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From the report "Easy Money, Hidden Costs: Applying Precautionary Economic Analysis to Coalbed Methane in the Powder River Basin"By Joshua Skov and Nancy Myers - SEHN, June 2004

COALBED METHANE Methane is the main component of natural gas. Like other fossil fuels, methane can form over time from the decomposition of organic matter. Due to its depth, and in part from pressure of underground water often closer to the surface, methane remains trapped in the coal deposits where it formed. To reduce underground pressure in order to pump up the methane, CBM mines must pump out water trapped in the coalbeds.

Coalbed methane is the fastest growing domestic source of natural gas.

Heavy subsidies for CBM development and technological advances in the past two decades have made CBM a viable resource, and it now represents about 7.5% of US natural gas production.

The Powder River Basin in southeastern Montana and northern Wyoming is the primary frontier for expansion in CBM production. Plans are for up to 77,000 new wells in the region, more than 5 per square mile. Some 25,000 miles of unpaved roads and 47,000 miles of pipelines and power lines will transform thousands of acres of natural landscape into an industrial corridor.

At planned rates of extraction, methane would be produced in this region for about 20 years. The total amount would be the equivalent of about one year's supply of natural gas in the United States.

WATER ISSUES CBM development as proposed could pump up as much as 13 trillion gallons of groundwater. This removal of water will produce an estimated 600-foot drop in the coalbed water table in Montana and a 700-foot drop in Wyoming.

Some 5,000 water wells will be affected by the drop in the water table. With expense at $10,000 for each well that must be deepened or protected from contamination, costs would add up to $50 million.

Water quality. Saline and sodic waters alter soil chemistry, an important variable for agriculture. These alterations of soil chemistry affect how water moves through the soil, potentially creating problems for irrigation-based cultivation. Salinity refers to the level of dissolved salts, while sodicity refers to the level of sodium. Water can be sodic without being saline.

"Lost water" value. At the low end, the value of water lost to the people of Montana and Wyoming over twenty years will be over $2 billion--$84 per person per year for 20 years. A high-end but still conservative estimate puts the value at over $10 billion, or nearly $400 each year from each person in the two states. These estimates are based on three parameters

  1. Value of water per acre-foot ($258-$900)

  2. The number of gallons produced from planned CBM extraction (9-11 trilllion).

  3. The percentage of water that is "lost," meaning either unsuitable or unavailable for reuse (25-50%).

Population growth. The arid West is still attracting migrants from throughout the US. One low-growth scenario estimates 17% increase for the Powder River Basin and adjacent Tongue River Basin by 2025, with a high-growth scenario delivering a 36% increase.

PROPERTY RIGHTS  More than half of the areas identified for CBM development are on land with split estate -surface rights and mineral rights are separate. Local landowners own only the surface rights, while the American people own the mineral rights. The federal government (especially the Bureau of Land Management) auctions off mineral rights for the purpose of encouraging CBM extraction.

A split estate is not evenly split. When it is allowable to exploit mineral rights in a way that disrupts local hydrology (which means virtually any mineral extraction), the mineral rights effectively take precedence because their exploitation compromises the value of the surface rights.

When damage agreements are in place, the owner of the mineral rights compensates the surface user as damages to the surface occur. But these agreements seldom cover all damages or their true costs.

PUBLIC BENEFITS In Wyoming, CBM helped erase a $200 million state budget deficit in 2000. The USDA projects that the deficit will turn into a $400 million surplus by the end of 2004, that CBM will bring 7,000 new jobs to the state, and that the $1 billion investment by energy companies will translate to an overall net effect of $1.4 billion in all sectors of the Wyoming economy.

An industry-funded analysis projects the following benefits for Montana:

  • Royalties to Montana schools --$253.5 million

  • Royalties to Montana state general fund -- $426 million

  • Production tax paid to Montana for schools, state and local governments and other agencies -- $1.1 billion

  • Potentially create up to 736 jobs

  • Estimated total wages -- $264 million

  • Estimated total purchases of goods and services -- $1.3 billion

  • Total economic benefits -- $4.2 billion

PUBLIC SUBSIDIES  "Section 29" tax credit. This tax credit for alternative fuels was originally intended as a short-term measure to boost production from new sources. It continues to subsidize CBM production, although this is now an economically viable source.

If Section 29 credit is extended in new energy legislation, as is likely, the Powder River Basin could be the largest recipient of these subsidies. If CBM wells increase to 77,000 within the next ten years, and if half become eligible for the tax credit, the subsidy received by the Powder River Basin could exceed $300 million per year.

Percentage depletion. Independent oil and gas companies and royalty owners are allowed to deduct 15% of their annual gross receipts from their taxable income. This means that the total amount deducted for may eventually exceed the initial investment. It also tends to allow a larger deduction than the more standard method of cost depletion.

