Spectra Energy Watch

Spectra Energy ‘Backtracks’ on Methane Incident

First: “Nothing Released …. No Smoke …. No Incident”

Then Admits:  Methane & Hydrocarbons Released;

Investor Group Wants Report on Fugitive Methane Emissions

From Spectra Energy Board of Directors

Spectra Energy Corporation (SE, NYSE) was forced to backtrack on dismissive assertions it made about a nighttime incident at its huge natural gas compressor station in Bedford County, PA, after persistent neighbors and a reporter kept pressing the company and state regulators for facts.¹

The Spectra Energy facility – known as Steckman Ridge – is a 12-billion cubic feet underground natural gas storage reservoir with a 5,000 horsepower compressor station, 13 injection/withdrawal wells and related pipeline infrastructure in Monroe Township (Bedford County) Pennsylvania.  It is located near the Maryland border, about two hours from Washington, DC.

On the evening of March 9, neighbors heard snapping and popping sounds like fire crackers coming from the facility; then they saw what looked like smoke coming from the compressor station.  They called 911 and fire trucks from the nearby town of Everett rolled to the scene.  The noise lasted 2-3 hours, according to neighbors.

Spectra Energy:  “No Incident”

Spectra Energy’s initial response was autocratic and dismissive:  “Nothing was released. There was no smoke. No incident.”  This was from Marylee Hanley, a “Director of Stakeholder Outreach” located nearly 500 miles away in the greater Boston area.

Then the story began to change, thanks to the persistence of nearby Property Owner Angel Smith and Associate Editor Elizabeth Coyle, of the Bedford Gazette.

They kept the pressure on Spectra Energy and the Pennsylvania Department of Environmental Protection (DEP).  With its initial “no incident” response crumbling, the company apparently substituted a different Director of Stakeholder Outreach from its Houston headquarters.

This one, Andrea Grover, admitted what the Pennsylvania DEP had already acknowledged:  There was a release of methane and other hydrocarbons; but so far the company refuses to say how much.

But as reported in the Bedford Gazette, Spectra Energy is legally permitted to emit literally tons of pollutants per year from this single facility.  For example:  50 tons annually of volatile organic compounds; 25 tons of hazardous air pollutants, according to the DEP.

Investors Want Methane Emissions Data

Timing is everything in life.  As it turns out, a large socially responsible investor group, Trillium Asset Management, with over $1 BILLION in assets under management, has filed a shareholder resolution requesting a report from Spectra Energy’s Board of Directors on its fugitive methane emissions.  Reference link: https://www.ceres.org/incr/engagement/corporate-dialogues/shareholder-resolutions/spectra-energy-fugitive-methane-emissions-2013

Trillium Asset Management said:

“We believe Spectra Energy’s social license to operate is at risk and the company has a responsibility to implement a program of measurement, mitigation, and disclosure.” 

If that weren’t enough evidence of ongoing problems with Spectra Energy operations – as recently as December, the Pipeline Hazardous Materials Safety Administration (PHMSA), issued Spectra Energy CEO Greg Ebel a “Final Order” and civil penalty of $134,500 related to various violations across several states.  Included in this Order, the company was cited for failure regarding valve inspections.

Failure Regarding Valve Inspections

In fact, PHMSA said the company failed to follow its own Standard Operating Procedure (SOP) 5-5010, Valve Inspection and Maintenance, which requires annual valve inspections, but at least at intervals not exceeding 15 months, “for valves that might be required during an emergency.”

The Notice alleged that between 2008 and 2011, multiple valves at Spectra Energy’s pipeline division (Texas Eastern) facilities in Texas, Louisiana, and Arkansas had not been partially operated as part of the annual inspections.

Increases Risk of Preventable Pipeline Accidents

The PHMSA document notes (emphasis added):

“Respondent [i.e., Spectra Energy], however, conceded that at the time of the inspection SOP 5-5010 required inspection and partial operation of all valves, both emergency and non-emergency, and that it had not complied with this procedure.  An operator that fails to follow its own procedures for valve inspections increases the risk of preventable pipeline accidents.”

Reference Link (see pages 3-4 of PHMSA’s Final Order):  http://www.phmsa.dot.gov/staticfiles/PHMSA/DownloadableFiles/420121009_Final%20Order_12212012.pdf

Regarding valve problems and methane emissions at its Steckman Ridge facility, Spectra Energy initially maintained that there was a normally operating valve release of “air,” according to the Bedford Gazette’s account.

Then the company admitted (emphasis added), a “small pressure relief valve was activated when the valve detected a higher than normal pressure in that section of the station.”  As a result, a “small volume of natural gas” was released, according to the report in the Bedford Gazette.

Since the company is committed to the word “small,” why not answer the question about how much and exactly what was released?  But this incident and Spectra Energy’s defensive behavior raises more questions.

Was There An Unexpected Event?

For example, while events were unfolding at the Steckman Ridge compressor station, I contacted a source familiar with such gas operations.  Based on the eyewitness accounts, this source stated (emphasis added):

“The first thing I thought of was a relief valve opening and closing because they open and close with tremendous pressure applied to the valve and the instantaneous starting and stopping of flow through the valve is noisy, given the high pressure.

“My question to Spectra Energy would be whether the valve actuated for routine testing purposes or was there an unexpected event that occurred?  If there was an unexpected event what was the reason?”

This is yet another question that Spectra Energy has, so far, declined to answer.  Will the Pennsylvania DEP pursue this question with the company?

As Spectra Energy began to backtrack from its initial denial, the source noted, “It doesn’t surprise me that they tried to pull a fast one because they think nobody understands their business but them.  Just arrogance.”

Michelle Beegle, who lives one-half mile from the compressor station is quoted in the Bedford Gazette as saying:  “’It just goes to show you how they are lying’ she said.  ‘I don’t believe a word they say, the company or DEP.’”

For those who look for fact-based answers, Spectra Energy has a long, documented record of problems.  It includes violations, explosions and fines (including a 15 million dollar federal fine).  Refer to Footnote #2 under Links & Resources for an easy-to-use guide to the company’s track record.²

Further, Spectra Energy’s history at its Steckman Ridge facility includes an on-the-record statement filed by Spectra Energy with the Federal Energy Regulatory Commission (FERC).  In its own document, Spectra Energy uses Webster’s dictionary definition of “lying” to support the company’s assertion that, “There is no evidence of willful ‘lying’ by any Project Representative to landowners.”   See Footnote #3 under Links & Resources for context and a downloadable pdf file of Spectra Energy’s document that it submitted to FERC.³

Spectra Energy has had operational problems from the beginning at its Steckman Ridge facility.  It is time for answers – not corporate platitudes about “Stakeholder Outreach.”

Links & Resources

¹ Spectra backtracks on gas incident – Bedford Gazette, March 15, 2013, by Elizabeth Coyle, Gazette Associate Editor – two pdf files:

Spectra Backtracks p. 1 BG 3-15-13.pdf Spectra Backtracks p. 1 BG 3-15-13

Spectra Backtracks p. 2 BG 3-15-13.pdf  Spectra Backtracks p. 2 BG 3-15-13

See also the online edition (subscription required): http://www.bedfordgazette.com/news/2013-03-15/Front_Page/Spectra_backtracks_on_gas_incident.html

Residents report loud sounds at compressor station – Bedford Gazette, March 12, 2013, by Elizabeth Coyle, Gazette Associate Editor – two pdf files:

Residents report loud sounds, page 1 BG 3-12-13.pdf  Residents report loud sounds, page 1 BG 3-12-13

Residents report loud sounds, page 2 BG 3-12-13.pdf  Residents report loud sounds, page 2 BG 3-12-13

See also the online edition (subscription required): http://www.bedfordgazette.com/news/2013-03-12/Front_Page/Residents_report_loud_sounds_at_compressor_station.html

² Spectra Energy’s Track Record is available from public sources.  Following are highlights with links that include additional sources and documents:

1)    Top Civil Penalty Ranking from EPA – Spectra Energy’s Texas Eastern pipeline division is ranked number seven on the EPA’s list of the “Top Civil Enforcement Cases Based on Penalty Assessed Through EOY FY 2009.” The National Enforcement Trends (NETs) document on the EPA website shows a $15 million penalty for discharging highly toxic PCBs – polychlorinated biphenyls – at 89 sites along the company’s 9,000-mile gas transmission pipeline running from Texas to New Jersey.

EPA Link:  http://www.epa.gov/oecaerth/resources/reports/nets/nets-j1-topcivpencasesofalltime.pdf

Los Angeles Times Link:  http://articles.latimes.com/1989-10-21/news/mn-191_1_record-fine

TIME Magazine Link:  http://www.time.com/time/magazine/article/0,9171,966034,00.html

2) PCB Contamination (PolyChlorinated Biphenyls) – Spectra Energy acknowledges in its Form 10-K (filed with the Securities and Exchange Commission on Feb. 27, 2012) that highly toxic PCBs remain in its pipeline system (emphasis added):  ”The Toxic Substances Control Act, which requires that polychlorinated biphenyl (PCB) contaminated materials be managed in accordance with a comprehensive regulatory regime. Because of the historical use of lubricating oils containing PCBs, the internal surfaces of some of our pipeline systems are contaminated with PCBs, and liquids and other materials removed from these pipelines must be managed in compliance with such regulations.”  See p. 23 (5th bullet) of Spectra Energy’s 10-K filing, under the subhead, “Environmental Matters.”

Pdf file:  SpectraEnergyCorp10K2011

Spectra Energy Watch – Spectra PCBs 2: http://www.spectraenergywatch.com/blog/?p=498

Spectra Energy Watch – Spectra PCBs?: http://www.spectraenergywatch.com/blog/?p=480

3) Underground Natural Gas Reservoir Explosions – Spectra Energy’s underground natural gas storage reservoir outside of Houston (Moss Bluff) experienced catastrophic failure in 2004 with two explosions, 6 1/2 days of fire and two evacuations.  An estimated 6 bcf of natural gas was consumed during the fire.

