Local fiscal impacts of oil and gas development in the United States Daniel Raimi, Senior Research Associate University of São Paolo, Brazil November 17, 2016

Presentation overview Background on the Shale Public Finance research project Major oil and gas related costs for local governments Major oil and gas related revenues for local governments Net fiscal impacts of oil and gas development for local governments Case study: North Dakota’s Bakken region Analysis and implications for potential Brazilian plays Here’s what we’ll cover in today’s presentation.

Shale Public Finance project Supported by The Alfred P. Sloan Foundation Duke University Energy Initiative Resources for the Future Carried out at Duke University and Resources for the Future Richard Newell, co-principal investigator President and CEO of Resources for the Future Daniel Raimi, co-principal investigator RFF and University of Michigan Funded by Sloan and Duke [advance] Carried out by Richard Newell and myself while we were both at Duke University. Richard has recently been named as the next president of RFF, an energy and environmental economics think tank in Washington, D.C. And I am at the university of Michigan at the university’s Energy Institute and its School of Public Policy.

Research objectives Oil and gas development has increased dramatically in the United States over the past ~10 years How has this increase affected local government’s ability to provide services? How have governments managed revenue associated with oil and gas activity? What lessons can be learned? I’ll briefly tell you about what we wanted to accomplish with our research. As you all know, oil and gas production has grown substantially in the U.S. over the past 10 years or so. [advance] We wanted to see how this activity has affected the quality of government services for the citizens living in the many regions where activity has grown or has been a big part of the economy for a long time. [advance] A key aspect of this issue is how governments manage revenue generated by oil and gas production. As you know, each state regulates oil and gas differently, and each state has different ways of generating government revenue from the industry. [advance] The end goal of our research is, of course, to understand what we can learn from the wide range of policies and experiences that we’ve seen across the US.

Research methods Examine every major onshore oil- and gas-producing region in the United States (21 regions in 16 states) Structured interviews with over 200 local public officials 61 counties, 78 municipalities, 12 other local government entities Analysis of state and local financial documents and policies To do this work, we’ve traveled to and examined every major onshore oil- and gas-producing region of the country, totaling 21 regions in 16 states. [advance] The purpose of this travel was to conduct structured interviews local government officials, primarily from counties and municipalities. We interviewed over 200 local officials across 61 counties, 78 municipalities, and 12 other local government entities. These interviews were designed to understand, and—where possible—quantify how oil and gas activity affects the demand for the services they provide, and how it affects the revenue they receive. [advance] We also spent a lot of time talking with experts at state regulatory agencies, oil and gas companies, and independent researchers at universities and other research organizations. [advance] We held two workshops at Duke University, in the state of North Carolina, where we gathered many of these experts representing the different states we examined. [advance] To try and quantify the effects of industry activity, we looked very closely at state and local financial documents and policies. The results of that work is what I’ll be talking about this morning.

Our travels: heat map of recent drilling permits Marcellus Fayetteville Haynesville Eagle Ford Permian Barnett Green River Denver- Julesburg San Juan Uintah North Slope Kenai Peninsula Kern County Woodford Hugoton Most permits Some permits Few permits No permits Utica Piceance Los Angeles Anadarko Miss. Lime Bakken This map illustrates the 21 regions we visited. The color coding indicates the level of oil and gas permitting activity in each region in early 2015, with dark orange indicating the most active areas. Some oil and gas plays such as the Permian, Bakken, and Marcellus straddle state lines, and where they do, we looked at local governments on both sides of the border. Map source: Drilling Info 2.0. Heat map data represents drilling permits issued in the 90 days leading up to Feb. 20, 2015. Permit data not available for Alaska.

Key costs for local governments related to oil and gas development As you might expect, every region experienced development differently. However, we did find some general themes emerging. Here are some of the major fiscal challenges that state and local governments faced associated with the industry. After going over the key costs, I’ll talk about the major revenues for governments generated by oil and gas development.

