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The Promise of Fracking - Pt. 1


The Promise of Fracking


Nowhere did the promise of fracking Marcellus Shale shine brighter than the banquet hall of the Binghamton Regency in late May of 2008.

Spread before farmers on fine china over white linen was a feast of tenderloin tips, roasted vegetables, and chocolate mousse. They ate as they awaited turns at the “signing table.” Dinner was hosted by XTO Energy, the Texas drilling company seeking mineral rights to 50,000 acres in eastern Broome County.

That afternoon, and at two later banquets, XTO paid $110 million to 500 landowners for mineral rights to their land. For some, the single XTO check was more earned than in years of farming.

Gas prices were nearing an all-time high, and XTO was on a quest to tap the northern reaches of the mother of shale gas formations, extending from New York’s Southern Tier through Pennsylvania and parts of Ohio and West Virginia.

To many, these were just the beginnings of the promise coming true.

First came the promise of leases worth millions. Then came the promise of jobs from drilling and related business. Royalty checks on natural gas flowing from tens of thousands of wells would further enrich landowners. Economic prosperity. Clean energy.

A Broome County study in 2009 projected gas extraction would generate $15 billion over 10 years, support more than 16,000 jobs and result in $792 million in salaries and wages and $85 million in state and local taxes.

The promise seemed too good to be true. And, for New York, the promise wasn’t enough.

After a long review, Gov. Andrew Cuomo’s administration a year ago found environmental risks outweighed potential economic gains in New York State. The decision isn’t necessarily permanent – a new political administration could embrace the promise of fracking, the extraction of petroleum from bedrock by injecting the ground with pressurized chemical solutions and sand.

While New York politicians and regulators weren’t sold on the promise, those in Pennsylvania have embraced it. In the seven years of fracking just across the state border, about 9,500 wells have been sunk on rolling farmland.

In terms of sheer production, the Marcellus has exceeded all expectations. Of all the nation’s natural gas “pay-zones” enabled by unconventional development, none has been prolific as the Marcellus Shale. Since 2007, Marcellus production is more than twice the next two largest natural gas formations, each in Texas.

For many, the promise of fracking in Pennsylvania came true.

Some landowners have received life-changing windfalls. Pennsylvania communities have benefited with an infusion of cash for housing, hospitals, roads and public safety, and cheap abundant fossil fuel is now flowing into New York markets.

But hindsight in Pennsylvania shows initial economic projections and job estimates were grossly inflated, much of the wealth has left the area, industry has alienated some of its most supportive allies, economic returns remain precarious as prices fall and regulators have failed to protect the public against predatory exploitation.

Ultimately, the impact of the gas rush might be judged more favorably if not measured against such inflated expectations.

In Pennsylvania, is the best already over, or is even more to come? How long can the economics of shale be sustained, and at what cost?


* Pennsylvania Labor Department inflated figures to make shale gas industry job outlook stronger than it is.

* Industry is generating millions of dollars in “impact fees” to small-town economies to buy good will near drilling sites in lieu of a more costly state tax.

* Fracking has brought both a rise in crime and influx of money to help rural poverty and public safety.

Handshake Means Nothing


Walter Brooks, of Springville Pennsylvania, was on the front line of the Marcellus gas rush. He was among the first owners to be approached by landmen, the first to lease his land, and the first to experience the consequences.

In 2006, Brooks, thinking nothing would come of it, signed a standard industry lease that gave Cabot Oil and Gas of Houston Texas mineral rights to his 212 acres for just $5,300, or $25 an acre. This amounted to less than a tenth or less of what landowners would get once word got out that they were sitting over trillions of cubic feet of natural gas.

“If only I knew,” Brooks said in a recent interview. “But you could say that about a lot of things.”

As Cabot began drilling wells on his land, the farmer held hope that royalties would make things right.

When the water supplying the family farmed turned brown shortly after the start of drilling, Brooks said, the company immediately delivered water to his house, and the problem cleared up soon after that. That didn’t bother him. But his patience is now being tested with the way Cabot does business.

