Economic Impact of Kinder Morgan Utopia Pipeline Project"

Transcription

1 Economic Impact of Kinder Morgan Utopia Pipeline Project Dr. Shawn M. Rohlin 1 Associate Professor of Economics Director of the Center for Entrepreneurship and Business Innovation Kent State University srohlin@kent.edu Dr. Nadia Greenhalgh-Stanley Associate Professor of Economics Kent State University ngreenha@kent.edu! Corresponding Author!

2 Executive Summary Ohio stands to benefit from $237.3 million in economic impacts from the Utopia Pipeline proposed by Kinder Morgan, Inc. during its first five years, according to a study by Kent State University Associate Professor of Economics, Dr. Shawn M. Rohlin. Project construction is expected to start in January of 2017, continuing through the middle of The report states the project will produce direct and indirect short-term and long-term positive benefits to Ohio s business community and support a large workforce and high volume of economic activity in communities along the pipeline route, while meeting increased demand for energy originating from Ohio s Utica Shale Region to help the United States become more energy independent. The study outlines how the Utopia Pipeline Project will:! generate $4.9 million in tax revenues,! create 2,132 direct and indirect jobs in Ohio,! contribute $144.9 million to Ohio s gross state product and! provide $87.5 million uplift to the Ohio economy through additional income and spending. The pipeline will transport petroleum products ethane and ethane-propane blends through 215 miles of pipeline and 14 Ohio counties to existing Kinder Morgan infrastructure ending in Windsor, Ontario. The petroleum products will be used as feedstocks for plastics used in building and construction materials, automobile manufacturing and many consumer products, including child car seats, coolers, food wrapping materials and more. Four sources of economic benefits created by the project are cited in the study, including:! Increased spending in Ohio due to the construction of the pipeline,! local spending from out-of- state workers while working in Ohio,! economic benefits from the permanent workers after the pipeline is completed,! and reduced manufacturing input costs for Ohio companies due to the proximity of the production of plastic feedstock made from the petroleum products being transported on the Utopia Pipeline. The total economic benefits in this report are estimated using the Regional Input!Output Modeling System (RIMS II) and calculates both direct and indirect economic effects for employment, income, and GDP (typically called value-added effects). In addition, the model estimates expected tax revenues as a result of the proposed project. And lastly, the study examines the impact of lower input costs as a result of the plastic feedstock produced from the #

3 ethane and ethane-propane mixtures transported by the Utopia Pipeline returning to Ohio and the region. 1. INTRODUCTION The Utopia Pipeline Project proposes to construct a pipeline from Harrison County to Fulton County in the state of Ohio. The facility and pipeline construction will occur between January 2017 and mid-year The expected cost of the project is $500 million, with roughly $168 million being spent on construction labor costs and $332 million for material costs. It is expected that half of the labor will come from the local workforce and 5 percent of the materials will be supplied by Ohio-based companies. The Utopia Pipeline Project will create both new direct and indirect economic activity in Ohio. The economic benefits will include new jobs, labor income and value-added (GDP) to the region. The remainder of the report is structured as follows: A synopsis/overview of the project is described in Section II, while Section III provides information on the methodology used to calculate the economic impact. Section IV discusses the direct, indirect, and total economic effect of the project and Section V provides a brief conclusion. 2. OVERVIEW OF THE UTOPIA PIPELINE PROJECT Figure 1: Proposed Utopia Pipeline Project Map $