Roads, bridges, and other infrastructure can be affected by industry traffic and population Roads and bridges This is the most common major cost for local governments Challenge is greatest when the industry is most active Challenge is greatest in regions with limited existing oil and gas infrastructure Water and wastewater infrastructure May require upgrades if rural regions experience rapid population growth These projects can be extremely costly (>$50 million for small cities) These long-term investments can create fiscal challenges if industry activity and associated population growth slows The most common, and largest costs we observed were infrastructure costs. First, roads and bridges can be heavily impacted by the large volume of heavy trucks that support oil and gas activity. Road damage tended to be most acute during heavy phases of activity when many new wells were being drilled and hydraulically fractured. In places where there had not been a lot of oil and gas production in previous years, there weren’t many pipelines to move oil and water from the wells And in those places, truck traffic was very heavy [advance] Second, water and wastewater infrastructure costs have been substantial, particularly in western states experiencing rapid population growth. Those regions have some similarities with the Vaca Muerta region and Anelo province, which I’ll cover a little later. One of the big challenges, and risks, faced by local governments in these regions is that investments in these water and wastewater systems often require tens of millions of dollars and need to be recouped over decades. If oil and gas activity declines after the investment is made, local governments may have a hard time financing those investments, an issue we saw in a number of cities. This issue is relevant for the Vaca Muerta region because oil and gas prices tend to be volatile. When prices are high, there’s lots of drilling and production, which leads to population growth. During those periods, local governments are trying to keep up with population growth and expand their services. But when prices fall, population growth also slows, and government revenue declines. If governments have invested heavily in expanding their services, they may face difficulty financing those investments over the longer term. Photo by Daniel Raimi DeWitt County, TX 2014

Regional governments may face a range of increased staff costs Police/fire/EMS Increased vehicle traffic, well site accidents, population can increase demand Specialized training and equipment may be necessary Other staff costs Workforce retention is often a challenge during periods of industry growth Housing government employees has been a challenge in some regions We also saw a variety of staff costs for local governments. Many counties and cities have seen substantial upticks in demand for police, fire, and emergency services. This growth is mostly due to increased vehicle traffic leading to more accidents, and increased population increasing the need for each of these services. For fire departments in regions without much prior experience with the industry, we saw substantial expenditures on training and new equipment to manage fires and other incidents involving well sites or hazardous materials. [advance] The other major staff cost we observed was workforce retention, which was an issue for almost every local government we visited, and was caused by the high pay offered in the oil and gas sector, especially for individuals with experience operating heavy machinery. Photo by Daniel Raimi Glendive, MT 2013

State governments have updated and/or expanded oil and gas regulatory programs Add/increase expertise in oil and gas issues Some U.S. regions have a long history of regulating oil and gas activity Other regions have needed to build regulatory programs and staff expertise Increase monitoring and enforcement activities For governments in regions where oil and gas activity grew rapidly, there have been a different set of staff costs. Those costs are generally associated with the need to update regulations for oil and gas producers. We have not focused on this issue in our research, but it’s certainly an important government service that I would expect the Vaca Muerta region is dealing with today. Some states, like Texas, Oklahoma, New Mexico, and others have decades of experience regulating oil and gas production. But states like Pennsylvania, Ohio, and North Dakota needed to find the people who had the expertise to develop smart regulations on the industry. [advance] Those regions, and other regions experiencing a substantial increase in drilling activity, would need to increase the number of people who monitor production sites and enforce regulations that are in place. Photo by Daniel Raimi Dimock Township, PA 2013

A small number of local governments have faced environmental-related costs Induced seismicity associated with wastewater injection Quakes in parts of Oklahoma and Kansas pose risks for private and government property Legacy environmental damage Cities in Los Angeles County have encountered increased construction costs for infrastructure projects due to abandoned oil wells and infrastructure A fourth and final type of cost we observed was related to environmental issues. In parts of Kansas and Oklahoma, government property has suffered damage from seismic activity associated with increased volumes of oil and gas wastewater disposal in the region. Private property can also be effected by these earthquakes. Ratings agencies have issued warnings about private property values in this region, which could in turn decrease government revenues. It’s important to note that these earthquakes have not occurred in most oil and gas producing regions. They’ve been an important issue in the places where they occur, but that’s really just 1 out of the 21 regions we examined [advance] We saw a second environmental issue in parts of southern California, where abandoned oil pipelines and oil wells from the early 20th Century would turn up during construction, with contaminated soils. For infrastructure projects like laying new water lines, this means that the city has to pay for the cleanup of those sites. For private developers, this raises the costs of construction, which in turn can affect local local economic activity, property values, and tax revenue. Photo by Daniel Raimi Panola County, TX 2014