Industrial Fire World (IFW) Pdf: What Lies Beneath > Industrial Fire World

USA TODAY Link:  http://www.usatoday.com/news/nation/2004-08-20-gas-explosion_x.htm?csp=36

Gas Storage And Single-Point Failure Risk Pdf:  article_singlepointfailurerisk

Spectra Energy Watch – Moss Bluff Incident:   http://www.spectraenergywatch.com/blog/?p=390

4) “Unlawful Conduct” at Steckman Ridge– The Pennsylvania Department of Environmental Protection (DEP) issued two Notices of Violation in 2009 for Spectra Energy’s “unlawful conduct” during the first year of operation at its Steckman Ridge compressor station in Clearville (Bedford County), PA.  Spectra Energy’s “unlawful conduct” violated air quality and clean stream regulations of the Pennsylvania Code, according to the Pennsylvania DEP.

PA DEP Pdf:  DEP Fines Steckman Ridge:Spectra Energy

Philly IMC Link:  http://www.phillyimc.org/en/natural-gas-compressor-station-coats-farmland-used-gear-oil

Altoona Mirror Link:

http://www.altoonamirror.com/page/content.detail/id/528428/DEP-fines-gas-company–22K.html

Altoona Mirror Link: http://www.altoonamirror.com/page/content.detail/id/526358/Gas-company–Automatic-shutdown-not-an-issue.html

Spectra Energy Watch – Emergency Shutdown: http://www.spectraenergywatch.com/blog/?p=372

Spectra Energy Watch – Spectra Promises: http://www.spectraenergywatch.com/blog/?p=466

³ Understanding the Corporate Culture in its own words:  Definition of lying as a defense – Spectra Energy filed a 32-page report with the Federal Energy Regulatory Commission (FERC) exonerating itself regarding complaints about abusive and unethical behavior toward landowners as part of its 12 billion-cubic-feet underground gas storage reservoir in Clearville, PA, known as Steckman Ridge.

The original report is accessible on the Spectra Energy Watch website and it is titled, “Inquiry Report — Response to Benard Allegations.”  In its official report, Spectra Energy uses the dictionary definition of lying as a proof point to claim:  “There is no evidence of willful ‘lying’ by any Project Representative to landowners.” This technique illustrates the slippery slope gas companies like Spectra Energy navigate between their words and their deeds.  Spectra Energy’s report and the first of four commentaries are available at this link, “Pious Mouse Wash 1: http://www.spectraenergywatch.com/blog/?p=213

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/spectra-energy-retreats-on-methane-incident/   Accountability Central is part of the Governance & Accountability Institute, Inc.

In addition, this post was also published on CSRHUB, a Corporate Social Responsibility website at this link: http://www.csrhub.com/blog/2013/04/spectra-energy-flip-flops.html

In Canada, it was published by PIPELINE OBSERVER, a website of the Canadian Association of Energy and Pipeline Landowner Associations focused on property rights: http://pipelineobserver.ca/spectra-energy-flip-flops/

Legal Showdown Coming on Compulsory Integration;

Investigative Work by William Fischer;

Attorneys to File Suit if New York Government Issues Permits for Horizontal Hydraulic Fracturing

New York State’s compulsory integration law – written by the gas industry and passed with no public hearing – is fast approaching a serious legal challenge.

Under it, landowners who prefer not to sign gas leases can be forced into drilling units. Further, the law treats property owners who willingly sign shale gas drilling leases differently from landowners who are forced into drilling units.

This unequal treatment ranges from lower royalty rates, denial of a signing bonus, potentially high financial risk penalties including paying a percentage of actual well costs, and other liabilities.

If, as some expect, New York Governor Andrew Cuomo’s Department of Environmental Conservation (DEC) issues permits for horizontal hydraulic fracturing, a legal challenge will follow to have the compulsory integration law struck down as unconstitutional.

The law as written does not apply to gas-bearing shale deposits, according to William C. Fischer, described as a “forensic” investigator, by Attorney Helen Slottje.

Compulsory Integration Not Applicable to Shale

Slottje is Managing Attorney at the Community Environmental Defense Council (CEDC) in Ithaca, NY.  CEDC is a public interest law firm founded by Helen and David Slottje.  Link: http://www.cedclaw.org/

Fischer’s detailed research involves a close reading of Title 9 of Article 23 of the Environmental Conservation Law “to provide for the compulsory integration of private property.”

His assessment is available in an 11-page, sourced white paper titled, A Critical Review of the Compulsory Integration Requirement. ¹  

Among Fischer’s key points (emphasis added):

• “The Environmental Conservation Law (ECL) statute does not authorize the compulsory integration of gas bearing shale deposits.”
• “Compulsory integration of gas bearing shale deposits constitutes an unauthorized taking.”

Fischer points out that the 2005 amendment failed to update the technology definitions of New York State’s 1963 law.

As it turns out, Fischer writes:  “The 1963 provisions were written prior to the development of high volume, slick water, hydraulic fracturing … and were based on the technology of the time; i.e., vertical drilling into oil and/or gas fields and pools.”  (p. 3)

As a result, “Title 9 does not authorize the compulsory integration of gas bearing shale formations.  Bill #S5553-B seems to have left unchanged the definitions section of the 1963 version,” Fischer writes.

Attorney Slottje agrees:  “There are statutory definitions of a pool and a field.” “There are no pools in the Marcellus Shale, it is just a rock.”

Preparing Legal Challenge

Slottje told an audience in Kirkland, NY, last year that the Community Environmental Defense Council (CEDC) in Ithaca, NY, is readying a legal challenge seeking to have the compulsory integration statute declared unconstitutional and struck down.  Video of that 91-minute presentation and Q&A are available at this link: http://www.youtube.com/watch?v=W71xDr5Zz4k

In that presentation, she elaborates on the legal issues raised by Fischer:

• “Compulsory Integration – forcing people to lease … – makes no sense and has no legal support in shale formations.”
• You don’t have a pool and it is not migratory gas.  So the legal arguments that were used to make this acceptable… don’t exist in this instance.”

High-volume, slickwater hydraulic fracturing technology emerged in 1997, when Mitchell Energy developed it in the Barnett Shale of Texas.

NYS Stuck with Law It Passed

According to Fischer (emphasis added), “nothing in Title 9 makes reference to or includes anything which could be construed as a gas bearing shale formation.  And no agency of the State may promulgate rules and regulations which exceed that authorized and intended by statute.”

“Compulsory Integration has not gotten enough attention,” says Lou Allstadt, a former Mobil Oil Corporation executive with 31 years in the industry.  “I think it is vulnerable legally and politically when people understand it.”

Attorney Chris Denton, who practices oil and gas law in New York State, told me that Fischer “is at his best when he is issue spotting.  He [Fischer] highlights the apparent incomprehensibleness of oil and gas law.”

Denton notes (emphasis added) “that if the Final Order of Integration includes a grant to the driller of the right to drill horizontally beneath an unleased property that entry of the well bore into such parcel would be a trespass or a ‘taking’ under the fifth amendment to the US Constitution.  I know of no court who has ruled on this issue in New York.” 

As Attorney Helen Slottje told the audience in Kirkland, NY, “We’re focused on a court challenge [to compulsory integration].”

Slottje said the lawsuit would likely take the form of a “hybrid Article 78 declaratory judgment.”  She described this as an “expedited, specialized legal procedure in New York where you can challenge an administrative agency’s decision” (i.e., the DEC).

Legal Challenge = Article 78 Declaratory Judgment

The advantage of this approach is that it can be accomplished in a relatively short time.  As Slottje notes:  “The court just looks at the record from the administrative [DEC] decision and decides if it was legal or not.”

She elaborates:

“So our claim would be that this process, this [compulsory integration] hearing, violated people’s due process – substantive and procedural due process rights – that it’s a taking, because”

• There is physical trespass;
• There’s no compensation – that’s violative of the 5^th and 14^th amendments of the United States constitution, it is violative of the corollaries to that in the New York State constitution

“We will seek a declaration from the court that the compulsory integration statute itself is unconstitutional and needs to be struck down.”

To date, the DEC has not issued horizontal hydrofracking permits.  Launching such a lawsuit requires a current compulsory integration case and a current plaintiff (the injured party).

Cuomo’s DEC Refuses to Release Health Studies

Meanwhile, Governor Cuomo and the DEC appear to edge closer to issuing drilling permits.  This despite challenges to the process and lack of transparency surrounding Cuomo’s Public Health Review of the Supplemental Generic Environmental Impact Statement (SGEIS) for high-volume hydraulic fracturing.

As recently as February 12, DEC Commissioner Joseph Martens stated (emphasis added):  “If the DOH Public Health Review finds that the SGEIS has adequately addressed health concerns, and I adopt the SGEIS on that basis, DEC can accept and process high-volume hydraulic fracturing permit applications 10 days after issuance of the SGEIS. The regulations simply codify the program requirements.”  Link to DEC statement: http://www.dec.ny.gov/press/89195.html

But the Community Environmental Defense Council (CEDC) is challenging DEC’s refusal so far “to release the scientific reports that the proposed high volume horizontal fracking regulations are required to be premised upon.”

In a public statement, the CEDC states:  “Under New York law, the DEC must release within thirty days after being asked all scientific studies that are used as the basis for a proposed rule.”  Refer to the CEDC statement: http://www.cedclaw.org/news/2013/02/dec-shuts-the-public-out-again/

Attorneys Helen and David Slottje, of the CEDC have notified the DEC “that if it fails to respond they will bring a suit to compel production of the reports and to stop the proposed regulations from being enacted.”

Compulsory Integration’s Domino Effect

This is only the beginning of the coming problem faced by industry and government proponents of compulsory integration laws, also known as forced pooling or unitization.

In addition to challenging the industry-written law in New York State, the domino effect could extend to other states.

When the legal challenge is raised over compulsory integration in New York State, it will highlight the vulnerability of similar laws in nearly 40 other states. These laws are largely written by the energy industry; and are often punitive toward property owners forced into a drilling unit.²

Links & Resources

¹ A Critical Review of the Compulsory Integration Requirement, Title 9 of Article 23, New York State Environmental Conservation Law – A White Paper (as amended) by William C. Fischer, November 12, 2011 – pdf file:  Expanded CI White Paper by WCF 5th draft

² State Laws Can Compel Landowners to Accept Gas and Oil Drilling, by Marie C. Baca, ProPublica, May 19, 2011 – List of states with forced pooling/compulsory integration/unitization laws: http://projects.propublica.org/tables/forced-pooling

NOTE:  This article is cross-posted on the Accountability Central website at this link:   http://www.accountability-central.com/nc/single-view-default/article/compulsory-integration-legal-challenge-coming-investigative-work-by-william-fischer-attorneys/   Accountability Central is part of the Governance & Accountability Institute, Inc.

