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Our team Editor Dan Burnett ReporterS Matt Hughes Jerry Lynott
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Photographers Fred Adams Matt Hughes Design Lindsey Jones
IMAGING Maureen Dessoye Copy EditorS Ron Bartizek Sandra Snyder
GRAPHICS Mark Guydish
on the cover: Citrus Energy Completions and Drilling Manager Rick Fields near one of the six natural gas wells on Procter and Gamble’s property in Mehoopany, Wyoming County. Story on page 17. Photo by Fred Adams.
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BY MATT HUGHES mhughes@timesleader.com Dale Bennett didn’t need a job in the natural gas industry; he wanted one. After 13 years with Procter and Gamble’s Mehoopany plant, Bennett said he earned a very good salary and excellent benefits for his family. But as he watched the gas industry transform the landscape around his home in Wyoming County, Bennett saw big
things happening and wanted to get on board. “I thought that, ‘hey, I want to be a part of this,’ ” Bennett said. “I had heard from the news that this business would be in our backyard for the next 25 to 30 years, and I just had such a feeling to want to be a part of it that I started looking for jobs in the natural gas industry.” Fifteen months ago he See MEET, Page 18
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matt hughes photo/the times leader
A Chevrolet Camaro powered by compressed natural gas sits on the show floor of the Marcellus Shale Coalition 2012 Shale Gas Insight Conference in Philadelphia. BY MATT HUGHES mhughes@timesleader.com PHILADELPHIA – With an abundance of natural gas flowing from the Marcellus Shale, energy industry leaders contemplated new markets for Pennsylvania’s natural gas at the Marcellus Shale Coalition’s 2012 Shale Gas Insight conference in Philadelphia.
An abundance of supply from the Marcellus and other shale plays, a down economy and an unseasonably warm winter exerted downward pressure on the price of natural gas, with prices falling from about $4.50 per thousand cubic feet to around $3 in September. “That’s significant,” Marcellus Shale Coalition President Kathryn Klaber said of the price drop.
Speakers said power plants switching to natural gas are driving much of the current demand – without the power sector’s interest the price per mcf could be as low as $1, Klaber said – but greater potential for the use of gas exists in the chemical production industry, the export of liquified natural gas and in natural See CONFERENCE, Page 10
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Act 13, Pennsylvania’s comprehensive natural gas impact fee law, took effect nearly a year ago but its full impact has yet to be seen. The first impact fee revenues have begun to pour in and parts of the law have been suspended amid a legal challenge by opponents. Here’s what the law and its repercussions are all about:
13
questions about
1. WHAT IS ACT 13? Signed into law by Gov. Tom Corbett in February, Act 13 imposes a fee on each gasproducing Marcellus Shale well determined by the price of natural gas and the number of years since the well was drilled to compensate municipalities, counties and state agencies for the impacts of gas drilling. This year drillers were required to pay $50,000 for each horizontally drilled well and $10,000 for each vertical well drilled through 2011, regardless of when drilling began. The law also amended the state’s Oil and Gas Act with a variety of other provisions regulating drilling. Among other provisions the law standardized zoning rules regarding gas infrastructure, established uniform setbacks for wells and other gas infrastructure, mandated disclosure of chemicals used in hydraulic fracturing and established a fund to encourage the use of natural gas vehicles in Pennsylvania.
2. WHAT DOES THE LAW SAY ABOUT ZONING? The law declared that “all local ordinances regulating oil and gas operations shall allow for the reasonable development of oil and gas resources.” It made oil and gas operations other than impoundment areas, compressor stations and processing plants a permitted use in all zoning districts and compressor stations a permitted use in agricultural and industrial districts. It forbid municipalities from imposing conditions, requirements or limitations on oil and gas facilities that are more stringent than would be placed on other industrial uses in the same zoning district. It also forbid local governments from increasing the minimum distances gas facilities must be set back from homes and bodies of water beyond those set down by the act.
3. WHO OPPOSED THE LAW? House and Senate Democrats mostly voted against the bill that would become Act 13. Many municipalities opposed the
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Act 13
lack of zoning control inherent in the bill. Seven municipalities sued the state over local zoning rights taken away by the law, and 67 municipalities and counties symbolically supported them by signing letters criticizing Act 13. The Pennsylvania State Association of Township Supervisors, while supportive of other parts of the law, staunchly opposed its provisions concerning zoning. Numerous environmental groups including PennFuture, PennEnvironment and Protecting Our Waters opposed House Bill 1950, the bill that became Act 13. National taxpayer advocacy group Americans for Tax Reform also opposed the bill, calling the impact fee it imposed a tax.
4. WHO SUPPORTED IT? Gov. Tom Corbett was a primary advocate for the bill. The governor opposed any production-based severance tax on well production. Republicans in the state legislature also overwhelmingly supported the law while most Democrats voted against it. Gas industry group the Marcellus Shale Coalition supported the “greater certainty to operate across Pennsylvania” provided by the standardization of oil and gas regulatory framework, according to President Kathryn Klaber. The County Commissioners Association of Pennsylvania, the Chesapeake Bay Foundation, the Renew Growing Greener Coalition, the Pennsylvania Association of Conservation Districts and the state Fish and Boat Commission, among others, also spoke in favor of House Bill 1950, the bill that became Act 13.
5. WHY DID THE INDUSTRY WANT TO STANDARDIZE ZONING RULES? Pennsylvania has some 2,562 municipalities. A lack of uniformity among their zoning regulations means natural gas companies must spend more time and money determining where they can build well pads and other gas infrastructure and reviewing their plans
with local zoning and planning officials. The Marcellus Shale Coalition has also argued that the lack of uniformity creates uncertainty for drilling companies in their land-development planning. Making drilling a permitted use in all zoning districts and establishing uniform rules about design features like well setbacks, as Act 13 did, would have curtailed this uncertainty, the coalition has said.
