Regional Economic Impacts of Coal Bed Methane Water Management in the Powder River Basin of Wyoming Roger Coupal, Department of Agricultural and Applied Economics, U of Wyoming David Finnoff, Department of Economics and Finance, U of Wyoming Charles Sims, Department of Applied Economics, Utah State University

Powder River Basin (PRB) Covers 31,080 km 2 Primary land uses are agriculture and ranching Provides most of the irrigation water in the area Semi-arid climate with 30 – 41 cm/year in precipitation Checkerboard pattern of federal, state, and private landowners BLM dominate landowner with 315,774 ha of public lands and 602,311 ha of mineral estate

Coal-bed methane (CBM) Coal beds account for 7% of natural gas produced annually CBM emerging as an economically viable source of methane PRB has largest coal reserves in U.S. Rapid CBM development over last decade generating considerable tax revenues, jobs, and regional income

Co-produced water Methane extracted by pumping groundwater from CBM production wells Pumping causes drop in pressure that forces methane gas to surface Surface discharge and disposal of CBM produced water currently considered a beneficial use in both Montana and Wyoming Water production about million gallons per day in PRB

Concerns with co-produced water The quantity of water – Lowered water levels in aquifers – Soil erosion – Disruption of natural water flows The quality of water – Co-produced water has moderately high salinity hazard and very high sodium hazard

Water quality effects on soil and plants Sodic water causes soil crusting and impairs soil hydraulic conductivity and infiltration CBM product water can make clay soils completely unsuitable to plant growth High salinity and sodium levels cause replacement of salt intolerant species with more salt tolerant species

Co-produced water management Current management practices – Discharge into stream channel – Apply to crop or rangeland – Storing in infiltration ponds – Dust control and coal mine use – Reinject back into aquifer Surface disposal transfers ownership and responsibility to the State creating an incentive to engage in surface disposal Costs accrue to surface owners and the state not the coal industry (externality)

Economic questions 1.What are the positive economic benefits (jobs, income, regional tax revenue) and negative environmental costs of CBM development in the PRB? 2.How to manage CBM water production in a way that minimizes the impact on state and private landowners and how does this management affect the rest of the economy? Approach: A computable general equilibrium model of the PRB economy

Computable general equilibrium (CGE) General equilibrium theory – markets in real world economies are mutually interdependent Computable general equilibrium – An attempt to use general equilibrium theory as a modeling tool in empirical analyses of resource allocation and income distribution issues in market economies – Aimed at quantifying the impact of specific policies on the equilibrium allocation of resources and relative prices of goods and inputs

Characteristics of CGE models Household (consumers) disaggregated by income levels Firms (producers) disaggregated by producing industries Utility and profit maximizing behavior on the part of households (consumers) and firms (producers) Product (output) and factor (input) markets are competitive and relative prices flexible enough to ensure supply equals demand Includes non-market transactions such as government transfers

Input (Capital and Labor) Output Household (Consumption) Firm (Production) Firm (Production) Output Exports to foreign or domestic output markets Imports from foreign or domestic output markets Exports to foreign or domestic input markets Imports from foreign or domestic input markets Government taxes Government Revenue

Industry Sectors Crops (CROP) Livestock (LVSTK) Construction (CONST) Electricity generation and supply (EPWR) Utilities (UTIL) Wholesale and retail trade (TRAD) Oil and Gas extraction (OGE) Oil and gas drilling (OGD) Oil and gas support (OGC) Coal (COAL) Other mining and quarrying (MIN) Processed food (FOOD) Manufacturing (MAN) Finance (FIN) professional and business services (PSER) Services (SER) Federal Government (FGOV) State Government (SGOV) Local Government (LGOV) Miscellaneous (MISC) Household Income Classes HHD1 Income<$10K HHD2 Income $10-15K HHD3 Income $15-25K HHD4 Income $25-35K HHD5 Income $35-50K HHD6 Income $50-75K HHD7 Income $75-100K HHD8 Income $ K HHD9 Income $150K+

