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Socioeconomic aspects of oil & gas development

by Carol Dunn
WALSENBURG — The most recent Huerfano County Community Forum meeting on May 17 featured George Blankenship, of Blankenship Consulting in Denver. Blankenship presented the lifecycle of oil and gas development, describing the process in phases.

Phases of O&G development
The first phase, which Shell is now embarking on, is exploration, using one well. The next planned phase will be appraisal, with 5-15 wells in 2013-2016. The results of these two phases will determine if the project will proceed to the pilot phase. The pilot, with the number of wells to be determined, will decide if the project will go to development. The development phase, again with the number of wells to be determined, would last for ten years, followed by the production phase for 20-30 years.

Employment predictions
Blankenship explained that there are three types of employment that result from O&G development: direct, which is Shell employees and Shell contractors; indirect, which is the vendors that sell to Shell; and induced, which is comprised of people and businesses who will serve the population that comes to work on the project.
Blankenship said local businesses will usually expand their services to accommodate the influx of the workforce needed for each phase. A 2007 Oil & Gas Economic Analysis by the Colorado School of Mines Energy Research Institute determined the job creation outlook in the Raton Basin. For every 100 drilling jobs, 6.5 indirect jobs are created plus 22 induced jobs. For every 100 production jobs (after drilling), 27 indirect jobs are created plus 43 induced.
Direct jobs for locals in O&G development will be slow in coming. The first well drilling jobs will virtually all be non-local because the hires need particular experience and expertise plus Health Safety & Environment (HSE) qualifications.
Shell’s Venture Integration Manager Tracy Boyd explained that, since contractors are on the riskier side of the exploration business, they must be HSE approved. “Contractors account for 88% of the work injuries in Shell Americas,” he said. Further, ISNetworld (*ISNetworld® is a [registered] trademark of ISN Software Corporation.) tracks their performance, competency, risk, training processes, fitness to work, drug and alcohol testing, and tools and equipment.
Blankenship said initially there would be a limited demand on local government infrastructure and service, perhaps a limited need for road maintenance, law enforcement, medical services, or traffic management.
If the project goes to appraisal, one or two rigs will operate. Most workers will still be non-local, but local businesses, like motels, RV parks and restaurants, will see more activity.
If the project goes to production, the makeup of the workforce will depend on experience in the local employee pool. Work will also proceed on the infrastructure of the development field.
The pilot phase would see more local contractors being used, and non-local service companies would begin to set up offices here. Local communities may see some growth, with limited government services still required, mostly roads. Slowly the demand for a full range of local government services would increase. There would also be increased tax revenues to the local government.
As Blankenship described the development phase, four to six rigs would be operating, and additional field infrastructure would be required. Long-term jobs would be available to operate and maintain an increased number of producing wells. There would be an increased number of workers, including local hires and non-locals who relocate to the area with their households. The workforce will spike during drilling, mostly various specialty contractors.
By this time some local contractors would have become HSE qualified, with local field offices and yards, local vendors, and expanded retail service businesses. There would then be an increased demand for a wider range of local government infrastructure. There would be an increase in county and school revenues and increased royalty payments to mineral owners.
The temporary workforce will decrease, drilling activity will fall-off, and most production employees would be residents with local households. Blankenship said the ad valorem tax revenues at this point would be substantial to the County. In 20 or 30 years, as production decreases, revenues would then decline over time.

Huerfano compared to
North Dakota and Pinedale, WY
Blankenship showed the following comparison of the O&G scenario in Huerfano County as compared to Bakken in North Dakota and Pinedale in Wyoming.

Huerfano Bakken ND Pinedale WY
1 county 6 counties 1 county
1-6 rigs 209 rigs 56 rigs (in 2006)
1 O&G company 37 O&G 29 O&G
companies companies (in 2009)

Referring to Huerfano County, Blankenship said, “This is a moderate level of development. This is manageable.” Compared to other development areas, this area is considered to be a smaller basin. Shell has already leased most of the basin, so there is very little room for other companies to come in, if Shell geological studies hold true.
Blankenship said community struggles with O&G have resulted because they haven’t been able to plan for development. He stressed, “Huerfano County has time to plan. There’s some real opportunity here, and I hope they take advantage of it. I’m optimistic.”

Planning for development
On the topic of planning, Gardner resident and Forum member Dale Lyon used a Powerpoint presentation to discuss why and how areas with O&G development should plan to avoid a boom and bust economy. She quoted a report by The Burghard Group on strategic community planning: “The real challenge facing your community is to either 1) leverage the shale energy industry as a catalyst for sustainable economic prosperity, or 2) fall victim to experiencing the negative economic impact of a boom-to-bust cycle.”
Lyon said the first boom-bust cycle in Huerfano County was between the late 1800s and the 1950s. She suggested that evaluation of environmental impact should reflect a balance of social, economic and environmental factors. Lyon also warned that economic impact reports cannot tell us how many actual jobs will be created, who will get those jobs, or what they will pay. Lyon’s presentation stated that the pace and scale of drilling will determine the duration of the boom period and that will be influenced by marketability of the products. She cautioned that, during a boom, rents skyrocket, there is an increased demand for hotel rooms, and there is an influx of new people into the area. Further, rural roads are not designed to withstand the volume or weight of O&G truck traffic.

