgasandcrudeoiloutoftheground.As
olderwellsdepleteordepressurizeandbecomeuneconomical,newwellsmustconstantlybe
drilled.
TheOhioOilandGasindustry,however,isatapivotpoint.Theindustryischangingrapidlyin
thefaceofpotentialdevelopmentoftheUticashaleformation.Priorto2011,theoilandgas
industry focused on development of the Clinton sandstone formation. This report provides
insightintotheindustrysimpactuponOhioeconomybasedupondevelopmentoftheClinton
formationin2010aswellastheindustryspotentialneartermimpactofinvestmentsinOhioto
exploreanddeveloptheUticaformation.Theestimationofinvestmentsandtheirprojected
impacts developed in this report depend upon the continued viabilityof the Utica formation.
Theviabilityislargelyafunctionofpriceandtechnology.Marketpriceofnaturalgas,crudeoil,
and natural gas liquids must be adequate to encourage investment. Continued technical
successemployinghorizontaldrillingandstimulationtechnologiesmustbeachievedatacost
efficient level. The supply chain of labor and equipment must grow at a pace with the
development of the formation. Lastly, ultimate demand for the products of the Utica shale
mustbeevident.TotheextentthatOhiofirmswillusethesechemicals,naturalgas,itsliquids,
andoil,industrieswillbenefitfromreducedcostsofinputsandbemorecompetitive.
This study provides evidence and analysis of how natural gas development stimulates the
economyandprovidesestimatesofthebenefitstoOhioansofhavingandmaintaininganatural
gas and crude oil industry within the state. For example, the disruption of the Louisiana
suppliednaturalgasduringHurricaneKatrinaofferedaglimpseofthebenefitsofOhiosupplied
naturalgas.Thatis,therewasnodisruptioninsupplytoOhio.NaturalgassuppliedfromOhio:
a) islessdisruptableduringtimesofpeakdemand
b) issoldonapricelevelingfirstofthemonthindex
c) reducesnaturalgaspricelocallyaswellasnationwide
d) facesminimalinterstatepipelinecapacityconstraints
e) supportsorcreatesthousandsofjobsandmillionsofdollarsinannualrevenueforthe
state.
The next section provides an overview of the methodology undertaken to estimate the
economic benefits of Ohioproduced natural gas and crude oil. The subsequent section
presents the projected economic impacts from capital investments for the Utica shale
development.ItincludesananalysisofleasingandroyaltypaymentsandtaxespaidbyOhiooil
andgasIndustryfromtheUticaformation.Thissectionalsopresentstheeconomicimpactsof
theindustrywithrespecttojobs,income,andgrossstateproductandnewwellsdrilledandthe
value of 2010 wells drilled. The third section examines the value of natural gas to Ohio
consumersintermsofpricereductions,avoidedinterstatepipelinecharges,securitybenefits,
andpricevolatilitybenefitsoflocalnaturalgas.Thefourthsectionanalyzesthedistributionof
thenaturalgasandcrudeoilindustryoutlays.Thefinalsectionsreviewcapitalreinvestments
the industry makes to the states benefit, taxes paid by the industry and the benefits of gas
reserves.
III.METHODOLOGY
Inthisstudy,Kleinhenz&Associatescompletedseveralinvestigationsrequiringamultifaceted
approachthatincludedtheuseofaregionaleconomicmodel,aliteraturereview,primaryand
secondarydatacollection,interviews,surveysandanalysis.Likeourpreviousreport,thisstudy
estimates the direct, indirect and induced economic impacts by sector using the model
developed by Regional Economic Models, Inc. (REMI). Public data available from the Energy
InformationAgency(EIA)aswellasdataandresearchconductedbytheDepartmentofEnergy,
the Government Accounting Office, and various universities were employed. In addition, key
industry players in the market were interviewed. This comprehensive approach provides
perspectiveandinsightstothequestionsposedandarevalidtoaddressthevalueoflocalOhio
productionofnaturalgasandcrudeoil.
Figure2:ResearchDesign:ProjectFlowChart
DesignDataCollectionProcess
CollectSecondary
Data
OhioTax
Commission
Hubp
rice
Data
CollectPrimary
Data
EIA,
University
Private
OhioO&G
DataODNR
DMRM
O&G
Producer
Survey
Reports
Producers
Extrapolate
CostDatato
Royalty,
Taxes&
Price
Volatility
FreeGas
Analysis
Analysis
TotalIndustry
Expenditures
Estimate
Price
Calculate
Pipeline
Dampening
Transmission
Effect
Customize
Savings
Components
ofREMI
Economic
Impactof
Utica
Formation
Interviews,
GasUtilities
and
EconomicImpact:
OhioOil&Gas
Industry&2010
Wells
O&G
Exploration
CostsSurvey
Aggregate
Producer
Expendituresfor
Consistency
withREMI
Categories
IV.ECONOMICIMPACTSOFTHENATURALGASANDCRUDEOILINDUSTRYONTHEOHIO
ECONOMY
ToestimatetheeconomicvalueoftheexistingnaturalgasandcrudeoilindustryontheStateof
Ohioseconomyandspecificallytheimpactofwellsdrilledin2010,Kleinhenz&Associatesused
an econometric model which employs a dynamic input/output framework that tracks how a
dollarofinvestmentflowsthroughtheeconomyovertime.Theeconomicmodelingframework
thatbestcapturestheseflowsiscalledaninputoutputmodelandmostoftenappliedtoassess
theeconomicoutcomesofjobcreationorreduction.
Fundamentally, expenditures by natural gas and crude oil industry firms affect the Ohio
economy directly through the purchases of labor, materials and services in the state and
indirectly as those purchases generate spending by suppliers from related sectors of the
economy. Induced economic impacts result as household income changes (created by direct
and indirect effects on wages) lead to further consumer spending throughout the state
economy.Thiscyclecontinuesuntilspendingeventuallyleaksoutoftheregionasaresultof
taxes,savingsorpurchaseofgoodsorservicesfromoutsidethestate.
An econometric model developed by Regional Economic Models, Inc. (REMI) was used to
measurethecombinationofdirect,indirectandinducedeffectscriticalforthisanalysis.10Itis
anempiricalrepresentationoftheOhioeconomyanditsintersectoriallinkagesenabletheuser
totracetheeffectsofachangeinthedemandforgoodsandservicesduetoanexpansionor
contractionofafirmorindustry.Asadynamicrepresentationoftheeconomy,themodeltakes
into account interregional trade flows, intraregional trade flows, and the pressures of
competitionondemandforcapitalandlabor.Suchcompetitionimpactsthecostsofbothlabor
andcapital,themixofresourcesusedbyindustry(productionfunction)and,inthelongrun,
theamountofregionalgoodsandservicespurchasedandproduced.Basedonmanyequations,
theREMImodelmakesthecorrelationbetweeninputofgoodsandservices(capital,laborand
technology)andoutput.Forexample,producing1mcfofnaturalgasmayrequire10workers,
thousandsofdollarsofmaterials,andaparticularsetofequipment(representingtechnology
and capital investment). If any of the three ingredients labor, materials or equipment
becomesscarceorunavailable,thefinaloutputwouldbenegativelyaffected.
Theamountofintraregionaltradedependsontheproportionofthetotaldemandforagoodor
commoditybyallusersinthestudyareacapturedbyeachindustry.Thelocalmarketshareof
totaldemanddependsonrelativeproductioncosts,theestimatedpriceelasticityofdemand,
andtheeffectivedistancebetweenthestudyareaandeachoftheotherregions.Anincrease
or decrease in the local share will depend on price and quantity produced compared with
competitorsinthemarket.Thechangeinshareofaspecificareainanyregiondependson
changesinitsdeliveredpriceandthequantityitproducescomparedwiththesamefactorsfor
competitors in that market. The share of local and external markets thus drives the exports
10
TheNortheastOhioREMIModelwasusedinthisanalysisandincludesallOhiocounties.Themodelhasitsown
baseforecastandrequiresindividualinputsofeconomicactivity.
10
from and imports to the home economy. The economic model represents the major
interindustry linkages among private industries aggregated into 70 major industrial sectors,
including three public sectors (state and local, federal and military). The model combines
countydatatocreateregionsorspatialunitsofanalysis.
A baseline projection of the Ohio economy is embedded in the model and serves as the
baseline forecast that is used to estimate the impacts of economic change or shock. The
baselineforecastestablisheseconomicandlaborconditionsbasedonaseriesofassumptions
andhowtheyareaffectedbytrendsforecastedatthenationallevel.Thenationaltrendsare
reflected in the baseline based on the states industry mix and competitive conditions. For
purposes of this study, all impacts are compared to the baseline forecast. This underlying
feature is what makes the model dynamic, meaning that it is able to show how the Ohio
economywillreactovertime.
For modeling purposes, specific economic sectors using the North American industrial
classification system (NAICS) codes affected by the oil and gas industry expenditures were
required.ThesesectorsaredefinedbytheU.S.OfficeofManagementandBudgetandinclude:
NAICS213industriesinthesupportactivitiesforminingsubsectorgroupestablishments
primarilyprovidingsupportservices,onacontractorfeebasis,requiredforthemining
and quarrying of minerals and for the extraction of oil and gas. Establishments
performingexploration(exceptgeophysicalsurveyingandmapping)forminerals,ona
contract or fee basis, are included in this subsector. Exploration includes traditional
prospectingmethods,suchastakingcoresamplesandmakinggeologicalobservations
atprospectivesites.
NAICS2111Theactivitiesperformedonacontractorfeebasisbyestablishmentsinthe
Support Activities for Mining subsector are also often performed inhouse by mining
operators.Theseactivitiesinclude:takingcoresamples,makinggeologicalobservations
atprospectivesites,excavatingslushpitsandcellars,andsuchoilandgasoperationsas
spudding in, drilling in, redrilling, directional drilling, well surveying; running, cutting,
and pulling casings, tubes and rods; cementing wells, shooting wells; perforating well
casings;acidizingandchemicallytreatingwells;andcleaningout,bailingandswabbing
wells.
MeasuringEconomicImpacts:Indicators
In the following tables, estimates for the various measures from each of the simulations are
analyzedandreportedasdifferencesfromthecontrolforecast.Economicimpactsarereported
forfiveelements:
1.
Employmentchanges
2.
Changeingrossregionalproduct(GRP)
11
3.
Changestoincome
4.
Output
5.
Localincometaxes
EmploymentABureauofEconomicAnalysis(BEA)conceptbasedonplaceofworkincluding
fulltime and parttime employees, as well as seasonal employees. It is important to note
thatthesejobsaresimplyjobsastheyarecountedandweightequallyfullandparttime
positions. These jobs are distributed across a number of industries and so, in any given
industry,ajobmayrepresentasummationofpositionsacrossanumberofindustriesin
whicheachindustryhaslessthanonecompleteorfulltimeequivalent(FTE)position.
Gross Regional Product (GRP) An economic measure of the valueadded that labor
contributestothefinalproductorservice.Thismeasureisusedmoreoftenthanoutputasit
doesnotincludethevalueofintermediategoodsorinputsintoestimatingtheeconomic
impact.Forexample,ifa$25,000autoiscomprisedof$15,000inparts(intermediategoods)
and$10,000inlabortoassemblethepartsintoacompletecar,thenthe$10,000inGRPis
what the state uses to measure its input or contribution into the value of the vehicle
(output).
Personal Income This measure consists of total increases in payroll costs paid by local
industries, plus income from selfemployment, other property income and transfer
payments.
Output This indicator is also estimated by the model as a measure of economic impact.
Outputisanalogoustosalesandisameasureofthetotalvalueofboththeinputstolaboras
wellasthevalueofinputsfrommaterials.
Local Income Taxes This measure is estimated by multiplying the personal income figure
generatedbythemodelbyanaveragetaxrate.Thisisamedianapproximationanddoesnot
takeintoaccountthoseareaswithhigherratesnordoesittakeintoaccounttheworkersand
companiesfromtownshipsthatarenotabletolevyatax.
12
EconomicImpactoftheDevelopmentoftheUticaFormation
RecognizingthatthedevelopmentofnaturalgasfromtheUticaformationinvolvesasequence
ofactivities,Kleinhenz&Associatessoughttheassistanceofacommitteeofindustryexpertsto
provideinputonthevariousstagesofthedevelopmentprocess.Thisincludedactivitiesbefore
andafterdrillingthatarerelatedtomeasuringtheeconomicimpact.Thecommitteeprovided
a forecast of the likely number of Utica formation wells drilled, expenditures and production
estimatesfortheyears2011to2015.Inaddition,expertsadvisedastomidstreaminvestments
required and Ohio counties most likely to benefit from early investments. Other industry
executiveswereinterviewedaboutthegeneralstatusoftheindustryandforspecificcostsfor
labor and materials for natural gas exploration, development and production. The data
gatheredfrommeetingsandfrominterviewsareusedtodevelopassumptionsandinputsinto
theREMImodel.Whenestimatesaremade,theyareconservativeandarebasedonstandard
economic practices and the advice of experts. This study does not include historical or
projected spending to upgrade or expand natural gas transmission pipelines, although it is
recognized that Utica Shale development will result in significant new construction activity in
thatsector.Midstreaminvestmentsthatincludelateralgatheringpipelinesystemsarecaptured
inourstudy.Thisreportdoesnotincludeexpendituresforanydownstreamactivitiessuchas
expansionofinterstatenaturalgastransmission,increasednaturalgascompressioncapability,
naturalgasdistributionornewbusinessesthatmaybecreatedinOhioduetodevelopmentof
theUticaformation.
OurresultsoneconomicbenefitsofthedevelopmentoftheUticaformationarepresentedin
threeparts:
1) Economicimpactsofplanneddrillingandcompleting3,922horizontalwellsinOhio
2) Economic impacts of consumer spending associated from lease and royalty
payments
3) DirecttaxespaidbyOhiocrudeoilandnaturalgasproducers
EconomicImpactsofPlannedDrilling
DataRequirementsandAssumptions
The REMI model allocates planned expenditures associated with Utica shale by historical
spending patterns as estimated for the industry within Ohio. As such, the Ohio natural gas
industrysproductionfunctionincorporatesactivitiesbyOhiofirmsaswellasbyfirmsoutside
Ohio. Recognizing that the Utica play incorporates new technology, i.e., horizontal drilling,
enhancedwellstimulation,andperhapsagreaterdegreeofcomputermodeling,theincreased
usageofservicecompaniesisassumed.Theseskillsandservicesmaynotbeavailablewithin
13
Ohio to a sufficient degree. Such importing of horizontal well technology and expertise has
beenwitnessedregardingtheMarcellusshaleandothershaleplaysaroundthecountry.
A fully completed well and production gathering lateral pipeline was estimated to be $10
millionbaseduponindustryinformation.Basedonpastperformanceofotherdrillingactivities,
a 98% completion rate was adopted assuming that the Utica wells are as successful as the
horizontal well trials in the nearby Marcellus formation. Exploration, development and
production expenditures were subdivided between dry hole (33%) and completion (67%)
activitiesperexpectedwell.
ToprojectfuturedrillingactivityforUticadevelopmentinOhio,thecommitteeprojectedthat
over 4,000 wells would be drilled by 2015 3,922 of those as ultimately completed. This
projectionwasbasedontheMarcellusGasdevelopmentinPennsylvania.Usingindustryexpert
input,itwasfurtherassumedthatonly75%ofwellsdrilledeachyearwouldbecompleteddue
tothescarcityofwellservicingcapacity.Inthesecondyearafterdrilling,itwasassumedthat
75%oftheuncompletedwellswouldbecompleted,etc.
In addition to drilling and completion, production gathering lateral pipelines must be built to
linkthenewwelltothenearestbranchofthegatheringsystem.Suchpipelinescanrangefrom
onetosevenmilesinlengthandcostonaverage$2,051,280perpad.Inthisstudy,10wellsper
pad are assumed.11 While references for more than 20 wells per pad are evident, there are
several uncertainties in this new drilling activity. Experts noted that they expect a time lag
between drilling of the first hole and the drilling of subsequent wells on the same pad. The
geologyofeachsiteisanotherkeyfactorwhichwilldeterminethelengthofthehorizontalbore
and, in turn, determine the economics of how fast a pad might be filled in with wells.
Uncertaintyexistsabouttheneedforcompaniestodrillthefirstwelltosecuretheleaseand
then come back to drill infill wells later. Yet another concern belies the activities of the
midstream firms that might construct liquid separator plants. With more liquid content, the
midstream firms may need to build larger diameter pipescloser to larger pads orbuild out a
networkoflargerpipestoaregionwithmultiplepads.Themorethemidstreamfirmsbuildout
theregion,thelessthedistancefromthewellheadtothelargediametergatheringpipe.
With drilling and completion expenditures of $9.7 million and a production gathering lateral
pipeline of $200,000, investment approximates $10 million per completed well. In addition,
nearly$3millionpernevercompleteddryholewillalsobespent.
NotallofthisspendingisexpectedtooccurwithinOhiogiventhatsomesuppliesareimported
fromotherregionsandlandincomerecipientsmayspendmoneyoutsidethestate.Asizeable
well support industry has developed in Pennsylvania, for example, as corporations from the
worldoilandgasservicebusinesseshaveestablishedoperationsinPennsylvania.
11
EstimateprovidedbyexecutiveoffirmthatbuildslateralpipelinesinOhio.
14
Toallowforthisimportation,itisassumedthat10%ofinitialexpendituresaretobemadeto
firmsoutsideofOhio.Thisassumptionissupportedbyvariousrecentstudies.ThePennsylvania
MarcellusShalestudy12usingfirmaccountingrecordsfoundthat95percentofexpendituresin
2009 occurred within the state of Pennsylvania. A second Pennsylvania study13 focusing on
occupational demand associated with the growth of Marcellus Shale development reported
thatbetween70and80percentofthelaborin2007wasfirstimportedintoPennsylvania.Yet
by 2010, only 29 percent of the new hires were from out of Pennsylvania. The authors
emphasized that there is much variability across the many support industries and across
companies.
