In part one we took on the environmental and human health opposition to hydraulic fracturing drilling in Pennsylvania. Today we look at the economics of the impending boom. Governor-Elect Tom Corbett has pledged not to levy any tax on the drilling companies for the gas they take out. We speak to Jean Friedman-Rudovsky, a journalist and Pennsylvanian native based in Bolivia about what lessons can be learned from that country’s experience with natural gas.
Produced by Jesse Freeston and Malak Behrouznami
JESSE FREESTON, PRODUCER, TRNN: In part one of our series on natural gas drilling in Pennsylvania, we looked at the environmental and human-health resistance to the process known as hydraulic fracturing, or fracking for short. Pennsylvania is one of 30 states and 5 Canadian provinces where the industry is currently developing, but if current estimates are correct, Pennsylvania may have the most gas of anyone. We spoke to Jan Jarrett, president of Citizens for Pennsylvania’s Future.
JAN JARRETT, PRESIDENT, CITIZENS FOR PENNSYLVANIA’S FUTURE: Pennsylvania will become an international leader in energy production. It will drive and be the dominant part of our economy.
FREESTON: Despite projected revenues reaching into the trillions of dollars, governor-elect Tom Corbett has pledged that Pennsylvania will be the only state not to tax the extraction of the resource.
TOM CORBETT (R), GOVERNOR-ELECT FOR PENNSYLVANIA: A tax right now I don’t believe is appropriate. In fact, I don’t see a tax in this. These companies right now are already paying taxes, and the money that they create and they’re spending in Pennsylvania turns into taxes through income, through royalty payments, and many other ways.
FREESTON: We spoke to Leslie Haines, editor-in-chief of Oil and Gas Investor, the industry’s premier trade magazine.
LESLIE HAINES, EDITOR-IN-CHIEF, OIL AND GAS INVESTOR: We’d rather know what the taxes are going to be, going forward, than to keep fighting over it. Once you know where you stand and what the taxes are going to be, then you can plan your business. If they do too much of a tax, people will go back to Texas or they’ll go to Colorado and Wyoming or they’ll go to Alberta, wherever.
FREESTON: Governor-elect Corbett said any tax would hurt the state.
CORBETT: I believe we would chase away these companies at this point in time.
FREESTON: Looking at the industry’s own words, it’s hard to believe that Corbett is right. The most recent edition of Oil and Gas Investor includes a feature on drilling in the Marcellus. The article polls seven company executives and analysts, all seven of which extol the profitability of the Marcellus, despite the fact that gas prices are at record lows, sitting below $4, when they went as high as $13 just two years ago. Companies are moving into Pennsylvania at rapid pace. Insiders are quoted as calling it extremely good geology, the most economical and the lowest cost source of natural gas in North America. One analyst suggested companies could make a profit here if the price was only $2.50. Meanwhile, the price of gas is expected to rise very soon, and no tax will be levied in Pennsylvania. Freelance journalist Jean Friedman-Rudovsky is a Pennsylvanian native who now resides in Bolivia. She thinks that Pennsylvanians ought to take note of Bolivia’s gas experience.
JEAN FRIEDMAN-RUDOVSKY, FREELANCE JOURNALIST BASED IN BOLIVIA: At least in Bolivia that logic hasn’t really panned out. Bolivia has the second-largest natural gas reserves in all of South America, and in 2006, President Evo Morales nationalized those gas reserves. And what that in fact meant was that he started heavily taxing the foreign companies and foreign governments that were extracting natural gas from here in Bolivia. Before 2006, Bolivia was receiving about 20 percent of the profits made off of its own natural gas reserves through royalties and taxes. After 2006, they started [making] 80 percent. So, literally it was inversed: the companies before were making 80 percent, and now the Bolivian state maintains 80 percent of the gas royalties. And the most important thing which goes against the logic of this candidate is that none of the companies left Bolivia, simply because it was a resource that they still needed, so they had to give in to whatever Bolivia was demanding. So one could say that these companies stayed because, well, they had existing contracts, so they may as well just play it out, and certainly some opposition here in Bolivia says that investment has gone down and companies aren’t investing as much as they have before, when in fact they do continue to invest. Bolivia’s natural gas sector is growing, and it still is the basis for Bolivia’s economy, and it looks like it’s going to be for many years to come, even though the taxes are so high.
FREESTON: Tax formulas in the United States don’t normally target profits, usually taxing the gas extracted at somewhere around 5 percent. But if stability is what companies are looking for, then profits are the natural place to apply a tax, so there’s no reason to fear being taxed into a loss.
FREESTON: Is there an argument against a tax on the profits?
HAINES: No, I don’t think so. I think they’d accept that, if they knew going forward what it was and if they felt it was reasonable.