Strategic planning how-to
Lyon recommended forming a local drilling committee of citizens and pointed out the need for baseline data on roads, water treatment, rents, traffic, and use of government equipment. She also pointed out that local government needs to budget for future costs. Lyon said that the one thing regions that have experienced shale gas development now wish they had done better is planning. She reported that rural regions whose economies are dependent on natural resource extraction frequently have poor long-term development outcomes. Lyon said, “Effective planning to moderate the speed at which the extraction occurs, and to invest the infusion of short-term revenues in longer-term economic development, could potentially mitigate the effects of the boom-bust cycle.”
Lyon suggested that a slower ramp-up would allow time to develop job training programs, local businesses, better planning, new industries and baseline data. She said that only by anticipating what may occur, planning for change, and communicating a concrete vision for the future can policy-makers make the kinds of choices that will “stand the test of time.”
The suggested forward-focused strategic plan would involve: water, environmental and natural resources, local infrastructure, sociodemographic change, local economy, health and safety, consumer protection, legal and regulatory landscape, local governments, and changing local service demands. Lyon reported that strategic planning would involve leveraging a partnership with Shell to decide the goals, efforts needed, assets and capabilities. It would also take into account strengths, weaknesses, opportunities and threats (SWOT). Paraphrasing the Burghard Group recommendations, Lyon said thoughtful, respectful collaboration between local public and shale energy industry leaders will result in responsible development of the industry and the community’s economic future.

Tax Revenues and growth
Shell Manager Tracy Boyd reinforced and elaborated on several of the points in Blankenship’s presentation. He listed the tax revenue streams surrounding O&G development: state severance; federal royalties; ad valorem (property ) and production tax; sales tax; federal and state income taxes; plus various license permits and fees. He said many times tax revenues are used for infrastructure enhancement and the growth of community services. The community will see income as Shell employees and contractors spend locally for lodging, food and supplies. There will also be a demand for goods and services from local producers to supply the needs of energy activities. Over the winter, Boyd said about $490,000 was spent in this area by Shell or because of Shell’s proposed exploration project.

Shell works with communities
Boyd described how Shell works with community colleges and vocational programs to focus on training a workforce that will be qualified when Shell is ready to hire locally, providing more of an opportunity for youth to stay local. Boyd also said Shell likes to invest in things that have direct social impacts on the communities where it works. “We’d like to see the money stay here,” he said.
The Shell team stresses that they are committed to engaging the community (via the Forum) on a working basis. They also intend to forecast development levels during the various phases and transmit that information to the public. Communications Advisor Scott Sheffler said, “Shell has already started these conversations.”
Boyd pointed out that the response to the O&G development needs to be responsible. “The demand for infrastructure and housing will diminish at the end of the development phase or perhaps when the market changes,” he said. He suggested that policy makers seek to develop infrastructure and housing that has a use beyond the development phase. As examples, he described housing designed for seniors or special needs; tourism-friendly RV parks; and other amenities that have uses beyond O&G. Shell advises local governments to avoid long-term development-dependent debt. He said, “Communities change, and revenue flows change.”

Shell will plant alfalfa
Project Manager Philippe Heer explained that over 100 old wells were used for data to decide if Huerfano County would be a good area to explore. Shell contracted some seismic work in the area and purchased more that existed. The company is working from 31 square miles of 3D seismic data of “excellent quality” and 750 miles of 2D data.
Heer said Shell is proposing four well locations, and an invitational meeting was held in Gardner to tell people about those sites. “We wanted the landowners to be the first to hear about it,” he said. Shell’s purchase of the Thorne Ranch is final, and the team toured the ranch in the past week. It has a “highly fascinating ditch system,” Heer said. He emphasized that Shell wants to get the system up and running and “get these fields green again.” He told HWJ, “I see myself as a coordinator.” Shell will hire a contractor to plant alfalfa or other cover crops. Then the next priority will be to build water storage so the water can be used in the off-irrigation season for drilling (probably in November). In Heer’s words, Shell will be using “a little” water for site and road construction and dust abatement.
Heer said, “We see the community, even the skeptics, start to trust us and understand what we are doing.” He added, “We want to prove to you that we’ll actually do what we say we’ll do.”
The public can access Community Forum information in the Documents section at http://communityforum.keystone.org/.