Review of Hefley et al.’s “The Economic Impact of the Value Chain of a Marcellus Shale Well.” By Matthew Rousu, Dave Ramsaran, and Zach Zoller

 

The objective for this study is to discover the cost of natural gas drilling. The research group had an all access pass to a drilling site in Washington County, PA.  From this and other additional information; they break down the cost in each step of natural gas drilling. This report breaks down the direct cost of building and operating one Marcellus Shale well.

The authors go through a detailed and step-by-step analysis of all the costs involved in well drilling.  These costs reflect economic activity that will take place in Pennsylvania (or neighboring states) that wouldn’t otherwise occur.  We can’t confirm that these (cost-of-well) estimates are all correct, but the level of detail gives us some confidence in the numbers.  No multiplier is used in this, and the authors don’t attempt to extrapolate the cost-per-well to determine the overall impact to any given region.  We have some concerns that different wells may have different costs.  We also have some concerns that some of the money may not be spent in Pennsylvania, especially since many of the wells are in border towns. 

The final section of this report highlights the issues and opportunities that Pennsylvania faces, along with future research areas.

 

If graded on our best practices – how well does this study do?

What the study does well:                                             

            1) It avoids the mistake of stating both the monetary and jobs impacts, as the study only looks at the direct costs of a single Marcellus Shale well - estimated at $7,651,825.

            2) The study clearly defines the geographic region of the study as it examines the effect of one Marcellus Shale drilling site in Washington County, Pennsylvania.  That being said, it’s tough to know whether the full initial spending would take place in Pennsylvania, or whether, for example, a law firm from a neighboring state would be employed.  We suspect a small but non-trivial amount of first-round spending isn’t taking place in Pennsylvania.

4) This study only looks at costs – hence no double counting.

6) The study lays out the analytical methodology to reach its conclusions by breaking down the direct costs of extracting natural gas.

            7) The study does compare its results, specifically comparing its economic impact results to that of Considine Watson, and Blumsack (2011).  One interesting thing to note – if you apply the estimated cost per well from this (Hefley et al. 2011) study to the number of statewide wells estimated in Considine, Watson, and Blumsack (2011) – you arrive at approximately the same estimated direct expenditures estimate in both studies (just over $10 billion).  Given these studies were done independently, it gives extra credibility to the estimates.

            8) This study was funded by University of Pittsburgh and the Washington County Energy Partners.  Given this, if there is any bias, one would expect it to result in higher estimates.

What the study does not do well:

3) The authors don’t define whether their looking at total increased economic activity for an area, or economic activity for the people living in the area prior to when the drilling process begins. From reading, it appears that their goal is simply to see all the economic activity from the well, regardless of whom it affects.

5) The Pitt Business Working Papers clearly states that, “the papers are not subject to peer review, nor reviewed or edited for style and content.” However, in the Acknowledgment section of the study, the authors thank “Dean John Delaney, Ann Dugan, Pat McCune, Jeff Kotula, Mary Stollar, our collaborators in Pitt Business’ supply/value chain initiative, and co-authors in both the Spring 2011 undergraduate and graduate supply chain management project course teams” for their “important comments and insights on the earlier drafts of this paper.”

 

Overall

·       This study seems quite reasonable.  We aren’t knowledgeable enough to verify if each line-item in the cost analysis section is accurate, but given the details we have no reason to suspect any problems.  This study’s estimates also seem to match results from Considine Watson, and Blumsack (2011). 

·       One needs to be cautious with the estimates.  The costs of the well could represent benefits to the area from increased revenue.  However, the study doesn’t examine increased potential costs that aren’t incurred by the drilling companies (e.g., increased wear and tear on infrastructure).  That is fine, as it wasn’t the goal of the study, but media outlets could easily misinterpret the authors’ estimates. 

·       The authors do a good job raising a number of potential concerns and areas for future research at the end of the paper.