Frackers Fund University Research That Proves Their Case

Pennsylvania remains the largest U.S. state without a tax on natural gas production, thanks in part to a study released under the banner of the Pennsylvania State University.

The 2009 report predicted drillers would shun Pennsylvania if new taxes were imposed, and lawmakers cited it the following year when they rejected a 5 percent tax proposed by then- Governor Ed Rendell.

“As an advocacy tool, it worked,” Michael Wood, research director with the non-profit Pennsylvania Budget and Policy Center in Harrisburg, Pennsylvania, said in an interview. “If people wanted to find a reason to vote against having the industry taxed in that way, that gave them reason to do it.”

What the study didn’t do was note that it was sponsored by gas drillers and led by an economist, now at the University of Wyoming, with a history of producing industry-friendly research on economic and energy issues. The researcher, Tim Considine, said his analysis was sound and not biased by industry funding.

As the U.S. enjoys a natural-gas boom from a process called hydraulic fracturing, or fracking, producers are taking a page from the tobacco industry playbook: funding research at established universities that arrives at conclusions that counter concerns raised by critics.

Buying Prestige

Cary Nelson, president of the American Association of University Professors, who made the tobacco analogy, said companies and their trade associations are “buying the prestige” of universities that are sometimes not transparent about funding nor vigilant enough to prevent financial interests from shaping research findings.

The Penn State report is not the only example.

A professor at the University of Texas at Austin led a February study that found no evidence of ground-water contamination from fracking. He did not reveal that he is a member of the board of a gas producer. Company filings examined by Bloomberg indicate that in 2011, he received more than $400,000 in compensation from the company, which has fracking operations in Texas.

A May report on shale gas from the State University of New York at Buffalo (85074MF) contained errors and did not acknowledge “extensive ties” by its authors to the gas industry, according to a watchdog group. One of the authors was Considine, the same economist who wrote the Penn State study.

Growing Problem

“It’s a growing problem across academia,” Mark Partridge, a professor of rural-urban policy at the Ohio State University, said in an interview. “Universities are so short of money, professors are under a lot of pressure to raise research funding in any manner possible.”

In 2008, private sources provided about 6 percent of all academic research funding, according to a June report from the Washington-based AAUP. The figure excludes gifts, endowments for new faculty appointments, consulting or speaking fees, honoraria, seats on company boards, commercial licensing revenue, or equity in startups.

Controversy has followed when research too closely supports a corporate agenda. Litigation against tobacco companies helped reveal a decades-long effort that relied on academic research to suppress the dangers of smoking. Today, schools of public health at Columbia University, Harvard, Johns Hopkins, and others ban tobacco funding, according to the association’s report.

Inside Job

More recently, the 2010 documentary film “Inside Job,” reported that the financial-services industry paid university economists to testify in Congress and in antitrust cases, serve on boards of directors, and give speeches to the companies and industries they study, without disclosing the inherent conflicts of interest.

As questions have arisen about the environmental and economic implications of fracking, the same pattern is appearing.

Fracking, in which millions of gallons of chemically treated water and sand are forced underground to break shale rock and free trapped gas, has lowered energy prices, created jobs, and enhanced national security, according to a task force formed by President Barack Obama’s Energy Secretary Steven Chu. It is displacing coal, lowering U.S. output of pollution blamed for global warming.

Earthquake Links

Critics say the benefits may not outweigh the environmental and health risks. Fracking has been linked to groundwater contamination in Pennsylvania, high ozone levels in Wyoming and to headaches, sore throats and difficulty breathing for people living close to wells in Colorado. Burying wastewater from drilling has been linked to earthquakes in Ohio, Arkansas and other states.

Some of the controversies on fracking research center on the Marcellus Shale, a gas-rich geological formation which stretches from New York to Tennessee.

In 2009, with drilling interest on the rise in Pennsylvania’s share of the Marcellus, Rendell proposed a severance tax similar to one in West Virginia – a 5 percent levy on the value of gas produced plus 4.7 cents for every 1,000 cubic feet. The tax would have generated about $100 million in its first year. Opponents cited the Penn State study, which found that drilling would decline by more than 30 percent under the tax. Considine, a former professor of energy and environmental economics at Penn State’s College of Earth and Mineral Sciences, was the lead author.