6. HOW DID THE LAW END UP IN THE COURT? A lawsuit was filed by seven municipalities (four in Washington County, two in Bucks County and one in Allegheny County), two municipal council members, Dr. Mehernosh Khan, the Delaware Riverkeeper Network and Delaware Riverkeeper Maya Van Rossum. The plaintiffs sued the Public Utility Commission, the state Attorney General’s Office, the state Department of Environmental Protection and their chief administrators, challenging the constitutionality of Act 13 as it pertains to local zoning authority. The court ruled that the municipalities and their elected council members had standing to sue, but the Delaware Riverkeeper and Dr. Khan did not.
7. WHAT DID THE COURT SAY? The Commonwealth Court declared the statewide zoning provisions in Act 13 unconstitutional, null, void and unenforceable on grounds it violated the due process rights of local governments. It removed provisions in the law making gas wells a permitted use in all zoning districts, forbidding municipalities from imposing more stringent zoning regulations than those imposed on other industries and allowing the Department of Environmental Protection to waive setback distances gas wells must have from bodies of water. The rest of the law was left intact and remains in effect. See ACT 13, Page 10
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BY MATT HUGHES mhughes@timesleader.com
PHILADELPHIA – Gov. Tom Corbett thanked gas industry leaders packed into a conference room at an industry conference in September for the sector’s contributions to Pennsylvania’s economy. “I’m here to say thank you,” Corbett said Sept. 20 at industry group Marcellus Shale Coalition’s 2012 Insight Conference in Philadelphia. “Thank you to the industry that has added another $200 million to the common good.” Corbett referred to revenue from Act 13, the natural gas impact fee passed in February that raised approximately $200 million in the first round of fee payments, which were due Sept. 3. “We got that one right,” Corbett said. “Last year at this time the opposition was fretting about the state’s failure to pass a $100 million extraction tax. This year, the citizens of Pennsylvania collected twice that, all to be targeted to public services and protecting the environment.” Act 13 imposes a flat annual fee on
gas wells drilled in Pennsylvania that is tied to the price of natural gas and declines over time. Horizontal gas wells drilled prior to 2011 were assessed a fee of $50,000 each. Assuming natural gas remains in the same price range, those wells will be charged a fee of $40,000 in 2013, $30,000 in 2014, $20,000 in years four through 10 and $10,000 in years 11 through 15. Wells drilled in 2012 begin the cycle at $50,000. Corbett also touted the jobs created by the natural gas and associated industries and the new investment in Pennsylvania he said the industry has spurred, calling the Marcellus Shale boom “the tip of the spear” of a “new industrial revolution.” He said the abundance of cheap natural gas in Pennsylvania has prompted renewed growth in the state’s manufacturing sector and that he promoted the availability of cheap energy in the state during a March trade promotion trip to Europe. The governor also took sharp aim at opponents of natural gas development, claiming they have “no understanding of the industry.” “Our opponents agree that we can land a rover on Mars, but they can’t bring themselves to agree that we can safely drill a mile under our own soil,” Corbett said. A contingent of several hundred opponents protested outside the
Pennsylvania convention center where Corbett spoke. The rally was organized in conjunction with Shale Gas Outrage, a counter-conference sponsored by environmental and anti-drilling groups that took place in Philadelphia during the same two days as the Marcellus Shale Coalition conference. Claudine Luchsinger, a protester from Narrowsburg, N.Y., said Corbett’s presence at the conference “says that the governor’s been bought by the gas industry.” “We’re here to tell Gov. Corbett that our Delaware River is not for sale,” Luchsinger said. Corbett accepted more than $1.6 million in campaign contributions from the natural gas industry for his 2010 campaign for governor and is frequently criticized by anti-drilling groups for his pro-industry stance. Corbett’s administration was well represented at the conference. Michael Krancer, Secretary of the Department of Environmental Protection represented Mitt Romney in a debate with former DEP Secretary Kathleen McGinty, President Barack Obama’s surrogate. Department of Community and Economic Development Secretary C. Alan Walker, Governor’s Office Energy Executive Patrick Henderson and Department of Labor and Industry Deputy Secretary Michelle Staton participated in panel discussions.
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CONFERENCE Continued from Page 4 gas vehicles. Gas companies explored the prospects for those uses at the conference, held Sept. 20 and 21 at the Pennsylvania Convention Center. The chemical industry is the largest user of energy after the refining sector and largest user of natural gas, according to Martha Gilchrist Moore of the American Chemistry Council. After years of moving operations abroad because of the high domestic cost of gas and natural gas liquids, U.S. chemical output increased 12 percent last year as companies restarted old plants and submitted applications to build new ones. Shell is considering building an ethylene cracker plant near Pittsburgh, and C. Alan Walker, Secretary of the state Department of Community and Economic Development said other companies have expressed interest. “I’m sure that there are going to be more crackers built in the Appalachian region,” Walker
matt hughes photo/the times leader
News reporter Ted Koppel interviews DEP Secretary Michael Krancer and former DEP Secretary Kathleen McGinty during the Marcellus Shale Coalition’s Shale Gas Insight Conference. said. “Yes, we’re talking with other companies who are looking.” Just as cheap gas can revolutionize manufacturing, speakers said the liquified natural gas market offers the opportunity for a paradigm shift in U.S. trade. In 2007, companies anticipat-
ing a domestic gas shortage filed applications for 38 liquified natural gas importing hubs; by 2012, 14 applications had been filed to export liquid gas, Jim Halloran of PNC Wealth Management said during a panel discussion. Frank Semple, president and CEO of pipeline company
ACT 13
10. WHAT ELSE DOES ACT 13 DO?
Continued from Page 6
Only a few parts of Act 13 were struck down by the Commonwealth Court. The law’s main provision, the imposition of a drilling impact fee, remains in effect, with the first round of fee payments collected in September. Other sweeping provisions include: • Minimum distances natural gas wells and other gas infrastructure must be set back from homes and bodies of water were made uniform, • Drillers are required to disclose chemicals used in fracturing a well to DEP within 30 days of fracturing, and a public disclosure internet site was established, • The amount gas companies must pay to bond wells was increased, • Maximum fines for drillers who violate environmental laws were raised, • Requirements for spill prevention and containment measures on well pads were heightened, • A Natural Gas Energy Development Program was established to encourage the use of natural gas vehicles and the development of related infrastructure.