FRIEDMAN-RUDOVSKY: There are clearly a lot of differences between Bolivia and Pennsylvania, and so you can’t necessarily say that just because it worked for Bolivia it’s going to work in Pennsylvania. But one of the other things is that, I mean, Bolivia has enormous infrastructure challenges for it to be able to get its gas out to Brazil and to Argentina, who are its main buyers. There are extensive pipelines, and it is, it’s something that’s a big challenge. Now, one of the advantages that Pennsylvania has over Bolivia is that they’re talking about producing energy for that region right there. I would say states that have the Marcellus Shale are at an extreme advantage. Companies now want to get to this gas. And it seems like, at least based on examples from other countries, they would be able to tax, the demand would still be there, and the companies would have to say, okay, we’re still going to do this, because this is a resource that we want. Bolivia now is able to use that money to go toward social programs. They give stipends to school-aged children to be able to buy books and other school materials. They give stipends to women who are pregnant so that they’re able to have prenatal care. It’s been able to really generate a whole basis of social welfare programs that otherwise Bolivia would be without.
FREESTON: But in Pennsylvania, some have suggested that the gas companies have influenced the tax debate in their favor. The gas industry is highly organized in the state. Halliburton, Hess, Chesapeake, and roughly 100 other interested corporations formed the Marcellus Shale Coalition in 2008 to promote the industry’s interests.
JARRETT: The gas drillers have sprinkled about $3 million around Pennsylvania’s political landscape in campaign contributions. Pennsylvania is a state that does not have any limits on campaign contributions.
FREESTON: During the race for governor, Corbett was singled out for taking money from the gas companies.
DAN ONORATO, DEMOCRATIC CANDIDATE FOR GOVERNOR: You know you took more money than any elected official in Pennsylvania from the gas and oil companies. That’s why you’re not pushing for the tax.
CORBETT: If those companies and if anybody out there thinks that money contributed to a campaign is going to cause me to make a decision other than that which is in the best interests of Pennsylvania, they’re sorely mistaken.
JARRETT: I think the latest numbers are that Tom Corbett received about $800,000 from the gas drilling industry, but they’ve also contributed to the Democratic candidate, Dan Onorato—not as much, but they’ve also given him some substantial contributions.
FREESTON: Gas money has made its way into the universities as well. Corbett’s assertion that taxation would drive away companies was bolstered by a 2009 study from Penn State University advising that drilling activity would decline by 30 percent if the state imposed even a slight tax like that seen in neighboring West Virginia. It was later disclosed that the study was funded by the Marcellus Shale Coalition. Sharon Ward is the director of the Pennsylvania Budget and Policy Center.
SHARON WARD, EXEC. DIR., PENN. BUDGET & POLICY CENTER: Actually, Penn State has disavowed that study. They have asked that the industry no longer call it the Penn State study but instead call it the Marcellus Shale study.
FREESTON: The report was updated in May 2010, this time with the disclaimer that it was indeed funded by the Marcellus Shale Coalition. The updated study estimated that more than 100,000 jobs would be created in 2011 alone.
WARD: Let’s just look at the hard facts and the hard numbers. The Department of Labor and Industry, several studies have said we’re going to see about 5,000 or 6,000 new gas jobs in the next four years, not 100,000 new gas jobs.
FREESTON: Despite its dubious roots, the industry-funded study continued to play a central role in the Corbett campaign.
CORBETT: We are the Saudi Arabia of natural gas if we develop it and develop it now. We need to develop this industry right now, because it’s going to provide hundreds of thousands of jobs from every study that I have seen.
FREESTON: Haines also gave us inflated jobs numbers.
HAINES: I think already over 100,000 jobs have been added just in the state of Pennsylvania in the last couple of years from drilling this Marcellus Shale. So it’s really significant.
FREESTON: According to the latest available government statistics, the entire industry currently employs less than 12,000 people. Regardless how many jobs the industry brings, for the time being it is going ahead without taxes. Stephanie Simmons, from the Pittsburgh chapter of the Sierra Club, is concerned that the lack of state income leaves people at great risk.
STEPHANIE SIMMONS, SIERRA CLUB (PITTSBURGH): If we have an accident, our emergency responders, 80 percent of whom in Pennsylvania are volunteer now, they don’t have the proper equipment, they don’t have the proper training, and nobody is providing a fund for what happens when the worst happens.
FREESTON: Still, others are questioning why the state would give up an opportunity to raise large amounts of money when it is faced with a projected deficit of $2 to 5 billion next year, while at the same time school boards around the state are in serious debt crisis, with towns like Harrisburg forced to debate cutting kindergarten and high school sports programs.
End of Transcript
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