Shale gas royalties in Pennsylvania: How much goes to local or state residents?
Posted on 02-19-2018
By Associate Professor Jeremy G. Weber
Pennsylvania has quickly become the second largest producer of natural gas in the United States. If it were a country, it would rank about sixth in the world in terms of production. Unlike elsewhere in the world, where governments own the right to the gas in the ground, production revenues in Pennsylvania and other U.S. states are split between energy companies and (mostly) private owners of gas rights.
How natural gas production affects local economies depends on whether gas-right owners live near where production occurs. Suppose that the price of natural gas doubles but drilling and production do not change. Revenues to gas-right owners, referred to as royalties, will also double but have no effect on the local economy hosting the wells if the owners live elsewhere. If, instead, many owners reside locally, their incomes will rise and lead to greater spending on restaurants, home renovations, and the like, all of which will have a multiplier effect on local income. This multiplier effect has been documented by myself and others in a research paper of the Federal Reserve Bank of Kansas City, which found that each $1 in royalties creates an additional $0.50 in the county where it is received.
Do the owners of Pennsylvania’s natural gas live in the communities where production happens? A recent study by myself and University of Pittsburgh graduate student Max Harleman found that more than half of all acreage leased for drilling in the state is with an owner who lives in the county where the acreage lies. Using royalty rates stipulated in natural gas leases, we further estimate that 7.2 percent of the value of production of the typical shale gas well goes to residents of the county hosting the well. The corresponding dollar amount depends on production and prices but under plausible assumptions, local royalties from a single well would be about $650,000 over the life of a well.
Looking across Pennsylvania in 2018, local royalties could plausibly amount to about $1 billion (= “7.2 percent” x “the state’s expected 2018 value of production”). These are the revenues retained within the county; the amount retained by owners living anywhere in the state would be much higher. Another study of leases showed that 90 percent of acreage leased in the state is with residents of the state, which would suggest $1.8 billion in royalties in 2018 (see the figure below). By comparison, U.S. Department of Labor data indicate that Pennsylvania residents received about $1.9 billion in unemployment benefits in 2017.
Projected Local and In-State Natural Gas Royalty Payments for Pennsylvania, 2018
Note: The projections assume 2018 monthly production equal to the level observed in November 2017 (469,615 Million Cubic Feet), which is the last month of production reported by the Energy Information Administration. It also assumes a wellhead price of $2.50. For local leases, royalty rates and ownership shares are based on Harleman and Weber (2016); for in-state leases, rates and shares are based on Fitzgerald (2014).
Royalties will disproportionally go to owners of the rights to large tracts with many productive wells. Still, in some places a sizeable share of local households will likely receive some royalties. For the five counties that have accounted for most of the state’s production in recent years, our study estimates that the share of households receiving money through leases ranges from 4 percent (Lycoming County) to 22 percent (Bradford). This is likely a conservative estimate because we assume that a quarter of lease-holding households have two mineral owners, with each signing a distinct lease.
These numbers illuminate one of the strongest links between natural gas production and the state and local economy in which it occurs. Looking forward, the link will likely grow in importance because of greater production coupled with higher prices. In its 2017 Annual Energy Outlook the U.S. Department of Energy forecasts rising natural gas prices and, from 2020 to 2040, a 43 percent increase in natural gas production from Appalachia’s shale formations. In practice, prices and production are difficult to predict. This is increasingly true as U.S. natural gas markets become more integrated with markets around the world and global changes, such as China’s shift away from coal and towards natural gas, ripple through U.S. markets. Whatever the direction of shocks to production or prices, they will have substantial implications for incomes in shale producing areas through royalties alone.
Jeremy G. Weber is an Associate Professor at the University of Pittsburgh, Graduate School of Public and International Affairs and the Department of Economics. His research cuts across energy, agriculture, the environment, and well-being. He teaches classes in quantitative methods and energy and environmental policy.
About the blog: The GSPIA Energy and Environment blog provides commentary and analysis that furthers understanding of E&E issues of public interest. Its primary contributors are GSPIA faculty and students.