Drillers on hold as state studies possible impact

To gas and oil companies eager to explore natural gas reserves within its boundaries, New York officials are saying, "Wait."
 
Members of the Independent Oil & Gas Association of New York are poised to act on leases they hold in the Marcellus Shale, a gas-rich area in the Southern Tier and Finger Lakes regions. Those members range from one- and two-man operations to XTO Energy Inc., a merger of the world’s largest energy producer, ExxonMobil Corp., and domestic energy giant XTO Energy.
 
The state Department of Environmental Conservation is reviewing drilling’s potential impact on the environment and local infrastructure. Of key concern are hydraulic fracturing-an American innovation that involves pumping millions of gallons of water, sand and chemicals into underground rock formations to extract natural gas-and the transport and treatment of wastewater used in the process. The DEC plans this year to release a final supplemental generic environmental impact statement and related regulations.
 
This article is the second in an ongoing series on the natural gas industry in New York and its interests in the Marcellus Shale.
 
As the DEC’s review stretches into its third year, New York is losing business to its friendlier neighbors, said Brad Gill, IOGANY’s executive director.
 
"One of the industry’s concerns of SGEIS and the regulatory situation is New York becoming uncompetitive," Gill said. "I can name very specific examples of numerous cases where people wanted to come to New York and aren’t doing it now. And I could name numerous examples of companies that have left New York and are busy and employing Pennsylvania workers.
 
"The gas is not going anywhere," Gill said, echoing a rallying cry of drilling’s critics, "but unfortunately the jobs are. To say the gas will be there when the state is ready-I question if the companies will be there when we’re ready."
 
New York imports 95 percent of its natural gas. Most comes from the South and Canada. As Pennsylvania ramps up production, New York is becoming increasingly reliant on its neighbor, Gill said.
 
It also is missing out on tax revenues, corporate income taxes, production royalties and other economy boosters, he said. To wit: Talisman Energy USA Inc., a Canadian oil and gas firm, moved half of its Horse-heads workforce to Warrendale, Pa., where it maxed out its new facility and is filling up another. Another firm closed its Elmira office and moved to Pennsylvania, he said.
 
Pennsylvania’s earlier start in Marcellus gas exploration gives it the leg up on New York, he added.
 
"If you had an office right across the border in Pennsylvania and you can service New York, you’re not going to open a New York shop."

Culture shock
When natural gas drilling companies started following opportunities in Pennsylvania and Ohio, they were tuned to the way things work in Texas and Arkansas, says Anthony Ingraffea, an engineering professor at Cornell University. The topography, weather conditions, local attitudes toward drilling and supporting resources are different.
 
"One of the problems I see is kind of a culture shock," added Robert Poreda, a University of Rochester professor of earth and environmental sciences and an oil, gas and hydrologic consultant. "They (have worked) with different regulations. In Pennsylvania they have to be more careful; locals don’t have a long-term love affair with gas, and the geology is more complex. This is one of the things we’re trying to point out to them."
 
Residents of Dimock, Pa., for example, contend hydrofracking by Cabot Oil & Gas Corp. has contaminated their well water. The Environmental Protection Agency in early December concluded it was safe but said two weeks ago it will retest water samples after gaps in the data came to light.
 
The EPA last year also found that water wells in Pavillion, Wyo., contain compounds likely associated with gas production, including hydrofracking,
 
"They got here and they weren’t prepared," Ingraffea said of out-of-state oil companies doing business in Pennsylvania. "They’re trying to invent new technologies. That’s good. Highly educated people work for the oil and gas industry, and they are figuring out solutions.
 
"In the meantime, what do we do? The poor people of Pennsylvania are suffering the consequences that the industry wasn’t prepared and neither was the DEC. The regulations weren’t in place; the technology wasn’t in place."

Shale gas bubble?
Some experts argue that even drilling’s economic benefits are questionable in the long term.
 
"Shale gas is addictive. Once you’ve invested in the infrastructure, … to justify that capital investment you have to keep the gas flowing. Gathering lines, dehydration units, compression stations, storage facilities, transmission lines-that’s all capital-intensive," Ingraffea said.
 
Characteristic of shale gas wells is rapid decline of production, he noted.
 
"Fifty percent of the gas that comes out of a shale gas well comes out in the first year, so you have to keep drilling more and more wells to justify all that capital and ancillary structure," he said. "You’ve got to keep poking holes in the ground."
 
Multiple wells can be drilled from a single site, or pad. To secure a lease, oil companies are required to take action on the site.
 
"From a technical perspective it’s much more efficient to drill multiples (wells) at one pad," Ingraffea said. "But companies drill one well and go to the next pad to lock up the lease."
 
With shale gas, the amount produced can vary widely from well to well, said Phyllis Martin, senior energy analyst with the Energy Information Administration.
 
"(Production) depends on the location," she said. "Within the shale play you can have two wells right next to each other and they can have different (production levels)."
 
Lost in the discussion are significant job and tax revenue gains natural gas production could mean for New York, proponents said.
 