NY Farm Bureau Supports ‘Safe & Responsible’ Drilling

But Opposes Unequal Treatment by Compulsory Integration Law

While the New York Farm Bureau supports “safe and responsible development of natural gas in a manner that protects our land and water,”¹ it is challenging several aspects of New York State’s compulsory integration law.

The industry-written law was passed in 2005 with no public hearings.  It treats property owners who willingly sign shale gas drilling leases differently from landowners who are forced into drilling units by the law.

This unequal treatment ranges from lower royalty rates, denial of a signing bonus, potentially high financial risk penalties including paying a percentage of actual well costs, and other liabilities.  The 2005 law is seen by some as legally and politically vulnerable.²

Three different pieces of legislation to amend the law are supported by the Farm Bureau:³

• Require equal royalty payments to landowners forced into a drilling unit versus current law that provides more favorable treatment to property owners willing to lease.  This bill would require royalty payments “to be equal to the highest royalty in the [drilling] unit or 18.75% at the minimum.”  (Bills S. 3659 – Sponsor:  Senator Valesky; and A. 3082 – Sponsor:  Assemblywoman Lupardo)

• Boost the amount of leased acreage required to trigger compulsory integration in a potential drilling or spacing unit to 75% – up from the current 60%.  (Bill S. 7167 – Sponsor: Senator Grisanti))

• Extend the right of landowners to cancel a signed oil or gas lease from 3 days to 5 days or a full business week.  (Bills S. 750 – Sponsor:  Senator Young; and A 6211 – Sponsor:  Assemblyman Magee)

Jeff Williams is Deputy Director & Manager of Governmental Relations for the New York Farm Bureau.  He was involved in legislative/industry discussions over the 2005 law; and he is also a member of the High-Volume Hydraulic Fracturing Advisory Panel of the New York Department of Environmental Conservation (DEC).

The 18-member panel, originally announced by the DEC in 2011, comprises industry, environmental and elected officials.⁴

Williams told me that, originally, the Farm Bureau opposed the compulsory integration bill, which caused a storm with the Assembly sponsor of the bill, William Parment.  Parment (Democrat, District 150) announced his retirement in 2010.

Williams recalls much excitement in 2005 over the Trenton Black River formation – a large “play” that could potentially bring economic benefit to New York State and landowners.  Back then, high-volume (horizontal) hydraulic fracturing was not an issue as industry was doing vertical fracturing in the state.

During the 2005 legislative negotiations over the proposed law, equalizing the royalty rate between willing and forced gas leaseholders was a nonstart for industry participants, according to Williams.  In fact, the industry threatened to leave New York State.

After some amendments to the proposed bill, the Farm Bureau changed its stance to “no position,” as noted in Williams’ letter to Richard Platkin, Counsel to Governor George Pataki at that time.

Today, the New York Farm Bureau is the primary organization pushing legislation to equalize royalties and make other changes in the compulsory integration law in order to “provide protections for landowners.”

Ashur Terwilliger is President & State Director of the NY Farm Bureau’s District 4.  He is not a fan of “taking” property rights at either the federal or the state level.  As he told me, “The most important thing on my agenda is private property rights! You pay taxes and then someone comes in and steps on your rights?!”

His personal position reflects “Farm Bureau Beliefs,” as stated on the organization’s website:  “Property rights are among the human rights essential to the preservation of individual freedom.”   http://www.nyfb.org/about_nyfb/

As Deputy Director and Manager of Governmental Relations Jeff Williams said,  “We, the Farm Bureau, definitely take umbrage at the [unequal] royalty rate” in the current law.

Links & Resources

¹ New York Farm Bureau Priority Issues for 2012  http://www.nyfb.org/legislative_affairs/subpage.cfm?ID=57

² For additional background on compulsory integration, see two previous posts on the Spectra Energy Watch website:

• Eminent Domain as Compulsory Integration: Property Owners Treated Differently – Face $$$ Penalties When Forced into Drilling Unit – Link http://www.spectraenergywatch.com/blog/?p=1674

• Myth of “Free Ride” for Landowners Forced into Drilling Units; Compulsory Integration Supporters vs. Opponents – Link: http://www.spectraenergywatch.com/blog/?p=1700

³ New York Farm Bureau Bill Memos:

• Equalize Royalty Rates, S. 3659 and A. 3082 – pdf file: NYFB S 3659, A 3082
• Increase Acreage Required for Compulsory Integration, S. 7167 – pdf file: NYFB Bill Memo S 7167
• Extend Lease Cancellation Time, S. 750 and A. 6211 – pdf file: NYFB S 750, A6211

⁴ New York State Department of Environmental Conservation High-Volume Hydraulic Fracturing Advisory Panel – Names and contact info: http://www.toxicstargeting.com/MarcellusShale/dec-fracking-panel

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/ny-farm-bureau-supports-safe-responsible-drilling-but-opposes-unequal-treatment-by-compulso/   Accountability Central is part of the Governance & Accountability Institute, Inc.

Myth of “Free Ride” for Landowners Forced into Drilling Units;

Compulsory Integration Supporters vs. Opponents

New York State’s 2005 compulsory integration law was written by the oil and gas industry and passed unanimously with no public hearings, according to Attorney Chris Denton, an oil and gas lease attorney in New York.¹ 

Coincidentally in 2005, Range Resources began gas production from Renz #1, the first high-volume hydraulic fracturing (HVHF) well in the Marcellus Shale in Pennsylvania.  Shale gas extraction by HVHF had come to the northeast.

Today, experienced voices argue the pros and cons of New York’s law and I contacted several of them.

Compulsory Integration ‘Vulnerable’ or Valuable?

“Compulsory Integration has not gotten enough attention,” says Lou Allstadt, a former Mobil Oil Corporation executive with 31 years in the industry.  “I think it is vulnerable legally and politically when people understand it.”

Thomas West, Founder and Managing Partner of The West Firm in Albany, NY, “played a key role” on behalf of the gas/oil industry in writing the compulsory integration law, as the firm’s website states.  Link: http://www.westfirmlaw.com/practice-areas/oil-gas-law.cfm

Attorney West summarized its value:  “In a nutshell, New York’s spacing and compulsory integration statutory scheme is considered a conservation measure that promotes the full development of the resource and protects the correlative rights of all landowners in the unit.”

The 2005 law creates three legal options for property owners forced into a drilling unit.  For more background, see part one of this series on compulsory integration: http://www.spectraenergywatch.com/blog/?p=1674

Compulsory Integration:  No “Opt Out”

Attorney West notes (emphasis added):

1. “The three options, include the right [of the landowner] to participate by paying the pro rata share of the estimated costs of the well, including plugging in abandonment costs.
2.  “Second, an uncontrolled [property] owner can elect to be carried, which means that the well operator pays the estimated costs on behalf of the landowner and collects a 200% risk penalty before the landowner obtains rights of participation, but the landowner may be eligible for a graduated royalty during the risk penalty payout period.
3. “Third, the landowner can be integrated as a royalty owner at the lowest royalty in the unit, but not less than 1/8^th.”

Here is where the discussion gets emotional.  As Attorney West told me (emphasis added):

“Since the New York law is focused on maximizing the development of the resource, it does not allow people to opt out, which only serves to hurt their neighbors and preclude the orderly drainage of the resource.”

Industry veteran Andy Leahy agrees and speaks of property owners who would prefer not to lease and so are forced into a drilling unit as “hard-nosed folks” who get a “free ride” without “taking any risk.”

Leahy has been a contract oil and gas land title searcher for about a dozen years.  His resume includes work for Honor Resources Company and Mason Dixon Energy, Inc.  His website is NY Shale Gas Now!: http://nyshalegasnow.blogspot.com/

Equitable vs. Punitive Treatment

Leahy explains the compulsory integration law was passed at a time when there was excitement about the potential harvest of gas from the Trenton-Black River formation, via “conventional-but-high-tech-seismic” exploration techniques.

“The dry hole percentage there was significant,” Leahy says, “but not something industry often cares to publicize.”  

“So NY’s compulsory integration equity considerations (circa 2005-2006) were deeply affected by the question of how do you pay for all these dry holes, and how do you set it up in such a way that development is encouraged, and not thwarted by the law,” Leahy says.

Equitable:  Surface & Environmental Impact

Closer to Mr. Leahy’s idea of “equitable and non-punitive” treatment under compulsory integration is a landowner “Getting 12.5% to 20% of the proceeds out (royalty), plus bonus, etc. — without making much direct effort, but while accepting the chance of direct surface or nearby environmental impact ….”

He also notes that property owners who are compelled to be integrated, do “get the benefit of no-surface impact, which is very important for some people.”

In other words, landowners who are compelled to be integrated will not have drilling operations on the surface of their property.

“Myth of the Free Ride”

Attorney Chris Denton has represented property owners in more than 40 compulsory integration actions and says, “The ‘free rider’ charge always particularly galled me.”

As he notes in a paper he wrote (emphasis added):

“The entire risk penalty concept turns reality on its head.  It is the landowner who has the rights to the oil and gas, it is the landowner who pays the taxes all those years, it is the landowner who has the strict liability under law for pollution on her property regardless of who causes the spill.” ²

“The risk of which the oil and gas company speaks is the risk of a ‘dry hole’,” Denton says.  “In other words, the loss of its well drilling costs. With today’s 3D seismic for on shore drilling, that risk is minimal.”

“In business, exclusivity and monopoly franchises are valued at a premium,” according to Denton.   “Yet when DEC awards a permit which results in a compulsory integration order, the single permit drilling monopoly granted to the driller is not valued and paid to the landowner who no longer has the right to drill, no longer has the right to develop, and no longer has the right to produce his gas.  Instead the landowner is given back 12.5% of his gas while the company with the drilling monopoly receives 87.5% of the gas.  This makes no sense at any level.”

“… the real ‘free ride’ is by the driller,” Denton says.  “In Compulsory Integration the driller does not have to pay fair market rates for your gas or provide you with negotiated environmental protections.”

Note:  More to come in the next post as we unwind compulsory integration.