Inoursimulations,thebulkoftheeconomicimpactsoccurinthelateryears,whenpresumably
laborcontentistiltedmorelocallytothestateofOhio.TheOhioinfrastructureandindustry
supply chain, arguably will grow in response to the Marcellus development occurring in
Pennsylvania. As the Marcellus shale play in Pennsylvania became apparent, labor and
investment were assumed to have been drawn from other shale plays in the U.S. such as
Barnett and Eagle Ford in Texas. Thus, Ohios oil and gas industry benefits from nearby
PennsylvaniasinitialdemandforlaborandinvestmentanditisassumedthatOhiowillbemore
self sufficient than Pennsylvania was at the same time of its development. Finally, the
investmentofOhiosoilandgasindustryduetothenearbyMarcellusplayisexpectedtobea
springboardofrapidinvestmentinOhiosneartermUticaformationdevelopment.Themodels
defaultexpenditurepatterns,moreover,allowformorepurchasestobemadealongindustry
lines rather than along geographic lines once expenditures are made. In this manner, we do
not force the Utica expenditures to only be spent within Ohio; rather, the model allocates
expendituresaccordingtoregionalpurchasefactors.
The economic impacts of the Utica shale industry in Ohio are a direct function of drilling
activity. The collective opinion of our study committee is that if the Utica play is proven
successful, a great deal of activity would then occur over the next decade. For modeling
purposes,initialwellexpenditureswereassumed,tooccurin11counties.14
12
Considine,etal.,2011,p.11.
Pennsylvania Marcellus Shale Economic Impact Study, Pennsylvania Statewide Workforce Needs Assessment,
preparedbytheMarcellusShaleEducationandTrainingCenter,June2011,p.2021.
14
Year 1: Stark, Carroll, Columbiana, Jefferson. Year 2: Portage, Trumbull, Mahoning, Tuscarawas, Harrison,
Guernsey,Belmont.
13
15
Figure3:CountieswithInitialUticaDevelopment
DirectUticagasexplorationanddevelopmentexpendituresamountto$246millionin2011and
areestimatedtorampupto$14billionby2015.Overthenextfiveyears,oilandgasproducers
areprojectedtospendover$34billion.Thisamountdoesnotincludeleaseorroyaltypayments
madetolandormineralrightsowners.Thesearediscussedandmodeledinthenextsection.
Table2:UticaWellGrowthandExpendituresinOhio,20112015
Wells
Drilled
Completed
2011
27
20
2012
161
123
DryholeExpenditure
CompletionExpenditure
TotalExpenditures($million)
$99
$147
$246
$565
$877
$1,442
2013
2014
2015 5YearTotal
785 1,386 1,644 4,003
608 1,171 1,501 3,423
$2,651
$4,160
$6,811
$4,561
$7,820
$12,381
$4,909
$9,104
$14,013
$12,785
$22,108
$34,893
16
Results
Table3summarizesthepotentialeconomicimpactsonthestateofOhioassociatedwiththe
emergenceoftheUticagasplay(notincludingroyalitiesandleaseexpenditures).203,138jobs
acrossallindustriesareprojectedtobecreatedorsupportedinOhioby2015.Sales(Output)
inOhiowillincreasebyover$22billionandwagesbynearly$12billion. All
figures
are
calculatedatthe2010pricelevel.
AmoremeaningfulestimateoftheeconomicimpactisGrossRegionalProductthatsubtracts
interindustry purchases from gross purchases and measures the value of labor and capital.
Usingthismeasure,theUticagasexpendituresforexplorationanddevelopmentwilladd$12.2
billiontotheeconomyofOhio.By2015,localwagetaxrevenuesamountto$239million.
Table3:EconomicImpactsofUticaExpendituresinOhio
(notincludingimpactsfromroyaltyandleaseexpenditures)
Measure
2011
2012
Employment
3,794 21,469
GrossRegionalProduct(2010$) $180,490,801 $1,090,454,086
WagesbyPlaceofWork
$153,076,171 $955,291,749
Output(2010$)
$336,442,364 $2,028,308,975
LocalWageTax(@2%)
$3,061,523
$19,105,835
2013
2014
2015
102,052 177,006 203,138
$5,382,507,950 $9,972,385,040 $12,265,597,116
$4,907,806,396 $9,412,658,692 $11,990,570,072
$9,987,537,682 $18,429,639,625 $22,583,274,738
$98,156,128 $188,253,174 $239,811,401
Benefitsdisplayedabovearecalculatedbythemodelattheindustrylevelandsummed.Direct
expendituresmadebytheoilandgasindustrywindtheirwaythroughtheOhioeconomyand
generateeconomicimpactsacrossavarietyofindustrysectors.Specificindustrybenefitsare
noted below. Sectors with largest employment impacts include support activities for mining,
retailtrade,andprofessionalandtechnicalservices.
Table4:NetEmploymentImpactsbySelectedSectorsDuetoUticaWellDevelopment
Category
Supportactivitiesformining
Retailtrade
Professionalandtechnicalservices
Administrativeandsupportservices
Ambulatoryhealthcareservices
Construction
Foodservicesanddrinkingplaces
Wholesaletrade
Realestate
Personalandlaundryservices
2011
2,473
166
149
107
106
98
71
54
43
33
2012
13,521
1,007
885
625
634
660
434
321
259
201
2013
63,118
4,948
4,299
3,023
3,215
3,235
2,156
1,539
1,287
1,010
2014
105,709
8,990
7,675
5,365
5,911
6,673
3,994
2,722
2,307
1,834
2015
117,204
10,743
8,988
6,236
7,060
9,077
4,940
3,162
2,670
2,158
17
EconomicImpactsofRoyaltyandLeasePayments
Inthissection,theeconomiccontributionsofroyaltyandleasepaymentsforUticashalewells
to the Ohio economy are presented. Natural gas development affects the economy through
land payments. Natural gas companies negotiate leases with landowners to access land for
development. These agreements often provide an upfront payment or bonus to oil and gas
rightsowneraftersigningtheleaseandthenproductionroyaltypaymentsduringthelifeofthe
agreementifproductionisestablished.Royaltypaymentsarepaidbythenaturalgasandcrude
oil producer to the owner of the mineral interest, usually the landowner. Private owners,
corporations, municipalities, nonprofit organizations, and federal and state landowners could
leasetheirmineralinteresttoproducers.Paymentsareapercentageoftheproceedsgarnered
fromthewell.
EstimationofRoyaltyPayments
Expected Ultimate Recovery (EUR) is the amount of oil and gas expected to be economically
recovered from a reservoir or field by the end of its producing life. EUR estimates for the
developmentofUticaformationarebaseduponearlyreportsofreservesintheMarcellus.The
industryexpertsonthestudycommitteerecommendedanassumedestimateofanEURof5
bcfperwellforOhio.PubliclyavailableEURestimatesrangedfrom3.7to9.9bcfandsupport
the producers estimate. According to Anadarko Petroleum, ultimate recovery (EUR) on
Marcellus shale wells will be at the high end of the 4 billion to 6 billion cubic foot range.15
CONSOL Energy reported, We have seen outstanding results in the last five Marcellus shale
wells.Theestimatedultimaterecoveriesofthesewellsrangefrom5.5bcfto9.9bcf.16InJune
2010,UltraPetroleum(UPL)estimatedtheEURtobemoreconservative,or3.75bcf.Forthe
higherpressured Centre County area, Ultra estimated an EUR of 5 bcf.17 Atlas estimated
averageanticipatedEURsof6bcfwells.Finally,inaJuly2011pressrelease,RangeResources
estimatedEURforwellscompletedin2009and2010toaverage5.7bcfperwell.18
HowmuchoftheEURwillbeproducedinthefirstfiveyears?Theconsensusviewofourstudy
committeeisthat40%oftheEURwillbeproducedwithinthefirstfiveyearsandapproximately
80%withinthefirst10years.Furthermore,thefirstyearsdeclineisdeemedtobebetween70
and83%ofinitialdailyproduction.Thesefiguresarebaseduponothershaleproductionrates
15
March30,2011Anadarkonewsrelease,shale.typepad.com.
CONSOLEnergy(CNX)conferencecall,July29,2010.
17
Source:Seekingalpha.comULTRAnewsrelease.June4,2010.
18
http://marcellusdrilling.com/2011/07/rangeresourcesnaturalgasliquidsandhighercommoditygaspricesequalavery
goodquarter/
16
18
aswellasuponearlyMarcellusproductionrates.InaJuly2011pressrelease,RangeResources
estimatedthe5.7bcfetypecurvereflectsthat40%oftheEURisproducedwithinthefirstfive
yearsofproduction.19
InananalysisofproductionratesbyBrandonBaylorofotherU.S.shaleformations,20firstyear
production was shown to decline and estimated 73% within the Barnett shale formation.
AnnualproductiondeclinerateswereestimatedforonewellintheHaynesvilleformationfor
the first 10 years which 80% of all recovery takes place. The first years decline rate was
estimated to be 82%; the second year 45%; and the third year, 30%. Chesapeake Energy
predictsthat55%ofproductionforitsMarcelluswellswillbeproducedwithinthefirst10years
and approximately 40% in the first five years. The initial production rate is projected to be
4mmcfe/dandEURispredictedtobe4.2bcfe.Inthefirstyear,17%ofEURwasexpectedto
beproduced.Inthesecondyear,anadditional9%willbeproducedandinyearsthreeandfour
another10%.Yearsfiveandsixaretoaddanother7%ofproductionoutoftheEUR.
The basis for this studys estimate of expected royalty and tax payments utilizes an analysis
submitted by James Knobloch Petroleum Consultants and shows a similar decline rate as
discussedabove.
Uticawellproductionassumptionsareasfollows:
1) 5,000,000mcfexpectedultimaterecovery(5bcf)
2) Productionfromwellsdrilledin2011willoccurin2012,thusroyaltyandtaxpayments
commencein2012
3) AnnualperwellproductionrateaspercentofEUR:
Year
EUR
2012
17%
2013
9%
2014
6%
2015
5%
2016
4%
4) Mcfpricebaseduponanindustrypriceassumptionof$4.50multipliedbya1.2factorto
accountfortheliquidsexpectedintheproduction
5) Royaltiesof15%andpaymentslagdrillingbyayear
6) Countypropertytaxof0.051%
7) ProjectedcompletedwellstobedrilledaspresentedinTable2above.
19
http://marcellusdrilling.com/2011/07/rangeresourcesnaturalgasliquidsandhighercommoditygaspricesequalavery
goodquarter/
20
Baylor,Brandon.MarcellusShaleDeclineAnalysis,PaulFultonScholarshipPaper,MariettaCollege(undated,circa2010).
19
Table5:RoyaltyPaymentsforaSampleUticaWellDrilledin2011
Yearof
Production
2012
2013
2014
2015
Mcfper
well
874,533
433,955
315,394
239,421
15%
131,180
65,093
47,309
35,913
Price/Mcf
$5.40
$5.40
$5.40
$5.40
Royalty
Payment
$708,372
$351,504
$255,469
$193,931
Multiplying the single well tax estimates by the appropriate number of wells in production
yieldstotalsfortheexpecteddrillingactivitywithintheOhioUticaplay.
Table6:EstimateRoyaltyPayments,AllOhioUticaWells20112015
Year
2011
2012
2013
2014
2015
Sum
WellsDrilled
27
161
785
1386
1644
4003
Wellsin
Production
0
20
143
751
1,923
2,837
GrossGas
Royalty
Production
Payment
0
$0
17,053,411
$13,813,263
116,357,749
$94,249,776
591,406,043
$479,038,895
1,269,345,132
$1,028,169,557
1,994,162,335
$1,615,271,491
Royaltypaymentslagdrillingbyayearinthiscalculationandmostlikelywillnotoccuruntilthe
first wells are producing natural gas. Calculations based upon assumed annual drilling and
productionratesrevealthatroyaltypaymentsin2012willbe$13millionandgrowto$1billion
by2015asmanymorewellsarebroughtonline.
EstimationofLeasePayments
Annualleasepaymentsareprojectedtobe$1.5billionoverthenextfiveyearsasexploration
firms lock in their claims. This forecast is based on the payment experience in Pennsylvania
regardingtheMarcellusshaleformationandcurrentleasingactivityofseverallargeexploration
companiesinOhio.
Table 7 displays the combined estimates of royalty and lease payments associated with the
projectedUticadrilling.Researchliteratureshowsthatrecipientsofsuchwindfallpayments
such as oil and mineral lease payments do not spend 100% of the payments within the first
year.Severalstudieswerereviewedtoarriveatanacceptableexpenditureamounttobeused
asaninputintothemodel.Authorsofthesestudiestookintoaccountthesizeofthewindfall
relative to normal earnings, the type of windfall (cash versus property value), the age of the
recipient,expendituresmadeondurableversusnondurablegoodsandotherfactors.Thebody
20
ofliteratureappearstopointtoamarginalpropensitytoconsume(MPC)ofwindfallincomeof
between4and10%.21
Table7:EstimatesofRoyaltyandLeasePaymentsandExpendituresbyConsumers
Year
2011
2012
2013
2014
2015
FromRoyalties
$0
$966,928
$6,597,484
$33,532,723
$71,971,869
FromLeases
105,000,000
105,000,000
105,000,000
105,000,000
105,000,000
Forthisstudyweuseamodestassumptionof7%MPCoutofwindfallincometobespentby
households due to Utica leasing and drilling activities. Since the holders of mineral interests
thatreceiveroyaltypaymentscantakeonmanylegalforms,andassuch,thevalueofstateand
local revenues from these payments are not incorporated into the study. Given these
assumptions,asshowninTable8,forevery$1millionofOhiobasedexpendituresassociated
withreceiptofthesepayments,approximatelyeightadditionaljobsarecreatedorsupported
andnearly$670thousandisaddedtothestateseconomy.
Table8:EconomicImpactsof$1MillionofConsumerExpenditures
EconomicImpactMeasure
Employment
GrossRegionalProduct(2010$)
WagesbyPlaceofWork
Output(2010$)
Impact
PerMillion$
8
$469,334
$305,180
$670,469
InTable9theestimatedimpactsduetoroyaltypaymentsareprovided.Thesearetheproduct
oftheroyaltypaymentsmadeaspresentedinTable6,the7%marginalpropensitytoconsume,
21
Dr.LorenC.Scott&Associates(April2010)EconomicImpactoftheHaynesvilleShaleontheLouisianaEconomy,
whousedastudybyYashMehra,FederalReserveBankofRichmondQuarterlyReview,Spring2001.(Ascitedina
studycommissionedbyAmericasNaturalGasAlliance:CenterforCommunityandBusinessResearch,The
UniversityofTexasatSanAntonio,InstituteforEconomicDevelopment,EconomicImpactoftheEagleFordShale,
February2011.
Imbensetal.,EstimatingtheEffectofUnearnedIncomeonLaborEarnings,Savings,andConsumption:Evidence
fromaSurveyofLotteryPlayers,TheAmericanEconomicReview,Vol.91,No.4(Sep.2001),pp.778794.
Christopher D. Carroll, NBER Final Draft, A Theory of the Consumption Function, With and Without Liquidity
Constraints
(ExpandedVersion),July6,2001.
AbdelGhanyetal.,WindfallIncomeandthePermanentIncomeHypothesis:NewEvidence,JournalofConsumer
Affairs,Vol.17,No.2,pp262276,1983.
21
and the economic benefits per million of consumer expenditure from Table 8 divided by $1
million.
Table9:EconomicImpactsofUticaRoyaltyPayments
Measure
Employment
GrossRegionalProduct(2010$)
WagesbyPlaceofWork
Output(2010$)
2011
2012
2013
2014
2015
0 8 52 262 562
$0
$453,812
$3,096,424
$15,738,047
$33,778,846
$0
$295,087
$2,013,420
$10,233,516
$21,964,375
$0
$648,296
$4,423,411
$22,482,662
$48,254,930
InTable10theestimatedimpactsduetoleasepaymentsareprovided.Thesearetheproduct
oftheleasepaymentspresentedinTable7andtheeconomicbenefitspermillionofconsumer
expenditurefromTable8dividedby$1million.
Table10:EconomicImpactsofUticaLeasePayments
Measure
Employment
GrossRegionalProduct(2010$)
WagesbyPlaceofWork
Output(2010$)
2011
2012
2013
2014
2015
820 820 820 820 820
$49,280,072
$49,280,072
$49,280,072
$49,280,072
$49,280,072
$32,043,900
$32,043,900
$32,043,900
$32,043,900
$32,043,900
$70,399,278
$70,399,278
$70,399,278
$70,399,278
$70,399,278
Usingtheseestimates,thefutureeconomicimpactofexpendituresfromcombinedroyaltyand
leasepaymentsbetween2011and2015arecalculatedandaresummarizedinTable11.During
thefirstyear,2011,theUticagasindustrycouldgenerateorsupport820morejobsandresult
inadditionalsalesof$70milliontotheOhioeconomy.By2015,theprojectedimpactsgrow
evenlargerwithover1,300Ohiojobsand$118millioninadditionaloutput.Theseestimates
donotaccountforanylocal,state,orfederalstateorlocaltaxesbeingpaidbytheroyaltyor
lease recipient. Moreover, only 7% of the windfall portion of payments received is used in
calculating economic impacts. It is also recognized that the second year of a consumers
expenditureisnotincorporatedintothecalculationsofeconomicimpact.Thewidedegreeof
savingsandtaxuncertaintywouldmakeresultsofsuchacalculationunclear.
