In this July 27, 2011 file photo, Range Resources site manager Don Robinson stands near the well head by the drill that goes into the shale at a well site for natural gas in Washington, Pa.  (AP Photo/Keith Srakocic, File)

Significant news out this morning from the U.S. Department of Energy’s Energy Information Administration:

… The estimated unproved technically recoverable resource (TRR) of shale gas for the United States is 482 trillion cubic feet, substantially below the estimate of 827 trillion cubic feet in AEO2011. The decline largely reflects a decrease in the estimate for the Marcellus shale, from 410 trillion cubic feet to 141 trillion cubic feet.

Now, this comes after last summer’s fairly confusing release of a new U.S. Geological Survey analysis of the Marcellus Shale reserve, and in the wake of other reports that have warned the Marcellus is not nearly as huge as some hopeful reports from the media, industry and political leaders have said.

In today’s early release of a summary of its 2012 Energy Outlook, the EIA explained its new figures this way:

Both EIA and USGS have recently made significant revisions to their TRR estimates for the Marcellus shale. Drilling in the Marcellus accelerated rapidly in 2010 and 2011, so that there is far more information available today than a year ago. Indeed, the daily rate of Marcellus production doubled during 2011 alone. Using data though 2010, USGS updated its TRR estimate for the Marcellus to 84 trillion cubic feet, with a 90-percent confidence range from 43 to 144 trillion cubic feet—a substantial increase over the previous USGS estimate of 2 trillion cubic feet dating from 2002. For AEO2012, EIA uses more recent drilling and production data available through 2011 and excludes production experience from the pre-shale era (before 2008). EIA’s TRR estimate for the entire Northeast also includes TRR of 16 trillion cubic feet for the Utica shale, which underlies the Marcellus and is still relatively little explored.

Interestingly at about the same time the EIA was briefing the media on its new report, Chesapeake Energy announced this news, what it called an update on additional steps it is taking to continue creating shareholder value in response to the lowest natural gas prices in the past 10 years:

Chesapeake plans to further reduce its operated dry gas drilling activity by 50% to approximately 24 rigs by the 2012 second quarter from 47 dry gas rigs currently in use and by 67% from an average of approximately 75 dry gas rigs used during 2011 … Specifically, during the 2012 second quarter, Chesapeake plans to have reduced its drilling activity in both the Haynesville and Barnett shales to six operated rigs each and to 12 operated rigs in the dry gas area of the Marcellus Shale in northeastern Pennsylvania.

And even in the so-called “wet gas” areas of the Marcellus like West Virginia (those areas where the natural gas reserves also contain significant amounts of potentially profitable other materials like ethane, butane, propane, and pentane), Chesapeake said:

Chesapeake plans to further reduce its undeveloped leasehold expenditures, the majority of which have been focused on liquids-rich plays during the past three years. The company is now targeting to invest approximately $1.4 billion in undeveloped leasehold expenditures in 2012 (net of joint venture partner reimbursements), of which approximately 90% will target liquids-rich plays and 100% will be in plays where the company is already active. This compares to undeveloped leasehold expenditures, net of joint venture partner reimbursements, of approximately $3.4 billion and $5.8 billion in 2011 and 2010, respectively.

Chesapeake CEO Aubrey McClendon said:

We have committed to cut our dry gas drilling to bare minimum levels that are likely to be maintained until expected drilling economics on dry gas plays return to levels competitive with expected returns in Chesapeake’s lineup of liquids-rich plays, which we believe is the best in the industry. As in previous natural gas pricing downturns, Chesapeake is promptly responding to rapidly changing market conditions, and we hope today’s announcement helps disprove the view held by some industry observers that producers fail to act rationally in times of unusually low natural gas prices.

Yesterday, Chesapeake Energy officials were tweeting away in an effort to downplay the potential impacts of their company’s decision to sign a long-term contract to transport 75,000 barrels of ethane per day from the Appalachian shale region to the Texas Gulf Coast:

“We believe 75,000 barrels a day is a fraction of the ethane that will be produced. The news is ABUNDANCE.”

“If we can get a price locally, we will sell locally. The pipeline agreement is not a sales agreement.”

Chesapeake’s Scott Rotruck had already told the Gazette’s Eric Eyre that this pipeline agreement would not be the end of West Virginia’s efforts to lure a “cracker” plant to our state. As Eric reported on Sunday:

Rotruck said the pipeline project actually could help West Virginia’s chances of recruiting a cracker plant to the state. Ethane supplies “should remain significant” in the region, he said.

Sites under consideration for the cracker plant include Bayer-owned properties in New Martinsville and Institute.

“This announcement should not preclude our state’s ability to attract an ethane cracking facility,” said Rotruck, Chesapeake’s vice president of corporate development. “It will help ensure robust Marcellus development, which must be demonstrated in order to build a cracker.

“Proper ethane management will be a multi-tiered solution, with possibilities for storage, pipeline and cracking facilities.”