8. WHAT HAPPENS NOW? The Public Utility Commission, the Attorney General’s Office and the Department of Environmental Protection have all appealed the Commonwealth Court’s decision to the state Supreme Court. A hearing on the appeal was scheduled for Oct. 17 in Pittsburgh. It will likely be many months before a new ruling is issued.
9. WHAT DOES PRESERVING THE INJUNCTION MEAN? Under Pennsylvania’s appellate court rules, when the state appeals an injunction order the order is automatically stayed, or postponed, while the appeal is heard. If that happened here the zoning regulations in Act 13 that the court declared unconstitutional would have remained in place until the court ruled on the state’s appeal. But the Commonwealth Court decided in August to allow the injunction to stay in place until the Supreme Court rules on the appeal, meaning that for now, at least, the zoning ordinances municipalities had prior to Act 13 will remain unaltered by the impact fee law.
11. HOW MUCH HAS THE FEE RAISED SO FAR? The Public Utility Commission, which col-
MarkWest Energy Partners, suggested that exporting natural gas could be a “tool for global diplomacy,” as exporting gas could weaken the control other nations, particularly Russia, exert over some regional trade markets. See CONFERENCE, Page 20
lects and distributes the fee, announced in September it had collected nearly $206 million in the first round of payments, which were due Sept. 1. Of that, close to $198 million was paid by drilling companies.
12. WHERE DOES THE MONEY GO? The state will take an initial $25 million off the top for distribution to various state agencies, including the PUC, Department of Environmental Protection and the Fish and Boat Commission, as well as for county conservation districts and a natural gas vehicle fund. Sixty percent of what’s left will be divided among the 37 counties and approximately 1,500 municipalities hosting gas wells. The remainder will be used to repair deteriorating local bridges and various environmental projects.
13. WHEN WILL THE STATE AND MUNICIPALITIES SEE MORE DRILLING FEE REVENUE? Starting in 2013, annual impact fee payments will be due April 1.
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matt hughes photo/ the times leader
Kevin Petak of ICF International predicts natural gas prices will remain relatively stable in the coming decade.
BY MATT HUGHES mhughes@timesleader.com Natural gas prices will rebound from the rock bottom low they hit earlier this year, but not immediately, an industry analyst said at a recent conference in Philadelphia. Natural gas prices at New York’s Henry Hub, a frequently cited index price, dropped below $2 per million British thermal units in April, the lowest price in more than a decade, and significantly lower than the average price of $5 to $7 that had been the
norm since 2003. Kevin Petak, vice president of the Fuels Group at global technology, policy and management consulting firm ICF International, said the price has prompted a nationwide slowdown in natural gas drilling, with the number of active drilling rigs dropping from a peak of 1,000 last October to about 500 in September. “We don’t see (gas below $3 per million British thermal units) as a sustainable price environment, and in fact the
Gas prices at Henry Hub (2010$/MMBtu), projected $12 $10 $8 $6 $4 $2
Nuclear Retirements
Demand Surge
Perfect Storm Leads to Unsustainably Low Gas Prices
$0 2005
Stable Prices-Market Growth and Supply Growth in Lockstep
Supply Rationalization
2011
2015
Historic
2020
2025
2030
2035
ICF Projected
Source: ICF International, PennFuture’s 2012 Clean Energy Conference
© 2012 ICF International. All rights reserved. See GAS PRICES, Page 14
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GAS PRICES
U.S. and Canadian Natural Gas Supplies (Averag Annual Tcf), projected
Continued from Page 12
45
gas producers around North America would probably agree with that assessment ... that’s why gas production drilling activity has been cut in half over the last few months.” The slowdown has affected gas drilling in Northeast Pennsylvania disproportionately as some drillers have shifted their operations to the western portion of the state, where higher priced petroleum compounds can be extracted together with natural gas. Petak said natural gas is likely to rebound above $4 per million British thermal units within two to three years and climb above $5 within a decade, though the price should then level off, and is unlikely to return to the high prices of the early 2000s for some time. Petak attributed the recent drop in gas prices to a “perfect storm” of strong growth in gas supply, weak demand growth and an unusually warm winter that left utilities with a surplus of gas in storage. 2011 was a record year for natural gas production growth in the U.S. and Canada, with production growing by 1.6 trillion cubic feet over the preceding year, a 7 to 8 percent increase. Shale gas production will continue to increase, Petak said, with annual production in the U.S. and Canada nearly tripling from 9 to 10 trillion cubic feet this year to 25 to 30 trillion cubic feet by 2035. It will also account for a much larger portion of domestic gas supply, making up two-thirds of American and Canadian natural gas supplies by 2035, as opposed to less than a third today. But a slow economy has left demand unable to keep step with supply, and the warm winter only exacerbated the problem. “Contrary to popular belief, natural gas markets are still a winter-peaking market,” Petak said. “The majority of the load in natural gas markets is consumed in the wintertime or a fair amount of it is consumed in the winter, so it’s still
40
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Marcellus rises to almost 7Tcf in 2035
35 30
Shale
25 20
Offshore
15
Tight
10
Coalbed Methane
5
Conventional Onshore
0 2010
2015
2020
2025
2030
2035
Source: ICF International, PennFuture’s 2012 Clean Energy Conference
U.S. and Canadian Gas Demand (Tcf per year), projected 45 40 Industrial (GTL)
LNG Exports
35 Industrial (Petrochem) Industrial (All Other)
30 25 20
Power
15 10
Commercial
5
Residential Other
0 2010
2015
2020
2025
2030
2035
Source: ICF International, PennFuture’s 2012 Clean Energy Conference
a winter-peaking market as opposed to electric markets, which tend to be summerpeaking markets.” Barring another warm winter, Petak’s firm foresees natural gas prices climbing back to above $4 within two to three years, and climbing above $5 a few more years out in response to increased demand from the utility industry as increasing numbers of coal generation plants are retired, from petrochemical and ammonia producers, from liquid natural gas exporters and possibly from gas-to-liquid refineries. Gas-to-liquid plants convert natural gas to liquid fuels such as gasoline and diesel, and require massive quantities of