CBM water emissions Gas and CBM water are outputs of production in the oil and gas extraction (OGE) sector “early” case: 1 MCF of gas = barrels of water “moderate” case: 1 MCG of gas = 6.06 barrels of water “late” case: 1 MCF of gas = 3.30 barrels of water

CBM water impacts and production Ranchers select inputs (water, etc.) to minimize costs of production The effect of CBM water is introduced by decreasing the efficiency of water as an input in production – Livestock forage will be reduced Water is now less efficient in production increasing the cost of water relative to other inputs and increasing the overall cost of producing livestock – Ranchers must purchase feed due to reduced forage Ranchers respond by reducing the production of livestock which has effects that spread throughout the economy

Input (Capital and Labor) Oil & Gas Household (Consumption) Oil & Gas Co. (Production) Rancher (Production) Livestock Exports to foreign or domestic output markets Imports from foreign or domestic output markets Exports to foreign or domestic input markets Imports from foreign or domestic input markets Government taxes Government Revenue CBM water

Welfare measures Households gain utility or welfare u from their consumption of goods (oil, gas, livestock, etc) but their consumption is constrained by income (m) and the price of the consumption good (p) How do we measure the welfare impact of CBM in PRB? – Suppose households face a set of prices p 0 and had income m 0 before CBM began – After CBM begins they face a new set of prices p 1 and have new income m 1 – Welfare impact of CBM = u(p 1,m 1 ) – u(p 0,m 0 ) We can calculate the same measures for any policy change – Tax on surface disposal of CBM water – Prohibiting surface water disposal – Subsidy on crop and livestock production in the basin

Economic Data and Specification Benchmark dataset based on 2004 IMPLAN derived social accounting matrix (SAM) – IMPLAN data: data on transactions between 509 industry sectors, 9 household groups, and 4 levels of government – SAM: a static matrix representation of transactions that take place in the regional economy Information from WY Dept of Audit and U.S. Bureau of Economic Analysis used to modify data All model parameters (except elasticities of substitution) are calibrated using data and optimality conditions

Policy analysis 6 different policy scenarios that make different assumption about how detrimental CBM water emissions are on livestock production Each scenario evaluated with tax rates ranging from 0 to 0.5 Welfare changes measured in comparison to “business as usual” scenario What are the regional consequences of a quantity tax on the output of OGE levied by local governments?

Regional Livestock Production

Welfare impacts by household when CBM water emissions have no detrimental impacts

Welfare impacts by household when CBM water emissions have large detrimental impacts

Welfare impacts by household when CBM water emissions have intermediate impacts

What drives welfare changes? Direct price effects – Increase in price of OGE – Decrease in price of LVSTK Income effects – Wages fall – Rental rate of capital rises Indirect price effects – More capital intensive sectors → upward pressure on unit costs & prices – More labor intensive sectors → downward pressure on unit costs & prices – Sectors using OGE as intermediate input → upward pressure on unit costs & prices – Sectors using LVSTK as intermediate input → downward pressure on unit costs & prices Overall – For all scenarios (except 6) domestic prices decline in most sectors – Welfare losses occur because declining wages lower household incomes by more than the aggregate price decline – Differences in welfare impacts among different income groups due to different compositions of capital and labor ownership as well as household demands for output from different sectors

Take home points 1.Tax on OGE sector will only have positive impact if CBM water has a negative impact on livestock production 2.Low income households experience welfare gains even if no detrimental impact from CBM water 3.Regional wages fall but the rental rate of capital rises with tax on OGE sector 4.Welfare losses occur because declining wages lower household incomes by more than the aggregate price decline 5.All scenarios increase local government tax revenues

Extensions and caveats Clearly impacts may accrue to more than livestock sector Static model that provides a “snapshot” of the regional economy Need more sophisticated relationship between gas and water production Integrate watershed and hydrologic studies to determine actual watershed impacts