But the West Virginia AFL-CIO is apparently not convinced. Here’s the press release they sent out yesterday evening:

John Dillinger, the famous bank robber of the 1930’s when asked why he robbed banks replied, that’s where the money is! Today if West Virginia working families, (who struggle each day due to the scarcity of good jobs), were to ask Chesapeake Energy CEO, Aubrey McClendon why he is robbing West Virginia we suspect he would answer; because that’s where the money is!

After reviewing a document from the American Chemistry Council we believe Chesapeake Energy’s decision to export up to 125,000 barrels of ethane per day, (from our valuable Marcellus shale natural resource), by pipeline to the gulf coast will potentially destroy any hope of as many as 12,000 West Virginia jobs and result in the loss of $800 billion in wages and tax revenue.

Is this justice for West Virginia working families or is it another example of an out of state corporation robbing us?

(The labor organization apparently got their numbers confused … Chesapeake’s deal involves up to 75,000 barrels per day, while 125,000 barrels per day is the entire capacity of the Enterprise Products Partners pipeline).

There’s some interesting discussion of the whole pipeline issue over at the Marcellus Drilling News site and the Energy Inc. blog from the Pittsburgh Business Times.

West Virginia’s political leadership and much of the media continue their push to show how great Marcellus Shale drilling is going to be for our state, and to dispel any notion that the state’s tax structure and regulatory requirements are not tough enough on the industry.

Take today’s top story in the Charleston Daily Mail, in which statehouse reporter Ry Rivard writes:

West Virginia appears to place a higher tax burden on natural gas operators than five surrounding states, according to a recent study by the Marshall University Center for Business and Economic Research.

A team led by professor Calvin Kent compared West Virginia to 18 other states, including Kentucky, Maryland, Ohio, Pennsylvania and Virginia.

“West Virginia places more taxes and fees on natural gas production than most of the other states which were studied,” Kent and his team concluded. That includes Pennsylvania, which is in direct competition with West Virginia for drilling activity.

Before we’re too tough on our buddy Ry, though, let’s not forget that the Gazette’s statehouse reporter, Phil Kabler, took this Marshall spin without question, writing last week:

A report by the Marshall Center for Business and Economic Research found that West Virginia’s taxes and fees imposed on natural gas production are comparable overall with other natural gas producing states, but noticeably higher than surrounding states.

West Virginia’s severance tax, 5 percent of gross value, is higher than neighboring states, including the states of Pennsylvania and Maryland, which have no severance tax on natural gas.

“You’ve got a huge advantage in Pennsylvania right now, because natural gas is being exploited out of that state with very minimal taxation,” Marshall professor Cal Kent told an interim committee on Finance.

The report said it is impossible to determine what impact the tax rates will have on development of Marcellus Shale drilling in the state, since taxation is only one of many factors that determine where companies will locate.

Now, this Marshall University report is certainly being promoted by industry groups and their supporters. But if anybody had bothered to dig a little deeper, they might have found this preliminary analysis by the West Virginia Center for Budget and Policy, which explains that simply comparing the basic tax rate isn’t enough — it doesn’t show the full picture. To do that, as the center explains, you have to look at “effective rates” of taxation:

However, effective rates are often lower than statutory rates. The effective rate is the end result after you adjust for deductions, limits and credits.

As we’ve written before over on the Gazette’s Coal Tattoo blog, that sort of review paints quite a different picture, showing that West Virginia’s severance tax (for all mining – industries, including coal and natural gas):

Using this method, West Virginia has an effective severance tax rate of 3.2%, well below the average of 5.2% for the top ten states. Alaska had the highest effective rate at 11.2%. Of the ten state’s most reliant on the severance tax, West Virginia ranked 7th for effective rate. West Virginia also had a lower effective rate than neighboring energy producer Kentucky, and a lower rate than the western states whose production is growing more competitive with West Virginia every year.

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A few weeks ago, a West Virginia University study touted the economic benefits of the Marcellus gas drilling boom to our state. The study got a lot of attention from the West Virginia media.

But another brief report, released last month by the West Virginia Center on Budget and Policy, doesn’t seem to have gotten nearly as much coverage. Perhaps that’s because the center’s preliminary findings  offers some cautions about whether a big drilling boom will be the economic savior that some political leaders would have us believe.

Among other things, the center points out that during the time period when the natural gas industry was on the rise in West Virginia (since 2002), the counties that have dominated gas production in our state have nonetheless experienced population loss, lower incomes, higher poverty and less economic diversity.

The report offers some important cautions about the gas boom:

– Annual production from a shale well declines by about 50 percent in the first year alone, and economically recoverable gas production is uncertain beyond five years.

– A boom in activity has a different impact than a slower ramp-up, providing an economic spike that is unlikely to be sustainable in the longer term.

– Expectations of wealth from development of this sort works against diversification and increases the cost of doing business in other industries.

– After the initial boom and construction phase, few jobs remain.

The report advises that state policies that mitigate negative effects on local communities and deal with environmental impacts can help.

And, it concludes that a mineral trust fund that uses revenue from increased severance taxes to promote economic diversity would be a positive step.

The Legislature is still considering bills concerning the Marcellus boom … so stay tuned.