New York's natural gas battle
The Marcellus Shale is a gold mine of natural gas - pitting gas companies and farmers against locals and environmentalists.
(Fortune Magazine) -- The farmland around the college town of Oneonta, N.Y., is punctuated by barns and cows. But the quiet setting belies a battle that is raging over the Marcellus Shale, a largely untapped deposit of natural gas that runs from West Virginia to New York.
Gas companies, environmentalists, and cash-strapped farmers have been squaring off over the lucrative commodity, whose fate could be decided soon.
Experts say Marcellus is the largest natural gas deposit in North America, even bigger than Texas's lucrative Barnett Shale. A Penn State study of the shale has placed the amount of recoverable gas there at 489 trillion cubic feet -- more than 20 times the amount that the United States uses each year.
Companies including Chesapeake Energy (CHK, Fortune 500) and Hess Corp. (HES, Fortune 500) have been vying with one another to tap the gas deposit, which could be worth nearly $2 trillion in revenue based on today's low prices.
Range Resources (RRC) has spent $1 billion on rights to drill in the region, where it's leasing about 900,000 acres. Chesapeake Energy's 1.5 million acres of leased Marcellus land are a big reason its stock is up 74% this year.
But while gas producers have already started drilling the Marcellus in Pennsylvania, they are still waiting in New York, whose Department of Energy Conservation recently released a regulatory proposal for public comment.
The comment period ends Nov. 30, but the process will likely reach into next year, according to Richard Capozza, a lawyer at Hiscock & Barclay in Syracuse who represents several local gas companies. "The industry thinks they can work through it," he says, "but the environmentalists are up in arms."
Local advocacy groups say it would be better to preempt spills and contamination by banning drilling or mandating large distances between wells and water sources. "The draft does take steps to mitigate impact, but it doesn't adequately protect the area," says Adrian Kuzminski, an activist who lives in nearby Fly Creek.
Drillers have known about the Marcellus Shale for more than a century, but it used to be prohibitively expensive to extricate the gas from the dense, deep rock. Thanks to a new use of a technology called hydraulic fracturing, or "fracking," Big Energy now has a reason to drill into the shale.
The process involves drilling thousands of feet into the ground, then turning the drill sideways to dig horizontally. An injection of water, sand, and chemicals produces small explosions that crack the shale and free the gas.
While gas producers say none of these technologies are new, environmentalists argue that the usage of both fracking and horizontal drilling is an untested combination that could cause new problems.
To counter antidrilling sentiment, the "gas men," as locals call them, have conducted town-hall-type presentations all summer. At a recent meeting in Oneonta, a small group of activists stood outside wearing placards with slogans such as, "Get the Frac Off My Land." One protestor held a sign with an image of a devil thrusting a contract that read "Natural Gas" into a person's hands.
Inside, about 100 people watched as Brad Gill, executive director of the Independent Oil & Gas Association of New York, showed a photo of a well drilled near a high school football field, its diminutive size making it look as innocent as a mailbox. "We have an excellent track record of safety," he told the crowd.
Indeed, natural gas drilling has been going on in New York since the 1800's without major incident. A series of recent fracking fluid spills in Dimock, Penn., however, has locals worried that New York's water supply is at risk. "We need to take a proactive approach to stop impacts," says Robin Krawitz, chair of Otsego 2000, an advocacy group.
Gill downplayed the spills. "[The Dimock incident] appears to have involved sloppy material handling, which is unfortunate," he says, adding that Cabot Oil & Gas (COG), the producer behind the spills, is not an IOGA NY member.
Such incidents are potentially hazardous because of the small chemical component in the fracking fluid. Gas companies are tight-lipped about the chemicals they use, but the DEC's proposed regulations would require them to divulge their formulas. A pending bill called the FRAC Act aims to bring fracking under the jurisdiction of the EPA. (The fracking process is currently exempt under the Safe Drinking Water Act.)
Gill says a federal agency would have difficulty overseeing all drilling. "I can't imagine that, with the current economic worries, the EPA could staff up enough," he says.
Several attendees at the Oneonta meeting voiced concerns about whether New York's own regulators were equipped to handle the coming onslaught of drilling activity. DEC spokesperson Yancey Roy says 19 employees handle permitting. "We've acknowledged that we would need more staff," he says. "But if there's a rush of applications, that doesn't mean we're going to cut corners."
Not all New Yorkers oppose drilling for natural gas. Gov. David Paterson's office recently issued a draft of his energy plan, noting that the resource "presents an opportunity for the State to unlock substantial economic value." New York currently imports 95% of its gas.
Additionally, many landowners -- many of whom are farmers struggling with crashing milk prices -- have also welcomed the drillers. Some 10% of the land in Otsego County, home to Oneonta, has already been leased to gas companies.
When the gas men first came to the region, many of them were able to pick up the land for cheap. According to CEO Aubrey McClendon, Chesapeake acquired its land for $80 per net acre after investments from partner Statoil.
Since then, landowners have formed coalitions to negotiate with the gas men. In a more recent deal Fortuna Energy paid landowners $5,500 per acre, plus 20% in royalties.