August 3, 2010
Dr. Loren C. ScottLoren C. Scott & Associates, Inc.www.lorencscottassociates.com
Haynesville Shale
• One estimate: 251 tcf of natural gas• One of largest natural gas field in U.S.• Well production
– Conventional gas well: 2-3 mmcfd
– Fayetteville Shale: 5 mmcfd
– Marcellus Shale: 9.8–12 mmcfd
– Haynesville Shale: 22-24 mmcfd!!
Impact Methodology
• Direct Impacts– How much new $ injected into LA economy in 2009?
– Questionnaire sent to firms that operated in the shale in LA
– Questionnaire pre-tested
– questionnaires received from 7 firms holding about 70% of wells operating in the shale
– Adjusted sample to population
• Indirect Impacts:– BEA I/O table
.
Category Amount
2008Mineral Lease Payments $3,152,276,305
Royalty Payments $93,788,467
Rental & Surface Lease Payments $18,221,292
Wages and Salaries $31,879,630
Other Administrative Expenses $3,645,552
Direct Drilling Expenditures $1,081,620,980
Infrastructure Spending $75,350,000
Direct Taxes $3,962,000
State Taxes $13,992,034
Local Taxes $38,302,276
Total $4,513,038,536
2009
Switch from Lease payments to Actual Drilling
Category Amount
2009Mineral Lease Payments $957,321,967
Royalty Payments $305,928,166
Rental & Surface Lease Payments $23,119,348
Wages and Salaries $52,324,181
Other Administrative Expenses $45,395,079
Direct Drilling Expenditures $4,441,562,223
Infrastructure Spending $975,068,176
Direct Taxes $139,473,958
State Taxes $41,147,385
Local Taxes $35,646,398
Total Expenditures $7,016,986,881
Direct Employment 1,299
Contract Employment 3,019
Total Employment 4,318
20
40
60
80
100
120
140
01 02 03 04 05 06 07 08 09 10
North Louisiana Rig Count
3023
29
40
4957 60
68
95
3/2010: 138112 = Haynesville
Source: LA Dept. Natural Resources
Mineral Lease Payments?
• Normally: Insert all in I/O table– Assumes 95%+ spent in 2008
• Studies on expenditures out of wealth– Yash Mehra: 5%
• Are mineral lease payments like normal wealth or winning the lottery?
Impact Estimates: 2009Assuming 5% of Wealth Spent
• $10.6 billion in new business sales• $5.6 billion in new household earnings
– 3.5% of LA total
• 57,637 jobs– Reference point: 1/10
• 63,600 employed in all non-durable goods manufacturing in LA – chemicals, refining, paper, food products
• 59,300 employed in all finance & insurance companies in LA
• State lost 38,500 jobs in 2009 (2%) . W/O shale: -96,137 jobs (-5%)
Impact Estimates: 2009Assuming 25% of Wealth Spent
• $11 billion (v $10.6 b) in new business sales
• $5.7 billion (v $5.6 b) in new household earnings
• 60,790 jobs (v 57,637)
Impact: 2009 Tax Collections
• Direct taxes: from questionnaires• Indirect taxes:
– 7% of new household earnings to state– 5.4% of new household earnings to local
governments
• Total state and local direct and indirect taxes?– $912.3 mm!!
