New York State, under the leadership of Governor Andrew Cuomo, instituted a ban on hydraulic fracturing (fracking) in 2014. Not surprisingly, the ban was hotly contested. Opponents had portrayed fracking as a silver bullet that would create jobs and promote economic development. They predicted the state’s citizens would regret Cuomo’s decision. A retrospective analysis of the ban by the Institute of Energy Economics and Financial Analysis (IEEFA) reveals it may, in fact, have helped New York State to dodge a bullet, and saved investors hundreds of millions — if not billions — of dollars.
IEEFA research confirms that job creation in many fracking communities has not kept pace with industry promises. It was health concerns and the boomtown/ghost town dynamic that drove the decision to ban fracking in New York State, not fears of job losses. And contrary to the claims of political suicide, Cuomo, overwhelmingly won his last state-wide race.
Fracking’s Financial Performance: Weak Jobs and Low Profits
The shale boom has been a production boom. But, paradoxically, the shale boom has been a financial bust. If New York had not had a fracking ban in place, the oversupplied market would have been flooded with even more cheap gas, driving natural gas prices lower, resulting in more financial troubles for drillers and more bankruptcies.
Because shale drilling is so capital intensive, shale gas drilling companies have never been able to finance their capital expenditures out of cash from operations. In other words, they are constantly relying on the debt and equity capital markets to finance new drilling. While one would expect a new industry to require significant start-up capital, as the industry matures investors expect that it should become financially self-sustaining, generating enough cash to cover new investments. From 2010 through Q3 2018, a survey of 33 independent U.S. oil and gas drillers found that they had collectively spent $196 billion more on capital expenditures than they earned by selling oil and gas. Since the beginning of 2015, 144 North American oil and gas producers have filed for bankruptcy, according to legal firm Haynes & Boone.
A recent U.S. Chamber of Commerce report, “Infrastructure Lost: Why America cannot afford to ‘Keep it in the Ground,’” complained that the environmental movement’s opposition to fossil fuel facilities, in particular the Keep it in the Ground (KIITG) movement, has cost the economy in terms of GDP, jobs and taxes. This allegation was challenged in IEEFA Response to the U.S. Chamber of Commerce Analysis of the ‘Keep it in the Ground Movement’ with a report of its own.
Flawed Study Commissioned by Oil Industry Used to Forecast Economic Impacts of Shale Development
As evidence, the complaint examines the New York State fracking ban. IEEFA examines the Chamber’s deeply flawed analysis of New York’s fracking ban and concluded that far from costing New York jobs and economic development, the ban likely saved investors from joining the ranks of disappointed equity investors and bankrupted lenders.
For its calculation of the economic losses associated with New York’s fracking ban, the Chamber relies on a 2010 study commissioned by the American Petroleum Institute (API) to forecast the economic impacts of Marcellus Shale development in New York, Pennsylvania and West Virginia. That study predicted in its high development scenario that Marcellus shale development would grow from 1,598 jobs and $46 million in tax revenue in New York in 2011 to produce 27,060 jobs and $776 million in tax revenue in 2020.
Yet the underlying API study itself produced very inflated numbers when compared to the actual economic development that resulted from shale development in West Virginia, a state that did not implement a fracking ban. Natural gas production in West Virginia has outstripped even the high development scenario in the API report, according to the United States Energy Information Administration (EIA). Yet from 2008 to 2017, actual direct employment in the natural gas industry in West Virginia increased by only 2,640 jobs, according to Workforce WV. This is significantly less than the increase of approximately 15,000 new direct jobs predicted by the API study in its high development scenario., assuming the same multiplier between direct and total jobs that the API study calculated for 2009.
Poor Financial Performance of Shale Drilling Not Anticipated in Study Cited by Chamber
The poor performance of shale drilling as a driver of new employment opportunities is connected to the low-price environment created by the expansion of shale drilling, a consequence that was not anticipated by the API study. Low prices have forced the industry to become more technologically innovative in order to lower its cost structure. This means that the number of jobs in shale drilling per unit of natural gas extracted has declined dramatically. The number of exploration and production jobs per billion feet of natural gas extracted in West Virginia plummeted from 29 jobs per bcf in 2008 to 9 jobs per bcf in 2014 to 4 jobs per bcf in 2017, according to Workforce WV and EIA data.
The API study’s inflated job numbers spill over into inflated tax revenues, given that for New York 80% of the projected Marcellus-driven tax revenue was derived from employees and households.
Job and Tax Numbers Grossly Inflated – Shale Bust Ignored
In terms of economic development, therefore, the job and tax numbers quoted by the Chamber are inflated by roughly a factor of five.
Beyond this glaring error, created by relying on early studies that promoted the industry without a retrospective look at the actual performance of the industry in states where development occurred, the Chamber study strongly implies that fracking would have been a profitable venture in New York had it been allowed to occur. This is far from the case.
Neither Cuomo nor the grassroots groups that pushed for the fracking ban had investors top-of-mind in 2014. But, they should be thankful: New York’s fracking ban has likely saved them from ruinous investments.
Tom Sanzillo ([email protected]) is IEEFA’s director of finance.
Kathy Hipple ([email protected]) is a financial analyst at IEEFA.
Cathy Kunkel ([email protected]) is an energy analyst at IEEFA.
IEEFA Response to the U.S. Chamber of Commerce Analysis of the ‘Keep It In the Ground Movement
IEEFA: Red Flags on U.S. Fracking Disappointing Financial Performance Continues
IEEFA: More Red Flags on Fracking: Weak Third-Quarter Results