Links & Resources

¹ Compulsory Integration in a Changing Energy World – Paper written by Attorney Chris Denton, oil and gas lease attorney, Elmira, New York.  This is published as a pdf file on the Tioga Gas Lease website (see p. 4):  http://www.tiogagaslease.org/images/Compulsory_Integration_2012.pdf

² Compulsory Integration and Eminent Domain – Paper written by Attorney Chris Denton, oil and gas lease attorney, Elmira, New York.  See especially pp. 4-5, following section 5, “What about the claim of a free ride and the risk taken by the driller?”  Pdf file:  Compulsory Integration and Eminent Domain

NOTE:  This article is cross-posted on The Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/myth-of-free-ride-for-landowners-forced-into-drilling-units-compulsory-integration-supporters/  Accountability Central is part of the Governance & Accountability Institute

Eminent Domain as Compulsory Integration:

Property Owners Treated Differently –

Face $$$ Penalties When Forced into Drilling Unit 

Law Written By/For Gas Industry 

The shale gas/oil “gold rush” in the U.S. brings with it the power to take surface and/or subsurface property rights from private citizens – by several means.

Today, the United States is effectively approaching the status of many countries in Europe where the nation owns the mineral rights, not private property owners.

• So far, in the U.S., nearly 40 states have compulsory integration (or forced pooling or unitization) laws on the books.¹  These laws are largely written by the energy industry; and they are often punitive toward property owners who are forced into a drilling unit.

In New York State, for example, property owners who willingly sign shale gas drilling leases are treated differently from property owners who prefer not to lease, but are forced by state law into a drilling unit.

This different treatment ranges from a 300% risk penalty to the denial of a signing bonus to being assigned a lower royalty rate.  All under a law written by the energy industry.

‘Landowner Options’ – State Law

The first sense of disparate treatment can be found in the “Landowner Option Guide” on the Department of Environmental Conservation’s (DEC) website.  It warns property owners in the fourth paragraph (emphasis added):

    “Each option presents different risks and potential rewards. The option you select may subject you to certain costs and obligations, and there is no guarantee that a well will make money. You should carefully consider all the implications of your decision.”  Link:  http://www.dec.ny.gov/energy/1590.html

For example, if you elect (are forced?) to be integrated as a “participating or non-participating owner,” DEC states, “You will be held liable for your share of the additional costs,” according to the DEC.

What additional costs?  According to the DEC:

• Actual well costs – your share of “The actual cost to drill or plug the well….”

• Completion and operating costs – “If the well is successful, it will cost money to complete and operate ….”

• Gathering line costs – “If the well is a producer, the well operator will provide you with the estimated costs to install a gathering line to bring the gas to market.”

The potential dollar penalty of compulsory integration to a private property owner is staggering, according to Christopher Denton, an attorney who practices oil and gas law in New York State.

$1-6 Million ‘Risk/Benefit’ Penalty

By Denton’s published reckoning, a landowner who “elects” (?) to become an integrated participating owner might have 30 days after the compulsory integration hearing notice to raise an estimated one-to-six million dollars (or more), depending on his percentage in the unit, the well and the formation to which it will be drilled.⁵

As Denton’s analysis suggests, the various punitive wedges likely push a landowner into the “Integrated Royalty Owner” category.

Ohio offers a preview of what faces landowners in New York and other Northeast states.  As The Columbus Dispatch reports:

“When a Chesapeake Energy land man approached [Landowner Steve Neeley] months ago with an offer to lease the Utica shale mineral rights beneath his meticulously landscaped 9.5-acre property in eastern Ohio, Neeley declined. That’s when, Neeley says, the land man told him, ‘We’ll just take it.’ 

“Neeley and 23 of his neighbors are the first group of Ohio landowners forced to take part in Utica-shale drilling under a seldom-used state law.” ²

Controversy Over Forced Integration

Even Pennsylvania Governor Tom Corbett, otherwise a huge supporter of the energy industry, has consistently rejected forced pooling (aka, compulsory integration, unitization) and calls it, “private eminent domain.” ³

In addition to compulsory integration, drill sites bring gathering lines, transmission pipelines, compressor stations and huge underground storage reservoirs for natural gas.  All of this requires more “taking” of property via eminent domain plus more environmental & social risks.

“Involuntary compulsory integration represents the most controversial method drilling companies use to access gas,” writes Attorney Elisabeth N. Radow in the New York State Bar Association Journal. ⁴

In New York State, the 2005 compulsory integration law was passed unanimously in both the Assembly and Senate.  Is it possible not a single voice was raised on behalf of property rights?

Energy Industry Writes Law

Major industry players in drafting the law included the Independent Oil & Gas Association (IOGA) of New York, Chesapeake Energy and Thomas S. West, Founder of The West Firm in Albany, according to Attorney Christopher Denton, who estimated potential costs to landowners forced to be integrated.

In response to my query, Attorney Mike Fallon, speaking on behalf of IOGA, said,  “I cannot confirm that … I did not represent IOGA at the time.”  He acknowledged that industry often writes its own laws, “But I don’t believe the initial proposal came from IOGA.”

A prime mover on behalf of the energy industry is Thomas S. West, Founder and Managing Partner of The West Firm, a law firm based in Albany, NY.  The firm’s website states:

“Tom West is well known as a leading authority on New York’s oil and gas well siting program.  He played a key role in the 2005 amendments of Environmental Conservation Law Article 23 that overhauled New York’s compulsory integration program ….”    Link: http://www.westfirmlaw.com/practice-areas/oil-gas-law.cfm

Anti-Property Rights Emotion

In response to my query on compulsory integration, Mr. West replied (emphasis added):

“Since the New York law is focused on maximizing the development of the resource, it does not allow people to opt out, which only serves to hurt their neighbors and preclude the orderly drainage of the resource.”

So if landowners are allowed to opt out of drilling, it will “hurt their neighbors.”

This is a theme sounded repeatedly by supporters of compulsory integration who use language that refers to property owners who would prefer not to lease as “hard-nosed folks” who get a “free ride” without “taking any risk.”

No mention is made of the fact that an asset that doesn’t belong to the gas industry or the government is taken from citizens who don’t want to lease.

On top of this insult comes punitive treatment justified under a law written by the industry for the industry – after the industry gets what it wants, the mineral rights. 

Energy/Government Entitlement

Those of us who speak from experience (including this former gas leaseholder) know that such “taking” of private property rights amounts to a government entitlement for energy companies.

The industry cannot take property rights without government support.

It is not stretching a point to say that eminent domain puts landowners in a face-off with the equivalent of a cartel comprised of energy companies and government.

The power of eminent domain in all its variations allows corporations – backed by government – to control pricing and competition (i.e., “just compensation” and what constitutes “public interest”).  By definition, that is a cartel.

As we see in New York, that cartel has the power to penalize property owners, even while taking what it wants.

More To Come

Our next post will take a closer look at the energy industry’s entitlement to private property rights.  We will seek the perspective of supporters and opponents of compulsory integration, including legislators, individuals who are looking closely at the law, and institutions that support “responsible drilling” but object to the disparate treatment of landowners.

Links & Resources

 ¹ State Laws Can Compel Landowners to Accept Gas and Oil Drilling, by Marie C. Baca, ProPublica, May 19, 2011 – List of states with forced pooling/compulsory integration/unitization laws: http://projects.propublica.org/tables/forced-pooling

² No to ‘fracking’ doesn’t mean no – Landowner refusal can’t stop drilling,  by Spencer Hunt, The Columbus Dispatch, July 29, 2012 – http://www.dispatch.com/content/stories/local/2012/07/29/no-to-fracking-doesnt-mean-no.html#comment

³ Corbett takes stand against forced pooling – by Don Hopey, Pittsburgh Post-Gazette, March 30, 2012: http://www.post-gazette.com/stories/local/marcellusshale/corbett-takes-stand-against-forced-pooling-295198/

⁴ Homeowners and Gas Drilling Leases:  Boon or Bust?  By Elisabeth N. Radow, New York State Bar Association Journal, November/December 2011 – Pdf file:  NYSBA Journal nov-dec2011 lead article with reprint info

⁵ Compulsory Integration in a Changing Energy World – Energy in Depth – Northeast Marcellus Initiative, August 20, 2012, by Guest Blogger Attorney Chris Denton, Oil and gas lease attorney, Elmira, New York  http://eidmarcellus.org/marcellus-shale/compulsory-integration-in-a-changing-energy-world/12157/

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/eminent-domain-as-compulsory-integration-property-owners-treated-differently-face-penalties/  Accountability Central is part of the Governance & Accountability Institute, Inc.

In Search of Transparency in the Energy Industry;

Industry Says Public is “Illiterate,” “Insurgency”

Is Spectra Energy a Benchmark?

When the energy industry touts its Corporate Social Responsibility (CSR), an acquaintance says this really translates to Cynical Social Responsibility as a more accurate reflection of industry behavior.

For example, ExxonMobil CEO Rex Tillerson calls the public “illiterate.”¹  Range Resources and Anadarko Petroleum managers are on record recommending the use of military psyops personnel to deal with “an insurgency,” referring to landowners with the temerity – and perhaps the ‘illiteracy’ – to challenge industry operations.²

On the other side of the industry’s mouth, Spectra Energy CEO Greg Ebel talks of the importance of transparency in order to win public support.  “We need to maintain that [transparency] because the public’s criticism of us has been pretty significant these days,” Ebel told an energy conference, according to the Houston Chronicle.³

‘Pretty Significant’ Public Criticism

Yet Ebel and Spectra Energy are among many energy companies that decline to respond to questions from stakeholders, including property owners who are impacted by the company’s operations.  An energy reporter recently contacted this writer because Spectra Energy was not forthcoming in response to his questions.

Such behavior is embedded in energy industry culture.

The Goose Creek school district in Baytown, Texas, is about 25 miles from Spectra Energy’s Houston headquarters.  The district took the highly unusual action of shutting down an elementary school and a second building due to fears regarding a “leak or rupture” from nearby “aging pipeline corridors.”

The school board summarized its decision as follows (emphasis added):

“The closing of the school and West Town complex follows a risk-analysis study of the two sites situated between two aging pipeline corridors.  The risk-analysis study commissioned by the district concluded that should an incident – such as a leak or rupture – occur to a pipeline near the school or complex, there is a potential that students and/or staff could be injured or worse.“ ⁴

The Goose Creek school district’s risk-analysis study mentioned Spectra Energy’s 55-year-old, 30-inch pipeline by name – the only one to be specifically identified.⁴

When I contacted the company to ask what additional maintenance it might take with its aging gas pipeline; whether it believed nearby homeowners were at risk; and whether Spectra Energy cooperated with the risk-analysis study – the company declined to answer saying, “it would no longer be appropriate to respond to your correspondence.” ⁴   

This is a company whose execs publicly state:  “The safety and reliability of our pipelines is ‘mission critical’ for Spectra Energy.  Safety is our franchise.  It’s what we ‘do.’”⁵

But when the moment of truth comes, it is “no longer appropriate to respond.”