Key revenue sources for local governments related to oil and gas development Those are the key costs and challenges we saw in our research. Now I’ll look at the other side of the ledger--the major revenue sources associated with the industry.

Key revenue sources for state and local governments State severance taxes Collected by state governments, may or may not be allocated to local level Local property taxes Collected by local governments, oil and gas property definitions vary by state Federal, state, and local oil and gas lease revenue Collected by federal, state, and in some cases local governments Sales and use taxes Collected by state and local governments in most U.S. states Corporate and personal income taxes In-kind contributions Road repairs and/or donations from oil and gas companies Oil and gas activity tends to increase state and local government revenues from a variety of sources. Here are the leading six sources that we saw in the US. Generally speaking, the largest revenue source for state and local governments comes from state taxes on the production of oil and gas. These are called severance taxes, where the state collects a percentage of the value of oil and gas produced. The state collects this tax, and in some cases sends a portion of that revenue to the local governments within that state [advance]. The leading revenue source for local governments was taxes applied to oil and gas property. This includes the above-ground equipment as well as the value of produced oil and gas or, in some states, the value of underground reserves. [advance] State governments also receive revenue from oil and gas leases on state and federal land. In the US, most oil and gas production happens on privately owned land, and the private landowners are the ones who collect royalties. But the federal government, state governments, and local governments also own land, and they lease some of that land for oil and gas production. In those cases, the governments are the ones that collect royalties, usually somewhere between 15 and 20 percent of the value of oil and gas produced [advance]. Another major revenue source is sales taxes. Collections tend to rise when the industry brings new workers and economic activity to a region. [advance] Fifth, state governments in the US often collect income taxes from oil and gas companies, and on individuals who earn money either as an employee of oil and gas companies or as a landowner who receives royalties from production [advance] Last but not least are in-kind contributions from oil and gas companies to local governments. We saw in-kind donations, especially on road repair, where oil and gas companies would repair roads that they damage during their work. We only saw these in some parts of the US, and it wasn’t clear why they were common in some places and uncommon in others.

Each U.S. state collects different amounts of revenue from oil and gas producers Tax policies and rates vary widely Resource base varies widely Revenue allocation policies vary widely Comparing revenue policies between states can be complex for three main reasons. First, tax policies and tax rates vary widely from state to state. For example, the severance tax in Ohio is 0.5% and the rate in Alaska is closer to 20%. [advance] Second, states have different resource bases to tax. For example, Texas is the #1 producer of both oil and natural gas by a wide margin, and it raises billions of dollars per year from severance taxes, property taxes, and land leases. A state like Arkansas, on the other hand, is a much smaller producer. Arkansas raises less than $150 million per year. In addition, some states and local governments raise billions of dollars per year from oil and gas leases on the lands they own. Other states raise less than $1 million per year. [advance] And third, revenue allocation policies vary widely from state to state. That is to say, once states collect the revenue, they spend it in very different ways.

