The Society of Petroleum Engineers

Keep shale spinoff businesses in Pennsylvania

From Pittsburgh Post-Gazette

The gas-industry supply chain should be built in the commonwealth


The swearing in this month of Tom Wolf as Pennsylvania’s governor and Mike Turzai as speaker of the House presents a rare opportunity for bipartisan action on economic development in Pennsylvania. Shale-gas exploration has boosted the commonwealth’s economy since 2008. It holds even greater promise if elected officials act out of shared interest rather than partisan competition.

Especially important to the long-term well-being of Pennsylvanians is building a workforce that advances safe, economical shale-gas production and encourages local manufacture of goods the industry needs.

The IHS Economics consulting firm projects that private spending on support activities for oil and gas operations in Pennsylvania will grow from $4.4 billion in 2012 to $11.4 billion in 2025. These activities include exploration; well surveying; running, cutting and pulling casings, tubes and rods; cementing wells; shooting wells; perforating well casings; acidizing and chemically treating wells; and cleaning out, bailing and swabbing wells.

Well-drilling expenditures will expand from $1.7 billion in 2012 to $4.8 billion in 2025. Perhaps the best news is that spending on shale-related steel production and fabrication of products from steel stands to grow from $1.5 billion to $2.1 billion. Pennsylvanians have not felt this degree of economic stimulation since World War II.

To capture shale-gas supply-chain economic activity, the commonwealth must commit itself to redeveloping industrial sites for that purpose. We must manufacture in Pennsylvania tanks for separating wet-gas constituents such as propane and butane, steel containers for transporting fracking chemicals and wastewater, and railroad container vessels, including tender cars to hold natural gas for locomotives that have been converted to burn natural gas rather than diesel fuel.

Local manufacture of these goods would benefit the shale-gas industry by saving the expense of transporting goods from Southern gas-producing states where they currently are made. Those savings would help offset the impact of any shale-gas extraction tax that Pennsylvania might decide to impose.

Repurposing industrial sites as supply-chain manufacturing centers would help alleviate chronic unemployment in river communities from Monessen to Aliquippa. IHS projects that Pennsylvania state and local tax revenues from shale-gas workers will grow from $844 million in 2012 to $1.65 billion in 2025, a 5.3 percent compound annual growth rate, and that supply-chain labor income will grow 3.8 percent during the same period.

To achieve the best results, political leaders must keep uppermost in their minds the following considerations:

• Competition

Great Lakes states and New York are positioning themselves to compete for supply-chain economic activity. Lacking their own shale-gas reserves, they are particularly motivated to capture spinoff shale-gas revenue and tax benefits. IHS predicts that these states will aggressively pursue manufacturing opportunities, which means Pennsylvania will have to bring its A-game.

• Return on investment

Elected officials of both parties need to make return on investment their touchstone. Thousands of workers such as Consol Energy safety supervisor Samantha Larrick, profiled in the Post-Gazette Jan. 1, will pay their fair share of taxes. Taxes paid by workers and employers will more than cover the cost of the necessary state government investment in high school vocational training, community college STEM curricula and research universities’ shale-gas-related initiatives.

Many opportunities exist to create and balance incentives to serve the greater good. For example, Pennsylvania-made tanks, valves, pipes and plastic goods as well as services provided by Pennsylvania professionals, such as surveyors or engineers, should cost less than sourcing these things from Texas. Those savings could be passed on to gas customers to offset any increase in the price of natural gas that results from producers also passing on the cost of a severance tax, if one is enacted.

Another example of a way to encourage supply-chain development in Pennsylvania: Two years ago the Legislature modernized the bank-shares tax to address competition from out-of-state financial institutions. Now, credits against the bank-shares tax could be enacted to incentivize banks to finance redevelopment of industrial sites that serve shale-gas supply-chain manufacturing.

• Focus on the future

The International Monetary Fund thinks U.S. shale-gas production will generate $1 trillion over 40 years. Pennsylvania sits in the center of the largest known U.S. shale-gas field. Its gas production sits 300 miles or less from most eastern U.S. markets.

This opportunity to benefit Pennsylvania citizens dwarfs any other. Elected leaders need to think, plan and act accordingly.

James F. Bauerle and Leo A. Keevican are founding partners of the Pittsburgh-based Keevican Weiss Bauerle & Hirsch law firm. Some of their clients are active in the shale-gas industry.

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