How Oil and Gas Development Impacts Local Governments and Communities

Resources of the Future hosted an event the array of opportunities and challenges local governments across the country have experienced given the rapid growth of oil and gas development in the U.S. over the past decade.

The speakers explored the key issues facing local governments.

RFF’s Community Impacts Initiative

Alan Krupnick, RRF Co-Director for Energy and Climate Economics, discussed his organization’s Community Impacts and Interactions Initiative, which looks at the effects at the community level. The findings so far cover lower 48 petroleum-producing states, but RRF plans to include Alaska in future sets of research.

Oil and gas project stages consist of the initial assessment, leasing and permitting, exploration, development, production, and plugging and abandonment.

Fiscal impacts occur at all stages, and are related to financial infrastructure, staff, infrastructure, and education.

At the leasing/permitting stage, burdens are imposed on air, surface water, groundwater, and land. Communities are affected by noise, light, and odor pollution. Tourism, agriculture, and water use are also impacted.

At the development stage, the community burdens include road accidents, other damage, and soil waste.

During production, the burdens are habitat fragmentation from pipelines and roads, and seismicity (caused by wastewater disposal in deep injection wells).

All of the community burdens can be considered as negative externalities. They can be classified as health impacts, economic impacts, and ecosystem impacts.

Local government impacts include greater demands for financing, staffing and hiring, infrastructure, and k-12 education. Additional community impacts include economic development, social relationships, crime, healthcare, and housing.

The study looked at negative impact mitigation, which is done through regulation, voluntary best practices, and community processes.

Though not the subject of much study, RFF also looked at lease agreement clauses that protect land from projects and may provide external community benefits as either a substitute for or a compliment to regulation.

Krupnick described other RFF studies underway.

Almost completed is a road accident study. Development projects usually increase truck traffic, and result in more reports about traffic related injuries and deaths.
Solid waste handling. Project solid waste is exempted from the 1976 Resource Conservation & Recovery Act no matter what its contents. The study will examine whether the lack of special treatment is a good idea.
Wastewater modeling. Drilling wastewater is typically full of flacking fluids and other pollution. Decisions need to be made about whether the wastewater should be recycled, sent to wastewater treatment plants, or injected in deep wells. The process will be modeled from the operator’s perspective, to minimize private cost, and from the government social planning perspective, to reduce social and environmental impacts.
Community and industry interaction. Communities have been trying more frequently to ban development. Through the examination of community-industry protocols, better methods of interaction, past successes and failures, researchers hope to find ways to mitigate some of the concerns at the local level.

A report released on the day of the meeting described the plugging and abandonment stage for inactive wells. It looked at the environmental risks, decommissioning costs, and initial bond amounts, which often prove inadequate in cases of drilling company defaults or bankruptcies. The study concluded that bond amounts should be tied to drilling depth and actual decommissioning costs.

Richard Newell, a professor at Duke University, and Daniel Raimi, an associate at Duke University, examined the fiscal impacts of oil and gas development on local governments in every major producing region of the U.S. They looked at how state level policies relate to community health and status.

First, they explained that the key revenue sources for local governments consist of:

Local ad-valorem property taxes collected by local governments. Oil and gas property definitions vary by state.
State severance taxes, collected by state governments (such as Alaska). They may or may not be allocated to local governments.
State or federal leasing revenues, which are collected by state governments, and may or may not be allocated to local governments.
Sales and use taxes, which are collected by municipal governments mostly.
Direct payments including leasing and royalty revenues for production on local government land, and fee-for-service activities.
In-kind contributions such as road repairs or donations from oil and gas companies.

Alaska, compared to the other petroleum producing states and counties, received by far the largest share of revenue.

The biggest oil-related cost for local governments, particularly in counties that manage rural road networks, is roads, bridges, and other transportation infrastructure. Heavy industrial truck traffic can damage roads and bridges.

Additionally, water and wastewater infrastructure may require upgrades when municipalities experience rapid population growth. And, if industry activity and employment should slow down following long term infrastructure investments, the local governments are left with fiscal challenges.

Because of increased traffic, well site accidents, and higher populations, local governments may also experience increased staff costs related to police, fire, and emergency medical services. The governments may also need to spend more on workforce retention if many government workers take higher paid industry positions.

A small number of local governments may face environmental-related costs in the form of increased risk to regional private property values. Legacy environmental damage—meaning increased infrastructure construction costs because of abandoned oil wells and infrastructure—is another concern.

Newell and Raimi’s study measured net local government fiscal effects in 2013-2015. Both the North Slope and Kenai Peninsula boroughs experienced uniformly net positive impacts from oil and gas development.

The common theme for rural regions was that rapid population growth and service demands exceeded the rate at which local governments could collect revenues. The result is that after the boom some of the near-term issues have been eased, but the long term challenges remain. Resolved issues include easier maintenance of roads and bridges, and expanded government services for larger populations.

Remaining issues include larger municipal debt burdens, falling revenues, and limited economic diversification.

Newell and Raimi concluded that most local governments, as is the case in Alaska, report net positive fiscal impacts. Local factors and policies play an important role, including the design of revenue collection and allocation mechanisms, infrastructure cost impacts on rural regions, and the extent of industry-government collaboration on reducing infrastructure and service costs. Trust funds are also useful in future years when resources have low value or are depleted.

Aliza Wasserman, Program Director for Energy & Environment at the National Governors Association, gave a presentation about state level considerations regarding oil and gas development impacts.

State severance taxes vary widely between states. While most petroleum producing states still enjoy a net positive economic effect via disposable spending, the states that most heavily rely on severance taxes, including Alaska and North Dakota, have the opposite situation.

Proposals to address state shortfalls include tapping “rainy day” funds, new taxes, and spending cuts.

Wasserman said the political appetite for new oil and gas laws has declined as resource prices have declined. But, within that, interest has grown in learning state-local relationship management and local infrastructure impacts.

Areas that need to be researched in the future include:

Assessing balance of additional industry demands on the states: Local costs are also state costs, and the state budget pays for nearly all of the oil and gas industry regulatory oversight.
Local revenues from sales and income taxes should be included in the local revenue sources description.
Looking at whether economic research can show how investments in infrastructure and local relationship management can increase production levels and overall state economic benefit. If this is the case, then there is a higher likelihood there will be an interest in the state level.
Proposals to reallocate existing revenue are likely to be of greater interest than proposals for new taxes due to commodity low prices and industry layoffs.
Target research to separate mineral rights from land rights through optimal tax, as state-local tensions are high in places where mineral rights are separated from property rights, and are low where they are combined.
Research that looks at the state and local level is very helpful, as often research overlooks the sub-national level.
Insights on managing costs from this volatile industry that is integral to the long term U.S. economy are helpful. On a related note, at some points the research seems to imply that there is better local government when industry declines; looking into this would be useful.
Information on specific costs incurred by the locals would be helpful.
Solutions-oriented research papers are policy-relevant – insight on the role of revenue mechanisms is useful for policymakers.
It would be helpful to distinguish the problem for local governments and recommend policies by the type of problem that is addressed.