Edward Hill, Ph.D., and Kelly L. Kinahan of the Maxine Goodman Levin College of Urban Affairs at Cleveland State University recently published a report based on sales tax data that concludes Utica shale development is triggering wealth creation in Ohio – though its effect on employment growth remains sluggish. Hill and Kinahan analyzed four indicators of economic activity in early-state shale development in Ohio: sales tax receipts, well activity, natural gas prices, and total employment. Ohio's 88 counties were grouped into four categories for this analysis: strong shale, moderate shale, weak shale and non-shale.
As it relates to sales receipts, the report concluded that sales tax receipts in strong shale counties experienced double-digit growth (20.4%) from 2011 to 2012, far outpacing the growth in sales tax receipts in moderate shale (6.7%), weak shale (4.9%), and non-shale (8.7%) counties. The first quarter of 2013 witnessed a 14.2% increase in sales in the strong shale counties over the same quarter in 2012, as compared to 3.2%, 3.0% and 2.1% in the moderate, weak and non-shale counties, respectively.
Permitting activity witnessed similarly dramatic increases. Horizontal well permitting activity in the strong shale counties increased by 209% in the first two quarters of 2013 as compared to the first two quarters of 2012, while drilling increased by 50%, and wells drilled increased by 52% over the same period. During this period the number of new wells producing oil and gas in those counties, however, declined by 96%. The report concluded that there clearly is a relationship between shale development and the changes in sales tax receipts observed, though it did not address the specific nature of that relationship. The authors generally speculate that the cause of the observed sales increases likely was "shaleionaires" – landowners who profited from leasing formerly agricultural land for drilling purposes – and who increased their spending.
Reductions in prices also tended to reflect significant local production activity. Between 2011 and 2012 the report found the average Citygate price of natural gas in Ohio fell faster than the national average – 58% as compared to a 49% decline nationally. Prices fell from $5.46 to $4.62 per thousand cubic feet in Ohio while there was a national decline from $5.73 to $4.91 over the same period. The average Citygate price in Ohio from February to April 2013 remains lower than the national average: $4.52 in Ohio compared to a national average price of $4.71.
Hill and Kinahan found that employment growth in the strong and moderate shale counties has been modest in the first quarter of 2013 (.1% and .2%, respectively), but still outpaced employment growth in the weak shale (-.1%) and non-shale (-1.6%) counties, and the rest of Ohio (-0.03%) as compared with the first quarter of 2012. They found three principal factors contributing to the relatively slow employment growth findings: (1) the relatively long period of time required to train employees in the oil and natural gas industry, (2) the need for continued improvement in midstream development, and (3) the inability to limit employment data to those sectors or industries most affected by shale development. The authors observed that Ohio's mid-term economic future depends heavily on increases in the price of "dry gas" or methane, and whether valuable natural gas liquids (NGLs) are processed in or near Ohio.
It is notable that the researchers relied upon sales tax data as a measure of economic activity, given that the sales tax generally is thought to be imposed only on end consumers. This suggests that even at this early stage, economic activity extends beyond the most obvious beneficiaries of shale development. It remains to be seen whether or how the observed increases in sales will impact the audit policies of the Ohio Department of Taxation, which administers both the state and local sales and use taxes. The BakerHostetler North America Shale Blog will continue to monitor developments in the Utica shale play and at the Ohio Department of Taxation as they relate to these issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.