Local Government Examples
• Red River Parish: – 2001: -3.1%– 2008: 71.1%– 2009: 205.1%
• DeSoto Parish– FY01: -0.8%– FY08: 3.6%– FY09: 82.2%*
Local Government Examples
• Caddo Parish:– 2002: -0.8%– 2008: 7.0%– 2009: 1.4%
• Bossier Parish:– 2002: NA– 2008: 4.1%– 2009: 5.5%
E.G.’s Haynesville Shale Spillovers
• Energy Transfer Partners: $1.2 bill, 178-mile pipeline
• Regency Energy Partners– $47 mm, 46-mile Red River Lateral– +100,000 mmbtu/d of additional capacity
• Schlumberger (3/09)– $48 mm investment (finish 09)– 450 new jobs (Q1-10)
• Northwest Pipe:– Reopening mid-2010 after 3 years– Relocating recently modernized mill from Portland, OR– +120 jobs @$39,000
Impact on 2009 performance
Losses: 2009
• BTR -4,600 -1.2%• MO -1,700 -1.3%• NO -7,100 -1.4%• Shrev -4,900 -2.7%*• Laf -4,400 -2.9%• Alex -2,000 -3.0%• Houma -3,600 -3.7%• LC -3,800 -4.0%• * Projected last 12 months ago
130
140
150
160
170
180
190
1980 1985 1990 1995 2000 2005
Fig. 17: Shreveport-Bossier MSA Non-Farm Employment 1980-2009
Th
ou
san
ds
-8.2%(AT&T)
2001-03:3,900 Jobs (-2.3%) USDown 2 Years (-1.4%)
2009:-4,900 Jobs (-2.7%)
Forecasts:2010-14
400
450
500
550
600
650
700
750
2010 2011 2012 2013 2014
Projected Haynesville Shale Wells: 2010-14
Lower Than DNR EstimatesDecline Rate Due to:(1) Move to lower cost areas(2) Move where there is oil too
Impacts over 2010-14
• Year Sales Earnings Jobs
• 2010 $16.9 bill $4.3 Bill 111,329
• 2011 $12.0 bill $3.1 bill 76,339
• 2012 $11.3 bill $2.9 bill 69,424
• 2013 $10.6 bill $2.7 bill 62,883
• 2014 $10.6 bill $2.7 bill 60,637
Impacts on State Budget
• Year Severance Indirect Total
• 2010 $2.1 mm $301.7 mm $303.7 mm
• 2011 $12.1 mm $213.7 mm $225.8 mm
• 2012 $24.4 mm $210.1 mm $225.5 mm
• 2013 $62.6 mm $188.6 mm $251.2 mm
• 2014 $94.1 mm $188.6 mm $282.7 mm
• *Plus royalties (un-estimated)
Impacts on Local Budgets
• Year Local Tax Revenues
• 2010 $232.7 mm
• 2011 $164.9 mm
• 2012 $155.1 mm
• 2013 $145.5 mm
• 2014 $145.5 mm
The Threat:Opponents of Fossil Fuels Never
Sleep
Shale Plays & Water
• Lots of water needed for fracing– EIA: 2-4 mm gallons per well. (Simmons says 7 mm
gallons per well)– Where to get this amount of water?– Depletion of aquifers?
• What to do with water afterwards– Fluids are mostly water but also contain sand and about
2% chemicals– Groundwater contamination?– Treated & discharged, injected into underground wells,
recycled for further use– Government could halt water use under Clean Air Act of
1972 as early as end of 2010
#1: The oil spill
Things to consider
Environmental Calamity
• Hammering fisheries– But fisheries small in the impacted economies
• LA #2 in fish catch; total landed value of shrimp, oysters, menhaden & crab = $248 mm
• Total value along northern GOM coast: $661.4 mm
– Ditto for recreational fishing: $108.1 mm in LA– Most will make more $s from cleanup than from
fishing• BP hired 1,300 boats @ $1,200-$3,000 per boat + $200
per deck hand ($560 mm over 180 days)
Environmental Calamity
• Tourism: Very bad from East of Mobile Bay to tip of FL– About 50,000 condos from Pensacola to Panama
City– Economies here are tourism and military– Should be short run– Little impact to the East – LA & MS
Oil & Gas industry:The Moratorium
• Moratorium on deepwater drilling (now any wells using sub-sea BOPs or surface BOPs on a floating facility)– Drill ships (@$250k-$500k per day) will declare
force majeure & leave for Brazil, West Africa, Australia---sign 3-4 year contracts in new location (Diamond Drilling has already moved 2 ships)
– 33 rigs impacted (?); about 8,000 direct jobs– Direct wages @$1,800 per week: about $748 mm
a year– Multiplier effect: about 30,000 – 35,000 jobs
Oil & Gas industry:The Moratorium
• Moratorium Study Commission– Not a single member with the skill set to analyze the
problem– Loaded with anti-fossil fuels people