“You better get it on paper,” he said. “Word of mouth and a handshake means nothing to these guys.”

The complaint is widespread. In Pennsylvania, lawsuits and investigations over business practices are as much a part of the shale gas story as landmen, roughnecks and striking it rich.

When the land rush began, disputes tended to be over exploitive leasing practices. Now, with the flow of gas, Brooks and other landowners face an endless battle over deductions companies take from royalty checks.

While it is established in convention and practice that landowners do not pay to produce gas, case law has not settled the issue of who pays “post-production” costs of preparing and transporting gas to market.

Post-production costs typically are spelled out in the fine print of leases, vary from case to case and is open to wide interpretation. Landowners complain that the costs often show up as arbitrary and unaccounted deductions from their share of the bounty.

“We would like there to be accepted standards and basic rules that they would have to follow,” said Jackie Root, a landowner in Tioga County, lease negotiator and president of the Pennsylvania Chapter of the National Association of Royalty Owners.

In 2013, a group of Pennsylvania landowners filed a suit against Chesapeake Energy, a company headquartered in Oklahoma City with Marcellus operations centered in Bradford County. But arguing the nuances and complexities of lease fine print with company attorneys has proven an ambitious legal undertaking.

“For landowners to go to court to file a class action suit every time their royalty payments come up short – it puts them in a situation where they have to decide: ‘do I give it to the gas company or to the attorneys?’ ” Root said.

Root and her organization support a bill designed to clarify Pennsylvania’s 1979 Guaranteed Minimum Royalty Act, which landowners claim the industry is exploiting. The industry, proficiently equipped to handle both legislation and litigation, has so far successfully lobbied to keep the changes in the Act from a vote in the Pennsylvania legislature.

Industry officials say the debate over post-production costs are a contractual matter between landowners and business. “They get what they negotiate,” said Cabot spokesman George Stark. “There is nothing untoward. When price of gas is high, the fee isn’t so noticeable. But it is a fixed fee, and it looks bigger when the royalties go down.”

Landowner complaints spurred an investigation by Pennsylvania Attorney General Kathleen Kane. However, that has been weighed down by Kane’s own morass: she lost her law license, faces criminal charges and possible legislative dismissal following a scandal involving leaked documents.

The fight over post-production costs is testing the trust of some of the industry’s strongest allies. Despite their complaints, Brooks and Root– like many who receive income from the industry and support gas development as a matter of principal– bristle at the argument that fossil fuel development is an ecological disaster.

Root called New York’s ban “a crime” and a result of “an insane activist movement.”

Job Numbers Mislead


As Brooks drove his red Ford pickup over his land to survey operations on a recent fall afternoon, he turned onto a gravel access road framed by an open gate with a padlock dangling from the latch. At the top of the hill were six wells.

Brooks wondered aloud who might be on his property: Likely a Cabot worker but this could be “friend of foe,” Brooks said, noting that he got along better with some than others.

As he drove to the top, a large man stepped out of a truck, donned a Cabot hard hat and greeted him cordially as “Mr. Brooks.” The farmer’s demeanor eased as he recognized worker Matthew Faux.

Faux personifies the fulfillment of the natural gas promise. He graduated from Montrose High School in 2009 and worked in a local stone quarry. About that time, the gas boom took off. He landed a job with Guy Parish, a local contractor that fixed tractors and sold mulch to farmers.

Parish had quickly adapted his Montrose agricultural business to meet the gas industry’s needs. He began hiring semi-skilled young men like Faux – with mechanical aptitude and experience with equipment -- who could drive trucks and operate heavy equipment, serve as roustabouts and plumbers and didn’t mind working 12-hour night shifts and heavy lifting.

Jobs were now becoming scarce, however, as Cabot began $500 million in cutbacks in capitol expenditures in Susquehanna County due to a market glut and falling natural gas prices.