gas to operate. Two companies have submitted applications to build gas-to-liquid refineries in Louisiana, and Petak said he believes they will be built, though construction could take a decade. A recently constructed gas-to-liquid plant in Qatar took 10 years to build and cost nearly $20 billion, he said. Petak was less optimistic about demand from other natural gas fuel sources, specifically liquid natural gas and compressed natural gas, because the infrastructure required to supply vehicles with those fuels would cost even more than a gas-to-liquid plant. “I think the hurdles here are infrastructure-related,” Petak said. “LNG (liquid natural
gas) requires a tremendous changeover in the infrastructure. ...And who’s going to do it? Is it going to be just fleet vehicles, like UPS is going to change their whole fleet? Well, that’s rather limited penetration then. “And if you get into LNG refueling on a competitive basis in long-haul trucking, well then you’ve got some real issues and questions about, how does that come about on a competitive basis? How do you develop all these stations so that you create competition among the stations.... CNG (compressed natural gas) same thing. It’s a lot of infrastructure: institution infrastructure; refueling infrastructure, it has a tremendous cost with it.” Pennsylvania will invest $20 million in Act 13 natural gas impact fee revenue in a natural gas vehicle program coordinated by the Department of Environmental Protection, starting with a $10 million investment in 2012. Petak said liquid natural gas exports are also likely to drive demand, but that the volume of gas North America exports is likely to reach a ceiling at no more than 6 billion cubic feet per day, about 30 percent of the global liquid natural gas market. Assuming that the U.S. could export more would underestimate the market interest of other gas producing nations like Qatar and Australia, he said. “It’s just impractical to believe that North America will capture a much bigger percent than that because other countries have stranded gas (deposits),” Petak said. “Like Qatar, for example. In their north field, a single field has like 700, 800 trillion cubic feet of natural gas that’s stranded. They don’t have any significant domestic amount of demand to consume that gas. They want to export that gas because it costs them 50 cents or a dollar for them to produce that gas.” Natural gas prices are likely to remain relatively stable in the $5 per million British thermal units range for an See GAS PRICES, Page 24
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Fred Adams photos/ for the times leader
A Citrus Energy well head on Procter and Gamble’s Mehoopany plant.
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fred adams photo/the times leader
Smoke rises from towers at the Procter and Gamble Mehoopany plant behind a natural gas metering station. Gas produced onsite is used to power the P&G plant.
P
BY MATT HUGHES — mhughes@timesleader.com
rocter and Gamble has been burning through massive quantities of natural gas at its Mehoopany plant since its opening in 1966, but it was only a few years ago that the company tapped into the fuel near the property their. Through a partnership with gas drilling company Citrus Energy the paper products plant has developed six natural gas wells on its 1,100-acre property. Producing its gas on site cuts 1,500 miles out of Procter and Gamble’s gas supply chain, saving the company millions of dollars in energy transportation expenses. As company spokesman Alex Fried put it succinctly, “shorter is cheaper; shorter is cleaner.” All of the gas the company uses – roughly 10 billion cubic feet per year – now comes from Citrus wells in Wyoming County, and the company is finding new uses for this cheap, abundant resource. It employs natural gas vehicles to move products around the plant and to a nearby warehouse, and by next year the plant expects to produce all of its own electricity on site with natural gas. Using local gas instead of gas delivered by pipeline from the Gulf of Mexico saves Procter and Gamble money in transportation costs and insulates the company from fluctuations in the price
of offshore gas when hurricanes strike the Gulf. “When Katrina happened six or seven years ago and there wasn’t a Marcellus Shale and most of our gas was being produced offshore, large natural gas users like us ended up getting notices that you need to curtail production,” Fried said. “Around here we don’t tend to have weather events like you have in the Gulf of Mexico on your offshore oil and gas rigs.” The company also receives royalty payments from the wells on its property, further subsidizing its energy costs. Drilling at Procter and Gamble began with a vertical test well in December 2009 and by June 2010 Citrus brought the first horizontal Marcellus well online. Citrus has since drilled a total of six wells on four well pads on the plant’s grounds, with an additional pad under construction. Citrus benefits from the partnership because Procter and Gamble is a significant gas consumer and because a pipeline connecting the plant to the nearest interstate pipeline already existed, Citrus Completions and Drilling Manager Rick Fields said. “We were selling gas about a year and a half before other Wyoming County companies had infrastructure to sell gas,” Fields said. “It was only six or seven months from when Citrus knew there was gas here to where we were selling gas; that’s unique.”
Gas from the wells is routed to a dehydration station operated on the company’s grounds by Penn Virginia Resources, then to a UGI Energy Services metering station on a hill overlooking the Procter and Gamble plant. The gas Procter and Gamble needs is pumped directly to the plant, and anything left over flows to the Tennessee interstate pipeline, about eight miles away. Procter and Gamble’s gas fires a turbine that powers its production lines, which manufacture paper products and diapers sold under the Bounty and Charmin brands. Residual heat from the turbine is directed through ducts to create steam used in production and to dry paper towels. Procter and Gamble is in the process of installing a second natural gas turbine, and expects to be powered entirely by local natural gas by next year. The company is finding other uses for its locally produced gas. It recently installed a compressed natural gas fueling station at its campus and runs a fleet of 25 trucks on the fuel. The vehicles are used for short trips around the campus and to carry products to and from the company’s warehouse five miles away. “Switching to compressed natural gas saved money and it was also cleaner,” Fried said. “(CNG trucks) are a little more expensive than diesel but having a local fuel that’s less expensive they more than pay for themselves.”