Drew Complaints

“The high level of drilling activity in Pennsylvania is a function of relatively lower taxes,” according to the report. “This competitive advantage should be maintained.”

The study drew complaints prompting William Easterling, dean of Penn State’s College of Earth and Mineral Sciences, to investigate.

The section on a severance tax “should be more scholarly and less advocacy-minded,” he wrote in a June 9, 2010 letter to the Responsible Drilling Alliance, a Williamsport, Pennsylvania, group that supports a tax. Considine’s treatment of the issue may have “crossed the line between policy analysis and policy advocacy,” Easterling wrote.

“We appeared to them as an institution to be saying that we support fracking,” Easterling said in an interview. “So we just needed to clarify that. Once we did they weren’t completely happy campers, but at least they knew that we weren’t for sale.”

‘Clear Error’

Easterling also cited as a “clear error” the failure to disclose industry funding in the initial July 24, 2009 report. An Aug. 5 version identified the sponsor, Marcellus Shale Coalition, which provided a grant of about $100,000. News reports referred to the work as a Penn State study.

The Marcellus Shale Coalition, represents about 300 companies and provides information to policy makers, regulators and media on the “positive impacts” of gas development, according to its website.

“The gas industry is free to put out the facts the way they see them, but it’s different when it masquerades behind an academic institution,” Myron Arnowitt, Pennsylvania state director for the environmental group Clean Water Action, said in an interview.

“We would agree that whether or not this study came out with a Penn State seal on it or not, that it’s not appropriate to call it a Penn State study,” Easterling said. “The implication is that Penn State as an institution has done a study that has the imprimatur of Penn State.”

Legislative Debate

At the statehouse in 2010, State Representative William Adolph, a Republican from Springfield, Pennsylvania, cited Considine’s work during a debate over the proposed drilling tax. Imposing the tax would slow the growth of shale gas and threaten new jobs, Adolph said.

The study, Adolph said, revealed that the industry had created tens of thousands of jobs. “They predict another 110,000 in the next 2 years,” he said.

Adolph did not reply to a request for comment from Bloomberg News.

Representative Brian Ellis, a Republican from Butler, and then co-chair of the house Natural Gas Caucus, formally released the study at a July 27, 2009 press conference.

Butler, about 30 miles north of Pittsburgh, is seeing the benefits of gas drilling in new jobs and more business for restaurants and hotels. Gas drillers already pay state corporate taxes, Ellis said.

Impact Fee

“The ultimate question is do you believe that the folks doing the study are credible or not, and generally speaking, I have a lot of faith in the studies that have come out of Penn State,” Ellis said in an interview.

Rendell eventually dropped the severance-tax proposal, and Pennsylvania remains the largest gas-producing state without one, according to the National Conference of State Legislatures. Instead, the state this year approved a fee on drillers that municipalities can elect to charge to cover road damage and other impacts.

The impact fee will bring in about $85 million this year compared to $200 million under a 5 percent tax, assuming a gas price of $2.50 per thousand cubic feet, according to the Pennsylvania Budget and Policy Center, a non-partisan research group that provided analysis on state tax and budget issues. The fee will peak at about $200 million a year, while the tax could have reached $500 million in 2015 if gas prices rebound to $4.50.

Found ‘Troubling’

“I myself was taken aback by Penn State’s being used by the drilling industry to support their opinion here,” Representative Greg Vitali, a Haverford, Pennsylvania, Democrat, said in an interview. “I found it troubling.”

Considine said he had left Penn State for the University of Wyoming while the report was being produced and did not know why it was initially released without disclosing its industry sponsor.

“There are so many opponents of shale gas drilling in that region that they see anything that’s funded by industry, in their view it’s biased,” Considine said in an interview. “I disagree.”

Considine, who received a Ph.D. in economics from Cornell University, has also worked as an economist at Bank of America (BAC), and as the lead analyst for natural gas deregulation on the U.S. Congressional Budget Office, according to his University of Wyoming profile.

