Tuesday, September 10, 2013

The Myth of the Local Fracking Boom

There is lots of talk about how shale gas (made accessible by advances in technology) is an economic boom for Texas and the nation. In fact, a big study by IHS Global just came out touting the economic miracle that is shale oil and gas.

A Forbes story about this chastised Dallas for not taking part in the boom. They note that other cities (like Corpus Christi) have embraced the new energy economy and write:

But of course, cities like Corpus Christi…are places whose leaders clearly recognize that one of the best ways to benefit from an amazing industrial boom is to actually participate in it…”

Well, Denton is certainly participating in the new energy economy – hosting around 100 gas wells in its city limits and another 400 or so in its extra-territorial jurisdiction. That’s not to mention the crisscrossing maze of pipelines. We must be benefiting economically from this “amazing industrial boom,” right?

Actually: wrong. Read on.

We have all just assumed that our little microcosm of Denton mirrors the national and state macrocosm of economic bounty from shale gas. Nobody has any real idea of what the economic impact of shale gas is for Denton. I asked City Staff to put this together as we rewrote the ordinance but nothing happened. As a result, the Task Force and City Council went forward on the basis of this assumption.

There are obviously lots of facets to this picture – both positive and negative: jobs, royalties, taxes, commodity prices, road damage, real estate values, pollution, etc. I am not pretending to paint a full picture. But I have made a pretty good sketch. And along five variables – royalties, property taxes, resident wealth, schools, and jobs – it looks like there is no such thing as a local economic boom for Denton when it comes to fracking.

Just follow the five bold numbers below.

Last month I was digging through mineral property data to get a picture of how the money from drilling and fracking for natural gas in Denton is distributed. I was looking at the overall pie of roughly $25 million in certified value held by mineral owners to see who got which slices. (The bigger pie is about $84 million, but that includes the share held by the operators).

But to get at the local economic impact we need to look at this from another angle. We need to look at the City of Denton and treat its budget as the pie for our analysis. We can then look at all the revenues generated from natural gas development to see how big that slice is in the budget pie. Sure, the City of Denton owns just 14% of the mineral wealth in Denton. But maybe that is a significant figure when seen in the context of its budget. Maybe it is a big source of public revenue (hint: it’s not). 

There are two main sources of revenue for the city when it comes to gas wells: royalties and property taxes (severance taxes go to the state). The certified values I focused on are a proxy for both of these revenues, but they are not the actual thing.

To get the actual figures, I called the city Finance Department. First, to find out the royalties, go to the City Budget. All royalties (with perhaps a few very small exceptions) are in two separate pots. The biggest one is the Airport Fund (see p. 78), which reported 2012-2013 royalties of $1,125,000. The other one is the Parks Gas Well Fund (see p. 93), which reported 2012-2013 royalties of $225,000. That’s a total of $1.35 million. 

The total operating budget for the City of Denton (now proposed for 2013-14) is $825 million. If we factor out Denton Municipal Electric the grant program, and capital improvement programs it is $329 million. Even by this comparison, gas well royalties account for 0.4% of Denton’s operating budget.

Now let’s look at property taxes from the minerals. For geeks in the crowd, to get this you go to the figures found here on pp. 46-48, then take the figure for “oil and gas,” divide it by 100 and multiply it by the applicable city tax rate, which is 0.68975.

For 2013, the total mineral property tax revenue for the City of Denton was $538,742. Now compare that to the total property tax revenue (e.g., homes) of $48,139,199. It turns out that tax revenue from gas wells represents just 1% of the total property taxes in Denton.

Next, I thought it would be interesting to look at how the money held by Denton residents compares to the overall size of our local economy. This figure is much more a rough estimate than the others. I am working from certified values (a proxy for royalties). For Denton residents that figure is $1.7 million.

Now to get a sense of our local economy, I went here to find the number of households and the median household income in Denton. If you multiply these figures, you get $1,842,301,769. We can call that something like our “local GDP.” The mineral wealth held by Denton residents accounts for just 0.09% of the local GDP.

Ok, what about Denton Independent School District? Remember, DISD owns minerals from about ten producing wells that amounted to $96,850. But DISD’s budget is about $125 million, meaning that gas wells contribute just 0.08% to DISD’s budget.

Finally, recall that Natural Resources and Mining is the smallest employment sector tracked by our local government. It accounts for just 0.8% of employment in Denton County.

I think it is fair to conclude that the local economic impact is hardly a boom. Indeed, it barely registers at all, because it is so miniscule.  

This is why it is important to do local analyses of economic impacts. The numbers can look mighty impressive on a grand scale, but at local scales they can be quite puny. Perhaps small enough to make us wonder if the costs in terms of health and safety risks and drags on future land development are worth the financial benefits. 


  1. Your research is right on point, insightful, and should provoke considerable thought in moving forward for the city of Denton. Oh yeah, and thanks because this research makes some of us not appear so crazy after all.

    1. What about this?

  2. Another way to look at that is the gross regional domestic product for Dallas-Fort Worth, which the U.S. Department of Commerce estimated to be $391.4 billion in 2011.

    The Perryman Group updated their report in 2011 (look for it with the Fort Worth Chamber). Perryman has traditionally been an incredibly generous assessment of the annual economic impact of the Barnett Shale. That number was $11.1 billion.

    That's 2 percent of the local economy.

  3. Thank you.
    This is a nice and detail blog. Hope next time you write something about First Liberty Energy

  4. Not sure how the Texas Workforce Commission would know what industry you were working in. I personally report what county I did business in & what type of business because I have my own company, but I'm pretty sure contractors working for a big company don't have to do this. Also if your employer were based in Oklahoma or Midland I'm not sure if you would show up on TWC reports as working in Denton County.
    You also don't take into account what effect the oil business has on hotel occupancy. I would guess that 50% of all hotel rooms rented in Denton last year were oilfield related!

  5. Not only is there no benefit, nobody is looking after the drillers. Look what happened in PA: http://www.star-telegram.com/2013/09/11/5153530/xto-energy-hit-with-criminal-charges.html. Why didn't Denton handle their dumping case the same way? Maybe the City just took a share of the potential $100,000 civil penalty to look the other way. Your economic analysis does not include the City’s money to NOT inspect.

  6. Subtract the economic impact of lost property value when drilling and production is near homes - where those homes (or land) can not be sold. Property value loss = lost tax revenue. We have a number of cases in the county where this has happened.

    1. This comment has been removed by the author.

    2. For every "loss" that you claim I can show you 10 "gains" on the mineral tax rolls that weren't there 10 years ago.