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MEET, Continued from Page 3 landed a job with drilling services provider Cameron International. Bennett said he hasn’t looked back since. “I enjoy so much getting out of bed in the morning, because I know I’ll enjoy it,” he said. Bennett began his new career as a flowback technician, working with others sometimes half his age. It was challenging, he said. “I’m talking anywhere from 23 to 35 years old, and I was working side-by-side with individuals that were 20 years younger than me, so that was difficult,” he said. “Those boys were in shape, and here I am a 45-year-old man keeping up with those boys, but what I will say is that what I have found with these young men and ladies in this natural gas industry; they are very hard workers, and I think it does our generation proud to know that we have workers like this.” The experience Bennett gained in safety compliance at Procter and Gamble and the leadership skills he built during his eight years of service in the U.S. Marine Corps helped him gain a quick promotion to Health, Safety, Security and Environment Specialist. In that role he oversees employee performance on well pads and ensures the company’s flowback and well head equipment is being used properly and safely. It’s a job Bennett said gives him great personal satisfaction. “I know that I work for a company that truly cares that me and our employees go home every night to our families,” he said. “I know that the gas industry as a whole cares about that, not only about safety but about the environment.” The job also is different every day, he said. “What I thoroughly enjoy about what I do on a day-to-day basis is the ability to communicate with different types of people on different days,” Bennett said. “Every day I see different people. I love communicating; I love interaction with people. I’ve always been that way ever since I was in high school, and now in this position I’m out there every day with all different kinds of people in different situations and it’s awesome; it just makes my day so enjoyable.”
Environmental group seeks stop of
‘dirty drilling’ BY JERRY LYNOTT jlynott@timesleader.com
WILKES-BARRE – The environmental advocacy group PennEnvironment Research and Policy Center called for halting the use of hydraulic fracturing by natural gas drillers in the state until they can provide long-term coverage of the costs associated with the “dirty drilling” practice. The center assailed the practice in its report, “The Costs of Fracking: The Price Tag of Dirty Drilling’s Environmental Damage,” released last month. The report attributed not only physical damage to the air, land and water, but also linked pollution with health risks from the unconventional drilling used to extract natural gas from shale formations deep underground. The release of the report led up to the hearing this month before the state Supreme Court on whether municipalities can apply local zoning control over shale gas drilling or adopt statewide zoning provisions that PennEnvironment said would allow drilling in residential areas. “Our message today is clear,” said Lacey Vogel, a preservation associate with the center, with the release of the report on Sept. 20. “The environmental damage is bad enough, but as it turns out the dirty drilling imposes heavy dollar and cents costs as well and if we don’t take action the public will be left holding the bag for these costs.” Decades after coal mines closed acid mine water drains into creeks, streams and rivers and gas drillers will follow that lead unless they are forced to pay upfront to insure against leaving a legacy of damage, she contended. “We’re calling for a halt until … gas companies can cover all costs associated with gas drilling from health care costs to infrastructural costs to costs down the road decades from now years from now,” Vogel said. The 43-page report cited facts and figures related to the drilling in Pennsylvania and other states: • Cabot Oil & Gas spent $109,000 on methane removal systems for 14 households in Dimock, Susquehanna County, as a result of drilling-related contamination of local groundwater supplies. • A 2010 study showed a decrease between 3 and 14 percent in the value of
a $250,000 house in Texas located within 1,000 feet of a well site. • Air pollution from gas drilling in the Arkansas Fayetteville Shale region imposed more than $10 million in public health costs in 2008 • In Colorado and New Mexico, between 1.2 and 1.8 percent of all gas drilling projects result in groundwater contamination • Texas convened a task force to review the impact of drilling on local roads and approved $40 million for road repairs in the Barnett Shale region. The report from the center with offices in Philadelphia and Pittsburgh was distributed in a number of states and contained cherry-picked information to get PennEnvironment’s anti-drilling message across, said John Krohn, a spokesman for the petroleum industry group Energy in Depth. There was no mention of the millions of dollars Chesapeake Energy invested in roads in Pennsylvania, Krohn said. “This is an airdrop study based on bad science and in some cases disproved accusations designed to obfuscate the dialogue on Marcellus Shale development,” he said. The report contained “unfounded criticisms” of Marcellus development including its impact on water, Krohn said. “The very first example they use to indicate water contamination is Dimock, Pa. where the EPA literally just declared oil and natural gas operations didn’t contaminate the town’s water supply as some, including PennEnvironment, have claimed.” In May the U.S. Environmental Protection Agency said tests did not show unsafe levels of contamination in wells as a result of drilling in contrast to claims of residents. A representative of the Pennsylvania State Nurses Association joined Vogel and said its organization wanted to be heard in the drilling issue. “PSNA’s call to action is to support further research and data collection on the health effects of unconventional drilling of oil and gas,” said Deana Kilmer, a registered nurse and member of the association’s environmental health committee. Kilmer added the PSNA encourages legislators to include an RN or advanced practice nurse “at the table of the health policy committee to provide evidence of the health impacts of drilling on the citizens of commonwealth.”
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matt hughes photo/the times leader
Hundreds of protestors rallied against hydraulic fracturing and the gas industry’s political influence outside the Marcellus Shale Coalition’s conference in Philadelphia.