Table11:EstimatedCombinedEconomicImpact
ofRoyaltyandLeasePayments20112015
Measure
Employment
2011
2012
2013
2014
2015
820 828 872 1,082 1,383
GrossRegionalProduct(2010$)
$49,280,072
$49,733,884
$52,376,495
$65,018,119
$83,058,918
WagesbyPlaceofWork
$32,043,900
$32,338,987
$34,057,320
$42,277,416
$54,008,275
Output(2010$)
$70,399,278
$71,047,574
$74,822,689
$92,881,940
$118,654,208
22
Thehighereconomicoutputandgreateremploymentassociatedwithexpendituresassociated
withroyaltyandleasepaymentsbytheUticagasindustrygenerateadditionaltaxrevenuesfor
stateandlocalgovernments.TheseimpactsarereportedinTable12.Forevery$1millionof
Ohiobasedconsumerexpendituresfromroyaltyandleasepayments,totalstateandlocaltax
revenuesincreaseby$45,700.
Table12:PublicRevenueImpactsofConsumerExpendituresfrom
RoyaltyandLeasePayments
Impact
PublicRevenueEstimates
PerMillion$
StateIncomeTax(@3%ATR)
$9,165
CAT:SelfSupply
$1,312
CAT:Imports
$405
Sales:B2B
$2,950
Sales:Consumer
$25,799
TotalStateRevenueEstimates
$39,631
LocalWageTax(@2%)
$6,104
$45,735
TotalPublicRevenueEstimates
ImpactfromRoyaltyPayments
2012
2015
$8,862
$659,600
$1,269
$94,423
$392
$29,144
$2,852
$212,294
$24,946
$1,856,823
$38,320
$2,852,284
$5,902
$439,287
$44,222
$3,291,572
Impactfrom
LeasePayments
Yearly
$962,293
$137,754
$42,519
$309,716
$2,708,925
$4,161,207
$640,878
$4,802,085
SummaryResults:EconomicImpactofUticaFormation
The capital investments for the development of the Utica formation will have significant
impacts on the economy of Ohio. Our estimate suggests that producing Utica natural gas
requiressignificantexpendituresforexploration,leasing,drillingandpipelineconstruction.As
displayedinTable13,204,520jobsareprojectedtobecreatedorsupportedinOhioby2015.
Sales(Output)inOhiowillincreasebyover$22billionandwagesby$12billion.Revenuesto
governmentfromalocalwagetaxof2%areestimatedtoamountto$240millionby2015.
Table13:CombinedEconomicImpactsofSpendingonUticaGasFormation
(FromWellExplorationandDevelopment,Midstream,Royalty,andLeaseExpenditures)
Measure
Employment
GrossRegionalProduct(2010$)
WagesbyPlaceofWork
Output(2010$)
LocalWageTaxRevenues(@2%)
2011
2012
2013
2014
2015
4,614 22,297 102,924 178,088 204,520
$229,770,873 $1,140,187,970
$5,434,884,446 $10,037,403,159 $12,348,656,034
$185,120,071
$987,630,736
$4,941,863,716
$9,454,936,109 $12,044,578,347
$406,841,643 $2,099,356,549 $10,062,360,372 $18,522,521,565 $22,701,928,946
$3,708,303
$21,166,713
$100,297,006
$190,754,052
$240,891,566
23
Ingeneral,thefindingsfromouranalysisareconsistent(althoughnoexactcomparisonscanbe
madebecauseofmodelingandassumptionsused)onaperdollarexpendedbasiscomparedto
therecentstudypublishedbyPennsylvaniaStateUniversitydocumentingthedevelopmentof
the Marcellus Shale and its economic impacts on the Commonwealth of Pennsylvania.22 Our
study shows slightly more of an employment impact per $1 million of expenditures than
reported in the Pennsylvania Study. For Ohio, we estimate a range of 13 to 18 jobs per $1
million of expenditure. This compares favorably to Pennsylvania's 13 jobs per $1 million of
expenditures.GrossRegionalProduct(GRP)projectionsper$1millionofexpendituresarealso
comparable. In Ohio, on average, approximately $830,000 is generated compared to
Pennsylvania's$1millionofGRPper$1millionofexpenditure.Lastly,Ohioresultsshowa2011
output of $1.58 million per $1 million of expenditures while Pennsylvania results indicate a
$1.97millionoutputincreasedueto$1millionexpenditure.
EstimationofDirectTaxesPaidbyOhioOilandGasIndustryfromUtica
Formation
TheestimatedtotaltaxescollectedfromOhiosUticaformationfromnaturalgasandcrudeoil
firmsareestimatedtobe$5.4millionin2012.Aftertherampupofshaledrillingactivity,tax
revenuesincreasetomorethan$540millionin2016.ThisprojectionissummarizedinTable
19andincludesvarioustaxespaidbytheindustry,severancetaxes,propertytaxes,commercial
activitytaxes,andfinallyincometaxes.Thefollowingprovidesanexplanationofhowthese
estimatesarecalculated.
SeveranceTax
The State of Ohio imposes a severance tax on natural gas and oil production. At these large
levelsofproduction,weusetheindustryexpertsrecommendedrateof$0.03pertaxablemcf.
Table14:SeveranceTaxesForaSampleUticaWell
Yearof
Production
2012
2013
2014
2015
2016
TaxableMcf
743,354
368,862
268,085
203,508
184,392
Severance
Taxes
$22,301
$11,066
$8,043
$6,105
$5,532
22
Considine et al., The Pennsylvania Marcellus Natural Gas Industry: Status, Economic Impacts and Future
Potential,ThePennsylvaniaStateUniversity,July20,2011.
24
PropertyTax
Ohio natural gas and crude oil producers pay property taxes. For the property valuation, a
discounted cash flow method is used whereby the future net income from production is
estimatedandthepresentvalueofthatnetincomestreamiscalculated.Specificinformation
on this calculation is provided on the Ohio Oil and Gas Associations (OOGA) website and
availablefromtheOhioDepartmentofTaxation.FromOOGAwebsite(August2011):
2010UniformValuationofOilandGasDepositsRelease:
The2010formulaisasfollows:
CrudeOil TaxableValue
AverageDailyProduction:morethan1barrel$4,640perbarrel
AverageDailyProduction:lessthan1barrel$2,780perbarrel
NaturalGas TaxableValue
AverageDailyProduction:morethan8mcf$450permcf
AverageDailyProduction:lessthan8mcf$225permcf
Source:http://www.ooga.org/industrystudieslinks/taxinformation
AssumingthatUticawellsproduceatthemaximumtaxableratesforthefirstfiveyears,thena
singlewellwillbevaluedatbetween$267,000and$1million.Propertytaxeswillamountto
between$15,000and$54,000peryearperUticawell.
Table15:Property(AdValorem)TaxPaidforaSampleUticaWell
Yearof
Production
2012
2013
2014
2015
Mcfper
well
874,534
433,955
315,394
239,421
Valuation
DailyMcf @$450/mcf
2,396 $1,078,192
1,189
$535,014
864
$388,842
656
$295,177
Taxed
@.051%
$54,988
$27,286
$19,831
$15,054
25
CommercialActivitiesTax
TheCommercialActivityTax(CAT)paidbynaturalgasandcrudeoilproducersissimilartotaxes
paidbyotherOhiobusinesses.InOhio,theCommercialActivityTax(CAT)isataxof0.0026%on
afirmsgrossreceipts.
Table16:EstimatedCommercialActivityTax
Year
2011
2012
2013
2014
2015
GrossGas
Production
0
17,053,411
116,357,749
591,406,043
1,269,345,132
Price/Mcf
$5.40
$5.40
$5.40
$5.40
$5.40
GrossReceipts
$0
$92,088,418
$628,331,843
$3,193,592,634
$6,854,463,711
Commercial
ActivityTax
$0
$239,430
$1,633,663
$8,303,341
$17,821,606
IncomeTaxes
The EIA publishes Performance Profiles of Major Energy Producers (the Majors) which is a
comprehensive annual financial review and analysis of the domestic and worldwide activities
andoperationsof29majorU.S.basedenergyproducingcompanies.EIAexaminesacompanys
operationsonaconsolidatedcorporatelevel,byindividuallinesofbusiness,bymajorfunctions
within each line of business, and by various geographic regions. These Major producers
reported3%incometaxexpense.MultiplyingTaxablemcf(productionnetofroyaltygas)by
the price per mcf yields a gross revenue for Utica wells. Three percent of that revenue is
estimatedtobeallottedtoincometaxpayments.
Table17:EstimatedIncomeTax
(Estimatebasedupon3%oftotalrevenues,MajorsAnalysis)
Year
2011
2012
2013
2014
2015
Stateand
IncomeTax@
Federal LocalIncome
Taxable 3%ofTaxable
Taxes
Revenue
IncomeTax
Production
$0
$0
$0
14,495,399
$2,348,255
$1,878,604
$469,651
98,904,086
$16,022,462
$12,817,970
$3,204,492
502,695,137
$81,436,612
$65,149,290
$16,287,322
1,078,943,362
$174,788,825 $139,831,060
$34,957,765
26
SummaryResults:TaxesPaidbyOhioOilandGasIndustry
Table18displaystheestimatedtaxestobepaidpersinglewell.Multiplyingthesinglewelltax
estimatesbytheappropriatenumberofwellsinproductionyieldstotalsasdisplayedinTable
19fortheexpecteddrillingactivitywithintheOhioUticaplay.
Table18:SummaryofEstimatedTaxes,SingleUticaWell
Yearof
Severance Commercial
Federal
Stateand
Production
Property
Taxes ActivityTax
Income LocalIncome TotalTaxes
2012
$54,988 $22,301
$12,278
$96,339
$24,085
$209,990
2013
$27,286 $11,066
$6,093
$47,805
$11,951
$104,200
2014
$19,831 $8,043
$4,428
$34,744
$8,686
$75,731
2015
$15,054 $6,105
$3,361
$26,375
$6,594
$57,489
Table19:SummaryofTaxPayments,OhioUticaWells20112015
Year
2011
2012
2013
2014
2015
Total
Severance
Taxes
$0
$434,862
$2,967,123
$15,080,854
$32,368,301
$50,851,140
Commercial
FederalIncome
ActivityTax AdValoremTax
Tax
$0
$0
$0
$239,430
$1,072,262
$1,878,604
$1,633,663
$7,316,193
$12,817,970
$8,303,341
$37,185,668
$65,149,290
$17,821,606
$79,812,249
$139,831,060
$27,998,039
$125,386,371
$219,676,923
StateandLocal
IncomeTaxes
$0
$469,651
$3,204,492
$16,287,322
$34,957,765
$54,919,231
Total
$0
$4,094,809
$27,939,440
$142,006,475
$304,790,980
$478,831,704
27
TheEconomicImpactoftheOhioNaturalGasandCrudeOilIndustry
Like our previous report, the methodology to estimate the economic impact of the existing
naturalgasandcrudeoilindustrywasconductedasacounterfactualstudy.Thepurposeof
thismethodologyistoexaminethepossiblechangesontheOhioeconomythatmayresultif
the economic data of the natural gas and crude oil industry were removed. So what would
happeninthestateseconomyifthenaturalgasandcrudeoilindustrydidnotoperate?Toget
a statewide perspective of the importance of the industry to the state of Ohios economy, a
simulation was created which allows the entire industry to be removed completely from the
state.Thisapproacheliminatesalltheeconomicactivitythesupplychain,bothinterindustry
andhouseholds.Thereductionineconomicactivityduetointerindustry(indirecteffects)and
households(inducedeffects)isessentialtounderstandingwhatproductionofnaturalgasand
crudeoilmeanstotheeconomyandoutputofthestateofOhio.
ModelingMethodologyandAssumptions
TheapproachusedtoassesstheeconomicvalueoftheOhionaturalgasandcrudeoilindustry
toOhioseconomyemploysacceptedeconomicprinciples.Thebaselineestimateofnaturalgas
and crude oil jobs and wages for the State of Ohio in 2010 from the U.S. Bureau of Labor
StatisticsQuarterlyCensusofEmploymentandWagesapproximates4,490.
Table20:BaselineEstimateofOhioNaturalGasandCrudeOilEmploymentandWages
Industry
Code
IndustryCodeDescription
Jobs
21111 OilandGasExtraction
213111 DrillingOilandGasWells
213112 SupportActivities
2757
554
1180
23
AverageAnnual
Wages
$88,335
$38,920
$55,531
Whilethestatesaveragewagefortheindustrywasappliedtoallregionalcomponentsinthe
model,eachregionhasdifferentwageestimatesandtotalwagebills.Thetotalwagebillwas
usedtoreestimateemploymentineachregionbasedondividingthewagebillforthatregion
by the average wage for the state. Based on the marginal product of labor, which is tied to
averagewagewithinthemodel,eachregionhadanestimateofoutputwithintheREMImodel.
Usingemployment,itwaspossibletoestimatetheoutputattributabletoeachworker.
23
U.S.BureauofLaborStatistics2010QuarterlyCensusofEmploymentandWages(QCEW).
28
SummaryResults:EconomicImpactofOhioOilandGasIndustry
Table 21 contains the impact estimates of various measures of the natural gas and crude oil
industryonOhio.Asacounterfactual,allimpactestimatesarereportedasanegativeorlossto
thestate.Forexample,ifthenaturalgasandcrudeoilextractionindustrydisappearedfromthe
statein2010,12,954workersareimpactedandthestatewouldnothaveproducedslightlyless
than $1.0 billion in Gross State Product. Personal income would decrease by $792.6 million,
generatingalossoflocalpersonalincometaxrevenueof$15.9million.
Table21:SummaryImpactEstimatesofNaturalGasandCrudeOilExtractiononStateof
Ohio,2010
Measure
Amount
Employment (Jobs)
GrossRegionalProduct
PersonalIncome
Output
LocalWageTaxes@2%
12,954
$988,441,924
$792,556,763
$1,654,588,420
$15,851,135
Table22showsadditionaldetailonthetotaleconomicimpactsinotherindustrysectorsthat
areaffectedbythenaturalgasandcrudeoilindustryinOhio.Thistablecontainsestimatesof
impactstoemployment,grossstateproduct(valueadded,output[sales])andpersonalincome.
Whilethistableonlycontainsindustrieswithemploymentof10orgreater,nearlyallofthe70
industrysectorsreportedinREMIwereaffectedbythenaturalgasandcrudeoilindustry.
Asidefromtheimpactsofthetargetindustries,oilandgasextractionandsupportactivitiesfor
mining,constructionandretailtradearetheindustrieswiththelargestemploymentimpacts.
Construction supports all sectors of the economy and is impacted only as the industry ramps
downduetochangesindemand,butalsosuppliersandhouseholdsareaffectedbythechange
inthenaturalgasandcrudeoilindustry.Similarly,theretailtradesectorisadverselyaffected
by employment changes in the natural gas and crude oil industry as well as its suppliers and
householdssupplyinggoodsandservicestoworkers.
29
Table22:NetImpactsofSelectedSectorsfromLossofNaturalGasand
CrudeOilIndustry,201024
1
2
3
4
5
6
7
8
9
10
Sector
Oilandgasextraction
Construction
Supportactivitiesformining
Retailtrade
Ambulatoryhealthcareservices
Professionalandtechnicalservices
Administrativeandsupportservices
Foodservicesanddrinkingplaces
Wholesaletrade
Realestate
Jobs
2759
2004
1741
977
582
559
444
353
273
242
Output
Wages
$519,275,888 $269,690,812
$200,493,887 $96,838,951
$301,947,907 $174,961,090
$69,800,225 $30,082,703
$60,799,152 $36,956,787
$59,877,254 $38,175,583
$24,845,142 $14,692,307
$16,164,638
$7,244,110
$51,575,984 $20,959,854
$51,881,887
$2,903,700
EconomicImpactofNewWellsDrilledin2010
Ongoing exploration and development are critical reinvestments being made by Ohio natural
gas and crude oil producers to sustain their enterprises. Producers must constantly drill new
wells in order to maintain natural gas and crude oil production levels since wells and entire
reservoirs eventually become depleted and less productive. If exploration and development
activitiesceased,therewouldbefewerindustryandsupplychainjobs,alongwithareduction
of economic spending by both interindustry and by households. The following analysis
attemptstoestimatethevalueofreinvestmentmadebytheOhioOilandNaturalGasIndustry
annuallyintotheOhioeconomybyestimatingtheeconomicimpactofthenewwellsdrilledin
2010.
ModelingMethodologyandAssumptions
To estimate the annual impact of wells drilled in 2010, data on drilling expenditures were
assembled based on a sampling of actual costs of typical wells drilled during this period.
Kleinhenz&Associatesobtainedcostsforasampleofwells.25Thecostdatacompiledactual
expenditures for labor, materials, equipment and professional services for both development
andexploratorywells.UsingtheOhioDepartmentofNaturalResources(ODNR)26datasetthat
24
Tableonlycontainsindustrieswithemploymentof10orgreater.
Duetotheconfidentialityofthecostinformation,theactualdatacollectedisnotreportedinthisdocument.
26
Gotowww.ohiodnr.com/mineralfortheSummaryofOhioOilandGasActivities2010bytheDivisionofMineral
ResourcesManagementthatprovidesdetailsonwellsdrilled.
25
30
shows357wellsbycountyreporteddrilledandcompletedin2010,theaveragecostperwell
was multiplied by the number of wells completed to get the combined total for all these
expenditures of $169.4 million.27 The total value of expenditures based on the cost data
obtained for the sample wells are used to allocate share of spending to specific industrial
sectorsintheREMImodel.Theimpactsarenotaffectedbythesuccessofeachwell,onlythe
inputs (both labor and material) are used in the model. As estimated above, the industry
employs 4,491 workers. In order to model the net impact of the annual drilling activity, the
numberofjobsinvolvedonlyindrillingmustbeestimated.Itisimportanttonotethatthese
jobs are simply jobs as they are counted and are not necessarily workers. Some of the
workers would remain employed by the industry in the event that reinvestment was not
undertaken.
