Natural Gas:

API's John Felmy discusses economics of hydraulic fracturing

What is the job growth potential for the Marcellus Shale region if natural gas production is expanded? During today's OnPoint, John Felmy, chief economist at the American Petroleum Institute, discusses how the use of hydraulic fracturing can help with economic and jobs development. He also weighs in on upcoming EPA regulations of ozone pollution and greenhouse gas emissions.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is John Felmy, chief economist at the American Petroleum Institute. John, thanks for coming on the show again.

John Felmy: Thanks for having me.

Monica Trauzzi: John, your industry is paying close attention to the discussion over hydraulic fracturing and what its future will be in natural gas production here in the U.S. What's the potential for natural gas production through the use of hydraulic fracturing? What are some of those numbers?

John Felmy: Well, it's enormous. If you look at, for example, my home state of Pennsylvania alone, you're talking about the potential production of 500 trillion cubic feet of natural gas there and the resource there. It's been used for 60 years, it's a sound technique and it's a wonderful opportunity for economic development in areas that haven't had it for many, many years.

Monica Trauzzi: So, we're talking about having a supply for potentially 100 years?

John Felmy: If you look at the total U.S., the Potential Gas Committee has come up with estimates that basically say 100 years of gas and potentially even more, depending as we produce it.

Monica Trauzzi: So there's a big focus on the Marcellus Shale region. What's the job growth potential there?

John Felmy: Again, it's enormous. If you look at some studies of what the economic potential are, you're talking about potentially an excess of 200,000 jobs in the state of Pennsylvania alone and then tens of thousands of jobs in West Virginia and New York as we go forward over the next several years.

Monica Trauzzi: OK, so Marcellus is the big buzzword, that's what most people are talking about when they talk about hydraulic fracturing and natural gas production. What are some of the key hurdles that need to be overcome there?

John Felmy: Well, the key hurdles are, of course, going forward you're developing, in that area, a new industry. Pennsylvania has a long history of oil and gas going back to 1859, but it's only in the western part of the state. And so if you look at the kind of eastern two thirds of the state, they have no exposure to oil and gas developing. And so the first thing you need to do is build trust among the communities to understand what we're doing as an industry, to understand what the economic potential would be and why it's beneficial to that area and it's the first time that something positive like that has happened in 100 years.

Monica Trauzzi: Is your industry being transparent enough when it comes to the health and environmental effects of hydraulic fracturing?

John Felmy: We certainly are out there telling our story. I've made many, many trips across Pennsylvania. Our companies have. Our industry has. We're trying to lay out the facts as we know them so that folks understand this is the technique, this is how it's used, this is the benefits from it.

Monica Trauzzi: OK, so in terms of taxes and things of that nature, what needs to happen in these three states?

John Felmy: Well, in those areas we need to have rational tax policy, we have to have rational environmental and regulatory policy. And I think we're making good progress in all those things. In Pennsylvania there was a discussion of the severance tax. It hasn't gone anywhere to this point, but it's key to understand that while there isn't a severance tax in Pennsylvania, there are a lot of other taxes. Pennsylvania is a heavily taxed state. For example, it's marginal income tax rate is 9.99 percent at the peak. So we're already paying a lot of taxes to do business in Pennsylvania. So as we move forward, let's look at kind of a holistic view of what we should do in that regard.

Monica Trauzzi: So, if EPA finds that hydraulic fracturing isn't, in fact, safe, is there any way to move forward with our future energy policy without it?

John Felmy: Well, I'm not going to presume what EPA is going to say, but it's clear that hydraulic fracturing is very carefully regulated at the state level. It's been done that way for a long time and there's no evidence that it isn't being properly regulated. So let's look at the benefits right now and let's not be moving beyond in the hypotheticals that don't help.

Monica Trauzzi: OK, let's switch gears. EPA is set to put a number of regulations into motion next year, many of which will have a direct impact on your industry, that includes ozone pollution and greenhouse gas emissions. Is the Clean Air Act being rewritten essentially by putting these new regulations into place?

John Felmy: Well, we believe firmly that the Clean Air Act was never intended for this type of regulatory application. The potential could be devastating. If you look at what could happen, it could basically throw a real monkey wrench into the economy in terms of what we need right now, because it could sharply reduce the amount of expansion opportunities and that means no new jobs. And if there's anything we need right now, we've got to be sensitive to needing more jobs.

Monica Trauzzi: But on greenhouse gases we haven't seen any movement in Congress on any type of policy. So would it be prudent for the U.S. to be at a standstill in terms of any type of regulation?

John Felmy: Doing bad policy is not a good idea no matter what the circumstance is. And the fact of the matter is, the Clean Air Act wasn't designed for that. And if you look at the potential regulatory impacts that could be on the economy, it's something to think about very carefully.

Monica Trauzzi: How do you think things will play out in January once EPA begins to regulate? Will we just see a series of lawsuits and no real movement on regulation because everything is tied up in court?

John Felmy: Well, a lot is going to be a function of what happens with the election. It's going to be a function of what happens in terms of all the steps that EPA chooses to take. We're monitoring what's going to happen and we're following it carefully.

Monica Trauzzi: One final topic, E15. You've taken issue with EPA's recent decision to allow for more ethanol to be blended in with gasoline. Was enough testing done to determine whether that was a good call?

John Felmy: In a simple word, no. There is tests that need to be performed to be able to understand what the real impacts are across the vehicle fleets and on other pieces of equipment that use ethanol. Increasing that from E10 to E15 could result in a lot of damage for vehicles. And so we're very concerned about moving forward too aggressively in that area.

Monica Trauzzi: So that means less gasoline in the blends. What does that do for the financials in your industry?

John Felmy: Well, in terms of what the incremental impact will be, we really can't say, because we don't know who would adopt the higher blending formulas. There's a risk to adopting it. You also have to understand what consumers would do. Consumers are a key part of it. So, again, it's really premature to say what the impact would be.

Monica Trauzzi: OK, we'll end it there. Thank you for coming on the show. Nice to see you again.

John Felmy: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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