CONFERENCE Continued from Page 10 Semple also said international interest is strong not only in liquified gas but in natural gas liquids produced with methane, such as ethane. “So far, we’ve seen strong demand from international markets willing to purchase this high quality propane produced right here in western Pennsylvania,” Semple said. But the export of the domestic resource the gas industry claims also can enhance national security is not without controversy. Current Department of Environmental Protection Secretary Michael Krancer, speaking in a debate on behalf of Republican presidential candidate Mitt Romney, said the U.S. needs to develop domestic uses of gas and the country needs a national energy policy to help it do so, but that “export is not an all-bad thing.” Vehicles built to run on compressed natural gas offer another potential market for Pennsylvania’s gas, especially if
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gas vehicles can move beyond fleets and penetrate the consumer market. Todd Hartje of Chrysler discussed efforts in Italy to raise the number of consumer CNG vehicles on the road. By investing in refueling infrastructure and offering incentives for the purchase of CNG vehicles, Italy increased its number of CNG refueling stations from 300 in 2001 to more than 800 today and increased annual sales of natural gas vehicles exponentially, Hartje said. CNG vehicle sales peaked at 100,000 in 2009, and remained strong, albeit lower, after government incentives expired that year. “The customers realized that this was something that they could really use to get to work every day,” Hartje said. “We think the results definitely give us a road map in the United States and what we can do.” As the conference looked at Northeastern Pennsylvania’s place in the world energy market, the world also looked in at the conference. The more than 1,000 del-
egates included company representatives from Germany, China and Japan and a television news crew from South Korea. Tsunemasa Miura of Tokyobased chemical company Showa Denko KK said he attended the conference to learn “the situation of shale gas development and evolution in the U.S.” “This conference, Shale Gas Insight ... represents the overall situation, the U.S. situation ... it’s a good opportunity for us to study the situation in the U.S.,” Miura said. Opponents of natural gas drilling were also watching. A contingent of several hundred protesters rallied outside the convention center on the first day of the conference, carrying signs, singing songs, chanting and making speeches decrying pollution and the political influence of the deep-pocketed gas industry. A much smaller group cried shame at attendees entering the conference on the second day. “We know the truth,” said David Masur, director of anti-drilling group PennEnvironment at the rally. “The truth that they won’t
talk about, or admit in the halls of their conference; that their gas drilling is leaving a legacy of toxic pollution in its wake.” Inside, some speakers acknowledged the protestors and some noted the industry needs to do more to improve its public image. Former General Electric CEO Jack Welch, a keynote speaker, had sharp words for hard-line anti-fracking advocates, calling them “terrorists.” “You don’t convert terrorists; they don’t convert,” Welch said. “… I’ve dealt with them with asbestos; I’ve dealt with them on PCBs; I’ve dealt with them with nuclear. ... You’re not going to appease them. Appease them? They’ve got an industry. Do you realize that they don’t have a job if you go away? They don’t have work.” Instead, Welch advised the gas industry to remain transparent about its operations and to focus on building relationships with the communities where drilling takes place. “One of the things I found in See CONFERENCE, Page 24
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transition Landowners see lease agreement
BY MATT HUGHES — mhughes@timesleader.com
Five years after landmen anticipating a Marcellus Shale gas boom began seeking lease agreements in Northeastern Pennsylvania, many of those first wave leases are coming to an end. The leasing landscape in Pennsylvania has changed dramatically since the free-for-all of 2008 and 2009, Clark Burnett according to landowners and lease law experts. tracted, said Burnett, an oil and gas Once a well has been drilled in a law specialist who has represented drilling unit, or group of properties both landowners and independent from which the well extracts gas, the gas producers in lease negotiations. lease remains in effect for as long as An extension clause allows the gas the well continues producing gas. But company to extend the lease for an if gas companies do not begin drilling additional term, often five years, for within a time period defined in the an additional payment defined in the lease, a lease can expire. Most leases original lease agreement. give drillers a five-year window to Gas companies will often renew begin operating, meaning that leases leases where extension clauses exist, signed in 2007 and 2008 are beginbut they also are letting leases that ning to expire or will expire in the lack extensions expire, said Doug coming year. Clark, an attorney specializing in landAccording to two attorneys specialowner representation and lease negoizing in natural gas lease negotiations, tiation at Clark Law Firm, Peckville. two factors have drastically changed Gas drillers are generally at leisure the leasing market in Pennsylvania to let those leases expire, Clark said, since those leases were signed: the because they have largely consoliconsolidation of lease holdings by dated their lease holdings in concendrilling companies and the low price trated geographical areas. During the of natural gas. leasing frenzy of 2008 and 2009, a “I think the market is in transiMarcellus region landowner might tion right now,” said attorney Robert expect lease offers from several Burnett of Pittsburgh-based law firm companies, Clark said, but with lease Houston Harbaugh. “I think we are holdings consolidated, a gas company seeing a transition of capital from the is not likely to lease land surrounded dry gas areas to the wet gas areas by the land holdings of a competitor. and that is due in large part to the opAnd as the price of gas has fallen, portunity created by the Utica Shale. companies have shifted their spending “This past April the price of gas was into drilling, at the expense of their at $1.89 per (thousand cubic feet); leasing budgets, Clark said. that’s very low and it’s very difficult “I had (a client) who had like a for companies to make a profit for $4,000 per acre plus 18 percent that price,” Burnett said. (royalty) offer and it just went away,” Many leases contain extension Clark said. “And it wasn’t because (the clauses that give the gas company gas company wasn’t) interested; it was the option of extending the lease on because their budget went away.” land where gas has not been exClark said most of the new leases
he has seen signed have been in areas where the gas company intends to begin drilling in the near future. “They’re not leasing many properties in areas where they plan on drilling in four or five years; they’re leasing in areas where they plan on drilling in the next year,” Clark said.