Results
Table23showstheestimatedeconomicimpacts(totaldirect,indirectandinduced)ofthe2010
drilling activity in the State of Ohio.28 Ohios total economic output as measured by gross
regional product (the valueadded) increased by $135 million and generated approximately
2,249jobs.Totallaborearningsforthe2010activityareapproximately$116millionand$2.3
millioninlocalwagetaxespaid.Itisestimatedthatoutput(totalsales)increased$247million
duetothenaturalgasandcrudeoildrillingactivities.
Table23:Impactof2010DrillingActivityontheStateofOhio
Measure
Employment
GrossRegionalProduct(2010$)
WagesbyPlaceofWork
Output(2010$)
LocalWageTax(@2%)
2010Amount
2,249
$135,133,440
$116,348,270
$247,001,534
$2,326,965
Resultsfrommodelingthe2010drillingimpactsarelessthanthefullimpactanalysispresented
earlierduetolimitingtheshockstothemodel.Surveyandsecondarydataledtoestimatesof
jobs and expenditures that were devoted only to drilling. It is these devoted jobs and
concurrent welldrilling supply expenditures that shocked the 2010 model. The remaining
27
Thisestimateisslightlymoreconservativebutcomparabletoindustrydevelopmentestimatesof$178million
discussed later. Only data was collected on sample wells that were drilled and completed. There are other
exploratorywellsthatweredrilledbutwereeitherdryornotcompletedthatmayaccountfordifferences.
28
Theresultsfromthe2010simulationaresignificantlylessthanthoseofthe2007simulation.Primarycausesof
smallerimpactsare:reducedspendingbyproducers;notableshrinkageofoilandgassupplychainindustryactivity
inOhio;improvedQCEWwageandemploymentdata.
31
industry expenditures for the year were assumed to be devoted to lifting and officetype
overheadactivitiesandpersonnel.
Major sectors impacted by drilling activities in 2010 were professional and technical services
andfabricatedmetalproductmanufacturingasshowninTable24.Sectorssuchasconstruction
andretailtradewerealsoboosted.
Table24:NetImpactsbySelectedSectorsfrom2010DrillingActivities
Category
Supportactivitiesformining
Professionalandtechnicalservices
Fabricatedmetalproductmanufacturing
Construction
Retailtrade
Ambulatoryhealthcareservices
Administrativeandsupportservices
Trucktransportation;Couriersandmessengers
Foodservicesanddrinkingplaces
Wholesaletrade
Employment
726
235
194
172
165
104
103
77
69
51
Output
$91,186,320
$22,561,350
$41,208,826
$17,664,816
$12,202,572
$10,809,251
$6,059,382
$11,083,724
$3,195,214
$10,585,061
Wages
$54,020,941
$15,361,786
$13,565,540
$8,566,856
$5,369,186
$6,761,551
$3,460,884
$4,199,028
$1,511,574
$4,655,838
32
V.VALUEOFLOCALNATURALGASTOOHIOCONSUMERS
ThevalueoflocalnaturalgastoOhioconsumersisderivedfromfourelements:
1)
BeneficialpricereducingimpactthatOhiosupplyprovidesatthenationallevel.
2)
Avoidedinterstatepipelinetransportationcostsotherwiserequiredtobringnaturalgas
toOhio.
3)
Securityoruninterruptabilityofsupply.
4)
Thestoragelikebenefitofreducedpricevolatilityorpeakshaving.
Thesefourelementsareanalyzedanddiscussedbelow.
PriceReducingImpactofOhiosSupply
Ohioconsumerssavedanestimated$9.2millionin2010duetothepricereducingimpactthe
statessupplyofnaturalgashasonthenationalequilibriumpriceofnaturalgas.29Ohiossupply
ofnaturalgastothenationalmarketissmallbutsignificant.Asisdemonstratedinthesection
following,achangeinsupply,evenatthemargin,canhaveanimpactontheequilibriumprice
for the entire market. This beneficial impact is felt by consumers across the U.S. and is thus
much larger nationwide than the $9.2 million saved by Ohioans. This result is based on a
conservativeestimaterelativetootherspresentedinTable25below.
Ohiossupplyofnaturalgasandcrudeoiladdstothedomesticsupplyandhelpskeepenergy
prices from rising. It is important to Ohio and other states that natural gas prices do not
increaseandtheharmfulimpacthasbeenreportedinseveralstudies.Forexample,Stephan
BrownreportsinarecentstudybytheFederalReserveBankofDallas:
SustainedhighnaturalgaspricesareadragontheU.S.economy.Naturalgasisa
basic input to production and, if prices increase, can cause a classic supplyside
shockthatreducespotentialoutput.Thiscausesoutputandproductivitygrowth
to slow, which lessens real wage growth and increases the unemployment
ratethen inflation can accelerate. If market participants expect the nearterm
effects on output to be greater than the longterm effects, they will attempt to
smooth their consumption by saving less or borrowing more, which boosts the
interest rate. With slowing output growth and an increase in the real interest
rate,thedemandforrealcashbalancesfalls,andforagivenrateofgrowthinthe
29
Kleinhenz&AssociatesemployedtheUSDOEAEO2007Reporttoarriveatthisestimate.
33
monetaryaggregate,therateofinflationincreases.Therefore,risingnaturalgas
pricesreduceGDPgrowthandboostrealinterestratesandthemeasuredrateof
inflation.30
BrownconcludesthattheimpactofasustaineddoublingofnaturalgaspriceswillreduceU.S.
GDPby0.6to2.1%belowwhatitwouldotherwisebe.
The supply/demand graph below is used to illustrate savings. Without Ohios production of
natural gas, the national gas supply is at q1, a fixed amount beyond which the supply curve
becomesinelastic.Underthisscenario,asthedemandfornaturalgasswingsfromd1tod2,
thepricefornaturalgasincreasestob2.AnimprovedpricingscenarioforOhioandtherestof
thenationoccurswhenOhiosnaturalgassupplyisbroughttothemarket.Thesupplycurve,S,
isnolongerquitesoinelasticandswingstoS2,wherethemarketfindsequilibriumatpricea2
ratherthanpriceb2.Ohioconsumersrealizeabenefit,orsurplus,fromthepricesavings(b2
a2)multipliedbythequantityofnaturalgaspurchased(q2).
Figure4:ValueofOhioNaturalGasProduction:U.S.Market
=$9.2million
30
Brown, Stephan. U.S. Natural Gas Markets in Turmoil, Testimony to U.S. House of Representatives
SubcommitteeonEnergyandMineralResources.FederalReserveBankofDallas,June19,2003.
34
PriceandMarketImpactsofVariousSupplyScenarios
ApplyingtheactualdollarsandcentstotheshadedconsumersurplusareashowninFigure4is
aneconomicartform.Academics,industryandgovernmentresearchershavederivedavariety
of ways to measure the benefit. Many what if studies attempted to show the impact of
changes in the supply of natural gas on the price of natural gas. These studies recognize
constantly increasing demand both for base and peak load as well as improved natural gas
supplytechnologiesandareabletoforecastlongtermchanges.
Table25:NaturalGasSupplyScenarios
Study
NationalCommission
OnEnergyPolicy31
EIA,February200432
ESAIJune2007memo33
EnergyModelingStanford34
SupplyShockorImpact
4bcfperdayincrease
2tcflowerperyear
12%increaseinsupply
1to3.5tcf
peryearincrease
AmericanCouncilforEEE35
1%decreaseindemand
(or1%ofnewsupply)
34%increaseinsupply
DOEAEO,2010
ResultingPriceImpact
$2.1/mmbtupricedecrease
$0.20/mcfhigher
3.5%decrease/winterprice
10%pricereduction
@wholesalelevel
24%changeinprice
31
National Commission on Energy Policy, Increasing U.S. Natural Gas Supplies, A Discussion Paper and
Recommendations from the National Commission on Energy Policy. October 2003, pages 47.
www.energycommission.org
32
EnergyInformationAgency,AnalysisofRestrictedNaturalGasSupplyCases,February2004,pages25.
33
LNGWillCutTransportationValues,PutDownwardPressureonPrices.June2007,ESAIAnalysis.
34
Energy Modeling Forum, Natural Gas, Fuel Diversity and North American Energy Markets, EMF Report 20,
September2003,pages2529.
35
American Council for an EnergyEfficient Economy, Examining the Potential for Energy Efficiency To Help
AddresstheNaturalGasCrisisintheMidwest,January2005,page5.
35
TheAnnualEnergyOutlook2010isselectedtoaddressthequestion,Whatwouldbetheprice
impactifOhionaturalgasproductionfelltozero?Thestudyexamines10and20yeartime
frames, allows for other energy sources and market reactions, and reports the results of an
annually updated DOE model that has been wellresearched. It results in a conservative
estimated impact relative to other studies mentioned above. Natural gas supply is
homogeneous; Ohio production is just as marketable as extra shale from other regions. The
findingsofworthoftheseextraornewsuppliesareinterpretedasmeasuresofworthofany
domesticallyproducednaturalgas,includingOhios.
The U.S. Department of Energys Annual Energy Outlook looks at the impact of less than
expectedshalerecoveryonnaturalgaspricesin2025.Thechangeinpricegiventhechangein
supplyofnaturalgasoffersameasureofpriceresponsethatcanbeconveyedtoothersources
ofnaturalgas.Thepriceresponseiscalculatedasthepercentchangeinpriceofnaturalgas
dividedbythecausalpercentchangeinsupplyofnaturalgas.
PriceResponse=%ChangeinPrice/%ChangeinSupply
Or
%ChangeinSupplyxPriceResponse=%ChangeinPrice
Ohioconsumed770,585,000Mcfofnaturalgasin2010.36IftheOhioproducednaturalgashad
notbeeninexistence,thepriceofnaturalgasacrosstheU.S.wouldhaveincreased$0.012per
Mcf as per the 2010 scenario. Having Ohio natural gas translates into savings for Ohio
consumersof$9.2millionperyearduetothestateaddingproductiontothenationalsupplyof
naturalgas.Calculationsfollow.
36
2005wasthemostrecentdataavailableatthetimeoftheanalysis.
36
Table26:CalculatedPriceResponseofShaleGasProduction
Estimated2025
AverageLower48Wellheadprices(2009$permillionbtu)
ShaleGasProduction*Tcf
Source:EIAAEO2011,AppendixD,ShaleGasSupply
LowShale
Recovery
6.54
6.44
Reference
5.29
9.69
HighShale
Recovery
4.57
11.88
34%
24%
0%
0%
23%
14%
PercentChangeinSupplyfromReferenceCase2025
PercentChangeinPrice
CalculatedPriceResponse
0.705
(thepercentchangeinpricegivenapercentchangeinquantitysupplied)
0.602
Table27:OhiosContributionofU.S.Supply
78.1bcfofproductioninOhio2010
24,133bcfisUSconsumptionin2010
0.32% Ohio'shareofproduction
Table28:PercentChangeinSupplyxPriceResponse=OhiosPriceImpact
%changeinsupplyw/oOhioproduction
CalculatedPriceResponse
Ohio'sSupplyImpactonUSPrice
LowShale
Recovery Reference
0.32%
0.32%
0.7045
0.0000
0.228%
0.000%
HighShale
Recovery
0.32%
0.6022
0.195%
37
Table29:CostsavingsEffectofOhiosProductionontheU.S.MarketasaWhole
AverageLower48Wellheadprices(2009$permcf)
SavingsperMcf
LowShale
Recovery Reference
6.54
5.29
$(0.015) $
ave.savings $0.012
HighShale
Recovery
4.57
$(0.009)
perMcfnationwide
Table30:SavingstoOhioansDuetoOhiosPriceDampeningSupply
Expectedsavings:
38
AvoidedInterstatePipelineTransportationCostsintoOhio
HowInterstatePipelineTransportationCostsareAvoidedtheIntegratedGatheringSystem
ThefollowingisadescriptionofauniquerelationshipbetweenDominionEastOhio(DEO)and
theOhionaturalgasproducers:theintegratedgatheringsystem.Itisthroughthisintegrated
gathering system that Ohioans benefit by avoiding interstate pipeline transportation costs.
Gatherco,asecondsystemoperatinginOhio,gathersnaturalgasintheColumbiaGasterritory.
DEOs integrated gathering system is a very unique fully integrated system that provides
productiongathering,storage,transmissionanddistributionservices.ThebeginningofDEOs
integrated system goes back over 100 years to when DEO was one of the first companies to
exploreforandproducenaturalgasandcrudeoilinAppalachia.OnDEOssystemthereareno
servicechargesattheinterconnectionsbetweenthedifferentsystemsasyouwouldfindina
nonintegratedsystem,savingproducers,marketersandendusersmoney.Thereareonlyafew
othersystemsthataresimilartoDEOsintegratedgatheringsystem.
Dominionsintegratedgatheringsystemconsistsofalmost21,000milesoftotalpipewithover
1,350milesofgatheringpipelinerangingfrom2inchto20inches,withalargeportionofthat
being 6 to 8 inch pipe. DEO operates 25 compressor stations with over 32,000 total
horsepoweravailable.Thecompressorstationsmaintainpressuresinthegatheringsystemto
help maximize natural gas production. The pressures in DEOs pipeline systems varies; as a
result, some producerwells experience lowerpressures and others higher pressures. Typical
pressuresrangefrom25poundspersquareinch(psi)toover300psi.Bywayofcomparison,
natural gas is transported through interstate pipelines at a much higher pressure, typically
starting at600 psi and going as high as 1500 psi.37 According to the Sierra Pacific website,
naturalgasmovesthroughtheinterstatepipelinesatabout15miles perhour.Theelevated
pressure reduces the volume of the natural gas being transported and provides the force to
movethenaturalgasthroughthepipelines.
The DEOs integrated system has interconnects with wells owned by over 450 different Ohio
producers. The producers range in size from just one well, to much larger companies that
have thousands of wells connected into DEOs system. Dominion estimates approximately
40,000 wells of varying production levels are tied into the integrated gathering system. In
2009,159wellswereaddedtotheDEOsystemandin2010,121wellswereaddedon.
DEOandtheOhioOilandGasAssociation(OOGA)haveajointProjectReviewCommitteethat
wasestablishedaspartoftheProductionEnhancementAgreement(PEA)enteredintobetween
DEOandtheOOGAin2003.TheProjectReviewCommitteeismadeupofrepresentativesfrom
DEO and the OOGA. The Committee isresponsible forallocating capital funds for projects on
37
http://www.energysolutionscenter.org.
39
DEOssystemdesignedtoimprovetheproductionofOhionaturalgas.TheCommitteemeets
regularly to evaluate gathering and compression projects and to discuss problems and
productionbottlenecksdevelopingonDEOsintegratedgatheringsystem.TheProjectReview
Committee partnership between DEO and the OOGA was maintained in 2007 when DEO and
the OOGA entered into the Heat Content Agreement (HCA) that took the place of the PEA.
Overtheyears,aspartofthePEAandHCAagreements,$30millionhasbeeninvestedinthe
integratedgatheringsystem,addingpipelinesandnewcompressors.Inaddition,DEOemploys
a sophisticated hydraulic modeling tool. The tool allows for evaluation of system flows and
problems, and simulates changing conditions on the integrated gathering system. The
modelingtoolisusedtooptimizesystemoperatingpressuresacrosstheintegratedsystemto
maximizetheproductionoflocalOhioproductiongas.
DEO operates two main storage fields, the Chippewa Field and the StarkSummit Field.
Combined, these fieldshold over 140 bcf of natural gas with the capability to cycle 60 bcf of
naturalgassummertowinter.DEOownsandoperatesthestoragefields,butlargeindustrial
customers and marketers contract with DEO for storage services and capacity. The large
customers and marketers do not physically manage the natural gas storage operation, but
rathermanagecommoditytimingandpriceregarding,fillinganddepletingtheirallottedspace
perthecontractstheyhavewithDEO.Thelargecustomersandmarketersmustresubscribe
each year in order to maintain their allotted storage rights. For example, Timken Steel
managesitsownnaturalgasportfoliomuchlikeabroker/naturalgasmarketerwould.Thisis
viewedasabenefitforlargeindustrialusersofnaturalgasandiscountedasabenefittobase
loadusersseekingtolocateafacilityinnortheastOhio.
AccordingtoDEO,thelocalOhiosupplyofnaturalgasisareliablesourcethatisavailableto
marketersandisclosertotheenduserthanothersources,liketheGulfofMexico.LocalOhio
production is not exposed to shutins due to Gulf of Mexico hurricanes, which helps mitigate
supplydisruptionstoOhiousersaswellasnaturalgaspricespikeswhenthoseeventsdooccur.
Forexample,duringthestormsofRitaandKatrina,therewerenosupplydisruptionsforDEO;
however,localpricesdidrespond.
DEOexplainedthatOhioproducersbenefitfromapositivenaturalgaspricingbasis,i.e.,they
willbeabletoselltheirproductiontoamarketeratjustunderwhatitwouldcostmarketersto
buynaturalgasshippedupfromtheHenryHub(Louisiana).Inshort,duetobeingnearalarge
sourceofdemand,Ohioproducersrealizeahighernaturalgaspricethanfoundinotherregions
ofmajorproduction.Theargumentismadethattheendusercustomerstillbenefits,because
inacompetitivemarketplace,thetotalcosttotheDEOenduserwhenthesourceofthenatural
gasislocalOhioproductionshouldbelowerthannaturalgasproducedoutsideofOhio.
DEO no longer buys natural gas from producers for system supply. DEO merely gathers and
transports it to the end users. Historically, when DEO was the primary purchaser of Ohio
natural gas, some producers found it more profitable to sell direct to particular industrial
customersordrillwellsforthosecustomers.Oncederegulationoccurredandtheactivemarket
fornaturalgasthatexiststodaycameintoexistence,theproducersfounditlessrestrictive,less
40
risky, and less expensive to use marketers to sell their natural gas and use DEOs integrated
gatheringsystemtotransportittomarket.