4 Kinder Morgan (KM) is proposing to build, own and operate a new 215-mile pipeline within the state of Ohio, which will connect with KM s existing infrastructure to facilitate the movement of petroleum products ethane and ethane-propane mixtures to Windsor, Ontario. Figure 1 shows the current pipeline (blue) and the proposed new Ohio pipeline (red). Initially, the Utopia pipeline will be able to hold 50,000 barrels per day with the ability to expand capacity to 75,000 barrels per day with the building of additional pump stations. The construction phase would last 20 months, with construction starting in January The project will also require additional construction trailers to be created which will need staff during the construction period. The majority of the employment by KM will consist of temporary construction workers. It is expected that the pipeline will require approximately 750 workers at any given time and the entire project will require about 1,000 workers. KM employees, contractor employees, construction inspection staff and environmental inspection staff will be included in the personnel needed to carry out the project. On average, construction will be six days per week during daylight hours. Some parts of the project will require more or less work. For instance, horizontal directional drilling sites will require 24 hours-per-day of work during the construction phase. Typically pipeline industry labor agreements stipulate that half of the labor force should be from local labor unions and the other half can be from outside the area. KM intends to honor this by including 50 percent local workers and 50 percent non-local workers. However, the non-local workers will generate outside spending in the local area because they will need local goods and services while working in Ohio to complete the pipeline project and will spend part of their income and theoretically their entire stipend in the local economy. 3. APPROACH & DEFINITIONS This report uses the Regional Input!Output Modeling System (RIMS II), which is one type of a number of input-output models that are among the most accepted ways to determine the total economic impact of changes in final demand. The method and the multipliers it produces are made by the Department of Commerce s Bureau of Economic Analysis. The method can be used to calculate the direct effect on employment and income of the proposed expenditures. The direct effect includes employment and income effects generated by purchases of labor, materials and services in the region. However, the direct effect does not capture the total economic benefit to the region as there are also indirect effects (which are changes in inter-industry spending as a result of the changes in industries directly benefiting from the increase in demand), also known as supply-chain effects, and induced effects (which are changes in spending due to changes in household incomes from the increase in demand). In this report we calculate both indirect and %

5 induced effects together into one indirect effect. The RIMSII method will be used to calculate the benefit on: a. Employment: This is measured as the number of yearlong jobs created in the region from the Utopia Pipeline project. 2 b. Income: This is measured as the total pay received by the workers. It includes wages and salaries but not nonwage benefits such as health insurance or retirement assets. c. Value-Added: The total economic impact added to Ohio from the project creating new jobs, income and local spending. 4. ECONOMIC IMPACT ANALYSIS FINDINGS The Utopia Pipeline Project will create 215 miles of new pipeline over a 20-month period of time in the region. The project will mostly create temporary construction jobs, but also a few permanent jobs to monitor and maintain the pipeline. The estimated cost of the project is $500 million. There are four sources of economic benefits from this project: increased spending in Ohio due to the construction of the pipeline, the local spending of out-of-state workers while working in Ohio, the economic benefits from the permanent workers after the pipeline is completed, and the economic benefits from reduced input costs for Ohio companies from the material being transported. It is important to consider the economic impact for each of the four potential benefits listed above as well as estimates of tax revenues. The results are shown in Table 1 for both the direct and indirect economic effect of the pipeline investment. A. The Economic Impacts of the Construction of the Pipeline Table 1: Economic Impacts of Local Labor and Materials of the Utopia Pipeline Project Spending in Ohio Direct Indirect & Induced Total Value-Added/Gross Domestic Product $64,062, $63,438, $127,500, Income of Ohio Residents $46,668, $31,809, $78,478, Employment (# of Jobs-Years) # Typically, employment is measured in the number of jobs that last one year. Some impacts are short term but can be added together to get the number of full year jobs. Throughout this paper we will simply reference these yearlong jobs as jobs. &