The two buildings were shut down and abandoned at the end of the school year in 2009.  In 2011, a “For Sale” sign went up.  Recently, I contacted the school district to get an update.

Pete Côté, Executive Director of Support Services and Special Projects for the Goose Creek CISD (Consolidated Independent School District), replied.

As it turns out, the second building (West Town Center) is still for sale at an appraised value of $3.6 million; and on August 13, the school board approved a contract for the demolition of the elementary school, expected to be completed by October of this year.

Mr. Côté notes (emphasis added):  “As to the status of the aging pipelines running through the property, since we do not own or operate these pipelines we have little leverage to address this issue.  We’ve asked the Rail Road Commission to look at the issue and have been told the lines are currently in compliance w/ their requirements.”

Exposed bypass valve which is part of an "aging pipeline corridor" next to abandoned elementary school and second building in Goose Creek school district.

Meanwhile, Spectra Energy states on its website (emphasis added):

“We recognize that our stakeholders want to understand how we make decisions, manage our operations and hold ourselves accountable to our commitments and society’s expectations.”   Link:  http://www.spectraenergy.com/Sustainability/Economic/Acting-with-Integrity/

And the company does that by not replying to questions about how it manages operations such as aging pipelines that lead a school district to shut down and abandon two buildings?

It gets worse.  Spectra Energy goes so far as to acknowledge the problem it and the industry has with public trust as one of four key “Challenges” it faces (emphasis added):

• “Restoring public trust and rebuilding public confidence in natural gas pipeline infrastructure and pipeline safety awareness.”  Spectra Energy Website Link:  http://www.spectraenergy.com/Sustainability/Economic/

CEO Ebel and the industry ponder why energy industry credibility is declining as it shuffles the cards to replace principles with platitudes.

Spectra Energy’s ‘Corporate Shill’

For example, Ebel, a former Canadian government official, became CEO in 2009.⁶  Spectra Energy’s Wikipedia site reveals a company that cleanses and polishes its environmental record to the degree that Wiki editors criticized the “corporate shill” who continued to delete any effort at a fact-based, balanced report on the company’s performance record – failures as well as success.⁷

The “corporate shill” referred to by name is Jerry Hereden, a “Digital Web Specialist at Spectra Energy.”⁸

As the Wiki Revision History states:  “(Undid revision 381312289 by Jdhereden (talk) because the well-sourced, well written environmental section was deleted by a corporate shill.)”⁹

Among his tasks is to shrink the public record on the company’s adverse environmental and community impacts and inflate the image of 48-year-old CEO Ebel.

CEO Ego – Size Matters

The result is amusing.  Spectra Energy’s Wiki website runs about 1,300 words.  Nearly half that is devoted to Ebel’s image rather than company operations.  We learn about Ebel’s “Career,” “Leadership” and, especially, his “Thought Leadership” which describes his many media appearances.

Is this another celebrity CEO in aspiration?

Ironically, the section on CEO Ebel dwarfs his company’s section on its Environmental Record – which could be twice as long if it included a balanced performance record which we’d be happy to supply.  Anything to help the corporate shills.

Since we mentioned ExxonMobil’s CEO Rex Tillerson at the beginning of this, perhaps we should compare its Wikipedia site which runs two sentences about Tillerson.  If size matters to Mr. Ebel – the size of the executive bio emphasizes the wrong values unless the company is committed to Cynical Social Responsibility.

Motley Fool on Spectra Energy

On the subject of value, The Motley Fool (TMF) ran a piece on “insider ownership” earlier this year, written by Contributor Dan Newman.  It reviews Spectra Energy and four other companies.

Insider ownership refers to how much company management is “personally invested” in the company.  Newman’s chart shows that Spectra Energy execs own far less than one percent of company stock.

According to TMF Contributor Newman (emphasis added):

“All of Spectra’s directors and executives own about 0.2% of shares (http://www.dailyfinance.com/quote/nyse/spectra-energy-corp/s   ….  

“CEO Ebel owns 127k shares, and is required to own 200k within 5 years of becoming CEO (I think that’ll be 2013). That makes his position worth about $4m, whereas he got paid $6.8m in 2010. Not the best ratio, I agree.”

Motley Fool link:  http://www.fool.com/investing/general/2012/01/24/drilling-down-on-this-natural-gas-player.aspx

‘All Hat & No Cattle’

To borrow a western phrase, Cynical Social Responsibility is an illustration of “all hat and no cattle” – big talk, no substance.   Energy industry execs talk and talk about the decline in public trust.  But they do not do what they say they will do in terms of their much touted principles of transparency, accountability and integrity.

Instead, they trade principles for platitudes.  The energy industry created its own decline in public trust.  Now they will live with the consequences – from investors, communities, property owners.  Not even ExxonMobil has enough money to buy trust.  And yes, Spectra Energy is a benchmark – of what not to do.

Links & Resources

¹ Transcript of CEO Rex Tillerson’s Speech to the Council on Foreign Relations – “The New North American Energy Paradigm,” June 27, 2012: http://www.cfr.org/united-states/new-north-american-energy-paradigm-reshaping-future/p28630

² “Oil Executive:  Military-Style ‘Psy Ops’ Experience Applied,” November 8, 2011, CNBC by Emon Javers – http://www.cnbc.com/id/45208498

The CNBC coverage includes audio links for the comments made by Mr. Pitzarella of Range Resources and Mr. Carmichael of Anadarko Petroleum.

³ “Energy leaders urge transparency to win public support” by Zain Shauk and Simone Sebastian, March 8, 2012, Houston Chronicle at this link: http://www.chron.com/business/article/Energy-leaders-urge-transparency-to-win-public-3390421.php

⁴ Pipeline Fears Shut School – Spectra Energy Watch, March 2, 2011 – In addition to background information on the shutdown and abandonment of two buildings by the Goose Creek school district, the risk-analysis study is available as a downloadable pdf file at this link: http://www.spectraenergywatch.com/blog/?p=1089

⁵ Spectra Energy Responds to Natural Gas Pipeline Concerns – Group VP Bill Yardley’s statement in The Jersey City Independent at this link: http://www.jerseycityindependent.com/2010/08/27/the-mailbag-spectra-responds-to-natural-gas-pipeline-concerns/

⁶ Spectra Energy CEO Ebel’s biography from the corporate website – pdf file:  More_on_Greg

⁷ Spectra Energy Wikipedia – http://en.wikipedia.org/wiki/Spectra_Energy

⁸ Jerry Hereden, Digital Web Specialist at Spectra Energy – public profile at LinkedIn: http://www.linkedin.com/in/jerryhereden

⁹ Spectra Energy:  Revision history – Wikipedia – See note dated Sept. 6, 2010, which reads:  “(Undid revision 381312289 by Jdhereden (talk) because the well-sourced, well written environmental section was deleted by a corporate shill.)”  Link: http://en.wikipedia.org/w/index.php?title=Spectra_Energy&action=history

NOTE:  This article is cross-posted on the Accountability Central website at this link:  http://www.accountability-central.com/voices-featured-commentators-and-bloggers/mike-benard-columns/   Accountability Central is part of the Governance & Accountability Institute, Inc.

Cuomo Legacy Comes Full Circle in NY State

From Father’s Nuclear Dump to Son’s Hydraulic Fracturing;

 

Meanwhile Industry Documents Big Risks with Drilling:

Well Integrity “A Global Challenge,” Says Industry

Is the Cuomo legacy coming full circle – like father, like son?

Democrat Governor Andrew Cuomo suggests that the “southern tier” of New York State, along the border of Pennsylvania, is a good place to initiate high-volume hydraulic fracturing.¹

Twenty-three years ago, Governor Mario Cuomo wanted to put a nuclear dump in the southern tier, specifically Allegany County.²

Perhaps this bit of vintage citizen verse is coming back to taunt (or haunt) the Cuomo legacy.  (See photo.)

I’ll Take Allegany County

Its Roads So Bumpy

Let Cuomo Keep

His Nuclear Dumpy

Vintage verse marking Mario Cuomo's plans for a nuclear dump.

The Cuomo referred to is Mario Cuomo who was planning to site a nuclear dump in Allegany County in the 1989-1990 time frame.  That was then, this is now.

The irony is that Andrew Cuomo could be the recipient of similar poetry (see repurposed photo):

I love my home in Allegany

And I’ll live here all my life

Cause who would buy this house

Next to Cuomo’s Fracking Site?

Will Andrew Cuomo bring the family legacy full circle? (Repurposed photo.)

Depending on his decision, he will own this hydraulic fracturing legacy; and even those who would otherwise support him may not in the next election.

In public meetings and on websites, self declared life-long Democrats say that if Governor Andrew Cuomo persists in opening the state to high-volume hydraulic fracturing, they will follow the “ABC” voting practice – Anybody But Cuomo.

Scare tactics?  Perhaps not, based on the industry’s own data.  Would it not be fact based, as well as useful, to understand the failure rates over time for gas and oil wells? 

Cuomo 2^nd Term = 20% Oil/Gas Well Leaks?

The probability of environmental and community risk is not trivial, according to industry itself.  In addition, the risk to well integrity is not limited to the “fracturing” segment of the process.

According to Rich Liroff, PhD., executive director of the Investor Environmental Health Network:

“Such risks are associated with the broad life cycle of shale operations…. They are not limited to concern about hydraulic fracturing in its narrowest, technical sense.”³

Regarding the Cuomo legacy, Josh Fox, producer of the movie Gasland, predicts (emphasis added):⁴

“So if New York State starts drilling tomorrow, and Andrew Cuomo is elected for a second term – by the end of his second term as governor, it’s safe to say that 20% or more of oil and gas wells installed in his first term will be leaking.” 

Energy Industry Documents Well Failures

Proponents of drilling may scoff, but Fox draws on the energy industry’s own documentation including technical papers, and presentations from companies like Schlumberger, Southwestern Energy, Archer and others.

These industry sources are highlighted in his 18-minute video on potential drilling in New York State titled The Sky Is Pink.  Link: http://vimeo.com/44367635

In broad brush strokes, industry sources suggest that the first year of drilling sees well failure rates of 6-7 percent.  Failures rise after that; and failure rates can climb to 50% in just 15 years.