In "The Economic Impacts of the Marcellus Shale," a 2010 report to the American Petroleum Institute, Timothy Considine, a professor of economics at the University of Wyoming, estimated potential Marcellus activity in New York during 2015 at $1.89 billion, a figure that would rise to $2.2 billion by 2020. The potential value-added impacts in New York during 2015-from direct impacts, such as in the mining sector itself, to supporting trades and services-would total $1.7 billion, he wrote.
 
Considine projects the tax impact during 2015 would be $214.3 million in state and local taxes and $239.3 million in federal taxes.
 
A study by the Public Policy Institute of New York State Inc. predicts economic gains if high-volume hydrofracking commenced in a five-county area in the Marcellus Shale. For every 300 wells drilled, within a year or two of the last well drilled, 37,572 jobs would be added. New York could see $1.6 billion in value added (from salaries to community infrastructure improvements) and $600 million in local, state and federal taxes. The study assumed an estimate of 31 jobs per well and applied a 3.04 multiplier for this sector.
 
"You can actually see it happening in Pennsylvania just around the corner," said Robert Willpopp, an author of the study and director of communications for the Business Council of New York State Inc.
 
The Public Policy Institute points to a broader view of life in the Keystone State.
 
"Drilling for Jobs," PPI’s 2011 study, looks at job growth in Pennsylvania. As well drilling and gas production got into full swing, private-sector employment in Mc-Kean, Potter, Susquehanna, Bradford and Tioga counties, where drilling is concentrated, grew by 2,425 jobs or 4.7 percent between 2009 and 2010. Across the border in the shale-rich New York counties of Allegany, Steuben, Chemung, Tioga and Broome, employment fell by 0.3 percent, or 389 jobs.
 
Unemployment in the Pennsylvania counties fell to 8.4 percent from 9.2 percent in the same period. In their New York counterparts, unemployment rose 0.2 point, the Public Policy Institute reported.

Rapid growth in shale gas production in the last half-dozen years has transformed expectations of domestic energy supplies. In a 2010 study of the U.S. shale gas industry, conducted by IHS Global Insight, a consulting firm, and commissioned by America’s Natural Gas Alliance, the industry supported more than 600,000 jobs. It estimated growth to nearly 870,000 by 2015 and more than 1.6 million by 2035.
 
Shale gas contributions to the national GDP were more than $76.9 billion in 2010 and were expected to rise to $118.2 billion in 2015 and $231.1 billion in 2035.
 
The study reflected regulatory environments in each region and adjusted production profiles to show little or no development where applicable.
 
Experts caution against embracing optimistic revenue and job-growth predictions. Numerous factors likely would come into play, and local governments must be ready, they say. Among the issues studied by a group of Cornell University economists and regional planners are the impact of the boom-bust nature of gas development on local planning and a shortage of data about Marcellus Shale gas operations.
 
"Effective planning to moderate the speed at which extraction occurs, and a commitment to invest the short-term infusion of private and tax revenue in longer-term economic development, may mitigate the effects of the boom-bust cycle," wrote Susan Christopherson, a regional planning professor who conducts research on economic development and job creation, and Ned Rightor, president of New Economy Dynamics LLC.
 
And while gas development is bringing short-term economic gains, "existing evidence about the Marcellus shale gas operations is inadequate to make confident predictions about the numbers of jobs that will be created, business expansion or revenue generation," wrote Jeffrey Jacquet, a Cornell natural resource sociologist who studies the social and economic impact of natural gas development.
 
Indeed, natural gas development is a stopgap approach to the long-term problem of finding renewable energy sources, Cornell’s Ingraffea said.
 
"Instead of grabbing pennies from heaven … what New York State should be doing is a statewide strategic energy policy. How do we get New York State in our grandchildren’s lifetime to the point we have a sustainable energy policy?" he said.
 
"Will there come a time for our children and our grandchildren … to develop this resource in a way that is less risky and (has) less consequences? I hope so. That being said, do I anticipate that shale gas development in New York will give us another 30 years … until we transition to completely green energy? No, that’s an absurd statement."
 
Added UR’s Poreda: "It clearly helps the economy. … But it keeps us on a path of using hydrocarbon resources."
 
As proponents of both sides of the natural gas issue continue to debate, New York’s DEC this year is expected to conclude its study and release a final report.
 
"A few years ago we could have made the decision that this is just oil and gas development, (that) this is nothing new," Ingraffea said. "But this form of gas development is new. That’s what differentiates New York from Pennsylvania, that this is a new industry. That’s what triggered this whole process; we followed the law.
 
"New York has delayed things enough so we can see clearly what the problems are."
 
Environmentalists are not the only ones rooting for New York’s measured approach, Gill said.
 
The governor of Ohio called it a "godsend," and Pennsylvania officials told

IOGANY members in a meeting, "’Please give our gratitude to our counterparts in New York for delaying’ because their districts are flourishing," Gill said.

1/20/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email [email protected].