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