The industry sources are illuminating because industry does not mince words about problems with well failures – usually discussed under the umbrella of “well integrity.”  We have written previously about some of these industry pronouncements.⁵

Following are highlights from three industry sources.  All three can be reviewed in their entirety by going to footnotes 5, 6, 7 under Links & Resources below.

Schlumberger Warns on Cement Failure

For example, Schlumberger (NYSE – SLB), a world leader in the oil and gas industry, warns: “Despite recent advances in the cementing of oil and gas wells, many of today’s wells are at risk. … The environmental impact of contaminating a single fresh water aquifer is extremely serious.”

This warning is from the introduction to Schlumberger’s book, Well Cementing (Second Edition, 2006) by Eric B. Nelson and others.

In Oilfield Review (Autumn 2003), a 15-page Schlumberger article titled, From Mud to Cement – Building Gas Wells, states:  “Even a flawless primary cement job can be damaged by rig operations or well activities occurring after the cement has set.”⁵

Uncontrolled gas migration can contaminate surface and ground water; it is a well-known problem in the industry.  As the article notes (p. 63):

“Since the earliest gas wells, uncontrolled migration of hydrocarbons to the surface has challenged the oil and gas industry. Gas migration, also called annular flow, can lead to sustained casing pressure (SCP), sometimes called sustained annular pressure (SAP). … Annular flow and SCP are significant problems affecting wells in many hydrocarbon-producing regions of the world.”

Schlumberger lists four categories of likely causes of uncontrolled gas migration in a well (p. 64):

• Tubing and casing leaks
• Poor mud displacement
• Improper cement-slurry design
• Damage to primary cement after setting

The Schlumberger documents show a graph of U.S. Minerals Management Service data from 22,000 underwater wells in the Gulf of Mexico that indicates cement failures rise with the age of the well.  (See graph in this article.)

After 12 years about 40 percent of wells have cement failure. After 30 years, about 60 percent of wells have cement failure.

SCHLUMBERGER technical paper uses graph from U.S. Minerals Management to indicate that cement failures rise with the age of the well.

Well Integrity – “A Global Challenge”

Another industry source is Archer (OSE: Archer) – The Well Company – “a global oilfield service company that specializes in drilling services.”  This giant characterizes well integrity as “a global challenge.”  (See illustration in this article.)

ARCHER -- THE WELL COMPANY: Well integrity is "a global challenge." Shows % of wells with "integrity" issues.

The “global challenge” of well integrity is outlined in an Archer presentation titled, “Better Well Integrity” delivered by Ken Feather, VP Marketing & Sales, Well Services, in March 2011.  It indicates the percentage of wells with “integrity” issues:⁶

• 45% of wells in the Gulf of Mexico (or >6,000)
• 34% of wells in the North Sea/UK (or 1,600)
• 18% of wells in the North Sea/Norway (or 482) [Slide 5 in presentation.]

In terms of “failures affecting well integrity & performance,” Archer further suggests that 20% of catastrophic well failures are due to loss of well bore integrity.  [Slide 6 in presentation.]

Southwestern Energy – What Can Go Wrong

Southwestern Energy’s (NYSE: SWN) James Bolander, VP of Health, Safety & Environment, delivered a presentation in Washington, DC, titled “Assessment Methods for Well Integrity during the Hydraulic Fracturing Cycle.” ⁷

In it, the company illustrates what can go wrong such as cement channeling, or a leak through the well casing.  [See illustration in this article.]

SOUTHWESTERN ENERGY presentation illustrates what can go wrong such as a leak through the well casing.

Will regulators, government officials, and energy industry advocates be “fact based and non-emotional” about the probability of cement and well integrity failure immediately and over time – as documented by the industry?

Neither Pennsylvania nor New York track well failure rates, so how will they understand or deal with it?

And what of the thousands of abandoned or unreported wells in New York State alone?

4,000 Abandoned/Unreported Wells in New York

“There are approximately 4,000 abandoned or unreported wells on DEC’s priority plugging list,” according to Emily DeSantis, Assistant Director of Public Information for DEC.  “There are approximately 35,000 wells for which DEC has no records.”

As DeSantis told this writer in October of last year, “the proposed dSGEIS requires drilling companies to survey the land generally within one mile of a proposed well location.  If an unplugged deep well is found, DEC would require the operator to properly plug and abandon it before any high-volume fracturing begins.”

The challenge, as we have noted before, is that track records always trump promises.  If New York State cannot clean up old drilling messes, how will it prevent – let alone clean up – new drilling messes?  Especially if it does not even monitor and track well failure rates.

Is this the Cuomo legacy?

Links & Resources

¹ Cuomo Proposal Would Restrict Gas Drilling to a Struggling Area – The New York Times, June 13, 2012, by Danny Hakim: http://www.nytimes.com/2012/06/14/nyregion/hydrofracking-under-cuomo-plan-would-be-restricted-to-a-few-counties.html?_r=2

² Allegany County resists nuclear dumping, 1989-1990 – summary of May 1989 to April 1990 at Global Nonviolent Action Database (Research notes listed at end of article): http://nvdatabase.swarthmore.edu/content/allegany-county-resists-nuclear-dumping-1989-1990

• See also An Interview With Environmental Activist Richard “Spike” Jones – The Houghton Star, March 26, 2012, by Bekah Hall:   http://www.houghtonstar.com/news/an-interview-with-environmental-activist-richard-spike-jones-1.2828364?pagereq=1#.T-Ip2q4mIw8

³ Investors Want MEASURED Transparency – Spectra Energy Watch: http://www.spectraenergywatch.com/blog/?p=1614

⁴ New Anti-Fracking Film by Gasland’s Josh Fox Targets Cuomo: ‘Governor, What Color Will the Sky Be Over New York?’ – Rolling Stone, by Jeff Goodell, June 20, 2012  http://www.rollingstone.com/politics/blogs/national-affairs/new-anti-fracking-film-by-gaslands-josh-fox-targets-cuomo-governor-what-color-will-the-sky-be-over-new-york-20120620#ixzz1yMR5yJ6G

⁵ From Mud to Cement – Building Gas Wells, Schlumberger, by Claudio Brufatto and others, Oilfield Review, Autumn 2003, pp. 62-76 – http://www.slb.com/~/media/Files/resources/oilfield_review/ors03/aut03/p62_76.ashx    Pdf file:  From-Mud-to-Cement-article

• See also Does Cement Crack? Part 1 – Spectra Energy Watch: http://www.spectraenergywatch.com/blog/?p=1393

⁶ ARCHER – THE WELL COMPANY presentation: “Better Well Integrity” delivered by Ken Feather, VP Marketing & Sales, Well Services, in March 2011 – pdf file:   ARCHER well_integrity_failure_presentation

⁷ SOUTHWESTERN ENERGY presentation: “Assessment Methods for Well Integrity during the Hydraulic Fracturing Cycle” by James Bolander, VP of Health, Safety & Environment, in Washington, DC, March 2011 – Pdf file:  SWN assessmentmethodsforwellintegrityduringthehfcycle

NOTE:  This article is cross-posted on the Accountability Central website at this link:  http://www.accountability-central.com/nc/single-view-default/article/cuomo-legacy-comes-full-circle-in-ny-state/  Accountability Central is part of the Governance & Accountability Institute, Inc.

Investors Bring $1 Trillion of Pressure on Hydraulic Fracturing Industry;

Demand Disclosure & Commitment to Measurable Goals;

Meanwhile State Lawmakers ‘Gag’ Physicians & Restrict Industry Lawsuits;

Isn’t this Industry that ‘Discloses’ Frac Fluid?

Who Didn’t Get the ‘Transparency’ Memo

States like Pennsylvania and Ohio are swimming against the tide of transparency and disclosure involving high-volume hydraulic fracturing companies.  And it is a one trillion dollar tide.

Lawmakers in those states are advancing legislation to “gag” physicians and limit citizens’ ability to sue fracking companies over chemical disclosure.¹

In contrast, a group of heavyweight investors want more disclosure.

A coalition of 55 large investors – with nearly one trillion dollars in assets – is telling the shale gas fracking industry it is time to “clean up,” disclose and commit to 12 measurable “Best Practices.”

Investor Influence

These are folks who invest money in energy companies; and the “growing coalition” includes investors in the U.S., Europe and Australia, according to the group’s announcement last month.²

About 10.6% of the market cap of the S&P 500 stock index is invested in the energy sector.  In developed markets outside of the U.S. and Canada, the portion is 8.4%.  This is specifically the MSCI EAFE index (Morgan Stanley Capital International Europe, Australasia, and Far East).

“Investors may be overweighted or underweighted to the index depending on their views of the prospects for the energy sector,” said Steven Heim, managing director and director of ESG Research and Shareholder Engagement, Boston Common Asset Management.

Hidden Risks to Energy Stocks

Richard Liroff, PhD., executive director of the Investor Environmental Health Network, summarized the issue in his opening remarks at the May 16 press conference (emphasis added):

 “Energy companies need to do a better job of disclosing environmental and social risks associated with extracting gas and oil from shale formations and their policies and procedures for reducing or eliminating these risks.

 “Such risks are associated with the broad life cycle of shale operations including, for example, the transporting and storing water, waste and chemicals.  They are not limited to concern about hydraulic fracturing in its narrowest, technical sense.”

Liroff was one of three investor speakers at the 45-minute press conference, which is available for replay at this link: http://www.hastingsgroupmedia.com/BCIEHNICCR/051612FrackingGuide.mp3

In response to a question from Platts, an industry publication, Liroff noted during the press conference that, “there might be hidden risks to their [energy industry] stocks from management practices that don’t specifically address environmental and social risks.”

The 12 Best Practices Guidelines are contained in a 36-page document titled, “Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations.”  The 12 reportable goals include:

• Manage risks transparently and at Board [of Directors] level:  Ensure environmental, health, safety, and social risks are core elements of corporate risk management strategy.
• Assure well integrity:  Achieve zero incidence for accidental leaks of hazardous gases and fluids from well sites.
• Reduce and disclose all toxic chemicals:  Comprehensively disclose and virtually eliminate toxic chemicals used in fracturing operations.

A pdf file of the full document can be downloaded at this link: http://www.iehn.org/documents/frackguidance.pdf

Liroff told this writer, “This is all about measured transparency.”

