Bloomberg News

Pittsburgh Rebound Sparked by Spurned Gas Frackers

August 09, 2012

Pittsburgh’s Revival Sparked by Gas Frackers Spurned by Council

Since 2008, more than 5,200 natural-gas wells have been drilled into the Marcellus Shale, a deposit that underlies two-thirds of the state. Photographer: Julia Schmalz/Bloomberg

Pittsburgh, once known as America’s Steel City, is laying its Rustbelt heritage to rest by fostering growth in education and health services, while drawing strength from the booming natural-gas industry it keeps at a distance.

Drilling into Marcellus shale deposits is banned in Pittsburgh, yet hydraulic-fracturing, or fracking, operations in the countryside nearby have helped bring in jobs and boost demand for office space in Pennsylvania’s second-biggest city.

“Like eds and meds, like steel once was in Pittsburgh, it would be the industry to grow and employ people and turn the economy around,” Mayor Luke Ravenstahl, 32, said of gas extraction. Nearby drilling can provide a “growth mechanism” the city can use to propel a rebound, he said. The city faced insolvency in late 2003, as the population and employment fell.

Fracking is driving wage, job and population growth, even after health concerns led the City Council to ban it, according to development officials. Wells Fargo & Co. economists recently called Pittsburgh a “logistical hub” for the industry. To fuel the boom, Governor Tom Corbett, a Republican, is offering Royal Dutch Shell Plc (RDSA), Europe’s biggest oil company, at least $1.65 billion in tax credits to build a gas-fed chemical plant nearby.

New methods of extracting natural gas and oil are boosting the economies of states from Pennsylvania to North Dakota and Texas. Unconventional gas production alone is forecast to spur almost $3.2 trillion in new investment by 2035 and support more than 2.4 million jobs in the lower 48 U.S. states, according to an HIS Inc. study released in June. It projected a 14 percent annual compound-growth rate in Pennsylvania jobs tied to gas.

Distressed City

Pittsburgh has come a long way from August 2003. That’s when almost 100 police officers lost their jobs as the city cut 446 employees, closed swimming pools and curbed services to stem the financial hemorrhaging that pushed it into a state program for distressed cities, according to a June 2004 report.

“No one knew how bad it was going to get,” said Ralph Sicuro, 40, a firefighter and lifelong resident of the city.

By November 2003, Pittsburgh was the only major U.S. municipality with bonds rated below investment grade. Moody’s Investors Service, Fitch Ratings and Standard & Poor’s had all cut the city’s debt to “junk.” Today, the city’s score has been raised to A1 by Moody’s, fifth-highest investment grade, A by Fitch, sixth-highest, and BBB by S&P, ninth-highest.

Future Key

Local development officials credit the city’s emphasis on expanding schools and hospitals to replace closed steel mills and foundries. And they look to gas extraction as a future key.

“The Marcellus and Utica shale represent a transformative opportunity for the Pittsburgh region,” said Dennis Yablonsky, chief executive officer of the Allegheny Conference on Community Development. The group promotes growth in 10 area counties.

That transformation is already taking place, with the city’s population rising to almost 307,500 last year, the first annual increase since 1950. Jobs in the metro area surpassed a June 2001 peak of 1.172 million last month, reaching 1.176 million, U.S. Labor Department figures show. A new 33-story headquarters for PNC Financial Services Group Inc. (PNC:US) is rising downtown, the city’s highest tower in about 30 years.

“Things are going well for us right now,” Yablonsky said in his office overlooking the hill where the first Pennsylvania coal was mined in 1761.

Since 2008, more than 5,200 natural-gas wells have been drilled into the Marcellus shale, a deposit that underlies two- thirds of the state. The Utica shale is a separate formation that stretches from Ohio into northwestern Pennsylvania. About 2,000 permits have been issued to drilling companies this year, Pennsylvania Environmental Protection Department figures show.

Growth Drivers

By the end of March, jobs in the Pittsburgh region’s gas industry had almost quintupled to 437 from 93 in the first quarter of 2009, according to state Labor and Industry Department data. Within the seven-county metro area, employment had climbed 4.1 percent, or 46,000 jobs, in the past two years, Wells Fargo economists led by Jay Bryson said in a March report.

Much of the gain was in health care and education, which accounted for 30 percent of the added jobs and 20 percent of all payroll positions in the region, the economists said. Yet 5 percent of the growth was driven by shale drilling, they said.

The San Francisco-based bank’s economists said that for every job created by drilling in one of the 14 Pennsylvania counties that host 90 percent of the state’s shale-gas wells, 2.5 more spring up in nonproducing counties. They said a collapse in gas prices may slow the rate of expansion. The Pittsburgh metro region includes five of the gas-producing counties, the economists said, and several more are nearby.

‘Great Opportunity’

“It is a great, great opportunity and one that we look forward to taking advantage of in coming years,” Mayor Ravenstahl said in an interview in City Hall. He said it’s time to take Pittsburgh out of its distressed category. The city avoided a state takeover of its pension fund last year by diverting parking revenue to boost the retirement plan’s assets.

“We think the story is there,” Ravenstahl said. “We’ve turned a corner.”

The fracking boom has meant more work for the city’s professional services providers such as lawyers and engineers, boosting employment and demand for workspace, said Jeffrey Ackerman, managing director at CBRE Capital Markets. These include K&L Gates LLP and Reed Smith LLP, two law firms whose headquarters mark the downtown skyline. The amount of available top-quality office space has shrunk for 15 straight quarters. Oil and gas companies such as Shell, Chevron Corp. and Pittsburgh-based EQT Corp. have all rented more space as well.

Marcellus Energy

“The biggest driver is clearly energy and that’s coming from Marcellus shale,” Ackerman said. “It all feeds on itself.”

Not everyone welcomes the gas industry. In November 2010, the City Council banned the drilling, as it typically relies on the fracking process, in which a mix of water, sand and chemicals is injected into a shale bed deep underground to free trapped gas.

“We all have children and grandchildren and as representative of District 1 and also as president of council, I need to be worried about the health, safety and welfare of the residents of Pittsburgh,” council President Darlene Harris said in her City Hall office. She said gas companies should disclose more about their methods and be subject to tighter rules.

More than 69 percent of city residents view fracking as a moderate or significant threat to public health, according to Emily Dutton Craig, a spokeswoman for a University of Pittsburgh research group that released a survey last month on the quality of life in the region.

Coal Damage

The potential negative effects of drilling may eclipse the devastation wreaked on the region by coal, which is taking a century and billions of dollars to mitigate, said David Masur, executive director of PennEnvironment Research and Policy Center. The Philadelphia-based organization has pressed for a suspension of gas drilling.

Those who point to job and revenue gains from the industry are “shortsighted,” he said.

“You can make data tell any story you want,” Masur said. “We know, as we’ve seen time and time again with these boom and bust economies, they often leave a huge legacy of social and environmental problems in their wake.”

Sicuro, a vice president of the city’s firefighters union, said much has changed since his childhood days in the Hazelwood section, where a plant producing coke used in steelmaking would shower parked cars with ash.

Today, “there is a lot the city has to offer people who live here,” Sicuro said. Pittsburgh “has the potential to be better than it already is.”

Ravenstahl said balancing the industry and environmental concerns can be achieved.

“We can protect the environment and drill in a responsible way, while also creating tens of thousands of jobs for local Pittsburgh residents,” he said.

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net


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