Conversation at the well site turned from the status of the Brooks wells to the status of pipelines. The well fields were connected to regional markets, but they needed more lines to bigger markets. Without them, industry expansion will be choked off.

Faux said it was just a matter of time before the Constitution pipeline – now awaiting permit approval in New York State – would connect to major markets to the northeast. Things would pick up then. The industry was counting on it.

Despite the cutbacks, Faux, who has a year-old daughter and a fiancé, is not worried. He just bought a trailer and is saving for a house. When he graduated from high school he said he “couldn’t imagine owning a new vehicle or anything like that … I think I will be long retired and they will still be doing stuff here.”

The promise of jobs rising from fracking has been the mantra ever since the rise of drilling coincided with the onset of the deep recession in 2008. Soon after, an industry report published by Penn State University projected shale gas development would create more than 175,000 statewide jobs over the course of a decade – most of them blue collar.

With the veneer of academic credibility, the report made huge headlines, even though the university administration later distanced itself from the findings after an internal review found authors Timothy Considine and Robert Watson failed to disclose funding and “may have well crossed the line between policy analysis and policy advocacy.”

Still, the promise was reinforced by official numbers released from the Pennsylvania Department of Labor under the administration of former Gov. Tom Corbett. Industry jobs reached 230,000 in 2014. Corbett rounded the number up to 250,000 in some of his speeches.

Economists, checking the math, complained the Department of Labor was misleading the public by counting every worker in steel, construction, government regulatory agencies and certain other sectors regardless of whether they had anything to do with shale gas development.

Under current Gov. Tom Wolf, the Department of Labor switched to accepted methodology and projected jobs fell to under 90,000 – just over 1 percent of the state’s total number of jobs.

John Hanger, director of planning and policy for Gov. Wolf, characterized the revised figures as representing an “important” contribution to the state’s economy. But, regarding the previous calculation, “frankly, it was truly absurd,” he said.

For everyone like Faux who found employment with the drilling boom, there are hundreds like Eric Williamson, a licensed plumber from Kunkletown in Monroe County, Pa.

About the time Faux landed the job with Cabot, Williamson donned his best suit and tie and drove two and a half hours to a job fair at the River Inn in downtown Towanda. He found a line of more than 200 people in the parking lot drawn by the fracking promise: engineers, plumbers, machinists, laborers, truck drivers and a legion of other job seekers, nearly all of them men.

Hundreds more packed in shoulder-to-shoulder inside, all waiting for a brief moment to shake hands and pitch their credentials to representatives from Chesapeake Energy and various contractors. After several hours of standing in line, Williamson got his turn.

“I was sure I would at least get a call after that, but I never did,” recalled Williamson, who had been out of work for two years and now works for a plumbing and heating company unrelated to gas production.

The glowing promise of jobs has since dimmed

When Faux first came to work for him at the height of the gas rush, Guy Parish had 40 workers. Now he is down to 25, and he expects he will be back to four or five as he shifts his business from the needs of gas drilling back to agriculture.

“The rumor mill has it that the work will be back when they get the pipelines in,” Parish said. “If it doesn’t, I will move on. It was good while it lasted.”

Leaking Wealth


At the height of the leasing frenzy in New York in 2009, Barb Fiala, Broome County Executive at the time, called shale gas development the “the next IBM” – the company that once employed more than 10,000 people in the village of Endicott and supported tens of thousands of jobs elsewhere in the Southern Tier.

Fiala’s administration was so confident in the promise that it budgeted $5 million in lease and royalty revenue expected from county property for two years in a row. Like the Pennsylvania Department of Labor projections, Fiala’s IBM analogy and budget projections were gross miscalculations.

While fracking’s economic gains may boost local economies, the greatest financial benefits go to stakeholders far from Pennsylvania.

Two of the largest operators in Northeast Pennsylvania, Cabot and Chesapeake, are headquartered in Texas and move operations and crews throughout the country based on changing dynamics of energy markets and production costs.