U.S. governments collect revenue directly and indirectly from oil and gas production Direct revenues Indirect revenues Federal lands leases Federal income taxes Federal government State lands leases State income taxes State severance taxes State sales taxes State governments I’m going to show exactly how much revenue each state collects and how it spends that revenue. But first, I want to make a distinction between direct revenue and indirect revenue associated with the oil and gas industry. I’m going to focus on direct revenues which are in blue on the left side of the figure. That includes oil and gas leases on federal lands, which the federal government collects. A portion of that revenue then flows down to other levels of government. I’ll also talk about leases on state lands and state severance taxes. Those are revenues collected by the state government, which shares some of that revenue with local governments. Local governments in the US also collect revenue from leases on local government lands, and from local property taxes. Those are the direct revenue sources that I’ll quantify in the next few slides. But there are also important revenue sources that I won’t attempt to precisely quantify: indirect revenue sources, shown in grey. For example, the federal government collects income taxes from oil and gas companies, and some of that revenue eventually flows to state and local governments. Many US states also collect income taxes and sales taxes. Those are taxes collected on the wages of oil and gas industry workers, or on the purchases made by companies and their employees. Local governments also collect sales taxes, and that can be a substantial revenue source in places where the oil and gas industry has a large footprint. In short, these revenue sources are much more complex to quantify, but I want to acknowledge their importance. Local lands leases Local sales taxes Local property taxes Local governments

We quantify the key sources of direct revenue for state and local governments For every $1 of revenue from oil and gas production, what percentage do state and local governments collect from: Federal leases State leases Severance taxes Property taxes Other revenue sources can be significant, but are more difficult to precisely quantify What we did in our research is we tried to quantify as many of the direct revenue sources as possible. In the next slide, I’ll show state and local government oil and gas revenue from federal leases, state leases, severance taxes, and property taxes.

Direct oil and gas revenues for U. S Direct oil and gas revenues for U.S. state and local governments in FY 2013 This figure shows the percentage of oil and gas revenue state and local governments collect. For example, if the value of oil and gas produced in Alaska in 2013 was $100, this figure shows that state and local governments collected a little less than $40. As I mentioned earlier, there is wide variation between states, ranging from about 1% in Ohio to almost 40% in Alaska. On average, state and local governments collect a little over 10%. The leading revenue source is severance taxes, shown in grey on this figure, averaging around 5% across the 16 states we examined. Local property taxes, shown in red, are also an important revenue source in many states. They average around 2%. Third, in orange, you can see revenue from oil and gas leases on federal lands. In rural western states like Utah, New Mexico, and Wyoming, this is a major revenue source, but it’s a fairly small source for others. Finally, in blue you can see revenue from leases on state lands. In a few states, particularly Alaska, this is a major revenue source. Most oil production in Alaska happens on the North Slope, on land owned by the state government. On average, state leases generate about 2.5% for state and local governments. Source: Raimi and Newell, forthcoming. Figure shows revenue flowing to local governments from state severance taxes, local property taxes on oil and gas property, state oil and gas lease revenues, and federal oil and gas lease revenues.

States allocate these revenues for a variety of purposes State current expenditures Largest recipient of funds State trust funds Savings for future state government operations Education current expenditures Second largest recipient of funds Education trust funds Savings for future education expenditures Local government current expenditures So that’s how the revenue is collected. Now let’s take a look at where that revenue goes. We categorize these expenditures into five main categories. First, state current expenditures are funds that the state government spends on day-to-day needs like funding infrastructure, health care, administration, and other needs. Second, state trust funds are funds that the state government puts into an endowment. The state can spend the interest on that endowment, but they cannot touch the endowment under most circumstances. Third, a large portion of funds goes to fund primary and secondary education. Fourth, some states also have trust funds that are designed to support education for future generations. Again, the state puts these revenues into an endowment, and the interest earned from those investments funds schools. Finally, a portion of revenue flows to local governments. Local governments spend this money on roads, law enforcement, water systems, and other local needs.

Allocation of direct oil and gas revenue for U. S Allocation of direct oil and gas revenue for U.S. state and local governments in FY 2013 And this figure gives a sense of how the money is spent in each state. These are the same percentages I showed in the last figure, but instead of showing where the revenue came from, it shows the revenue’s final destination. In red, you can see the largest use of these funds is on state current expenditures. On average about 4% of oil and gas revenue goes to this source. The shaded red area shows state trust funds, which are about 1%. You can see that some states, notably Alaska, North Dakota, and Wyoming, invest much more into these trust funds. In dark blue is revenue that is spent on primary and secondary education, which accounts for about 2%. And in shaded blue are funds that go to education trust funds, which receive about 1%. Again, these education trust funds are quite large in some states. And in orange is revenue flowing to local governments such as cities. On average, local governments end up with about 1.5% of the revenue generated by oil and gas. Source: Raimi and Newell, forthcoming. Figure shows revenue flowing to state and local governments from state severance taxes, local property taxes on oil and gas property, state oil and gas lease revenues, and federal oil and gas lease revenues.