6 i. Employment The equivalent of approximately 1,730 total jobs will be created in Ohio during the course of the 20-month project. The project will directly create temporary construction and pipeline operation personnel. The direct effect shows that the pipeline investment directly generated 625 jobs in the local region. 3 The indirect and induced effects from providing 625 jobs in the construction field will produce an additional 1,105 jobs across many non-construction industries due to supply change effects and increased incomes of construction workers. Together the purchasing of local labor and materials for the construction of the pipeline will produce a total of 1,730 jobs. ii. Income The pipeline project will generate almost $78.5 million in labor income for Ohio residents. The direct economic impact will result in 625 new jobs and labor income of $46.7 million, while the indirect economic impact will generate 1,105 jobs and $31.8 million in additional labor income. The average salary per job created will be $74,669 and $28,787 for the direct and indirect effects, respectively. The economic benefits by industry are shown in Table 2 and discussed below. iii. Value-Added/Gross Domestic Product Another way to measure the economic benefits of the pipeline is to determine the amount of value-added which can be thought of as the equivalent of gross regional product in the region or gross domestic product at the national level, therefore we will use value-added and GDP interchangeable henceforth. GDP is the main way we measure the size of the economy or the impact of event or project on the economy. It is the market value of all final goods and services that result from the pipeline being built. The value-added of the pipeline investment project are $64 million for the direct economic result of the project and $63.4 million of the indirect economic result, for a combined total of $127.5 million for Ohio. iv. Economic Impacts by Industry The economic benefits by industry are shown in Table 2 and Figure 2. As expected, construction had by far the largest value-added, earnings and employment effects, with approximately half of the jobs and earnings generated being attributed to the construction industry. Because both direct and indirect economic effects of the pipeline investment include local income and money buying local products, approximately 25 percent of the jobs are created in the services and retail industry. However, because retail jobs can be relatively low paying, service and retail did not $ This number includes both construction jobs and jobs created from purchasing materials in Ohio. '

7 comprise 25 percent of the income effects. The remaining quarter of the jobs and earnings were comprised of manufacturing, health care, wholesale and transportation, and other. For valueadded, services had the second highest contribution ($14.3 million) and manufacturing had the third largest effect with $12.5 million. Table 2: Economic Impacts of the Utopia Pipeline Project by Industry!#$%&''%'()*+,-./.01,23#452% $86/4. 9AB<?>;<?=C D:?ECC F.$G86$-/.0 9>;<AC=<BB= 9?<>=A<DAC H%6/#IJ-'% 9>B<B=A<=;C ;>;E;= K%-L/8%1 9=<D=C<?:> M%#6NI8-%I.'I148/#I11/16.8% >>BE:; ON4#%1#%I.'IJ /4. 9A<;?D<B>C?BE:B P6N%- 9:<?C;<B>? J46# 9>;?<:BB<AAB 9?D<A?D<BCB H!.:441<DB>42.<?4 870/$+0/1+#31 2&+#$9&%+%)# 6/+0%71(+&/1+#31 $()+01+$$)$%+#(/ :%7/& 4/&5)(/$!#$%&'(%)#./%+)012&+3/ *+#',+(%'&)#- B. Impact of out-of-state Workers The project proposes to hire approximately half of all of its workers from out of state. However, (

8 this still has a positive economic benefit to Ohio because those workers will demand local goods and services as well as housing, which will create a positive economic impact on the region. Workers are expected to work six days a week, 48 weeks a year during the construction. During this time, it is estimated that they will spend $70 a day on local goods and services. Table 3 shows after using the RIMSII method, the out-of-state worker spending generates over $15 million in value-added impacts to the local region, as well as almost $8 million in earnings and 333 jobs. Table 3: Economic Impacts of out-of-state Labor Spending in Ohio Value-added/GDP Earnings Employment Out-of-State Spending $15,238, $7,936, C. Impact of Permanent Workers While the majority of the jobs will be temporary construction jobs, there will be five permanent jobs created by the project. The permanent workers will spend a large part of their income in the local economy which will also generate positive economic benefits for the local region. The economic impacts are shown in Table 4. The five year economic impacts include $2.2 million in value-added impacts, $1.1 million in income of Ohio residents, and 69 equivalent jobs. Table 4: The 5 year Economic Impacts of Permanent Workers of the Utopia Pipeline Project Spending in Ohio Direct Indirect & Induced Total Value-Added/Gross Domestic Product $1,364, $868, $2,232, Income of Ohio Residents $632, $431, $1,064, Employment (# of Jobs-Years) D. Taxes The Utopia Pipeline Project will improve government budgets in numerous ways, many of which are hard to determine a priori. To get a sense of some of the tax revenue implications, we estimate three sources of tax revenue for Ohio. First, sales taxes will be paid on all materials purchased locally for the project. In addition, sales taxes will be collected in the form of all goods and services the non-local workers will need to purchase during their stay in Ohio. Second, payroll taxes will be paid for all of the workers employed by the Utopia project. Third and finally, Kinder Morgan will pay facility taxes in each county. The pipeline project will generate approximately $4.9 million in tax revenue with $4.0 million coming from income taxes from construction workers and $724,500 coming from state sales taxes from out-of-state worker )