Economic Impact

In a 2011 study of the economic impacts of the Marcellus Shale in Pennsylvania, Timothy Kelsey, professor of agriculture economics at Penn State, found that drilling created as many as 23,884 jobs in 2009, less than half the number in Considine’s report. Considine assumed that landowners who got money from drillers live in Pennsylvania — according to Kelsey 7.7 percent live out of state — and that they would spend windfall bonus payments from leasing their property as they would ordinary income, Kelsey said.

“What we found out by surveying folks is they’re saving half of those dollars,” Kelsey said. “Because of that, the economic impact in any one year is going to be a lot less.”

A 2012 update of Considine’s economic analysis for Pennsylvania will assume that half the money going to landowners is spent and half saved, a shift from earlier reports that assumed 80 percent would be spent, according to Kathryn Klaber, president of the Pittsburgh-based Marcellus Shale Coalition.

“Is it materially going to affect the results?” Klaber said in an interview. “Absolutely not. The fact that new information is being taken into account by Considine to continuously improve the assumptions, that’s exactly what we want him to be doing.”

Industry Expertise

“We want somebody who’s got expertise in the industry to run standardized models and be able to interpret them with expertise,” Klaber added. “I think we got it right. To have an independent institution run the analysis to give all stakeholders a sense of the order of magnitude of what kind of jobs and economic impacts it’s brought with it.”

In Texas, Charles Groat, associate director of the Energy Institute at the University of Texas and former Director of the U.S. Geological Survey, proposed a study to help state regulators manage shale gas issues. He selected the researchers, edited its summary and presented it to the American Association for the Advancement of Science on Feb. 16.

Plains Exploration

Groat also sits on the board of Plains Exploration & Production Co. (PXP) (PXP), a relationship he didn’t disclose in the report, to his boss, or at the Feb. 16 meeting. As a board member, Groat receives 10,000 shares of restricted stock each year, according to company reports. His holdings as of March 29 totaled 40,138 shares, worth $1.6 million at the July 19 closing price. He also receives an annual fee, which was $58,500 in 2011. Houston-based Plains Exploration is fracking in shale formations in Texas, company spokesman Ed Memi said in an e-mail.

Raymond Orbach, director of the Texas university’s Energy Institute, said he learned of the connection from a Bloomberg reporter’s inquiry.

The report concludes that while there have been surface spills of fracking wastewater, there is no evidence of groundwater contamination from fluids injected thousands of feet below the surface.

Press Release

That produced the headline on the university’s press release that got news media attention:

“New Study Shows No Evidence of Groundwater Contamination from Hydraulic Fracturing,” according to the university’s Feb. 16 press release. The study cost about $270,000, none of which came from industry sources, according to university spokesman Gary Rasp.

“This report got more traction with the media because it was framed as independent,” Kevin Connor, director of the Public Accountability Initiative, a Buffalo non-profit that focuses on corruption in business and government, said in an interview. Connor’s group, which is preparing a report on the Groat study, receives funding from organizations such as the Sunlight Foundation and United Republic, which favor greater transparency in government.

The report can’t be viewed as industry friendly because it includes negative impacts of fracking, Orbach, a former under secretary at the U.S. Energy Department, said. Still, Groat’s failure to disclose his ties to Plains Exploration was an “issue,” Orbach said.

‘No Idea’

“To be honest, we had no idea,” Orbach said in an interview. “In the future we should have an asterisk or something that would indicate his presence on the board.”

In a subsequent e-mail, Orbach added, “while I believe this should have been disclosed when the study was released, I do not believe his service on the board had any impact at all on the findings.”

Sections of the report dealing with the regulation of fracking were written by Hannah Wiseman, assistant professor at Florida State University College of Law. Wiseman said she knew of Groat’s industry ties yet felt no pressure to deliver industry-friendly findings.

In her section of the report, Wiseman found “significant gaps” in state oversight of fracking.

Groat offered a more enthusiastic endorsement of state efforts when he presented the report Feb. 16.

“We conclude that there isn’t the need for pervasive new regulatory frameworks,” Groat said. “There’s a need for some supplementing within the states that regulate most of this, but by and large they’re doing a decent job.”

