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 WyomingDavid 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 km2

• 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 40.32 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 questions1. 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 SectorsCrops (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 ClassesHHD1 Income<$10KHHD2 Income $10-15KHHD3 Income $15-25KHHD4 Income $25-35KHHD5 Income $35-50KHHD6 Income $50-75KHHD7 Income $75-100KHHD8 Income $100-150KHHD9 Income $150K+

CBM water emissionsGas and CBM water are outputs of production in the oil and gas extraction (OGE) sector

“early” case: 1 MCF of gas = 41.57 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 p0 and had income m0

before CBM began– After CBM begins they face a new set of prices p1 and have new

income m1

– Welfare impact of CBM = u(p1,m1) – u(p0,m0)• 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