Risk of Public Opposition

This is echoed by international groups such as the International Energy Agency (IEA), comprised of members from 28 countries including in Europe, Asia and the U.S.  The IEA warned last month (emphasis added):

“But if the social and environmental impacts are not addressed properly, there is a very real possibility that public opposition to drilling for shale gas and other types of unconventional gas will halt the unconventional gas revolution in its tracks.”³

IEA stresses the importance of “full transparency, measuring and monitoring of environmental impacts and engagement with local communities … and measures to prevent any leaks from wells into nearby aquifers….”

The energy industry lobbies and spends heavily with million-dollar checks to prevent disclosure and restrict the public right-to-know.  Meanwhile many companies tout that they “voluntarily disclose hydraulic fracturing fluid contents” (e.g., per Range Resources website).  What the industry does not admit is that this is not FULL disclosure.

Industry and government need to recognize that they are bucking a heavy headwind.  The ‘good ‘ol days’ are over and are not coming back.

Investors and an engaged public will not go away.

Links & Resources

¹ Pennsylvania Act 13 of 2012 was signed into law by Governor Tom Corbett in February 2012.  Among its provisions is what is referred to as the Doctors Gag Rule which requires doctors to sign a confidentiality agreement and “provide a written statement of need” should they require specific information on the chemicals used in hydraulic fracturing.

Despite signing the bill into law, Governor Corbett told WHYY radio in Philadelphia that, “I’m not sure how that got put in there.”  Link: http://stateimpact.npr.org/pennsylvania/2012/05/16/governor-corbett-says-doctors-concerns-over-act-13-may-be-moot/

Ironically, the shale gas industry touts its public disclosure of fracking chemicals – usually on the industry friendly website FracFocus.org.  As Range Resources proudly says on its website:  “In 2010, Range was the first company to voluntarily disclose hydraulic fracturing fluid contents on a per well basis. It was our goal at that time to set a national model.”  This is not FULL disclosure, however, which the industry does not acknowledge – why not?

Link: http://www.rangeresources.com/getdoc/fecf2d47-a7e9-4b8e-b80d-395fc52f98ea/Commitment-to-the-Environment,-Safety,-Health—Lo.aspx

Act 13 (formerly HB 1950) – See section 3222.1; pp 98-99 on “Hydraulic fracturing chemical disclosure requirements”  http://www.legis.state.pa.us/CFDOCS/Legis/PN/Public/btCheck.cfm?txtType=PDF&sessYr=2011&sessInd=0&billBody=H&billTyp=B&billNbr=1950&pn=3048

Excerpt from Act 13 (emphasis added): (10)  “A vendor, service company or operator shall identify the specific identity and amount of any chemicals claimed to be a trade secret or confidential proprietary information to any health professional who requests the information in writing if the health professional executes a confidentiality agreement and provides a written statement of need for the information indicating all of the following:

(i)  The information is needed for the purpose of diagnosis or treatment of an individual.

(ii)  The individual being diagnosed or treated may have been exposed to a hazardous chemical.

(iii)  Knowledge of information will assist in the diagnosis or treatment of an individual.”

“(11)  If a health professional determines that a medical emergency exists and the specific identity and amount of any chemicals claimed to be a trade secret or confidential proprietary information are necessary for emergency treatment, the vendor, service provider or operator shall immediately disclose the information to the health professional upon a verbal acknowledgment by the health professional that the information may not be used for purposes other than the health needs asserted and that the health professional shall maintain the information as confidential. The vendor, service provider or operator may request, and the health professional shall provide upon request, a written statement of need and a confidentiality agreement from the health professional as soon as circumstances permit, in conformance with regulations promulgated under this chapter.”

• See also commentary on Act 13 at the Marcellus-Shale.US website: http://www.marcellus-shale.us/Act13-of-2012_HB1950.htm

¹ Ohio Energy Bill (Senate Bill 315) – Text of bill: http://www.legislature.state.oh.us/bills.cfm?ID=129_SB_315

Provisions include restrictions on who has legal standing to sue energy companies that withhold “chemical trade secrets.”  Is there a pattern here?  Jack Shaner of the Ohio Environmental Council (formerly neutral on the bill until this provision was added) said:  “’Sadly, what started out as one of possibly the most ambitious chemical disclosure laws in the country has now turned into one of the most radical and anti-public right-to-know laws in the nation,’ Shaner said,” according to an Associated Press story.

Sparks fly over Ohio energy trade secrets measure – Associated Press, May 23, 2012: http://www.ohio.com/news/ohiocentric/sparks-fly-over-ohio-energy-trade-secrets-measure-1.309138

• See also press statement from Ohio Environmental Council “Once promising Energy Plan springing leaky loopholes, missing critical parts” – http://theoec.org/PressReleases/PR_FrackingBill_5-21-12.htm

² MAJOR PUSH TO CLEAN UP SHALE GAS FRACKING AS 55 TOP INVESTORS WITH $1 TRILLION IN ASSETS WEIGH IN – Press Release from Boston Common Asset Management, LLC, May 16, 2012   http://www.bostoncommonasset.com/news/shale-fracking.php

• Refer also to the streaming audio replay of the 45-minute press conference: http://www.hastingsgroupmedia.com/BCIEHNICCR/051612FrackingGuide.mp3

³ International Energy Agency – Press statement on “Golden Rules” needed by energy industry: http://www.iea.org/newsroomandevents/pressreleases/2012/may/name,27266,en.html

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/voices-featured-commentators-and-bloggers/mike-benard-columns/  Accountability Central is part of the Governance & Accountability Institute, Inc.

Formal Complaint Filed with Texas State Bar Association;

Says Range Resources Lawyer Violated Rules of Professional Conduct

In Attempt to Silence Critics

“We do the right things for the right reasons because that is who we are.”

Ray Walker, Senior Vice President – Chief Operating Officer

on Range Resources’ Web Page, “Our Commitment.”

http://www.rangeresources.com/Our-Commitment.aspx

[…Music up and out, accompanied by birds singing…]

Sadly, Walt Disney is dead; and they don’t make movies like that any longer.  But energy companies still project “good neighbor” fantasies in their PR and marketing outreach.

Meanwhile, Range Resources COO Ray Walker should talk to company attorney David P. Poole about the company’s commitment to being a “good neighbor” and doing “the right things for the right reasons.”

Attorney Poole and two colleagues at an outside law firm have been named in a formal complaint to the Texas Bar Association by former DISH, Texas, Mayor Calvin Tillman.  The details follow:

Violated Rules of Professional Conduct?

The complaint alleges that Poole and his colleagues violated the Rules of Professional Conduct in an attempt to silence critics of Range and the nat gas industry.  (See Links & Resources section below for access to documents cited here.)¹

Range Resources (NYSE:  RRC) is a company that investors keep an eye on – perhaps because its 2011 revenue is over one billion dollars and the company is on a short list of nine “most likely takeout targets,” as noted in a UBS research report on Energy Sector Mergers & Acquisitions.²

In addition, the socially responsible investors with whom I communicate want Range to be the best it can be in order to retain its social license to operate.

The formal complaint to the Texas Bar Association by Tillman – and the dueling letters that preceded it – throw sunlight behind the glitzy corporate brand management efforts often seen in the energy industry.

Shareholder Value?

Tillman gets to the heart of the problem faced by Range Resources and many energy companies:  The industry’s sense of entitlement contributes to its loss in public trust.  With continuing behavior like this, will it also lose its social license to operate?  (It happened to the nuclear industry in this country.)

In the last paragraph of a March 11, 2012, reply to Attorney Poole, former Mayor Tillman cautions:

 “It would be interesting to discover what the shareholders of Range Resources would feel about the use of these intimidation tactics.  Not to mention the tens of thousands of dollars that these tactics cost the shareholders in legal fees.  Therefore, this intimidation not only destroys the public image of Range Resources, but costs a tremendous amount of money, and simply does not add value.  Perhaps if Range Resources would like to be viewed as the good neighbor that is portrayed in paid advertisements, you should start acting like one.”¹

In the formal complaint presented to the Texas Bar Association, Tillman states that Range Resources issued subpoenas for documents and depositions to Tillman and Sharon Wilson, author of a well-read blog titled Bluedaze Drilling Reform at: http://www.texassharon.com/

According to Tillman, at least two subpoenas were issued to him.  The complaint alleges that Range claimed it needed to depose Tillman and Wilson in order to collect information for its defense against specific lawsuits.

On the contrary, says Tillman (emphasis added), “this tactic is used to silence those who are critical of the natural gas industry and has no substantial purpose, other than to embarrass, delay or burden a third person not involved in the matter.”

The best insight into Range and energy industry behavior is found in the two letters exchanged in March between Range Attorney David Poole and former Mayor Calvin Tillman.  These letters preceded Tillman’s formal complaint to the Texas Bar Association¹

In his letter of March 5, Attorney Poole suggests he is not aware of any depositions issued to Tillman.  In Tillman’s March 11 response, he points out that Poole’s name is on every subpoena – and he uploads all the related files to Google Documents.  “Perhaps you have forgotten the numerous depositions you have requested,” Tillman chides.

Platitudes vs. Principles

Poole issues heroic declarations on behalf of Range Resources that sound like a triumph of platitudes over principles.

For example, in his March 5 letter, Poole writes that, “Range respects the rights of those with an interest in our industry….  Range also welcomes an active discourse …. We do, however, expect that dialog to be fact based and to accurately reflect Range.”¹

Excellent.  Here are some questions for executives at Range Resources who are committed to doing “the right things for the right reasons.”  These are the kind of fact-based questions investors might ask:

1)    Range Resources says on its website and Attorney Poole can’t resist repeating in his letter:  “We’re proud … to have been the first company to voluntarily disclose hydraulic fracturing fluids on a per well basis.”^{1, 3}  

May we assume that declaration means FULL disclosure?

Perhaps not.  According to a recent research report published by the Sustainable Investments Institute (emphasis added):  “The company [Range Resources] discloses chemicals in accordance with state requirements; it discloses only chemicals determined hazardous by OSHA in Pennsylvania and provided broader disclosure in Texas.  The company does not include proprietary exemptions.” ⁴

Which is it?  Is Range Resources proud to voluntarily disclose SOME or ALL chemicals in its hydraulic fracturing fluids?  If it is some – but not all – why not say that?  Would not that exemplify doing “the right things for the right reasons?”

2)    On the subject of voluntary disclosure and welcoming “an active discourse” – will Range champion unsealing legal settlements with landowners? 