Landowners see lull Trevor Walczak, founder of the Greenfield Gas Group and vice president of the National Association of Royalty Owners Pennsylvania Chapter, agreed with that assessment. His group represents 450 landowners controlling more than 23,000 acres in Lackawanna, Wyoming and Susquehanna counties. “Drilling companies are centralizing their resources around the areas where they are currently drilling,” Walczak said. “As they move out from those areas, they are renewing or signing new leases in the area that will most likely resemble what that particular well’s drilling unit may look like. “Generally, in areas not currently experiencing extensive drilling or in the fringes of productive regions, like the northern and western townships of Lackawanna County, landowners may not see their leases renewed or even be approached about a renewal.” When leasing does pick up, Walczak said he expects “the lease climate will again be shaped by landowner group activity.” “Landowner groups … fanned the flames of competition which led to big landowner lease agreements that shaped the lease market for everyone signing later,” he said. He added that even less productive areas of the Marcellus like that beneath Lackawanna County could eventually prove attractive to gas See LEASING, Page 26
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IN BRIEF DEP Launches Air Monitoring Study The Department of Environmental Protection has begun a one-year air monitoring study of Marcellus Shale development. The study in Washington County will measure ambient airborne pollutants in an effort to determine potential air quality impacts associated with the processing and transmission of unconventional natural gas. The data from the study will allow DEP to assess any potential long-term impact of air emissions from unconventional natural gas operations to nearby communities, and it will help DEP address the cumulative impact of the operations in the Marcellus Shale region. In 2010 and 2011, the agency conducted short-term ambient air quality sampling in the southwest, north-central and northeast parts of the state, where Marcellus Shale drilling was taking place. The sampling did not identify concentrations of any compound that would
likely trigger air-related health issues. DEP also tested for carbon monoxide, nitrogen dioxide, sulfur dioxide and ozone, but did not detect concentrations above National Ambient Air Quality Standards at any of the sampling sites. CABOT NAMED BUSINESS OF THE YEAR Cabot Oil & Gas Corporation was named Business of the Year at the Susquehanna County Annual Economic Development Breakfast Meeting held in August in New Milford. The award was presented by the Susquehanna Economic Development Board and The Progress Authority. Cabot was saluted for its significant business investment in the region as well as its leadership and charitable donations to the community. Cabot has invested more than $2 billion since commencing operations in Susquehanna County in 2006, helped create more than 400 jobs, paid millions in royalties to landowners and invested more than $18 million on improving and maintaining
roads, the company said. DEP Announces Natural Gas Vehicle Seminars The Department of Environmental Protection will hold Natural Gas Vehicle seminars on Oct. 30, at the Lackawanna County Center for Public Safety in Jessup, and on Nov. 1, at the Towanda Fire Hall in Bradford County. The half-day seminars are designed to help municipal and commercial fleet owners make informed decisions about converting their fleets to compressed natural gas and liquefied natural gas. To see a complete list of seminar dates and confirmed locations, and to register for any of the events as an attendee or vendor, visit www. dep.state.pa.us and click on the Natural Gas Vehicle Grant Program button. Legal Professional speaks at Convention Attorney Melissa Theis of The Marcellus Shale Oil and Gas Litigation Group was a guest speaker at the Annual Ohio Association for Justice Conven-
tion held in Columbus in May 2012. The OAJ is a statewide association of Ohio attorneys focusing on preserving Constitutional rights and defending free access to the civil justice system. The Convention enabled attending attorneys to become better informed about trends in legal issues, both in the state and across the country. Hydraulic fracturing has been increasingly scrutinized in the last few years as citizens from several states, including Pennsylvania and Ohio, have complained of health effects allegedly tied to oil and gas drilling. Theis, of the Scranton law firm O’Malley and Langan, addressed special issues that relate to these types of cases at the conference. Based in Towanda, The Marcellus Shale Oil and Gas Litigation Group is comprised of multiple attorneys from different law firms who combine their experience, knowledge and resources on behalf of landowners facing problems related to oil and gas exploration and drilling.
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By the NUMBERS Shale gas production in Pennsylvania continued to climb rapidly during the first six months of 2012, in spite of a slowdown in new well drilling. Marcellus Shale wells in the state produced close to 895 billion cubic feet of gas between January and June, more than double the 435 billion cubic feet produced during the same period in 2011, according to biannual reporting figures released by the Department of Environmental Protection in June. The Marcellus Shale now accounts for close to 10 percent of natural gas produced in the United States. CONFERENCE Continued from Page 20 my 20 or 30 years of dealing with these, ‘vocal minorities,’ is that you spend too much time trying to convert people that are un-convertible,” Welch said. “And you’ve got to spend more time working with the locals in the local communities, at the local level.” John Pinkerton, executive chairman and director of driller Range Resources, said the industry “didn’t react soon enough, and ... didn’t pay attention to what we were encountering,” regarding questions about the contents of fluids used in hydraulic fracturing. “And for the most part I think most of us thought it was just The New York Times and few of those,” Pinkerton said. “But our view was quite different; that it was Main Street that was asking the questions ... not the regulators or the press but it was a lot of ordinary citizens who were asking questions.” Pinkerton said Range was the first company in the Marcellus Shale to publicly disclose the contents of its fracturing fluids in 2010. Public disclosure of fluids via the website
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REGIONAL PRODUCTION OF NATURAL GAS WELLS Production (Mcf*) 700,000
Jan.-June 2011 July-Dec. 2011 Jan.-Jun. 2012
Percent change over 18 months
580% 128%
122% 98%
600,000
48% Tioga
348%
Susquehanna
Bradford
500,000
Wyoming Lycoming
400,000
300,000
200,000
100,000
Bradford Susquehanna Five counties *Well production is measured in Thousands (”M”) of cubic feet (”cf”)
Wyoming
Tioga
Source: Pa. Dept. of Environmental Protection
FracFocus.org, less some proprietary compounds that may only be obtained through a right-to-know request, is now mandatory under state law. Pinkerton said disclosure has greatly lessened the debate around fracturing fluids. “Since then I have gotten almost zero questions on fracking fluids,” Pinkerton said. “I think it’s a huge advancement; quite frankly we should have done it a lot earlier.” The Marcellus Shale Coalition used its conference to announce two new initiatives to further public engagement and promote its side of the gas drilling debate: a new technical-training school in Philadelphia and an internet website called Learn about Shale. The website contains answers to 600 questions submitted by the public during a previous initiative called Ask about Shale. “The perception is that there are concerns associated with our industry and all of those concerns need to be addressed,” said K. Scott Roy of Range Resources, a member of the coalition’s executive board. “... not to be dismissive of concerns (companies) don’t feel are legitimate. We need to answer all of those concerns.”