The production natural gas on DEOs system is purchased and aggregated by marketers.
Dominion has 38 active marketers of natural gas operating on the DEO system, with a large
percentageofthemarketerspurchasingnaturalgassupplyfromlocalOhioproducers.In2010,
over62bcfoflocalOhioproductionwasdeliveredintoDEOintegratedgatheringsystem,about
25% of DEOs total customer throughput of 249bcf.38The remaining DEO supply comes from
interstatepipelinesandisdeliveredtoDEOssystematinterstatedeliverypoints.
EstimationofAvoidedInterstatePipelineCosts
Due to Ohio natural gas production and the states gathering systems, Ohioans avoid $30
millionperyearininterstatepipelinetransmissionandstoragecosts.
DEO and Columbia Gas distribution companies both place Ohioproduced natural gas directly
intotheirpipelines.Duringpeakperiodsofdemand,theseutilitiesdrawnaturalgasfrommany
sources.Thereis,ineffect,astackofnaturalgasfromwhichtodraw.Thestackisdescribed
asdirectwellnaturalgas,storednaturalgasandinterstatepipelinenaturalgas.Eachportionof
thestackismorecostlyfortheutilitytodrawfromthanthepreviousportion.Anycostsavings
they accrue due to lower (transportation) cost from local natural gas can be passed on to
consumers.
In2010,Ohionaturalgasproducersprovided78.1bcfofnaturalgastoOhioans.39DEOhandled
62bcfandGatherco,Inc.,gatheringforColumbiaGas,estimateditpurchased6.95bcfduring
theyear.40Thesetwomajorutilitiescombinetohandlenearly70bcfoutofatotalof78.1bcfof
local natural gas produced. The remaining 9.2 bcf is consumed in Ohio and transported on
small public and private pipeline transportation systems and also avoiding the interstate
pipelinetransportcostforendusers.
WiththeadventofshalegasproductionintheAppalachianregion,thenaturalgastransmission
markethaschanged.41NaturalgasinthepastflowedintotheregionviatheGulfandWestern
regions.ThiswasdueinparttothelargeOhioandNewYorkdemandfornaturalgasandtothe
predominantsupplyofnaturalgasbeingintheGulforWest.Demandhasdecreasedbecause
ofindustrialtransformationsandforrecessionaryreasons,causingadragonlocalregionalgas
prices. Due to local regional production of shale gas, the local supply has increased and
pushed back supply both from the Rockies and the Gulf regions. This trend is expected to
continue.
38
Dominioninterview,2011.
SummaryofOhioOilandGasActivities,2010.OhioDivisionofMineralResourcesManagement.
40
Gatherco,Inc.
41
DominionEastOhioGasInterview(2011).
39
41
Adirect,costaccountingcalculationoftransmissioncoststothelocaldistributioncompanyis
difficultforseveralreasons:
thevolumeofnaturalgaschangesdailyandoriginatesfromstored,well
drawn,and/ortransportednaturalgas
therearepenaltypaymentsthatmaybeleviedonportionsofnaturalgasif
demand or storage input surges, placing an unexpected cost on the
transmissioncompany
Figure5illustratesthebasistrend.Whilein2006,whentheOhiopriceofnaturalgaswasnearly
$3.50greaterthanthepriceofgasattheGulf,duringthewinterof2010,thedifferencewasa
mere14cents.Atthepricedifferenceof$3.50,Gulfgaswaseconomicallytransportedintothe
OhiomarketandresultedinOhionaturalgasuserspayingatransmissionamountonthatgas.
SinceJune2011,thepricedifferencehasmovedbetween10and15centspermcf.Overthe
past12months,theaveragebasishasbeen16.5cents.42Suchbasisdataindicatesthatnatural
gas production in Ohio and surrounding states has, to some degree, replaced natural gas
broughtupfromtheGulf.
42
Price data provided by Hess Corporation which uses Dominion Appalachian 1st of the Month series and the
HenryHubseries.
42
Figure5:TheBasis:OhioNaturalGasPriceMinusGulfPrice,January15,20012011
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
$0.50
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$1.00
Basedontheabovefigures,theestimatedamountsavedwouldbeOhiosproductionof78.1
bcf,multipliedbytheaveragebasisamountof$0.165permcf.Thiscalculationyieldsasavings
toOhioansof$12.9millionperyearforOhioendusers.
EIAprovidesanalternativeapproachforestimation.Thebroaddifferencebetweenwellhead
price and city gate price captures the transmission costs in the classic, pre deregulation era
calculation.In2010,theU.S.naturalgasconsumer,onaverage,paidabout$2.00permcfof
natural gas for the pipeline transmission or transportation charge (see Table 31). Ohios
transmissioncostsareabovetheU.S.average,probablyduetostrongseasonalandindustrial
demand. Over the course of 20 years, Ohios wellhead to city gate costs averaged about 15
centsabovetheU.S.cost.In2009,themostrecentyearforwhichOhioscompositewellhead
and residential prices are available from EIA, Ohioans paid $2.24 per mcf in transmission or
storagecosts.The2010costof$1.68isestimatedbasedupon25%loweryearoveryearprices
observed for the months of January and February of 2011. Savings of $1.68 per mcf imply
statewidesavingsof$131,200,000($1.68/mcfmultipliedby78.1bcfofproduction).Notallof
thesavingscanbeclaimedsinceOhioscostsincludeanystorage,transmissionandgathering
coststhatwouldhaveaccruedtoeitherthetransmissionorthegatheringcompany.Ohiocosts
alsotakeintoaccountproductionthatdoesnotgoviathelargegatheringsystembutisputinto
transmissionpipesdirectly.
43
Table31:NaturalGasTransmissionExpenditures,WellheadtoCitygate
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010*
AnnualAverage
WellheadtoCitygateCost
Ohio
U.S.
0.55
1.32
0.67
1.26
0.91
1.27
1.06
1.17
1.05
1.22
1.51
1.23
1.74
1.1
2.48
1.34
1.75
1.11
2.40
0.91
2.04
0.94
3.71
1.72
0.16
1.17
0.64
0.97
0.84
1.19
1.63
1.34
2.12
2.22
1.05
1.91
2.53
1.21
2.24
2.79
1.68
2.00
1.56
1.40
5yearAverage:
Ohio
U.S.
0.848
1.248
1.976
1.138
1.478
1.198
1.914
1.894
20YearAverage
Unitsin$/mcf
SourceisU.S.EnergyInformationAdministration
*estimatedasdownby25%fromtheprioryearbaseduponJanandFebdata
44
TocomputethestoragecostportionofwhatOhioresidentialconsumerspay,aseasonalpricing
approach was employed from a study by Henning, Sloan and Schwindt. Authors report the
averageseasonalstoragevalueoftheColumbiaGasAppalachiaandtheDominionSouthpoint
market centers.43 In 2004, the authors found that the average season storage value for the
Columbia Gas Appalachian market center was $0.80 and Dominion Southpoint was $1.25.
Thesepriceswerethefiveyearaveragesfrom1999to2004reflectingthewintervaluelessthe
preceding summer value. Updating their study yields an average season storage value of 54
cents per mcf. While not a direct measure of cost, this price approximated an upper limit to
cost if one assumes storage is profitable. Viewing the Ohio winter production as production
from storage, end users are avoiding a storage charge of 54 cents permcf or a state total of
$42,170,000basedupontheHenning,SloanandSchwindtmethod.
Table32:EstimateofMaximumStorageCostsAvoided
Year*
20002001
20012002
20022003
20032004
20042005
20052006
20062007
20072008
20082009
20092010
20102011
Average
DTI1stoftheMonth
WinterlessPrevious
SummerPrice
$2.55
($0.99)
$1.62
$0.40
$1.20
$2.91
$0.13
$0.74
($4.12)
$1.58
($0.11)
$0.54
*Yearisthewinteryear.
Source:Kleinhenz&Associatescalculations.
The Public Utilities Commission of Ohio uses a rule of thumb that assumes the interstate
pipeline adds $0.4 to $0.5 per mcf transported from the gulf to Ohio.44 Using a midpoint of
$0.45 per mcf multiplied by the total Ohio natural gas production, 78.1 bcf provides an
estimatedsavingsof$35,145,000forOhioendusers.
43
Henning,Bruce,MichaelSloan,andRichardSchwindt,AnalysisofCompetitioninNaturalGasStorageMarkets
forUnionGasLimited,byEnergyandEnvironmentalAnalysis,IncandSimonFraserUniversity,October28,2004,
page33.
44
PUCOanalyst,July2011.
45
The U.S. Government Accountability Office (GAO) provides a fifth estimate of the cost of
transmission.TheGAOreportsthatinterstateandothercharges(includingchargesforstorage
functions) accounted for 9% of the customers natural gas bill in 2005.45 Local distributors
accountedfor33%andthecommoditycostaccountedfor59%.Usingthe9%proportionofa
customersnaturalgasbill,thecostin2010meansthatOhioconsumerssavedapproximately
$0.9981per mcf ($11.02 x 9%).This calculation indicates a total savings of $77,950,000. It is
importanttonotethatthiswouldbeamaximumamountsavedbyOhioanssincesomeportion
ofthe$0.9981isalsoallocatedforstoragefunctionsoftheinterstatepipeline.Inthecaseof
Ohio,afairamountofstorageiscarriedoutbythelocaldistributorsaswellastheproducers
themselves(aslocalwinterproducers).
Along the same lines as the GAO study employed above, Pacific Gas and Electric provided
insight into the portions of their customers bill that would represent interstate demand and
storage costs. An estimated 8% of the residential customers bill is rationed for these
activities.46ForOhioresidentialconsumers,8%amountsto$0.89permcf.SeeTable33.The
$0.89savingspermcfforOhioresidentialconsumersamountsto$69,500,000forthestateasa
whole.
Table33:StorageandInterstatePercentagesofOhioResidentialBills
EstimatedInterstateandStoragePortionsofOhioResidentialUserBills
PG&E
Item
$/mcf Percent
CostofGas
6.965
50%
Distribution
4.005
29%
InterstateCapacityandOther
0.965
7%
GasPublicProgramSurcharge
0.654
5%
BalancingAccounts
0.451
3%
LocalTransmissionandRateAdders
0.369
3%
BackboneCapacity
0.216
2%
Storage
0.151
1%
BackboneUsage
0.063
0%
MandatedCustomerProgramsandOther 0.009
0%
SelfGenerationIncentiveProgram
0.007
0%
Total
13.856 100%
*2010RateDetailbyEndUse,Table11A2
GTSRateCase2011exhPGE,9/18/2009
Ohio
calculated
$/mcf
5.54
3.19
0.77
0.52
0.36
0.29
0.17
0.12
0.05
0.01
0.01
11.02
Estimatesof
InterstateandStorage
Portions:Ohio
$0.89
45
Roles of Federal and State Regulators in Overseeing Prices, Government Accounting Office, Report to the
Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S.
Senate,September2006,GAO06968,page12.
46
GTSRateCase2011exhPGE,9/18/2009.
46
Therangeofestimatesshowsaminimumamountofsavingstobe$12.9millionperyearanda
maximumamountofsavingstobe$131millionperyear.Byeliminatingthehighestandlowest
estimates,theremainingfourmethodsyieldarangeofbetween$35.1millionand$77.9million
per year. Using the midpoint of these figures and allowing for the costs of the gathering
systems, we project a savings to Ohioans of $57 million per year that can be attributable to
localpurchasesinsteadofinterstatepipelinepurchases.
Table34:TransmissionandStorageSavingsEstimates
EstimationMethod
Avoided
Transmissionand
StorageCosts
$million
GulftoOhioBasis
PUCO
Henningetal.
PGE
GAO
EIAwellheadtocitygate
$12.9
$35.1
$42.2
$69.5
$77.9
$131.2
Kleinhenz&AssociatesestimatedthecostoftheOhiogatheringsystemstobe$0.35permcf.
This cost estimate was arrived at based upon confidential discussions with the Ohio Public
UtilityCommissionandDEO,anduponPGEreports.Theamountreflectsahypotheticalcase
andissubjecttogaspricechanges.Kleinhenz&Associatesbelievesitisagoodapproximation
ofcurrentcosts.
Table35:TotalNetSavingstoOhioansin2010,AvoidedTransmissionandStorageCosts
OhioProduction
Midpointestimateofavoidedtransmissionandstorage
78,100,000 Mcf
$57,000,000
Avoidedtransmission&storagecostperMcf
CostofOhio'sGatheringSystems
NetSavingstoOhioansperMcf(AvoidedCostslessGatheringCosts)
$0.73
$0.35
$0.38 PerMcf
TotalNetSavingstoOhioansin2010
$29,665,000
The savings are dependent on the ongoing availability of natural gas and the Dominion
gathering system built up and maintained over the years. The two are virtually inseparable.
47
OhioproducersarehardwireconnectedtotheDominiongatheringsystem.Thesystem,as
describedelsewhere,allowsDominiontodirectlytransportthenaturalgasfromthewelltoits
customers.Nointermediarytransactioncostsareincurredbyconsumersasmightbeincurred
inothermarkets.Duringthecriticalwintermonths,Dominionacceptsnaturalgasasneeded,
muchlikestorage.Dominion,atleastforthenaturalgastransportedfromOhiowells,avoids
third party storage transactions that would be faced by utilities in markets with no local
productionorgatheringsystem.Asreportedhere,thiscontributesalargebenefittotheOhio
naturalgasmarketplace.
SecurityorUnInterruptabilityofSupply
Ohioproducersprovideasupplyofnaturalgas(andcrudeoil)throughouttheyearthatisnot
necessarilysusceptibletoweatherorpolitics.Paperhedgingofnaturalgaspricescanhelpthe
purchaser avoid these risks up to a point. But consumers, particularly residential consumers,
ultimatelyneedtohavenaturalgas.Physicalaswellasfinancialtoolsexisttomanagesupply
andpricevolatility.47Thissectionreviewsstudiesconductedbyothersthatsoughttoquantify
thevalueofsecurityofthesupplyofnaturalgas.Onestudyassignsa$20millionperyearvalue
of security associated with Ohio production to Ohio consumers. This benefit does not stand
alone,butisrolledupintoavoidedpipelinecostsmeasuredabove.
There is willingness to pay for the security of supply of natural gas, but measuring such a
willingnessischallenging.GravesandLevineexplainthatafirmsriskmanagementandprocess
controls policies may set specific price targets or source availability targets.48 A study
conducted by the University of California Energy Institute49 found that the asymmetry
betweenbuyersandsellerscreatesaforwardpremiumwhenmarketsaretightduetoconcerns
aboutsecurityofsupply,butdoesnotcreateaforwarddiscountwhenmarketsareloosedueto
concerns about security of demand. The findings include observations consistent with a
natural gas interstate pipeline infrastructure that has spare capacity at most times, but
occasionally does become constrained. During a market constrained period, having firm
transportation rights (or the physical commodity) can be extremely valuable. To compute
thisvalue,theydevelopedamodelthatfoundduringcapacityconstrainedtimes,theforward
price exceeds the expected spot price. The differential is the premium for security. The
authors discuss the duality of pricing risk versus the quantity risk that the local distribution
companies face when arranging their supplies. The price risk is well known, but in modeling
47
Graves,FrankC.andStevenH.Levine,ManagingNaturalGasPriceVolatility:PrinciplesandPracticesAcrossthe
Industry,TheBrattleGroup,preparedfortheAmericanCleanSkiesFoundation,November2010.
48
Ibid,p.32.
49
Borensteinetal.,SecurityofSupplyandForwardPricePremia:EvidencefromNaturalGasPipelineRates,March
2006,PreliminaryDraft,page11,22.
48
terms,theutilityfacesnearcatastrophicriskshouldsuppliesfallshort,especiallyforresidential
demandinthecolderclimates.
Theauthorsfoundthatifexpectedspotpricesweretoriseby$1.00permmbtu,thenthebid
weekmarginwouldbepredictedtoriseby3.4 centsabovetherealizedspotprice.In short,
there would be a 3.4 cent premium paid. The report did not show a statistical difference
betweensummerandwintermonths.Theauthorsbelievethattheirfindingsimplythateven
inanindustrywherefirmsarenotpriceriskaverse,regulation,andspotmarketilliquiditycan
combinetogenerateforwardpricepremiumforanessentialinput.
Otherresearcherswereverydirectinexaminingthevalueofstorageasahedgeagainsthigh
prices. Storage facilities should be rebuilt or expanded, writes Peter Beutel, President of
Cameron Hanover, an energy risk management firm.50 He believes that holding the physical
commodityguaranteesagainstbasisrisk.Whendescribingfueloil,similartonaturalgasin
January, he says, No number of futures options can fill a single boiler. He encourages his
readerstorealisticallyappraisetheriskofnothavingthefuelonhand.
Utilitiesthatcanstorenaturalgas,dostoreitaccordingtotheGAO,sincestoragecanprovidea
hedgeagainstpricevolatility.51TheGAOfoundthat85%oflargeutilitiesand49%ofthesmall
utilitiesusestorageasameansofhedging.52Location/geologicalfactorsappeartodetermine
storageusage.
Since Ohio natural gas and crude oil producers are physically linked to the Dominion system,
their natural gas supplies are secure for Dominion. The quantity risk as noted in the
precedingdiscussionisnotfacedbyDominionandthus,thepremiumof3.4centsper$1.00of
price movement is avoided by Dominion and its customers. All in all, a guarantee of the
physicalcommodityisvaluableandacriticalbenefittoOhioans.
50
Beutel,Peter,C.SurvivingEnergyPrices,PennWellPublications.Yearunknown,pages1728.
GeneralAccountingOffice,ReportofCongressionalCommitteesandMemberofCongress,NaturalGas:Analysis
ofChangesinMarketPrice.December2002,pages3536.