No Modifications

Wiseman, who called states’ efforts to improve regulation “spotty,” continues to work on studies for the Texas institute.

“States need to improve many of their regulations,” Wiseman said in an interview. “It’s hard for me to comment on my boss’s characterizing.”

Groat said he did not try to lead the researchers to industry-friendly conclusions.

“The study results were determined by the individual investigators,” Groat said in an e-mail. “I made no modifications or alterations of their findings, some of which were not particularly pleasing to the shale-gas industry. Disclosing my Plains board position would not have served any meaningful purpose relevant to this study.”

Nelson, of the American Association of University Professors, said the university needs to go further.

‘Obvious Conflict’

“It’s more than an asterisk,” Nelson said in an interview. “They should be thinking about having regulations in place that would prevent someone with an obvious conflict of interest from playing certain roles.”

Considine is now a professor of economics in the School of Energy Resources at the University of Wyoming. The school and the university rely heavily on funding from the state’s oil, gas and coal producers.

“You can’t quantify how important minerals are to the state and to the University of Wyoming,” Renny MacKay, a spokesman for Republican Governor Matthew Mead, said in an interview. “You’re looking at a state with no income tax, no corporate tax. We’re all 100 percent reliant on minerals here in Wyoming.”

Wyoming collects a 6 percent severance tax on oil and natural gas production.

In addition to state funding, the School of Energy Resources last year received about $5.75 million in gifts from energy companies, according to its director Mark Northam.

Marathon Oil

In April, Houston-based Marathon Oil Corp. (MRO) (MRO) announced a $1 million gift to the university. The contribution “is consistent with Marathon Oil’s focus on supporting key educational initiatives in communities where we operate,” Jim Bowzer, vice president of Marathon’s north American production, said in a statement.

Calgary-based Encana Corp. (ECA) (ECA) which operates gas wells in Wyoming’s Jonah field, has given $7 million dollars to the university over the past six years to better train students for the oil and gas sector, according to Encana spokesman Doug Hock.

Corporate gifts are used for buildings, research equipment, scholarships or fellowships and help foster “a better educated student because we train their work force,” Northam said. Research priorities at the school are set by a council appointed by the governor that in 2011 included representatives from Anadarko Petroleum Corp. (APC) (APC), Arch Coal Inc. (ACI) (ACI), Rio Tinto Group, the world’s third-largest mining company, General Electric Co. (GE) (GE), and Denver-based gas producer QEP Resources Inc. (QEP) (QEP)

Corporate Generosity

The corporate generosity has some worried about the impact on academic independence.

“There’s no question that the oil and gas industry is approaching the University of Wyoming with a great deal of walking-around money and directly funding some of these departments with the apparent agenda of influence peddling, and it seems to be working very well for them,” Erik Molvar, a wildlife biologist with the Biodiversity Conservation Alliance in Laramie, Wyoming, said in an interview.

Hock of Encana rejected such characterizations of corporate involvement in research.

“It is unfortunate and there’s nothing we can do about that,” Hock said in an interview. “We want good science and we want to build a a skilled workforce.”

Considine has conducted contract research for industry groups such as the American Petroleum Institute and the Wyoming Mining Association. In a 2009 report for the mining group, Considine said Wyoming coal would lower U.S. energy costs by $280 billion a year. Global warming emissions from burning coal could be reduced by planting trees and using technology still in development to capture carbon dioxide from smokestacks, he said in the report.

Marcellus Shale

In a 2010 report for the Washington-based petroleum group, Considine said Marcellus Shale gas in New York, Pennsylvania and West Virginia would generate $16 billion in economic output and 184,000 jobs. The project, which relied on the same computer model used in the Penn State report, was done “during the summer when he not obligated to the university, so in a way it’s consulting,” the School of Energy Resource’s Northam said.

Last year, Considine co-wrote a report for the free-market Manhattan Institute that said gas drilling in New York would trigger $11.4 billion in economic output and create 90,000 jobs. In a 2011 year-end message to donors, the institutes’s president, Lawrence Mone, called its work crucial as “record federal spending and a seemingly endless stream of job- destroying policies continue to undermine economic recovery.”