Lycoming
Mark Guydish/NEPA Energy Journal
GAS PRICES Continued from Page 14 additional 15 to 20 years, Petak said, at which time prices could again rise as many nuclear plants begin to exhaust their lifespans. “The markets will begin kind of what I would call a happy medium, where producers are content, there’s fairly good profits at those types of price levels, but consumers are also relatively content,” Petak said. “It’s not like gas prices are going to get up in the $7, $8 to $10 per MMBtu (per million British thermal units) range where they were back in the middle part of this decade, and thus load growth is not going to be discouraged by this type of price environment.” He also noted his company’s predictions take a broad view and cannot forecast short term fluctuations in gas prices, which could be impacted in the near term by uneven economic growth, weather events and supply disruptions. “There’s a lot of near-term needlemovers that can affect this over time,” he said. “And for that you might not be right here in this justright middle.”
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LEASING Continued from Page 21 producers as technology improves. “As typical in the oil and gas industry, they hit the easy rock first, then when that runs out, it’s time to revisit the tougher ones using what they learned,” Walczak said. “Of course, lease offerings in this type scenario will look altogether different than the big paid-up lease bonus offers of five years ago.” Peter Wynne, spokesman for the Northern Wayne Property Owners Alliance, said the leases that members of his group signed with Hess Corp. were scheduled to expire last spring. The landowners group represents some 1,300 property owners holding more than 100,000 acres, with nearly all of that in the Delaware River Basin. That basin’s managing commission has placed a moratorium on hydraulic fracturing while it considers new rules for the process, and leases there have been extended indefinitely under force majeure until the commission determines new rules, Wynne said. A small number of the landowners group’s members own land in the Susquehanna River Basin, where drilling is allowed and with the exception of some along the Susquehanna/Wayne County border that were sold to Southwestern, those leases have been allowed to expire. Wynne said companies are hesitant to go forward in Wayne County because they do not know how much it will cost them to comply with the Delaware River Basin Commission’s yet-to-be-announced regulations. “Basically I think between the opposition (to drilling) and the low prices and the DRBC, you have a perfect storm to dampen interest,” he said. There are also questions about how much gas can be recovered from that portion of the Marcellus Shale. Wynne, who owns land in the Susquehanna River Basin, said he has been contacted by other companies about a new lease, but has not entered any serious negotiations. “There are other groups sniffing around,” he said. “We’ve been contacted about ‘are you interested in leasing,’ and my answer is, ‘are you interested in talking?’ I’m always interested in talking.” But the new offers he’s hearing are not as generous as those made five years ago. Even in Tioga County, where drilling has been much more active and proven profitable, leasing has slowed to a crawl, according to Jackie Root, a Tioga County property owner and Pennsylvania Chap-
ter President for National Association of Royalty Owners. “Leasing right now is sort of like watching water drip in Tioga County,” Root said. “People call me every day saying, ‘I want to lease now; can you get me a deal?’ Well usually the answer is no.” She said companies, having consolidated their lease holdings, may be willing to let a lease lapse for a year or two until they are ready to drill in an area. She has also heard of companies filing documents with county courts declaring their intent to drill on a property as a way of holding onto leases, even when it’s questionable when they will actually develop the property, leaving landowners with a conundrum. “(Getting the lease released) involves hiring an attorney and going through the drill and its unclear how easily (the gas company) might give that up,” she said. “And let’s say the company is going to go forward with that, would that stall their plans if they have to release it?” Clark said he has also seen “cases where the lease expired and a company filed a permit just so the lease wouldn’t expire.”
Forced pooling coming? Root and Walczak both said some reprieve could come if Pennsylvania allows the process of compulsory integration, or forced pooling, by which holdout landowners may be compelled to lease their subsurface gas rights when a certain percentage of their neighbors in the same drilling unit have leased. Pennsylvania does not currently allow forced pooling in the Marcellus region, and the process is opposed by many who believe it violates a landowner’s property rights or equate the process with eminent domain, a power that gas extraction companies lack. Root said an equitable forced-pooling law could spur new competition for unleased properties. A fair pooling law, according to Root, would give a landowner the option of either leasing for a percentage royalty payment or paying the drilling company to invest as a partner in wells drilled in the landowner’s drilling unit. Under the second scenario, the landowner would receive a 100 percent royalty for gas extracted from his or her portion of the drilling unit. Some companies may be interested in partnering in wells being drilled by other companies, and might offer more competitive percentage royalty payments for the opportunity to do so. “There are companies that are looking to do that,” Root said. “It allows them to spread the risk around.” Forced pooling has been allowed for
Marcellus drilling by West Virginia, and Root said she thinks the gas industry may push for it in Pennsylvania soon. “Some of us, like me, believe it should happen,” she said. “I think that the industry is going to propose it, and I think that we need to be prepared to negotiate it from a position that is going to be fair to the landowner.” Walczak added expanding use of natural gas would reduce the glut on the market, raising the price and giving energy companies more resources to devote to leasing, which would in turn benefit landowners. Clark said having a lease expire “is still a good thing,” even if the landowner shouldn’t expect the same signing bonus or lease terms they may have been offered in 2008 or 2009. If there is gas below the property, the company is likely to come back when it is ready to drill, but if natural gas prices remain low, landowners “need to be realistic about what the market is today.” “Sometimes what happens is people go on the Internet and they read about all these provisions that you should have in your lease,” Clark said. “But what happens is they’re reading articles from 2009 or 2010 … You need to realistic about what the market is today.” Holding out for a better offer from a company that is now “the only game in town” can be risky, Clark said, because the chance remains that the company may simply go around the holdout landowner, and once the property has been skipped over, the company may never come back with another offer. For landowners whose lease is approaching expiration or renewal, Clark recommended doing nothing until the lease runs out. “You don’t reach out to them,” he said. “You’re hoping you slip through the cracks.” After that, the first step should be to confirm that the gas company has not filed a permit or other legal document allowing it to hold the lease. If the lease truly has expired, then is the time to reach out to the company, first to ask the company to certify that the lease has expired by filing a “release” document, then, if the landowner is interested, about negotiating a new lease. Clark and Burnett both recommend hiring a lawyer to help negotiate the best deal, but their advice ended there. Whether or not to accept the terms a company is offering is an individual decision, they said. “I don’t get into telling people you should hold out or you should sign,” Clark said. “I would never say to anyone, hey, hold out or hey, hurry up and sign.”
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