52
Ibid,page43.
51
49
PriceVolatility
ResearchStudiesonPriceVolatilityanditsImportance53
Muchregulatoryeffortatbothstateandlocallevelsgoesintomonitoringandmanagementof
volatility.Pricesofbasicenergy(naturalgas,electricity,heatingoil)aregenerallymorevolatile
thanpricesofothercommodities.Onereasonforthisisthatmanyconsumersareextremely
limited in their ability to substitute other fuels when the price of natural gas, for example,
fluctuates.Residentialcustomersusuallycannotreplacetheirheatingsystemquickly,andinthe
longrun,itmaynotbeeconomicaltodoso.
The term price volatility is used to describe price fluctuations of a commodity. Volatility is
measuredbythedaytodaypercentagedifferenceinthepriceofthecommodity.Thedegree
ofvariation,notthelevelofprices,definesavolatilemarket.Sincepriceisafunctionofsupply
and demand, it follows that volatility is a result of the underlying supply and demand
characteristics of the market. Therefore, high levels of volatility reflect extraordinary
characteristicsofsupply,(e.g.,Katrina)and/ordemand(e.g.,prolongedcoldweather).
Volatilityprovidesameasureofpriceuncertaintyinmarkets.Whenvolatilityrises,firmsmay
delay investment and other decisions or increase their risk management activities. The costs
associated with such activities tend to increase the costs of supplying and consuming natural
gas.
Aspartofthisstudy,severalarticlesarepresentedsuggestingthevalueoflowvolatility.
A2009studyconductedbytheCaliforniaEnergyCommissionhighlightstheimportanceoflow
volatility.Thereportreviewsmajorpricespikesandvolatilityperiodsoverthelastdecade,the
most recent being the summer of 2008. Authors concluded that price volatility made for
uncertainpriceforecasts.Theyalsoask:Willincreaseddomesticnaturalgasproductionhavea
sustained impact on natural gas prices and volatility?54 The author does not estimate the
willingnesstopaytoavoidvolatility.
ResearcherMarkBolingerofLawrenceBerkeleyLaboratory,examinestheissueofthevalueof
reducing price volatility using the financial Capital Asset Pricing Model (CAPM). The CAPM
modelisusedextensivelyinmeasuringstockpricingandrisks.Bolingerconcludesthatitcosts
approximately 0.5 cents per kwh to hedge away natural gas price risk over a 10year period
usingfinancialswaps.Acomparisonof10yearswappricestoalevel10yearnaturalgasprice
53
FulldiscussionavailableontheEIAwebsitehttp://tonto.eia.doe.gov/oog/info/ngw/historical/2003/10_23/
Volatility%20102203.
54
Roesser,Randy.2009.NaturalGasPriceVolatility,CaliforniaEnergyCommission,CEC2002009009SD,p43.
50
forecast reveals that swap prices traded at a premium of $0.76/mmBtu (some 24% over the
priceforecasts).55Purchasersarepayingthispremiumtoavoidvolatilityinnaturalgasprices.
Demand for natural gas is also affected by price changes. A 10% increase in the Henry Hub
priceofnaturalgaswasfoundtocausea1.4%decreaseindemand.56
RobertPindyck,author,consultant,andprofessorofEconomicsandFinanceatMIT,foundthat
pricesandvolatilityarecorrelated.57Whilestatisticallysignificant,heconcludedthatthetrend
wasnotofgreateconomicsignificancebecauseshockstovolatilityaremeasuredtobeshort
lived,typicallyhavingadurationofseveralmonths.
Lowvolatilityisimportant,however,especiallytoresidentialcustomers.Consumerstypically
relyonnaturalgasforhomeheatingandtheirneedcanresultinsignificantriskofhealthand
safetywhennaturalgasispricedtoohightobeaffordable.58AuthorBarbaraAlexanderreports
there is a key role for storage facilities in the ability of the natural gas utility to manage its
natural gas supply for price stability. In particular, Those utilities with access to local
productionarefavored,becausetheyavoidthecostsassociatedwithtransportationofnatural
gasthroughinterstatepipelines.(p5).
Withthecombined409undergroundstoragefacilitiesintheU.S.,thereliability,integrityand
capabilityoftheU.S.naturalgastransmissionanddistributionnetworkissustained.In2009,
Ohio had 24 DepletedReservoir Storage sites with working natural gas capacity of 225 bcf
and daily withdrawal capacity of 4,972 mmcf.59 This Ohio resource accounts for 5% of U.S.
capacity.AnEIAreportconcludesthataccesstoundergroundnaturalgasstorageoperations
iscrucialintodayscompetitivenaturalgastransportationmarketplace.
AnEIAstudypublishedinAugust2007showsthatforevery1%differencefromthefiveyear
storage average, there is a 0.12% increase in price volatility.60The study, authored by
MastrangeloandTrapmann,reportsthatthedifferencefromstoragecouldbeaboveorbelow
the average. Either way, a market signal was sent signaling an atypical occurrence. Their
research focused on the Henry Hub and national storage data. However, it also examined
prices at the Chicago city gate and New York Transco Zone 6 hubs. Results were similar to
55
Bolinger,Mark,RyanWiserandWilliamGolove,QuantifyingtheValuethatWindPowerProvidesasaHedge
Against Volatile Natural Gas Prices, Environmental Energy Technologies Division, Lawrence Berkeley National
Laboratory,June2002,LBNL50484.
56
Costello,2006,page7.
57
Pindyck, Robert S., Volatility in Natural Gas and Oil Markets, Center for Energy and Environmental Policy
Research,MassachusettsInstituteofTechnology,June16,2003Draft.
58
Alexander,BarbaraR.NaturalGasPriceVolatility:RegulatoryPoliciestoAssureAffordableandStableGasSupply
PricesforResidentialCustomers,January2004.Pages51,4,5.
59
Daily natural gas withdrawal capacity by state, EIA191a form, 2009 results and Energy Information Agency,
OfficeofCrudeOilandNaturalGas,U.S.UndergroundNaturalGasStorageDevelopments:19982005,October
2006.
60
Mastrangelo,Erin,andWilliamTrapmann@eia.gov,AnAnalysisofPriceVolatilityinNaturalGasMarkets,EIA,
OfficeofOilandGas,August2007.
51
those found in this study and presented below. Insight is provided into how local storage
conditionsmightaffectlocalvolatility.
PriceVolatilityinOhio
Customersdontlikevolatility.aDEOmanager
Findings from the Mastrangelo and Trapmann EIA report discussed above combined with the
DTIdataanalysispresentedbelowindicatethatthelocalOhiomarketfornaturalgasisjustas
robust as the larger markets of Chicago and NY. The literature indicates that Ohios stored
natural gas and Ohio producers ability to produce natural gas on the spot during the winter
months (like virtual storage) reduces the fluctuation in overall natural gas available to be
deliveredtoOhio.Thisreductioninfluctuation,especiallyasitreducesthedeviationfromthe
nationalfiveyearstorageaverage,reducesvolatility.Figure6belowdepictshowOhioslocal
productionmitigatesvolatility.
Figure6:HowOhiosLocalProductionReducesVolatility
SOLUTION
PROBLEM
Ohioslocalproductionreduces
storageneedsleadingtoreductionin
highvolatility
Nationalaboveaveragestorageleads
tohighlyvolatileprices
RightAmountof
StorageWillCause
MinimalPrice
Volatility
SOLUTION
PROBLEM
Ohioslocalproductionactslike
storageleadingtoreductioninhigh
volatility
Nationalbelowaveragestorageleads
tohighlyvolatileprices
52
The majority of Ohioproduced natural gas is sold at the price set by the first of the month
indexpricesystemusedattheOhiomarketinghubs.Thepricesettingmechanismoffersthe
buyer(andseller)theopportunitytolockinasinglepriceforthefollowing30days.Customers
can avoid the one day peak events. These prices are arrived at during the last few days of
tradingpriortothefirstofthemonth.Onceset,thefirstofthemonthindexpriceisfixedfor
25daysuntilthecyclestartsagain.NotethatthebulkofnaturalgaslocallyproducedinOhiois
soldtoOhioconsumersunderthefirstofthemonthindex.Itislikelythatalargeportionof
theremainderisalsosoldunderfirstofthemonthindexprice.Otherhubsusefirstofthe
month contract pricing as well. As in the case of daily pricing, the analysis revealed that
Chicagooftensportedthesmallestvarianceandlowestmean,whileNewYorkwasattheother
endofthespectrum.DTIwasinthemiddle,reportingthesmallestvarianceinthewinterof
20042005.
DatafromtheDominionTransmissionInc.Appalachianandsurroundinghubswasanalyzedto
examinepriceandvolatilitylevels.TheDTIhubwasfoundtohavethelowestvolatilityinsix
outofthe12summersanalyzedandinsixoutofthe11wintersanalyzed.TheChicagoCitygate
hubwaspredominantlytheleastvolatileandhadthelowestaverageprices.
There is some trading that occurs daily at Dominion Transmission, Inc. Appalachian hub
primarilytofillunforeseenneedfornaturalgas.61ThedailypricesattheDTIhubarebuffeted
by national and international events just as are first of the month index prices. However,
during the highs and lows of pricing throughout the month, the natural gas production from
Ohioispumpedandsoldattheagreeduponfirstofthemonthindex.
Figure7:WinterPrices20002001
25
Winter20002001
$/mmbtu
20
15
10
5
0
11/01/00
12/01/00
01/01/01
Transco,zone6nonNY
chicago
02/01/01
DTI
61
Source:HessCorporation.
53
DuringoneofthecoldestMidwestyearsonrecord,thepricesattheNewYorkhubreached$20
per million btu. The DTI first of the month index was fixed at just over $10 per million btu;
however, even its spot price only ventured as high as $12 per mmbtu. The winter 200001
graphhighlightssupply/demanddictatingnaturalgasprices.AsillustratedinthegraphinFigure
7,acoldairincursionarrivedaroundNovember10,2000,elevatingprices.Amoreintensecold
developed on or about December 17 and it moved from the Northeast to the West an
unusualweatherpattern.TheNewYorkpricesubsequentlyjumpedto$15whiletheChicago
pricehitonly$10.Soonthereafter,bothjumpedtothe$15$16range.Whenthemostintense
episodeofcoldbeganaboutDecember21,Chicagopricesjumpedtoabout$16$17initiallybut
thendeclinedasthecoldairmovedEast.NewYork,however,endedtheyearcoldandstarts
theNewYearthesameway.Businessesreturningtonormaloperationanddemandfornatural
gas after the Christmas/New Year holiday, push the price spike up to $20 before the cold air
finallygoesbacktoCanada.Theoveralldemandfallsandthepricedeflates.
StatisticalanalysisondataoverthepastsevenwintersshowedDTIviedwithChicagoinoffering
thelowestvarianceinpricingsduringthewintersof20002001to20102011(Tables36and37).
DTIwasfoundtohavethelowestmeanpriceinfouroutof11yearsanalyzedandthelowest
varianceinpriceinsixoutofthe11yearsanalyzed.Ineightoutof11years,DTIhadthelowest
maximumpriceamongthethreehubs.Thiswasadirectbenefittothemillionsofnaturalgas
users, residential, commercial and industrial, in Ohio. Wild price swings and uncertainty can
underminethebestlaidplansandbudgets.Ohioutilitiesarechargedwithguaranteeingmuch
of the natural gas delivered in the state and they put a premium on deliverability and price
stability.62 Dominion and Columbia Gas pay large fees to the natural gas interstate pipeline
companiestoguaranteenaturalgasonacertaindayforacertainprice.
AsshowninTable36,comparingwinterpricesforDTI,ChicagoandNewYork,NewYorkusually
registersthelargestvarianceinpriceaswellasthelargestaverageprice.
62
DominionInterview
54
Table36:WinterMonthsPriceComparison:DTI1stofMonth,Chicago,NY
NovemberMarch,2000to2011
WinterMonthsPriceComparion:DTI,Chicago,NY
Lowest
Lowest Smallest Tightest Minimum
Winter
Mean
Variance Range
Price
0001
DTI
Chicago DTI
Chicago
0102
Chicago Chicago DTI
Chicago
0203
DTI
DTI
DTI
Chicago
0304
Chicago DTI
DTI
Chicago
0405
Chicago Chicago DTI
Chicago
0506
Chicago DTI
DTI
Chicago
0607
DTI
DTI
DTI
Chicago
0708
Chicago DTI
DTI
Chicago
0809
Chicago Chicago DTI
Chicago
0910
Chicago DTI
DTI
Chicago
1011
DTI
Chicago DTI
Chicago
Lowest
Maximum
Price
DTI
Chicago
DTI
DTI
Chicago
DTI
DTI
DTI
Chicago
DTI
DTI
Largest
Variance
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
Highest
Mean
NY
NY
NY
NY
DTI
DTI
NY
NY
NY
NY
NY
Alookatsummerpricingforthepast10yearsindicatesthatDTIhadthesmallestvariancefor
themostnumberofsummersandthatithadthesmallestrange(highlow).
55
Table37:SummerMonthsPriceComparison:DTI1stofMonth,Chicago,NY
AprilOctober,2000to2011
SummerMonthsPriceComparion:DTI,Chicago,NY
Lowest Lowest
Lowest Smallest Tightest Minimum Maximum
Summer
Mean
Variance Range
Price
Price
2000 Chicago NY
NY
Chicago DTI
2001 Chicago Chicago DTI
Chicago Chicago
2002 Chicago DTI
DTI
Chicago DTI
2003 Chicago Chicago DTI
Chicago Chicago
2004 Chicago DTI
DTI
Chicago DTI
2005 Chicago DTI
DTI
Chicago Chicago
2006 Chicago Chicago DTI
Chicago DTI
2007 Chicago Chicago DTI
Chicago Chicago
2008 Chicago DTI
DTI
Chicago Chicago
2009 Chicago DTI
DTI
Chicago DTI
2010 Chicago Chicago DTI
Chicago DTI
2011todate Chicago DTI
DTI
Chicago DTI
Largest
Variance
DTI
DTI
Chicago
NY
NY
NY
NY
DTI
NY
NY
NY
NY
Highest
Mean
NY
NY
NY
NY
NY
NY
NY
NY
DTI
NY
NY
NY
Figure8:Katrina&RitaSpike
17
Rita:9/24/05
16
15
Katrina:8/29/05
14
$/mmbtu
13
12
11
10
9
8
Transco,zone6nonNY
Chicago
DTI(Appalachia)
56
Figure 8 provides recent price volatility trends for Transco Zone6, Chicago, DTI and NYMEX
hubs.WhenHurricaneKatrinahitasoneofthecostliestanddeadliesthurricanesinU.S.history,
8.8bcfperdayofGulfofMexiconaturalgasproductionasestimatedforAugust30,2005,was
shut. This was the equivalent of 88% of daily production for the region. The impact of the
immediateHurricaneRitawasslightlyless,shutinonly8bcfperdayofGulfofMexiconatural
gas.63 While Chicago, DTI and NY hubs all tracked together, NY prices were clearly the most
reactionarybouncingfrom$10onAugust28toover$14bySeptember4.DTIbouncedfrom
$10to$13,whileChicagoexperiencedthesamepercentagebouncebutremainedlower.
The Katrina and Rita spikes highlight supply curtailment more than demand. Both storms
knockedoutsupply.TheyalsoknockedoutdemandintheLouisiana/Mississippiarea.Katrina,
occurring at the end of August/early September, didnt have as much natural gas demand as
RitaexperiencedattheendofSeptemberwhenpartsofthecountrystartneedingnaturalgas
forheating.ChicagohadsuppliesfromtheMidwestandCanadasoitwasnotaffectedasmuch
by the loss of supply coming up from Louisiana. Natural gas was available from Texas and a
meaningful amount of demand was knocked out by power plant, crude oil and chemical
refineryoutages.
63
EIA,HurricaneImpactsontheU.S.OilandNaturalGasMarketsDailyUpdates,2005.
57
Figure9:PriceSpikesandNearbyHubs20002007
PriceSpikesandNearbyHubs2000 2007
35
Jan152004
30
Feb252003
Rita
25
Winter2000 2001
Feb62007
Katrina
$/mmbtu
20
15
10
5
Transco,Z6NY
Chicago
day
NYMEX
12/5/06
8/12/06
4/19/06
12/25/05
9/1/05
5/9/05
1/14/05
9/21/04
5/29/04
2/4/04
10/12/03
6/19/03
2/24/03
11/1/02
7/9/02
3/16/02
11/21/01
7/29/01
4/5/01
12/11/00
8/18/00
4/25/00
1/1/00
DTIDailyPoolSeries
Figures 9 and 10 illustrate the major price spikes that have occurred since the year 2000. Of
noteisDTIsgenerallackofextremespikes.Thisisduetoitsfirstofthemonthpricingandits
nearness to markets that allow it to act as storage, dampening volatility. Figure 9 also shows
thatitissupplyanddemandatworkmovingprices.ThespikeidentifiedintheWinter2000
2001occurredwhentheU.S.experiencedthecoldestNovember/Decemberonrecord.During
thisperiod,naturalgasinventorywasverylow.OnFebruary25,2003,duringthecoldestpart
ofthewinterof2002/3,averycoldArcticairincursionoccurredintheNortheast.Acounter
clockwise wind pattern centered on New England went up to Canada and pulled the cold air
downintotheNortheast.In2004,abigjumpindemandrelativetosupplycausedtheJanuary
15,2004,pricepeak.ThejumpjustbelowtheKofKatrinareflectsthedecreaseinsupplydue
tothehurricanedamage.Atthatpointintime,demandwasrelativelystrongerthansupply.
The February 6, 2007, spike was the tug of demand from cold temperatures tightening the
supply/demandbalance.