WildEarth Guardians

“He’s definitely someone that we would just consider to be an industry propagandist,” Jeremy Nichols, director of the climate program at the conservation group WildEarth Guardians, said in an interview. “There’s not even an air of objectivity to it.”

“This whole ideal of industry funding biasing research is preposterous,” Considine said. “You look at universities all around the country. There are billions of dollars flowing from companies to do basic R&D.”

Regulators in New York have been weighing environmental rules on fracking since 2008. New York Governor Andrew Cuomo is considering a plan that would allow fracking in five counties near the Pennsylvania border.

In April, the newly formed Shale Resources and Society Institute at the State University of New York at Buffalo found that drillers in Pennsylvania had reduced by half the rate of blowouts, spills and water contamination since 2008. Potential environmental problems could be “entirely avoided or mitigated” under New York’s proposed rules, according to the shale institute’s report. Considine was the lead author.

Public Accountability

Connor of the Public Accountability Initiative sees similarities to Considine’s Penn State reports.

“You’ve got the authority of a public research university being used to publish research by individuals with a strong bias to the natural-gas industry,” Connor said. “It almost appears that work for this report had already been done and the University of Buffalo label just applied to it.”

Meanwhile, the shale resources institute is soliciting corporate partners, seeking $1.14 million to launch a “landmark effort to leverage the safe, sustainable, economic development of shale gas,” according to a document Connor said he downloaded from the group’s website.

“One of the amazing things about this institute is that it does not mention the words public health as something that will be considered,” Jim Holstun, an English professor and one of about 20 members of the newly formed University at Buffalo Coalition for Leading Ethically in Academic Research, a group formed in response to the drilling report, said in an interview.

Environmental Accidents

Contrary to the report’s central finding, the rate of major environmental accidents in Pennsylvania has increased since 2008, according to an analysis by Connor’s group.

In a May 16 blog post, Scott Anderson, senior policy adviser for the Environmental Defense Fund in Austin, Texas, called the report’s omission of administrative violations that had yet to cause environmental damage “questionable.”

The report, which identifies Considine by his title at the University of Wyoming, doesn’t disclose his prior work for industry groups. Considine said he did the study as part of his responsibilities at University of Wyoming. It was cited by Michael Krancer, Secretary of Pennsylvania’s Department of Environmental Protection, in his May 31 testimony at a House hearing on the impacts of new federal regulations on fracking.

“There is a compelling case that Pennsylvania state oversight of oil and gas regulation has been effective,” Krancer said in prepared remarks referring to the University at Buffalo study.

History Lacking

Nelson of the American Association of University Professors said he is planning to update the group’s June report with a section on fracking.

“In the case of the Buffalo fracking report, it’s that history that’s lacking,” Nelson said. “They were able to brag this didn’t have any industry support.”

The idea for the shale resources institute came from faculty members following a series of seminars last year on fracking, according to E. Bruce Pitman, dean of the College of Arts and Sciences at the University at Buffalo. The University at Buffalo is an “honest broker” in the state-wide debate about gas drilling, he said.

“There is a debate going on here but the fact of the matter is that nothing was hidden,” Pitman said in an interview. “Everybody knows where all the authors come from. All the data that’s used in the report was absolutely out there. People can then make up their minds.”

New York

Environmental groups such as the Sierra Club say fracking in New York threatens drinking water sources, including the reservoir that supplies New York City with 1.3 billion gallons (4.9 billion liters) a day.

Industry-funded studies may be double counting the effects of drilling activities and using unrealistic assumptions about spending and hiring, according to Partridge of the Ohio State University. A 2011 report from the industry-funded Ohio Oil & Gas Energy Education Program found that drilling may “create and support” more than 200,000 jobs in Ohio over four years, 10 times more than Patridge’s estimate in a study he co-wrote in the same year.

“We need a lot more disinterested research than we’re getting,” Nelson said. “We ought to be making policy on the basis of truly independent research. Not research where people have a reason to want to please the funder.”

To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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