9 spending. Local sales taxes from the same out-of-town workers generate $126,000. These results are shown in Table 5. Table 5: Estimates of Tax Revenue Effects from the Pipeline Type of Tax Revenue Amount State Sales Taxes from out-of-state Worker Spending $724,500 Local Sales Taxes from out-of-state Worker Spending $126,000 Estimated State Income Taxes from Construction workers $4,018, E. Discussion of Economic Benefits from Reduced Input Costs The Utopia Pipeline Project will transport petroleum products ethane and ethane-propane blends to Windsor, Ontario, which will increase the polyethylene (PE) capacity in the region. In the end, capacity will increase by an additional 1 billion pounds per year of polyethylene, of which an estimated 70 to 80 percent will be used back in the United States. Due to Ohio s large manufacturing base and its proximity to Ontario, Ohio businesses will greatly benefit from reduced input costs. Lower polyethylene costs will benefit a large variety of businesses, from building and construction materials to many consumer products, such as child car seats, coolers, and food wrapping materials. Of particular importance to Ohio is that PE is used in manufacturing car parts, which is an important driver of Ohio s economy. It should be noted that the project will not only benefit Ohio but also Mid-Atlantic, Northeast and Atlantic regions which are within trucking distance. Specific economic spending benefits are difficult to measure a priori but do have an important role in keeping Ohio s business community thriving and keeping and growing jobs in Ohio. 5. Summary and Conclusions RIMSII methodology was used to calculate both the direct and indirect economic benefits to the local region of the Utopia Pipeline Project. The two-year project plans to construct a 215 mile pipeline across 14 counties in Ohio. This report demonstrates that the Utopia Pipeline Project will produce important economic benefits to Ohio. The five-year economic benefits (combined Ohio, out-of-town workers and permanent workers economics impacts) are calculated to include the following: 2,132 equivalent jobs in Ohio Labor income of $87.5 million Value-added economic impact of $145 million A minimum of $4.9 million in tax revenue *

10 Overall Impact: $237.3 million in economic benefits in the first 5 years along with 2,132 additional jobs Kinder Morgan will directly add $112.7 million in economic benefits to Ohio s economy which will produce an additional $96.5 million in economic benefits. Lastly, for all of the measurable economic benefits there are many more immeasurable effects (like social effects from increased income and wealth in the area) to Ohio s economy and local and state government.!+

11 Appendix A: Authors Dr. Shawn M. Rohlin Shawn M. Rohlin is an Association Professor of Economics and the Director of the Center for Entrepreneurship and Business Innovation at Kent State University. His research focuses on the effect of government policies on firm establishment and employment decisions. His work has been published in journals such as Review of Economics and Statistics, Journal of Law and Economics, Journal of Urban Economics, and Economic Inquiry. In addition to his academic research, Dr. Rohlin calculates the economic impact of many events throughout the region and nation. Recently, he has calculated the economic impact of the MAC basketball tournament, the Gay Games, the Senior Games, and the Akron Marathon. He also was hired to calculate the economic effect of the short term loan industry. He has produced over 20 economic impact studies in the past five years and he also teaches the input-output RIMSII method to graduate students in his courses. Dr. Nadia Greenhalgh-Stanley Nadia Greenhalgh-Stanley is an Associate Professor of Economics at Kent State University. She is an urban and public finance economist and her research investigates the effect of changes in social insurance on household housing and portfolio decisions. Her work has been published in journals such as Journal of Urban Economics, Journal of Law and Economics, American Journal of Agricultural Economics, and Real Estate Economics. She has worked on numerous economic impact studies including the Akron Marathon and Gay Games study.!!