Expensing development costs. Oil and gas companies are allowed to count most exploration and development costs as expenses, and deduct them all at once from their taxable income instead of depreciating them over time. This allows them to defer their tax payments and earn interest on the money.

Over the next five years, federal tax breaks for CBM development in the Powder River Basin could range from $700 million to $1.7 billion in the following categories:

Section 29: $676 million - $1.57 billion Percentage Depletion:: $9.8 million - $38.1 million Expensing development costs: $21.4 million - $42.8 million Total tax breaks: $707 million - $1.65 billion

Research. The federal government has funded research through the Energy Department on technologies that have helped the CBM industry to develop. Environmental remediation research is also largely publicly supported. For example, the most common CBM-related research area in the public universities of Wyoming and Montana is on understanding and remediating the effects of CBM product water. The CBM industry supports some university research related to CBM exploration and drilling.

Mineral rights. The federal government has contributed to CBM development in the Powder River Basin by making federal lands and mineral rights available for drilling. In the Powder River Basin, about 56% of recoverable CBM is in federal mineral estates belonging to the people of the United States.

THE PUBLIC TRUST  This doctrine with roots in Roman law and English common law is embedded in state law and constitutions. Its essence is that government has a fundamental duty to maintain a regenerative natural environment for present and future generations. The state of Montana includes this provision in its constitution: "The state and each person shall maintain a clean and healthful environment in Montana for present and future generations."

Decisions on large-scale projects like this one lie in the domain of the public trust. They involve public lands and mineral rights and public subsidies, and they affect future generations.

ECONOMIC ANALYSIS The goal of economic analysis is to provide a sense of the net gain or loss to the public good.

The precautionary principle:

"When an activity raises threats of harm to human health or the environment, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically. In this context the proponent of an activity, rather than the public, should bear the burden of proof. The process of applying the Precautionary Principle must be open, informed and democratic and must include potentially affected parties. It must also involve an examination of the full range of alternatives, including no action." Wingspread Statement on the Precautionary Principle, January 1998

Applying the precautionary principle to economic analysis means giving priority to human health and the environment; taking uncertainty into account; describing full costs and harms as well as benefits; describing the distribution of costs, benefits, and uncertainty; and examining alternatives.

Environmental bonding is proposed as way of assuring that those who use society's resources are held financially responsible for damages. The resource user would put into escrow an amount based on an estimate of the worst outcome of the proposed activity.

ALTERNATIVES TO CBM DEVELOPMENT IN THE POWDER RIVER BASIN The American Wind Energy Association estimates that by the end of 2004, wind energy will provide the equivalent of 500 million cubic feet of natural gas per day and 3 billion cubic feet per day by 2008, equivalent to 6% of total natural gas production.

The United States can meet 20% of its electricity needs with renewable sources by 2020. Consumer savings of over $100 billion can be generated by 2020 by combining the shift toward renewable energy sources, which have lower long-term costs, with fuel efficiency measures. Natural gas use can be decreased by 31% from a business-as-usual scenario.


  • The benefits of CBM development occur in the immediate and near future, while the costs spread over several generations.

  • The benefits are highly concentrated, spilling over slightly to the public as a whole and to the public sector in the region, but still overwhelmingly concentrated with the oil and gas companies that would develop the resource.

  • Significant public resources have been directed to this project, further enriching the small cadre of beneficiaries at the expense of the larger public.


Benefits of CBM Development Through 2017 2017 – 2060 2060 – Oil/gas companies Value of CBM extracted None None


Landowners in Powder River Basin with damage agreements Compensation None None Landowners in Powder River Basin withoutdamage agreements Compensation where damages can be established None None Taxpayers in MT and WY Taxes on CBM, small gains in employment None None Taxpayers/citizens of United States One year’s supply of natural gas None None




Costs of CBM Development Through 2017 2017 – 2060 2060 – Oil/gas companies Expenses of CBM extraction and agreed damage compensation None None


Landowners in Powder River Basin withdamage agreements Disruption of current uses, contamination of wells Lower water table, potential soil damage and contamination, decreased economic value of land. Some continued impacts on water (even assuming 95% recharge) and soil; therefore, potential decreased economic value. Landowners in Powder River Basin withoutdamage agreements Same as above, plus expense to establish damages for obtain compensation Same as above Same as above. Citizens of Montana and Wyoming Loss of landscape, decreased recreation value in some areas, regional lower water supplies worth $2­–10 billion Regional lower water supplies, loss of landscape OR costs to remediate damaged lands Continued remediation expense OR lowered value of damaged lands Citizens of United States Substantial subsidies to oil/gas companies operating in region Continued depreciation tax breaks; possible long-term burden of regionally degraded hydrology and remediation of damaged lands Possible long-term burden of regionally degraded hydrology and remediation of damaged lands



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