Shepstone Management Company, Inc.
Pennsylvania royalty income to landowners conservatively topped $8 billion between 2010 and 2017, according the Commonwealth’s Independent Fiscal Office.
This is major unreported news. It’s about the overwhelmingly positive impact of the shale revolution on the Commonwealth of Pennsylvania; information that ought to send New York landowners to Albany with pitchforks, not that they didn’t already have a multitude of reasons to do so.
It’s about the fact Pennsylvania royalty income from gas drilling is conservatively estimated by the state’s Independent Fiscal Office to have been nearly $8.3 billion between 2010 and 2017 and is expect to reach $10 billion when the 2018 numbers are calculated. That’s $10 billion that went right into the pockets of landowners who spent it and multiplied the benefits to places such as Susquehanna County that were going nowhere prior to the shale revolution.
The Independent Fiscal Office is self-described as follows:
The Independent Fiscal Office (IFO) provides revenue projections for use in the state budget process along with impartial and timely analysis of fiscal, economic and budgetary issues to assist Commonwealth residents and the General Assembly in their evaluation of policy decisions. In that capacity, the IFO does not support or oppose any policy it analyzes, and will disclose the methodologies, data sources and assumptions used in published reports and estimates. The IFO will seek to establish collaborative relationships with the General Assembly, executive agencies and various non-governmental organizations that have an interest in the policy making process.
Pennsylvania royalty income from gas drilling was the subject of a recent report by this agency. It can be downloaded from here. The table above is recreated from the one in the report and tells a marvelous story, but it’s important to understand a few things at the outset, which set forth in the report (emphasis added):
The analysis estimates that natural gas royalty payments totaled $905 million in tax year 2010, peaked at $1.62 billion in tax year 2014, and then declined to $1.15 billion in tax year 2017.3 The collapse of natural gas prices in 2015 and 2016 motivated the large reduction in estimated royalty payments, although statewide production increased in both years. For 2017, natural gas prices recovered and estimated royalty payments did too.
The estimates from the table represent a lower bound for natural gas royalty payments for two reasons:
■ There may be cases where leaseholders reside and file returns from counties (or states) other than the land under contract and do not reside in one of the top eight producing counties shown in the table. This outcome would cause the methodology used to understate royalty payments.
■ The estimates only reflect payments to individuals who file a personal income tax return and report such income on line 6 of the tax return. However, some payments could flow to firms that report royalty income as net profits (line 4) on the personal income tax return.
…For tax year 2018, the analysis projects a further increase in royalties paid to Pennsylvania landowners.
Compared to 2017, the average spot price at major Pennsylvania hubs increased by more than one-third, while total output increased by 14 percent. If those gains were passed through to landowners, then royalty payments would increase by roughly 50 to 55 percent. The projection assumes that extraction firms deduct a similar amount of post-production costs in 2018 as deducted in 2017.
That’s pretty amazing in itself, but consider, also, the following facts we’ve gleaned from the data, organizing it and comparing to Census data:
- Susquehanna County alone has conservatively received almost $1.3 billion in royalty income.
- Washington County has received almost $2 billion in royalty income.
- The Northeast and Southwest Pennsylvania Marcellus Shale regions produce roughly equal amounts of royalty income to landowners.
- Susquehanna County personal income totaled an estimated $1.2 billion in in 2017 and royalty income from 2010-17 exceeded that, with royalty income amounting to almost 19% of total county personal income in 2017.
- Between 2010 and 2017, Susquehanna County mean personal income increased from $21,713 to $27,823, a gain of $6,110 or 28.1% in just eight years. Pennsylvania mean personal income went up by only $4,798 or 18.0%, meaning Susquehanna County erased much of its income gap and there can be no doubt royalty income is the explanation.
What’s even more important is that this Pennsylvania royalty is going to continue for several more decades and, eventually, Susquehanna County will not only catch up but surpass the Commonwealth. It was behind almost 19% in 2010 and, by 2017, was less than 12% behind. That’s how you revive a rural economy. What a shame New York has a governor blind to this reality.