Shale Game | News | Pittsburgh | Pittsburgh City Paper

Shale Game

Somewhere beneath our feet -- Pennsylvanians are told -- lies a mile-deep layer of rock known as the Marcellus Shale, which contains more natural gas than Saudi Arabia has oil. And natural-gas companies are lining up to drill it all around the state. 

Lately, though, they seem to be doing most of their prospecting in Harrisburg.

City Paper has acquired a document -- titled "A Holistic Solution to Modernizing Pennsylvania Policies Impacting Marcellus Shale Development" -- currently being circulated in Harrisburg. Credited to the Marcellus Shale Coalition, a trade group representing drillers, the proposed "solution" is a wide-ranging wish-list of industry priorities. Among its requests, for example, is that legislators "encourage" state and local governments to convert their vehicle fleets to natural gas.

The document -- which is marked "DRAFT CONFIDENTIAL" -- asserts that the coalition is "committed to participating in an honest, open dialogue." But it includes positions the coalition has, at least in public, offered few specifics on. Among them:

-- The coalition urges legislators to "oppose statutory and regulatory proposals that are not logically or scientifically based, or that would otherwise jeopardize capital investment with little or no benefit to the environment or consumers."

-- The coalition also asks legislators to "reinforce ... the current preemption language" in state law, which bars local officials from passing their own environmental regulations. It also seeks to ensure that drilling is permitted "in all zoning districts." (Since shale drilling can take place a mile below ground and a mile from the "well-head" visible on the surface, however, it's possible this exemption would only apply to below-ground operations.)

-- The coalition, which has long argued against imposing a "severance tax" on the value of gas drilled, will accept one -- sort of. Gov. Ed Rendell has proposed a tax of 5 percent on the value of the gas; the coalition accepts that rate -- but only after the well has been in operation for five years. Until that time, it urges charging only 1.5 percent on the value of the gas. 

The coalition largely declined to comment on the document, and did not respond to a list of e-mailed questions. Instead, coalition president Kathryn Klaber issued a statement asserting the coalition is "fully committed to crafting commonsense legislative and regulatory policies." Those policies, Klaber adds, "will help ensure that Marcellus development remains competitive with other shale gas-producing states," which will ensure "that the economic and environmental benefits associated with responsible Marcellus Shale gas production reach all Pennsylvanians." 

"If this is a strategy for the industry, it's unconscionable," counters Pittsburgh City Councilor Patrick Dowd after reviewing the document. 

Dowd's district includes Lawrenceville, where more than 60 property owners have signed leases with gas companies. He is seeking to adopt local controls on drilling activity, and calls any effort to curtail such regulation "abhorrent. It's also unacceptable that state legislators would be encouraged to squelch any debate that the industry deems 'not logical.'" 

Large oil companies, Dowd notes, have bankrolled scientists to argue there's no such thing as man-made climate change. Environmentalists and public-health experts, meanwhile, say that the burden of proof should be on those who say drilling is safe.

"I agree that we should oppose policies that aren't supported by scientific evidence," says Charles Christen, a public-health expert at the University of Pittsburgh's Center for Healthy Communities and Environments. But Marcellus Shale drilling is "so new that we don't have the science to adequately measure the risks." Shale drilling has gone on for years in places like Texas, Christen notes, but Pennsylvania's geography is considerably more complex. "Industry-paid geologists have a perspective, but where is the peer-reviewed science about the impacts of drilling here? We haven't seen that." 

As for the tax proposal, coalition spokesman Travis Windle notes that other states offer tax breaks similar to those the document proposes. 

Side-by-side comparisons are difficult, since states structure their taxes differently, and not all wells require "high-cost" mile-deep wells like those envisioned here. On the one hand, neighboring West Virginia charges a flat tax of more than 5 percent on all gas drilled. States like Texas and Oklahoma, however, do cut breaks for "high-cost" wells early on: Texas cuts its tax from 7.5 percent to below 4 percent for as much as 10 years; Oklahoma waives its 7 percent tax for the first two years, or until the initial cost of drilling the well is paid off. 

The industry seeks such breaks to offset the high up-front cost of drilling wells. But it's not clear Pennsylvanians would ever recoup the lost revenue. Natural-gas wells are often most productive early in their lifespan -- the period when tax rates would be lowest.

For example, production at some wells in the Haynesville Shale -- a Marcellus-like formation located in the Gulf region -- declined by 80 percent after the first year of operation. And in numbers cited by the Pittsburgh Business Times last month, driller Range Resources found that at 24 Marcellus Shale wells, production dropped by 85 percent in the first two years.

Radisav Vidic, an environmental engineering professor at the University of Pittsburgh, says it's hard to know if that pattern will be repeated: "There is no well in the Marcellus Shale that's been around for longer than five years, so no one knows how it will behave." Vidic understands the industry's need to recoup costs -- "It costs them $5 million per well" -- but adds, "If I were developing regulations, I would be very cautious about accepting this deal." 

In any case, says Arthur Berman, Pennsylvanians shouldn't be dazzled by industry promises. True, "A lot of people will make money," says Berman, an independent, Texas-based consultant with three decades of industry experience. But he contends gas drillers frequently overstate the revenue potential -- and the amount of gas available. As much as 70 percent of a well's value is pumped out after the first five years, he says -- by which time the industry is looking for new places to drill.

In fact, Berman likens the industry to a traveling circus. "If the circus stays in one town for too long, people figure out the gimmicks and get bored. So the trick is to keep moving" from one shale deposit to the next. 

Berman is a controversial figure in the gas industry: Last year, the trade publication Oil World killed a column he wrote because of industry complaints that he was too negative. But in any case, it can be hard to predict the industry's next move. 

With constituents alarmed by leasing activity, Dowd convened a July 29 community forum about drilling at the Teamsters Temple. On hand was David Spigelmyer of Chesapeake Energy, which holds the Lawrenceville leases. Spigelmyer earned applause by asserting that the company has "no plans in the city of Pittsburgh ... in the near future." Spigelmyer later told City Paper that the company purchased some leases because "we wanted to take a look at what the shale looked like. We have not seen vibrant production come out of the Pittsburgh region, and frankly we have great opportunities in other locations."

That's consistent with the company's paper trail. Another July 29 panelist, Ned Mulcahy, of environmental group Three Rivers Waterkeeper, noted that local lease-signing has died off in recent months. Financial documents filed with the Securities and Exchange Commission, meanwhile, assert that partly "due to recent low natural gas prices" the company has "reduced planned capital expenditures on natural-gas focused" fields.

Then again, those documents also suggest Chesapeake may sell off part of its Marcellus Shale operations -- part of a plan to "ultimately achieve an investment grade rating" for corporate bonds. (The company's debt has a "BB" ranking from Fitch -- a rating that is well above "junk bond" status, but that reflects an "elevated default risk.") And Berman says, "I highly doubt someone is buying leases they don't intend to use."

Such mixed messages only make gas drilling more volatile, says Dowd.

"To lease people's backyards and tell them they have no intention of drilling isn't logical," says Dowd. "I'm trying to allay the concerns of my constituents, and when I see a document like [the coalition's 'Holistic Solution'], I understand why they get so upset."

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