Total revenue flows to state and local governments in 16 U.S. states Source: Raimi and Newell, forthcoming. A: Some state current expenditures are allocated through an annual budget process to education and local government.

Alaska oil and gas revenue flows in FY 2013 Source: Raimi and Newell, forthcoming. A: Some state current expenditures are allocated through an annual budget process to education and local government.

Colorado oil and gas revenue flows in FY 2013 Source: Raimi and Newell, forthcoming. A: Some state current expenditures are allocated through an annual budget process to education and local government.

Net fiscal impacts for local governments So I’ve talked about the revenues and I’ve talked about the costs associated with the industry. When we compare these revenues and costs side by side, here’s what we find

Summary of net local government fiscal effects: 2013-2015 Marcellus Fayetteville Haynesville Eagle Ford Permian Barnett Green River Denver- Julesburg San Juan Uintah North Slope Kenai Peninsula Kern County Woodford Hugoton Uniformly net positive Mixed positive/neutral Mixed positive/negative Mostly net negative Utica Piceance Los Angeles Anadarko Miss. Lime Bakken We find that for most local governments, oil and gas activity has had a positive net fiscal impact. The dark blue in this figure shows regions where every local government reported net positive fiscal impacts. The light blue shows regions where impacts were either positive or roughly neutral. The red color indicates net negative fiscal impacts, where demand for services associated with the industry outweighed new revenues, and you can see that in some regions we saw a mix of positive fiscal outcomes for some local governments, and negative fiscal outcomes for others. But the map is mostly blue, which tells you that we found net positive impacts across most regions. Some local governments, however, have faced substantial challenges meeting demand for services associated with the industry. For the most part, these are highly rural regions that have experienced rapid growth in oil and gas activity. Source: Raimi and Newell, 2016. Map source: Drilling Info 2.0. Heat map data represents drilling permits issued in the 90 days leading up to Feb. 20, 2015. Permit data not available for Alaska.

Case study: North Dakota’s Bakken shale region Marcellus Fayetteville Haynesville Eagle Ford Permian Barnett Green River Denver- Julesburg San Juan Uintah North Slope Kenai Peninsula Kern County Woodford Hugoton Uniformly net positive Mixed positive/neutral Mixed positive/negative Mostly net negative Utica Piceance Los Angeles Anadarko Miss. Lime Bakken I’ll now focus on one of those regions, because I think it might provide some useful insight for the Vaca Muerta region and Nuequen province. This is the Bakken shale, and I’ll talk about the experience in western North Dakota. Source: Raimi and Newell, 2016. Map source: Drilling Info 2.0. Heat map data represents drilling permits issued in the 90 days leading up to Feb. 20, 2015. Permit data not available for Alaska.

The Bakken region is highly rural and has experienced rapid growth Population density (persons/sq. mile, 2010) Rural-urban continuum code (2013, 9=most rural, 1=most urban) Bakken 5.6 8.2 Permian 20.0 6.4 Eagle Ford 40.7 5.2 Oil production (mb/d) The first thing to know about the Bakken is that it is extremely rural. This table shows two metrics that I won’t describe in detail, but they both basically show that the Bakken is far more rural than other major oil and gas producing regions in the US. [advance] But as this figure shows, the Bakken experienced oil production growth on a similar scale with the Permian and Eagle Ford. Sources: Population density estimates from the U.S. Census Bureau. Rural-urban continuum codes from the U.S. Department of Agriculture. Oil production and regional definitions from the U.S. Energy Information Administration.