58
Figure10:PriceSpikesandNearbyHubs2008toCurrent
20
18
16
14
$/mmbtu
12
10
Transco,zone6nonNY
Chicago
DTI(Appalachia)
Thebenefitsoflowvariabilitytothevariousnaturalgasmarketparticipantsarelowerpricesfor
thepurchaserswhoaremainlyconsumersbutthereareadvantagestoproducers.Ifaproducer
commitstoprovidingnaturalgasandthenisunabletodeliver(sayduetowellfreezeups)the
damagesdoneorthecostoftryingtomitigatetheoutage(suchasobtainingnaturalgasfrom
other sources to meet the commitment) are smaller with lower volatility. High volatility
indicatesaverytightmarketandimpliestherearetoofewprovidersrelativetothedemand.
The market price for natural gas reflects supply relative to demand. Of the three markets,
Chicago,DTIandNewYork,theChicagomarkethasthelowestpricesbecauseithasthebetter
supply portfolio. Chicago has the benefit of receiving natural gas from Canada, from the
MidwestandfromtheSouth.WhenhurricanesKatrinaandRitaknockedoutproductionand
transmissioncapacityfromtheSouth,Chicagowasabletooffsetthelosswithsupplyfromthe
Midwest and from Canada. In addition, Chicagos proximity to its producers reduces its
transportation component. Transmission of natural gas from Chicago to New York adds
additionaltransportationcostsontopoftheChicagopricetodeterminetheNewYorkprice.
NY has higher prices for two major reasons: the distance involving the cost of transportation
andtoolittleinfrastructure.TheTranscoZone6pricesarethosethatfeednaturalgastothe
NewYorkMetroArea.Currentlythereisinsufficienttransmissioncapabilitytodelivernatural
gas to Metro New York. Boosting supply has been thwarted for years by a not in my back
yard(NIMBY)mentality,whichisverystrongintheNYarea.Congestionalsomakesitdifficult
and costly to add capacity. When a significant cold snap occurs, New York Metro demand
59
$/mmbtu
pricestypicallysurge.Thesupplysourcestomeetthisdemandare1)whatiscurrentlymoving
in the transmission line, 2) localized storage, and 3) oilbased peakshaving supply. Perhaps
evidence of this was seen in this past winter, 2010 to 2011, when Chicago and DTI buyers
enjoyedlowpriceswithalmostnochangewhilebuyersattheTranscoZone6hubsawmuch
volatility(Figure11).
Figure11:PriceSpikesandNearbyHubs,Winterof20102011
20
18
16
14
12
10
8
6
4
2
0
11/1/10
Winter20102011
12/1/10
Transco,zone6nonNY
1/1/11
2/1/11
chicago
DTI
Chicagoisamajornaturalgasmarketandasamajorhub,morenaturalgasistradedinChicago
thaninNY.NYisbigbutmuchsmallerthanChicagobecausesomuchofthenaturalgasthat
passesthroughChicagoisconsumedpriortoarrivingatNY.
DTIisalessactivehubthanChicagoandNYfromavolumeperspective.Itprimarilymeasures
natural gas produced locally. DTI offers daily pricing and monthly pricing. The DTI hub is a
meeting place for producers selling to industrial customers. A majority of the natural gas
tradedattheDTIhubispricedbasedonthefirstofthemonthindexprice.Whyisthereonly
one trading day per month for DTI? The load is fairly steady so there isnt the need to have
participants calling daily seeking buyers and sellers. As such, the participants at the DTI hub
determine the price once a month, for delivery during the month. The infrequent pricing
suggeststhattherearenotmanyparticipantsandthatthereisnotmuchdiversityindemand.
Producersprefertoproducefulloutallthetime.Whileindustrialcustomershavethesteadiest
demand, retail customers have the most variability day to day with the commercial users a
closesecond.Theyvarybecauseheatingandcoolingneedsvarywiththeweather.
WeconcludethatTranscoZone6whichsuppliestoNewYorkCityisthemarketplaceintheU.S.
thathastoolittlenaturalgasmostoften.Whensupplyiscurtailed,ahigherpricedetermines
whovaluesmostthesmallerquantityavailableandwhowillreceivewhatisavailable.
60
Several factors differentiate New York City from locations such as the Henry Hub and may
explain the relatively exaggerated volatility levels. First, New York City is separated
geographically from natural gas fields and production; so much of the natural gas coming to
market has to be transported over longer distances. This makes the price vulnerable to
congestionordisruptionsinthesupplychain.64
64
AnAnalysisofPriceVolatilityinNaturalGasMarkets,EnergyInformationAdministration,OfficeofOilandGas,
August2007,page11.
61
VI.OHIONATURALGASANDCRUDEOILINDUSTRYOUTLAYS
ThechartinFigure12showstherelativesizeofthe$718millionofrevenueoutlaysin2010and
offersawaytocomparenumberspresentedinthefollowingsections.
U.S. oil and gas industry profits have been less than broader U.S. manufacturing averages.
Royalties or payments to gain access to natural gas, and free natural gas, are unique to the
naturalgasandcrudeoilindustry.Theseareongoingfixedcostsandthevalueofthepayments
orthevalueoffreenaturalgasrisesandfallswithchangesinthepriceofnaturalgas.Likeother
industries in Ohio, the natural gas and crude oil industry pays taxes that benefit all Ohioans.
We provide estimates of the various taxes paid by the industry, severance taxes, property
taxes,commercialactivitytaxesandfinallyincometaxes.
Figure12:NaturalGasandCrudeOilIndustryOutlaysasaPercentof
Revenues,2010
EXPLORATION
33%
ROYALTIES,
12.5%
OPERATING
COSTS40%
INCOMETAXES11.5%
PROFIT3%
LessthanU.S.Mfg
IndustryAverage
Source:EIA,2009:OhioTaxCommission
62
VII.CAP
PITALREIN
NVESTMENTOFOHIO
OSNATUR
RALGASAN
NDCRUDEEOIL
PRODUCINGINDU
USTRY
Thissectionprovidessestimates fortheindu
ustrysreinveestments.FFigure13illu
ustratesthe cycle
orthe
ofreinvestment.Thesaleofnaturalgasleeadstoafteertaxandaffterroyalty revenuesfo
producerrs. In order to mainttain production and their liveliho
ood, produccers reinvest in
exploratiionanddrillling.Howevver,notalleexploration resultsinsu
uitablesitessandsome wells
comeupdry.Afterffreegasissiphonedoff,theproduceercansellth
heremaininggproduction
nand
thecycleecontinues.
By the nature
n
of the market, producers
p
arre price takkers. They accept
a
the market pricce for
natural gas
g and crud
de oil BUT they
t
also acccept the market
m
price for exploraation and drrilling
services. Whennatu
uralgasorccrudeoilpriicesarelow
w,theproducertypicallyycannotrein
nvest
significan
ntly.Whenpricesarehiigh,allthep
producerscro
owdthemarket,deman
ndingexplorration
anddrillingservices.Theincreasseddemand
ddrivesupth
hepricefortheseservicces.
Figure13:CyycleofReInvvestment
63
U.S.onshoreexplorationanddevelopmentexpendituresoffercomparablecoststothosefaced
byOhionaturalgasandcrudeoilproducers.Accordingtotheirpublishedfinances,theMajors
(thelargestnaturalgasandcrudeoilproducers)spent33.2%oftheirU.S.earnednaturalgas
revenuesonU.S.explorationanddevelopment.Thiscalculationresultsinanestimateof$238
million in expenditure on exploration and development and agrees with the Ohio Tax
Commission. 65TheOhioTaxCommissionfoundthatOhioproducersincurredproductionand
liftingcostsof40%ofrevenuesor$287millionintheyear2010.
65
TheTaxCommissionemploys30%.
64
Table38:2010EstimatedOhioNaturalGasandCrudeOilExploration&Development
ExpendituresBasedonMajorProducersExpenditures,2009
2009
U.S.
Estimated
Ohio2010
Expenditures
as%of
Revenues
(MillionDollars)
OperatingRevenues(U.S.2009,OH2010)
$119,905
Exploration
AcquisitionofUnprovedAcreage
GeologicalandGeophysical
DrillingandEquipping1
Other
TotalExploration
Development
AcquisitionofProvedAcreage
LeaseEquipment
DrillingandEquipping1
Other2
TotalDevelopment
TotalExplorationandDevelopment
(MillionDollars)
100% =
718
$5,195
$468
$3,647
$820
$10,130
4.30%
0.40%
3.00%
0.70%
8.40%
$31
$3
$22
$5
$60
$4,003
$1,011
$20,529
$4,096
$29,639
$39,769
3.30%
0.80%
17.10%
3.40%
24.70%
33.20%
=
=
=
=
=
=
=
=
=
=
=
=
$24
$6
$123
$25
$177
$238
Note:Theseareonshoreexpenditures.
OhioTaxCommissionrecognizes:
33%
$238
Addlsource:JamesmemotoTaxCommission,13006
65
Table39:Production(Lifting)Costs
SalesofNaturalGasandCrudeOil(U.S.2005,OH
2006)
U.S.OnshoreProductionCosts
(IncludesTexasandotherswithlowliftingcosts)
OhiosLiftingCostsasperTaxCommission
U.S.Expendas
%of
Revenues
U.S.
(MillionDollars)
Estimated
Ohio
Expenditures
(MillionDollars)
$119,905
100%
=$718
$28,151
23.5%
40%
=$69
=$287
Source: Performance Profiles of Major Energy Producers 2009, EIA and Ohio Tax Commission.
ProductioncostsforOhioproducersaremuchhigherthanforthelargeMajorProducersdueto
themanystripperwellsandlowproductivityofwellsinOhiorelativetotheMajors.TheOhio
TaxCommissionfound,fortaxpurposes,thathistoricalproductioncosts(lifting)forproducers
in Ohio are around 40% of revenues. For this reason, estimated Ohio expenditures for
productionare$287millionratherthanthe$169millionestimatedusingthecomparisontothe
Majors.
Table40:TotalExploration,DevelopmentandProductionCostsforOhio
Producers,2010
EstimatedOhio
Financials
(MillionDollars)
$718
$237
$287
$524
100%
33%
40%
73%
SalesofNaturalGasandCrudeOil(OH2010)
TotalExplorationandDevelopment
ProductionCosts
SumofCostsforProducers
Percent
66
AnalysisofOhioDrilling,CostsandPrices
Kleinhenz&AssociatesconductedasurveyofOhioproducersthathighlightsincreasingdrilling
costs. Survey respondents provided finding and lifting costs, annual natural gas volumes
provided to the mineral interest owners (surface owner) free of cost, estimated reserve
volumes,andnewwelldrillingactivityfortheperiod2006through2010.Producerresponse
waslimitedandprecludedcertainsurveyinterpretations.Thesurveyresultsarebelievedtobe
largely unrepresentative of known 2010 drilling activity in Ohio. Crude oil and natural gas
pricingandnewwellcostonafootagebasisaresummarizedalongwithsecondarydata.
Ohio producers who are drilling natural gas wells are not benefiting from the observed
worldwideincreaseinthepriceofoil.Whencomparedtocrudeoilpricing,naturalgaspricing
hasbeensignificantlydepressed.AnanalysisofOhiogasandoilpricesfortheperiod1998to
2007revealsthatthehistoricaloiltogaspriceratiowas6.5to1(i.e.,oilprice:$65/bbl,natural
gasprice:$10.00/mcf=6.5priceratio).Historically,pricingfornaturalgasandoilwouldprice
based upon the heat content. The heat content for six mcf of natural gas equals the heat
contentofonebarrelofcrudeoil.From2008to2010thepricingratiohasincreasedfrom6.5
to16.2.
Basedontheheatcontent,thepriceofnaturalgascouldbemultipliedbyafactorof6toarrive
attheequivalentheatcontentbasedoilprice.Today,oilpricesarelargelybeingdrivenby
world demand/supply while natural gas prices are largely being driven by domestic
demand/supply.
Table41:OiltoGasPriceRatio,1998to2010
YEAR
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
PricingHistory
GAS(dth)
DTIAppalachia($)
2.26
2.43
4.12
4.57
3.41
5.95
6.49
9.04
7.55
7.22
9.53
4.27
4.59
Average
Oil(bbl)
Ergon($)
11.82
16.14
26.76
22.13
22.49
27.64
38.03
53.06
62.43
67.69
93.77
55.91
74.42
Oil/Gas
Annual
Ratio
5.2
6.6
6.5
4.8
6.6
4.6
5.9
5.9
8.3
9.4
9.8
13.1
16.2
67
Reduced market prices in 2010 resulted in the lowest number of wells drilled in Ohio since
1887.66Only431oilandgaswellsweredrilledwithan87%completionrate.Fortheperiod
2006 through 2010, natural gas prices realized by the Ohio producing community decreased
39.2%whilethedrillingcostperfootincreased9.4%.Onacautionarynote,drillingcostswere
based upon only261 wells (total during the most recent five years) reported by survey
respondents.
Figure14:OhioNewWellDrillingCostsandNaturalGasPriceAnnualizedfor20062010
$90.00
$10.00
$87.50
$9.00
DriliingCosts($/footdrilled)
$7.00
$82.50
$6.00
$80.00
$5.00
$77.50
$4.00
$75.00
Average YearlyDTIAppalachia
GasPrice($/dth)
Average NewWellCost
($/footdrilled)
$72.50
$3.00
$2.00
$70.00
$1.00
2006
2007
Year
2008
2009
2010
66
DTIAppalachiaGasPrice($/dth)
$8.00
$85.00
SummaryofOhioOilandGasActivities:2010,DivisionofMineralResourcesManagement,ODNR,p,2,2011.
68
Table42:DrillingCostandPricingHistory,Ohio20062010
Year
2006
2007
2008
2009
2010
Respondents
DrillingCost
PerFoot($)
$77.00
$81.41
$83.79
$88.65
$84.21
PricingHistory
GAS(dth)
DTIAppalachia($)
$7.55
$7.22
$9.53
$4.27
$4.59
IncreasedexplorationandproductioncostsarenotuniquetoOhioproducers.Acapitalcost
index (Figure 15) developed by Cambridge Energy Research Associates shows a doubling of
capitalcostsfortheindustryworldwidesince2000.67BetweenJanuary2011andJune2011,the
capitalcostindexroseby 5%. The HIS CERA UpstreamCapital Costs Index was developed to
trackcostsofnewoilandgasfacilitiesworldwide.
Figure15:WorldwideUpstreamCapitalCostIndex
67
http://press.ihs.com/pressrelease/energypower/costsbuildingandoperatingupstreamoilandgasfacilitiestrendingupw
69
VIII.ROYALTIES,FREENATURALGASANDTAXES
Royalties
A royalty payment is made by the natural gas and crude oil producer to the owner of the
mineral interest. A royalty payment (and possibly the free natural gas discussed below) is
guaranteedto the mineral interestowner. In Ohio, the mineral interest owner is usually the
landowner. Private owners, corporations, municipalities, nonprofit organizations, and federal
and state landowners could lease their mineral interest to producers. The mineral interest
owner receives payment usually amounting to oneeighth (12.5%) of the proceeds garnered
from the well. The natural gas and crude oil producer takes all the risk and makes all the
investmentpertainingtotheexploration,developmentandproductionofthewell.
A few farmers with one of my wells on their property get $200,000 per year. Sometimes I
investmoreinthewellthantheirwholefarmisworth.
aproducer
Ohio natural gas and crude oil producers sold $718 million of oil and natural gas in 2010.
Accordingly, Ohio mineral interest owners received $90 million in royalty payments for the
year.
Table43:NaturalGasandCrudeOilProduction,19972010
OhioCrudeOilandNaturalGasProduction19972010
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
CrudeOil*NaturalGas*
6,050
98,255
6,004
97,154
5,647
93,641
5,785
90,301
5,652
84,135
5,422
86,315
5,455
88,095
5,554
84,858
5,009
88,824
4,785
78,122
10yrSum 55,363
889,700
*Oilinthousandsofbarrels,Gasinmmcf.
Source:SummaryofOilandGasActivities,2010OhioDivisionofMineralResourcesManagement
70
Table44:AverageWellheadPrice
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
CrudeOil*
$21.84
$22.50
$27.64
$38.00
$53.03
$62.43
$67.69
$93.79
$55.56
$74.42
NaturalGas*
$4.49
$3.56
$5.90
$6.65
$9.03
$7.75
$7.40
$9.77
$4.36
$4.68
Source:SummaryofOilandGasActivities,
2010OhioDivisionofMineralResourcesManagement
Table45:CalculationofIndustryRoyaltyPayments
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
TenYearSum
GrossSales
$573,296,950
$480,958,240
$708,564,980
$820,331,650
$1,059,464,610
$1,007,436,710
$1,021,151,950
$1,349,972,320
$665,572,680
$718,089,496
RoyaltyPayments
$71,662,119
$60,119,780
$88,570,623
$102,541,456
$132,433,076
$125,929,589
$127,643,994
$168,746,540
$83,196,585
$89,761,187
$8,404,839,586
$1,050,604,948
71
FreeNaturalGas
As part of the data and information gathering for this study, a survey was conducted of
producerswhichincludedinformationaboutthemineralinterestowners(surfaceowner)free
ofcostnaturalgasusage.Itisimportanttonotethatthefreenaturalgasconsumer(mineral
interest owner) has access to the produced natural gas at the wellhead, before the operator
sellsanynaturalgasfromthewell.Assuch,themineralinterestowner,usuallythelandowner,
has access to the natural gas at a lower wellhead pressure. One implication of this
arrangementisthatwhilethewellsmaybeproducingverysmallcommercialvolumes,thewells
maystillbeprovidingnaturalgasfreeofcosttothemineralinterestowner.