When a manufacturer moves into a community, a plant is built or renovated, local workers get steady employment and local businesses provide goods and services.

When a natural gas driller moves in, the initial burst of economic activity is strong but tapers off after wells are established and hooked to pipelines. Far fewer workers are needed to keep the wells running.

Economists call this funneling of income and resources out of an area “leakage,” and studies have shown that small rural communities in general and northern Pennsylvania drilling communities in particular tend to suffer from it the most.

As head of regional economic development agency Progress Authority, Tony Ventello is focused on figuring out ways to incorporate the bonanza of gas into local economies over the long-term rather than relying on dynamics tied to the ebb and flow of demand from distant markets and drilling crews that come and go.

“The big question is – how can we use this asset to build our local economies?” said Ventello, whose agency evolved from the Central Bradford County Economic Development Authority and the Towanda Area Industrial Development Corp.

Perhaps the most impressive example of this regionally is a multibillion complex to turn Marcellus Shale natural gas into feedstock for chemical production – an ethane cracker plant – that Shell Oil Co. is proposing for Beaver County near the prolific gas fields in southwestern Pennsylvania.

Northern Pennsylvania has no equivalent to this, as of now – and there are still some question of whether the cracker plant will get built in Beaver County. But Ventello points to many smaller success stories.

Fracking has allowed schools, hospitals, housing complexes and government buildings to convert to natural gas to upgrade antiquated systems. The Susquehanna County Court House, once powered by a hodgepodge of coal, electric and oil requiring paid help on weekends and holidays to shovel coal and empty ashes, has been refurbished with a natural gas system.

Athens and North Towanda now have filling stations for natural gas vehicles, and more gas–fired electric generating plants are coming on line throughout the region.

The political calculation that has allowed fracking in Pennsylvania, however, is different than in New York, where environmental and health risks are weighty considerations.

Fiala left her position as Broome County Executive to accept a position from Gov. Cuomo as commissioner of the state’s Department of Motor Vehicles. More recently, with Cuomo’s endorsement, she made an unsuccessful bid for the state senate. Whether due to politics or through lessons learned in Pennsylvania, the promise of shale gas has lost its luster for her. Fiala now supports New York’s decision for a ban.

“I don’t know what the balance sheet was in Pennsylvania,” Fiala said recently. “In New York, we have found a lot of the environmental issues outweigh the economic issues. A lot of people have benefited but a lot of people have suffered."

No Gas Shortage


The future of the fracking promise in Pennsylvania will depend on demand for natural gas. Fracking has made gas so cheap and so abundant, it overtook coal as the top source of U.S. electric power generation for the first time ever last spring

“The scale of this resource is just incredible,” said Hanger, Pennsylvania’s planning director who sees the current lull as part of the cyclical nature of the industry. Even with low prices, he said, advancing experience and economies of scale inherent continue to drive down production costs, making drilling viable at lower prices. And despite record production, there is no sign of the resource depletion.

Terry Engelder, a geologist at Penn State, was featured in a Time Magazine cover story as the first to calculate the amount of gas in the Marcellus back in 2008. His early projections of 490 trillion cubic feet of “technically recoverable” gas and 227 trillion cubic feet of “economically recoverable” gas raised eyebrows and was seen by critics as hype to draw investment into the industry.

Unlike many other projections made about the promise of fracking, Engelder’s projections appear to be realistic. The biggest part of the reserve is in Pennsylvania, which produced more than 4 trillion cubic feet in 2014 alone. Even as drilling has subsided, production remains enormous. Below the Marcellus is the Utica formation, which has produced impressive results with the early exploration.

Both the Marcellus and the Utica extend under the Southern Tier of New York. Their economic viability remains uncertain, and they will not likely be explored anytime soon given cut backs at existing sites in Pennsylvania.

As for the future?

“Of course, maybe we (America) do not need more natural gas,” Engelder said earlier this month. “The transition to renewables will not be made because we have run out of natural gas.”