Population in the Bakken grew extremely rapidly Census estimate Internal estimate Watford City, ND population That rapid growth in oil production led to rapid growth in population, similar to what I believe has been occurring the Vaca Muerta region. The figure at the top shows population estimates for one small city in the region called Watford City. This city grew from a population of about 2,000 ten years ago to almost 8,000 today. The picture at the bottom shows one of the many new housing developments that were going up in the region when we visited in 2013. Population growth was so rapid, and housing so scarce, that rental rates in the area increased by 400% or more in some cases. That created major challenges for residents on fixed incomes, and on local governments that were trying to attract new employees. Photo by Daniel Raimi Williams County, ND 2013

The region had limited infrastructure, both governmental and commercial (e.g., pipelines) The Bakken region had some history of oil production, but this boom was entirely new in scale. There were very few pipelines in the area, which meant that about 30% of the natural gas produced had to be flared. That also meant that lots of the oil and water produced had to be moved by truck instead of pipeline. And that meant an enormous amount of heavy truck traffic. Photo by Daniel Raimi Williams County, ND 2013

This led to a very large increase in demand for infrastructure expansion and repairs Here’s a road near a drilling rig in the area. These sights were fairly common in the area: roads that had been heavily damaged by industry vehicle traffic. That led to major new costs for local governments, and major headaches for companies trying to operate in the area and the local residents who used those roads every day. Photo by Daniel Raimi McKenzie County, ND 2013

Local governments reported in 2013 that revenues were not keeping up with demand for services Revenues had grown rapidly, but not as rapidly as costs Municipalities Major growth in demand for all services Several borrowed >$100M for new road and water/wastewater infrastructure Doubling, tripling, or quadrupling workforce while labor & housing costs soared Counties Unable to keep up with demand for road repair Also facing major new staff costs In 2013, during our first visit, industry activity was near its peak. Thousands of wells were being drilled each year, unemployment was estimated to be below 1 percent, and cities in the region like Watford City were bursting at the seams. Government revenues had grown rapidly, doubling, tripling, or more over the course of the previous several years. But local governments were struggling to keep up with costs. [advance] For municipalities, all the new residents meant that demand for services in every sector was growing enormously. These cities had each taken out upwards of $100 million in debt to upgrade their roads and their water & wastewater systems. And they were doubling, tripling, or quadrupling their staffs, even while labor and housing costs soared. [advance] For county governments, the major issue was road repair, and they simply weren’t able to keep up with demand.

When we returned in 2015 and 2016, some challenges had faded Partly due to market factors Partly due to policy factors About two years later, we returned to see whether things had changed. As it turns out, some—but not all—of the major challenges had eased up. This change was partly because of market factors, and partly due to changes in policy.

Lower oil prices have slowed drilling activity, truck traffic, and population growth Oil price (WTI $/bbl) ND rotary rig count First, the sharp drop in the price of crude oil in late 2014 reduced drilling activity, which in turn slowed truck traffic and population growth. This figure shows the drop in oil prices and the even more dramatic drop in the number of drilling rigs operating in the state. Data sources: BakerHughes for rig count, U.S. EIA for West Texas Intermediate spot price (nominal dollars)

State policy changes allocated additional revenue to localities 2015 legislation allocated a larger proportion of severance tax revenues to localities, along with one-time “surge” funding Watford City, ND Dunn County, ND millions millions At the same time that these market factors were reducing demand on local governments, the state of North Dakota made several policy changes to direct more revenue to the regions that had been most heavily impacted. Specifically, the state allocated a larger portion of severance tax revenues to local governments. It also allocated a large one-time allocation of “surge” funding to local governments. Watford City, which sits right in the heart of the producing region, saw its revenues from the state grow from less than $10 million in 2013 to $40 million in 2014 and more than $50 million in 2015. [advance] The state also increased allocations to Dunn County, which sits right next door. Source: Raimi and Newell 2016, Dunn County and Watford City, a case study of Bakken development

Local governments used these revenues to boost infrastructure and amenities Williston, North Dakota’s new $75 million Area Recreation Center. Photo by Daniel Raimi, October 2016.