Results of the recent producer survey indicate that 43% of the wells operated by the survey
respondentsprovidenaturalgastomineralinterestownersfreeofcost.Typicallythemineral
owners/surface owner receives an annual volume of 200 mcf per well. Survey findings are
similartothoseofaprevious2007producersurvey.Asof2010,therewere64,378wellsbeing
operated in the State of Ohio.68 Applying the recent producer survey response (43%),
approximately 27,683 wells are providing 5,536,508 mcf of natural gas free of cost annually.
Based on the average 2010 residential natural gas price of $11.02/mcf, the natural gas being
providedtoconsumers,freeofcost,hadavalueof$61million.
Inaddition,anundeterminednumberofwellsaresituatedingeographicareasnotservicedby
naturalgasutilitycompanies.Insuchcasesaccesstoproducedwellheadnaturalgasdisplaces
alternativehighercostenergyalternativessuchaspropaneand/orelectric.
TaxesPaidbyOhiosNaturalGasandCrudeOilIndustry
Total taxes collected in 2010 from Ohios natural gas and crude oil firms are estimated to be
$32.7million.Thisincludesvarioustaxespaidbytheindustry,severancetaxes,propertytaxes,
commercialactivitytaxesandfinallyincometaxes.Thefollowingprovidesanexplanationof
howthisfigureiscalculated.
OhioSeveranceTaxCollectionsforfiscalyear2011showthatproducerspaid$2.5milliontothe
StateofOhioonnaturalgasandcrudeoilproduced.Severancetaxislevieduponthequantity
extracted,notuponitsvalue.Ohiocrudeoilandnaturalgasproducerspay$0.10perbarrelof
oilandtwoandonehalfcentsperthousandcubicfeetofnaturalgas.69
68
69
SummaryofOhioOilandGasActivities,2010:DivisionofMineralResourcesManagement,2011.
http://codes.ohio.gov/orc/5749
72
Table46:FY2011SeveranceTaxesPaidforCrudeOilandNaturalGas
TypeofSeveranceTax
TaxesPaid
SeveranceTaxNaturalGas
$2,055,584
SeveranceTaxCrudeOil
$474,886
Total
$2,530,470
Source:OhioTaxCommission,2010.
In addition, Ohio natural gas and crude oil producers pay property taxes. For the property
valuation, a discounted cash flow method is used whereby the future net income from
productionisestimatedandthepresentvalueofthatnetincomestreamiscalculated.Specific
information on this calculation is provided on the Ohio Oil and Gas Associations (OOGA)
website and available from the Ohio Department of Taxation. From OOGA website (August
2011):
2010UniformValuationofOilandGasDeposits
TheOhioDepartmentofTaxationhasreleasedtheir2010uniformformulaforthe
valuationofoilandgasdepositsinOhio.In2005,HouseBill66exemptedproducers
from the tangible personal property tax. Since then, OOGA, the Department of
Taxationandstatelegislatorshaveworkedtofindafairandequitableformulato
replacethistax.Per2006'sbudgetbill(HB699),thisnewformulawascodifiedfor
thevaluationofthesereserves.
The2010formulaisasfollows:
CrudeOil TaxableValue
AverageDailyProduction:morethan1barrel$4,640perbarrel
AverageDailyProduction:lessthan1barrel$2,780perbarrel
NaturalGas TaxableValue
AverageDailyProduction:morethan8mcf $450permcf
AverageDailyProduction:lessthan8mcf
$225permcf
Source:http://www.ooga.org/industrystudieslinks/taxinformation
Multiplying the daily production of each well by the above multipliers provides the taxable
amount. The effective tax rate differs from county to county. To complete the tax paid
calculation,theMuskingumCountyeffectivepropertytaxrateof5.1%isappliedasreportedby
73
a member firm of OOGEEP.70 Applying the Muskingum County tax rate to Ohio production,
producerspaidapproximately$5.7millioninpropertytaxesin2010.Thisnumberisbelievedto
beconservativeduetodifferingpropertyratesacrosscounties.
The Commercial Activity Taxes (CAT) paid by natural gas and crude oil producers is similar to
taxespaidbyotherOhiobusinesses.TheOhioTaxCommission,OhioDepartmentofTaxation
reportedthatinfiscalyear2010,firmsinNorthAmericanIndustryClassificationSystem(NAICS)
codes211110and213110paid$2.77millionincommercialactivitytaxestotheStateofOhio.
Table47:CommercialActivityTaxesPaid,FY2010
IndustryCode IndustryDescription
211110
Oil&GasExtraction
213110
SupportActivitiesforMining
Total
Number
ofFirms TaxCollections
421
$1,705,551
119
$1,069,266
540
$2,774,817
Individualandindustryincometaxesarenotreported;however,theEIAPerformanceProfileof
MajorEnergyProducersshowsthatnaturalgasandcrudeoilfirmsgenerated3%aftertaxnet
incomebasedon2009operatingrevenues(mostrecentdataavailable).Thiswaslessthanhalf
the 7% net income of all manufacturing companies. The EIA Performance Profiles of Major
Energy Producers (the Majors) document is a comprehensive annual financial review and
analysis of the domestic and worldwide activities and operations of 29 major U.S.based
energyproducing companies. EIA examines a companys operations on a consolidated
corporatelevel,byindividuallinesofbusiness,bymajorfunctionswithineachlineofbusiness,
andbyvariousgeographicregions.Performanceprofilesfocusonannualaggregatechangesin
profits,cashflow,andinvestmentintheU.S.andinternationalenergyindustryresultingfrom
majorenergycompaniescurrentoperations.Performanceprofilesalsoexplorechangesinthe
majors'explorationanddevelopmentexpendituresandtheirsuccessinfindinganddeveloping
natural gas and crude oil reserves. Results are reported based on detailed financial and
operatingdataandinformationsubmittedeachyeartotheEIAonFormEIA28,theFinancial
ReportingSystem(FRS).
70
Providedforthefiscalyear2010.Inaddition,thefirmprovidedsamplesoftaxpaymentsmadeonseveralwells.
The firms real estate tax payments were also matched against well production, to arrive at taxes per Mcf
estimates.
74
Table48:IncomeStatementforMajorCrudeOilandNaturalGasCompaniesandCensus'All
ManufacturingCompanies,2009
MajorCrudeOil
andNaturalGas
Companies
IncomeStatementItems
AllManufacturing
Companies
2009 %
2009
billionsofdollars
OperatingRevenues
OperatingExpenses
OperatingIncome(RevlessExp)
InterestExpense
OtherRevenue
IncomeTaxExpense
NetIncomeAfterTax
1,146
1,094
51
11
19
30
30
100%
96%
4%
1%
2%
3%
3%
1,353,446
1,281,107
72,339
(27,487)
65,948
(16,214)
94,585
100%
95%
5%
2%
5%
1%
7%
Sources :FRSCompa ni es :EnergyInforma ti onAdmi ni s tra ti onFormEIA28(Fi na nci a l Reporti ngSys tem);
Al l Ma nufa cturi ngCompa ni es :U.S.Cens us Burea u,Qua rterl yFi na nci a l
http://www2.cens us .gov/econ/qfr/hi s t/
TheseMajorproducersreported3%incometaxexpensewhich,ifappliedtoOhioproducers,
would translate to $21.5 million per year (3% of $718 million). Of the $21.5 million, roughly
80%($17.4million)isassumedtobepaidtothefederalgovernment.Theremaining20%,or
$4.3million,ispaidtostateandlocalgovernmentsinOhioannually.
Table49:SummaryofTaxesPaidbyOhioNaturalGasandCrudeOilProducers
TypeofTax
AnnualAmount
mi l l i on
Severance
Property
CommercialActivity
Income(Federal)
Income(State&Local)
Sum
$2.5
$5.7
$2.8
$17.4
$4.3
$32.7
75
IX.BENEFITSOFRESERVES
Asareservoiristapped,naturalgasandcrudeoilareextracted.Theratesofproductionvary
from field to field and well to well but as natural gas and crude oil are drawn out of the
reservoir, the amount of natural gas and crude oil remaining in the reservoir is reduced. At
times,otherwellscanbedrilledintothesamefieldtoboostproductionbutthereservoiritself
isstillbeingdepleted.Whenthereservoirisdepleted,productionofnaturalgasandcrudeoil
cannolongeroccurduetooperatingexpensesexceedingproductionincome.
Withoutnewwelldrilling,Ohionaturalgasproductionwoulddeclinequicklyandsignificantly.
Thefigurebelowshowshowolderwellsarelessproductive.Wellsdrilledinbefore1971are
contributingonly4%ofproduction.Wellsdrilledinthepast10yearsaredelivering43%ofthe
naturalgasproduced.
Figure16:OhioNaturalGasProductionbyDecadeWellWasDrilled
Pre1971,4%
19711980,
14%
19811990,
23%
Source:ODNR,OILandGas,Production /RBDMS
20012010,
43%
19912000,
16%
Theonlywaytoreplacedecliningproductionofnaturalgasandcrudeoilistodrillintoanew
reservoiroronethatisnotdepleted.
Ifnoexplorationordevelopmentcanoccurinnewreservoirs,theneventuallyalloftheexisting
reservoirsaredepletedandproductioninOhioofnaturalgasandcrudeoileventuallyceases.In
all,2010localproductionkept$718millioncirculatingintheStateofOhio,ratherthanbeing
spentoutofstate.
76
IX.APPENDIX
Table50:UticaEmploymentImpactAnalysis:IndustriesinOhiowithatLeast10Employees
Category
Supportactivitiesformining
Retailtrade
Professionalandtechnicalservices
Administrativeandsupportservices
Ambulatoryhealthcareservices
Construction
Foodservicesanddrinkingplaces
Wholesaletrade
Realestate
Personalandlaundryservices
Privatehouseholds
Monetaryauthoritiescentralbank
Repairandmaintenance
Rentalandleasingservices
Hospitals
Membershipassociationsandorganizations
Nursingandresidentialcarefacilities
Fabricatedmetalproductmanufacturing
Securities,commoditycontracts,investments
Managementofcompaniesandenterprises
Educationalservices
Performingartsandspectatorsports
2011
2,473
166
149
107
106
98
71
54
43
33
24
23
22
21
21
18
15
13
12
11
10
10
2012
13,521
1,007
885
625
634
660
434
321
259
201
148
133
128
117
125
109
93
75
69
65
63
61
2013
63,118
4,948
4,299
3,023
3,215
3,235
2,156
1,539
1,287
1,010
737
647
616
550
634
537
470
351
334
309
324
297
2014
105,709
8,990
7,675
5,365
5,911
6,673
3,994
2,722
2,307
1,834
1,349
1,155
1,084
948
1,168
967
873
588
598
526
619
543
2015
117,204
10,743
8,988
6,236
7,060
9,077
4,940
3,162
2,670
2,158
1,606
1,348
1,247
1,078
1,420
1,144
1,075
633
699
575
786
658
77
Table51:UticaOutput(Sales)ImpactAnalysis:IndustriesinOhiowithatLeast10Employees
Sector
2011
2010$
Supportactivitiesformining
Retailtrade
Professionalandtechnicalservices
Administrativeandsupportservices
Ambulatoryhealthcareservices
Construction
Foodservicesanddrinkingplaces
Wholesaletrade
Realestate
Personalandlaundryservices
Privatehouseholds
Monetaryauthoritiescentralbank
Repairandmaintenance
Rentalandleasingservices
Hospitals
Membershipassociations
Nursingandresidentialcare
Fabricatedmetalproductmfg
Securities,commoditycontracts
Managementofcompanies
Educationalservices
Performingartsandspectatorsports
2012
2010$
2013
2010$
2014
2015
2010$
2010$
78
Table52:UticaGRPImpactAnalysis:IndustriesinOhiowithatLeast10Employees
Sector
Supportactivitiesformining
Retailtrade
Professionalandtechnicalservices
Administrativeandsupportservices
Ambulatoryhealthcareservices
Realestate
Foodservicesanddrinkingplaces
Wholesaletrade
Construction
Personalandlaundryservices
Privatehouseholds
Monetaryauthoritiescentralbank
Repairandmaintenance
Rentalandleasingservices
Hospitals
Membershipassociationsandorganizations
Nursingandresidentialcarefacilities
Fabricatedmetalproductmanufacturing
Securities,commoditycontracts,investments
Managementofcompaniesandenterprises
Educationalservices
Performingartsandspectatorsports
2011
2012
2013
2014
2015
2010$
2010$
2010$
2010$
2010$
79
Table53:CounterfactualImpactAnalysis:IndustriesinOhio
withatLeast10Employees,2010
Supportactivitiesformining
Retailtrade
Ambulatoryhealthcareservices
Professionalandtechnicalservices
Administrativeandsupportservices
Foodservicesanddrinkingplaces
Wholesaletrade
Realestate
Rentalandleasingservices
Personalandlaundryservices
Privatehouseholds
Hospitals
Repairandmaintenance
Monetaryauthoritiescentralbank
Nursingandresidentialcarefacilities
Membershipassociationsandorganizations
Performingartsandspectatorsports
Educationalservices
Managementofcompaniesandenterprises
Fabricatedmetalproductmanufacturing
Securities,commoditycontracts,investments
Amusement,gambling,andrecreation
Accommodation
Trucktransportation;Couriersandmessengers
Broadcasting,exceptInternet;Telecommunications
Insurancecarriersandrelatedactivities
Socialassistance
Utilities
Nonmetallicmineralproductmanufacturing
Publishingindustries,exceptInternet
Wastemanagementandremediationservices
Internetpublishingandbroadcasting
Plasticsandrubberproductmanufacturing
Machinerymanufacturing
Printingandrelatedsupportactivities
Motorvehicles,bodies&trailers,andpartsmanufacturing
Chemicalmanufacturing
1,741
977
582
559
444
353
273
242
193
168
137
119
115
108
92
89
74
67
62
54
42
38
27
27
24
24
22
21
18
18
18
18
17
17
13
10
10
$301,947,907
$69,800,225
$60,799,152
$59,877,254
$24,845,142
$16,164,638
$51,575,984
$51,881,887
$70,593,267
$11,580,816
$1,394,272
$13,786,561
$11,197,390
$32,348,133
$4,439,776
$3,612,687
$3,316,474
$2,262,840
$25,603,612
$11,431,531
$3,964,683
$1,198,991
$1,617,511
$4,286,824
$10,833,345
$5,223,388
$543,972
$14,554,459
$4,632,536
$6,005,954
$3,593,567
$5,223,127
$5,048,438
$4,385,300
$2,094,698
$7,450,610
$6,687,949
$128,348,258 $174,961,090
$48,678,293 $30,082,703
$42,763,481 $36,956,787
$40,255,500 $38,175,583
$16,412,922 $14,692,307
$8,585,172
$7,244,110
$36,159,341 $20,959,854
$39,473,982
$2,903,700
$44,174,613 $10,658,383
$7,039,160
$7,485,867
$1,394,272
$1,258,701
$8,040,414
$8,605,003
$6,758,662
$5,278,111
$19,152,424
$7,510,185
$3,668,308
$2,958,977
$1,427,108
$3,341,198
$1,897,486
$1,848,817
$1,383,370
$2,439,499
$13,943,702
$9,057,999
$4,997,104
$4,257,202
$2,070,079
$1,818,419
$815,303
$832,081
$1,047,480
$893,235
$2,107,794
$2,329,350
$6,238,524
$2,126,694
$2,876,740
$2,911,568
$321,878
$892,878
$8,653,267
$2,597,809
$2,227,744
$1,492,143
$3,400,545
$1,377,106
$1,949,080
$1,142,561
$3,075,001
$1,249,015
$1,940,176
$1,430,273
$1,786,701
$1,883,984
$1,035,302
$850,201
$2,027,127
$1,801,968
$2,588,647
$1,532,555
80
Table54:2010WellDrillingImpactAnalysis:IndustriesinOhio
withanImpactofatLeast10Employees
Sector
Employment
Output
726
235
194
172
165
104
103
77
69
51
37
32
30
29
26
23
22
21
20
19
16
16
14
10
$91,186,320
$22,561,350
$41,208,826
$17,664,816
$12,202,572
$10,809,251
$6,059,382
$11,083,724
$3,195,214
$10,585,061
$10,174,398
$7,432,800
$2,151,793
$4,135,968
$281,284
$2,625,313
$5,510,434
$2,143,935
$8,611,362
$6,857,661
$784,137
$703,470
$515,425
$1,049,183
2010$
Supportactivitiesformining
Professionalandtechnicalservices
Fabricatedmetalproductmanufacturing
Construction
Retailtrade
Ambulatoryhealthcareservices
Administrativeandsupportservices
Trucktransportation;Couriersandmessengers
Foodservicesanddrinkingplaces
Wholesaletrade
Realestate
Wastemanagementandremediationservices
Personalandlaundryservices
Mining(exceptoilandgas)
Privatehouseholds
Hospitals
Machinerymanufacturing
Repairandmaintenance
Primarymetalmanufacturing
Monetaryauthoritiescentralbank;Creditintermed
Nursingandresidentialcarefacilities
Membershipassociationsandorganizations
Educationalservices
Securities,commoditycontracts,investments
Gross
Regional
Product
2010$
$38,760,346
$15,171,502
$18,013,671
$9,409,642
$8,512,886
$7,601,466
$4,000,826
$5,447,577
$1,697,129
$7,421,276
$7,735,559
$4,031,600
$1,307,942
$2,138,240
$281,284
$1,532,655
$2,245,554
$1,294,324
$2,586,028
$4,060,541
$522,757
$277,617
$315,069
$547,638
Earningsby
Workplace
2010$
$54,020,941
$15,361,786
$13,565,540
$8,566,856
$5,369,186
$6,761,551
$3,460,884
$4,199,028
$1,511,574
$4,655,838
$611,305
$1,903,892
$1,293,182
$1,585,335
$257,790
$1,837,730
$1,730,442
$921,488
$1,942,873
$1,626,492
$696,182
$661,850
$608,444
$489,235
81
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