• Frances Beinecke – President of Natural Resources Defense Council
• Don Boesch – President of U. of Maryland Center for Environmental Science
• Terry Garcia – Ex. VP for Missions Program for National Geographic
• Frances Ulmer – Chancellor of U. of Alaska Anchorage & member of Aspen Institute’s Commission on Artic Climate Change & Member of Alaska Nature Conservancy
• Bob Graham, retired congressman from FL– Co-Chair William Reilly: First meeting in mid-July and
report “next year”
Oil & Gas industry:The Moratorium
• Morgan Stanley
– 5% chance lasting 6 months
– 60% chance lasting 12-18 months
– 35% chance lasting up to 4 years
Oil & Gas industry:The Insurance Issue
• Impacts of the spill on insurance costs in general– Actuaries in insurance companies have seen the
spill: “Oh shoot!”– Moody’s Investor Services study: Already
• Shallow water: +25%; deepwater: +50% already
• Raising liability cap from $75 mm to $10 billion
• Result: Independents driven out of the Gulf
Oil & Gas industry:The Governance Issue
• Plethora of new bills introduced into Congress to regulate the industry and force the industry to pay for the regulation.
• Meeting w Boggs Law Firm:– CEOs of companies drilling in Gulf must certify that
operations in Gulf in full compliance with all MMS regulations: Criminal penalties.
• Shifts MC curve upward = less activity• Wood McKenzie 5/10 report: 10% increase in
development cost renders 7 current discoveries in the Gulf uneconomical.
Other Key facts
• Measurement of spill non-trivial to BP– Fines based on volume of spill: $4,300 per barrel (?)– 3X higher if criminal fine– Through mid-June: w/o criminal penalty - $4.3 to $8.6
billion
• Shut down the GOM: Silly – 33% of US oil production from the GOM
• 18.7% of US oil production from deep waters
– 10% of US natural gas production from GOM• 5% of US natural gas production from deep waters
• Just switch to alternative energy like wind and solar: Equally silly
Wind Power
• Four pivotal limitations;– Intermittency:
• When will the wind blow?
• When it is not, need base load electrical generating capacity from traditional sources
– Cost– People do not want to live near them
• Billboards no; windmills yes???
Windmills – Bird Kills
• Altamont Pass - 50-square mile site between San Francisco and the Central Valley in Diablo Mountains: 4,000 windmills– July 2008 study: annual bird count: 10,000 birds– 1,300 raptors: Golden eagles (80 annually), red-
tailed hawks, burrowing owls & others
• Windmills in Blackbone Mountains in VA:– 2004 research – killed 4,000 bats
Robert Bryce in “Power Hungry”
“If you are anti-carbon and anti-nuclear, you are pro
brownout.”
You worried about spills?
How about this one?
Red Ink Spill
#2: Obama’s Proposed Tax
Obama’s Energy Policy
• $36.5 billion tax on the extraction industry– Eliminate expensing of intangible drilling costs– Eliminate allowance for percentage depletion– Repeal of domestic manufacturing tax deduction
for O&G companies, making refiners the only domestic manufacturers not covered by the manufacturing tax credit.
Oil Companies Don’t Pay Taxes
• Robert Shapiro and Nam Pham study of oil company stock ownership
• 43% owned by mutual funds and asset management companies that have mutual funds– 55 million Americans– Medium income: $68,700
• 27% owned by other institutional investors like pension funds– 2004: 2,600+ pension funds run by federal, state and local
governments held $64 billion in oil company shares• 14% held in IRA’s and personal retirement
accounts held by 45 million Americans
Energy Companies Don’t Pay Taxes?
• 2009 US Chamber of Commerce study
• Income taxes as a share of net income before taxation:– All manufacturing in US: 26.7%– Oil & Gas industry: 40.4%
August 3, 2010
Dr. Loren C. ScottLoren C. Scott & Associates, Inc.www.lorencscottassociates.com