While near-term issues have eased, long-term challenges remain Counties are having less difficulty maintaining roads and bridges Local governments have expanded to serve their larger populations But some municipalities now hold hundreds of millions of dollars in debt, and public revenues are falling due to low oil prices Slow growth over the longer term could create major fiscal challenges Economic diversification is a priority for local policymakers, but will likely be a challenge So what’s been the net impact of these market and policy changes? First, truck traffic has slowed rapidly and revenues have increased, making it easier for local governments to repair their roads. [advance] Local cities have essentially stopped expanding. They’re now big enough to serve their larger populations. [advance] But cities like Watford City now hold hundreds of millions of dollars in debt for infrastructure expansion. At the same time, public revenues are starting to fall—state severance tax collections are way down, and local sales taxes have also declined. If this downturn continues for another several years, one could imagine these debts causing substantial fiscal challenges for years to come. [advance] To try and reduce some of these risks, local policymakers have been working hard to diversify their economic base. But that’s probably going to be difficult. As I mentioned a few minutes ago, the region is quite isolated, and the volatility of the oil industry means that any investment in the region will be subject to volatility and uncertainty. In short, the most acute challenges seem to have passed, dealing with all of that rapid growth has created some new risks.

Conclusions and implications for unconventional oil and gas development in Brazil

Analysis and conclusions Most local governments report net positive fiscal impacts But local factors and policies matter Design of revenue collection and allocation mechanisms can significantly affect local experience In rural regions with heavy activity, infrastructure costs can outpace revenues Environmental issues have imposed substantial costs in a few locales A good working relationship with operators can help reduce infrastructure costs and manage other problems that may arise Revenue volatility can be a major challenge Policies in some regions exacerbate, rather than smooth out this volatility Regions with declining production face distinct issues Economic diversification will be a challenge for some regions So to summarize our results, most local governments report net positive fiscal impacts. [advance] But local factors and policies can make a big difference. We highlight four key factors: First, the design of revenue systems for local governments matters, and there are a variety different ways to design those systems. I’ll touch on that more in a moment. Second, in rural regions with large-scale industry activity, infrastructure costs can be very substantial. Third, environmental issues have not been a major challenge for most local governments, but have appeared in a few locations. And fourth, collaboration between local governments and companies, particularly on road repair, can go a long way to reduce infrastructure costs. [advance] Another key finding is that revenue volatility can be a major challenge for local governments. In some states, policies tend to exacerbate this volatility instead of smoothing it out. More volatility and uncertainty generally makes it harder for local governments to plan for the future. [advance] And finally, In today’s low price environment, regions with declining production face new challenges, largely associated with trying to diversify their economies. We’ll be looking into some of those challenges as we continue our research in this area.

Key considerations for emerging plays In rural regions, key issues will be scale-up and long-term issues of economic diversification Revenue mechanisms should seek to balance two priorities Allocate revenue to meet near-term needs Spend and save to support long-term economic and community health Near term: A two-part revenue allocation model may be appropriate to manage One funding source based on a percentage of oil and gas value A discretionary funding mechanism that can respond to unexpected needs Longer term: Spend and save to support two key goals Provide revenue for a time when the resource is extracted Lay the foundation for a more diversified economy

Implications for Brazil Some Brazilian regions with potential for shale development are sparsely populated Solimoes basin, Jandiatuba formation Amazonas state is roughly 6 people per square mile, similar to XXYY What is the current oil and gas revenue sharing system? Allocation of these funds is important for managing near-term impacts and long- term fiscal health More densely populated regions face other issues There is the potential for disruption of quality of life (traffic, noise, etc.) Local population may benefit from workforce training programs Energy infrastructure siting can be very important for future land use planning

Thank you Daniel Raimi raimi@rff.org Senior Research Associate, Resources for the Future Lecturer, University of Michigan Ford School of Public Policy raimi@rff.org Publications online at http://www.rff.org/shalepublicfinance

Publications: www.rff.org/shalepublicfinance Thank you Daniel Raimi Senior Research Associate, Resources for the Future Lecturer, University of Michigan Ford School of Public Policy Email: raimi@rff.org Publications: www.rff.org/shalepublicfinance