Why does the industry force confidentiality and non-disclosure agreements upon property owners and leaseholders?  Why did two newspapers in the Pittsburgh area seek to unseal such a lawsuit settlement involving Range Resources, MarkWest Energy Partners and Energy Group.⁵  Isn’t it easier to have a fact-based conversation if all the facts are on the table?

3)    How did Range Resources fail to accurately read its own production volumes in Western Pennsylvania in 2010?  How can the company command respect for its operational excellence from both investors and leaseholders?

Range Resources sent letters to gas leaseholders in Western Pennsylvania in August of 2010 claiming that royalties were overpaid for “several production periods.”  As a consequence, it would deduct the alleged overpayment from future royalty checks.

Does Range have a public explanation for why it cannot accurately manage leaseholder and company finances in a task that is fundamental to the industry?  I tried repeatedly at the time to engage in “active discourse” with Range but it declined to respond.

This is not small potatoes, according to the company’s 10-K filing for 2010 with the U.S. Securities and Exchange Commission.

Specific to its operations in the Marcellus Shale in Pennsylvania, Range states on p. 22 (emphasis added):

“This has been our largest investment area over the last three years.  We had 422 proven drilling locations at December 31, 2010.  Our 2010 production was 166% greater than 2009.  During 2010, we drilled 113.6 net development wells and 3.9 net exploratory wells in the Marcellus Shale, of which 114.4 net wells were successful.” ⁶ 

How credible is the 166% increase in production when the company admitted in the same year that it had misread its production volumes?

And how many leaseholders across those more than 400 “proven drilling locations” received letters in which Range said it apparently could not accurately read production and allegedly overpaid royalties?

But if everything is copacetic, why not answer questions?  “Do the right thing for the right reasons” – because that’s who you are.  Aren’t you?

Links & Resources

¹ Links to three documents involved in a complaint to Texas State Bar Association follow.  The complete list of documents (with links) can be found in Tillman’s March 11 response to Attorney Poole (below).  This includes subpoenas, deposition requests, quash requests.

• Letter of Complaint to Texas State Bar by Calvin Tillman (March 19, 2012): https://docs.google.com/open?id=0B0P-oym-MTKzYjBjU0Y2c1pTODZqVkRXTmtCWU9nQQ
•  Letter From Range Attorney David Poole to former DISH, Texas, Mayor Calvin Tillman (March 5, 2012):  https://docs.google.com/open?id=0B0P-oym-MTKzckxCWEhrTjlSN1NYanRGZDJreXBXQQ
• Tillman Response to Range Attorney David Poole (March 11, 2012):  https://docs.google.com/open?id=0B0P-oym-MTKzQU1RbFJVOGxUaml6dmh0RGVCbzhwUQ 

² UBS Investment Research: Energy Sector M&A – Specific to Range, the report notes: “We believe it is a matter of when not if Range Resources is acquired.”  pdf file (See especially pp. 1, 4-8):  EnergySectorMA

³ Range Resources Web Page “Commitment To The Environment, Safety, Health & Local Communities – See first paragraph after intro paragraph (in blue) where the company states: “In 2010, Range was the first company to voluntarily disclose hydraulic fracturing fluid contents on a per well basis.”  http://www.rangeresources.com/getdoc/fecf2d47-a7e9-4b8e-b80d-395fc52f98ea/Commitment-to-the-Environment,-Safety,-Health—Lo.aspx

⁴ Discovering Shale Gas:  An Investor Guide to Hydraulic Fracturing (March 8, 2012) – published by Sustainable Investments Institute with funding support from IRRC Institute; see pp. 64-65.  You can download a pdf file of the 74-page report at this link: http://www.irrcinstitute.org/projects.php?project=56

⁵ Two newspapers have sought to unseal a “highly publicized” lawsuit settlement with landowners critical of Range Resources and other energy companies.

• “Newspapers’ effort to open shale lawsuit supported by others,” Pittsburgh Post-Gazette, May 1, 2012:  http://www.post-gazette.com/stories/local/marcellusshale/newspapers-effort-to-open-shale-lawsuit-supported-by-others-633839/
• “Newspapers seek opening of Marcellus lawsuit settlement,” Pittsburgh Post-Gazette, October 4, 2011  http://old.post-gazette.com/pg/11277/1179687-100.stm
• See also “Small community of South Fayette focus of big Marcellus Shale controversy – Lawsuit, elections turn South Fayette into major test case,”  Pittsburgh Post-Gazette, October 23, 2011, at this link: http://old.post-gazette.com/pg/11296/1183985-503.stm

⁶ Range Resource Corp Form 10-K filed with the U.S. Securities and Echange Commission for the fiscal year ended December 31, 2010 – Pdf file:  RangeResources_10K_20110301

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-formal-complaint-filed-with-texas-state-bar-association-alleges-range-resou/  Accountability Central is part of the Governance & Accountability Institute, Inc.

Environmentalists & Tea Party Fight Property Rights Abuses;

Plus Sensenbrenner’s H.R. 1433 ‘Property Owner’s Protection Act’

Will Fuel Broader Eminent Domain Discussion

New Coalition for Property Rights in Texas includes environmentalists & Tea Party members. Photo courtesy of David McFatridge

The ‘sleeper’ issue of shale gas extraction is waking up; and the energy industry is not happy to have sunlight detailing the adverse effects of eminent domain on private property rights.

We are seeing a renewed focus on eminent domain “taking” – in all its variations:

• Two courts in Texas have recently ruled in favor of landowners vs. energy & pipeline companies.  One involves an appeals court reinstating a restraining order on TransCanada for its Keystone Pipeline project.  Though such legal victories can be short lived, one Texan observed, “This is pretty big for Texas!” ¹

• New Texas statewide coalition for private property rights is supporting landowners in the path of the Keystone XL pipeline there.  The coalition includes environmentalists and Tea Party conservatives who say the pipeline project tramples property rights and endangers water supplies in East Texas. ²

• Challenges are also developing to Texas Rule 37, which landowner advocates say “takes away the mineral owner’s right to negotiate a fair and equitable lease.”

• The U.S. House passed Congressman James Sensenbrenner’s (R-WI) Property Rights Protection Act (H.R. 1433).  The House bill enjoyed bipartisan support including Representatives Maxine Waters (D-CA), who is a co-sponsor with Sensenbrenner; Sheila Jackson Lee (D-Texas) and Lamar Smith (R-TX).  It now goes to the Senate.³

The Property Rights Protection Act is a start to correcting the abuses of eminent domain – but only a start, because it addresses just part of the problem referred to as “economic development takings.”  The infamous example of this was the 2005 Supreme Court decision on Kelo vs. New London, Connecticut. ⁴

3^rd Rail – Natural Resource Takings

The new House Bill does not address the “third rail” of eminent domain takings, known as “natural resource development takings.”

This is the form of eminent domain taking where government and energy companies join to seize private property rights (surface and/or subsurface) for gas/oil pipelines, compressor stations, underground nat gas storage reservoirs and more.

I call it the third rail of eminent domain because, to date, even property rights advocates like the Institute for Justice (which helped take the Kelo case to the Supreme Court) decline to step up to natural resource development takings because, they tell me, of the “public use” interpretation of the courts.

Not so at the grass roots level where there is increasing demand for change.  From Texas to New Jersey, citizens are challenging the domestic energy cartel comprised of government and industry.

Domestic Energy Cartel

It is not stretching a point to say that eminent domain puts landowners in a face-off with the equivalent of a cartel comprised of energy companies and government, because the power of eminent domain allows corporations – backed by government – to control pricing and competition (i.e., “just compensation” and what constitutes “public interest”).  By definition, that is a cartel.

This is not remotely connected to free-market capitalism.

Private property owners do not have much, if any, leverage when it comes to negotiating “just compensation” (the sound of laughter is coming from the energy companies).

This profitable power of “taking” is why energy companies want “forced pooling” in Pennsylvania; and why New York State has “compulsory integration.” Texans who value their property rights must deal with “Rule 37,” another variation of eminent domain by which government regulators permit gas & oil companies to seize mineral rights from private property owners.

Texas Coalition for Property Rights

Texans are fighting back.  According to a media advisory issued by the Coalition for Private Property Rights:

“’Texas politicians talk tough on eminent domain, but with Keystone we have a pipeline acting as a ‘common carrier’ and bludgeoning private property owners with eminent domain when there’s a real question whether it meets the legal requirements to do so,’ said Debra Medina, former Republican gubernatorial candidate and director of We Texans.”

Last month, the Coalition held press conferences in Dallas, Houston, Austin and San Antonio.  As reported by the Dallas/Fort Worth Star-Telegram (emphasis added): “… the [Keystone XL] pipeline dispute seems certain to reopen a legislative debate over eminent domain powers, which governmental entities and so-called common carriers such as utilities and pipelines use to acquire land for public projects after compensating the owner.”  (Energy companies are laughing again.)

Calvin Tillman, former mayor of DISH, Texas, told this writer that property rights abuse is what unifies the Coalition.  These groups include:  We Texans, Independent Texans, Texans for Accountable Government, and Texans Uniting for Reform and Freedom.

Texas Rule 37

DISH, Texas, is a small community that sits atop the Barnett Shale area, near Fort Worth. Tillman has 5 years of experience dealing with the energy industry and regulators as an elected official in DISH, including two terms as mayor.

In a statement he released on the subject of Texas Rule 37, Tillman says: ⁵

“The utilization of the Rule 37 exception takes away the mineral owner’s right to negotiate a fair and equitable lease.  Furthermore, it is being used to intimidate property owners into signing leases that solely benefits the production company.”

He continues:  “Rule 37 does not encourage a free market, with a competitive bid process.… because mineral owners are constantly threatened with ‘If you don’t sign for x dollars, we will take your minerals for free.’  How are you supposed to negotiate a ‘fair market price’ under those conditions?”

Finally, Tillman comments on the other half of the domestic energy cartel – government regulators in Texas (emphasis added):

“The State of Texas has allowed this abuse for far too long.… The three Railroad Commissioners take large amounts of campaign contributions from the very companies they are transferring this property to.  … this gives the distinct impression of crony capitalism, not the free market system we expect in Texas.”

Links & Resources

¹ Two recent Texas court decisions related to private property rights & eminent domain:

• Court of Appeals, 6^th Appellate District for the State of Texas – March 2, 2012, No. 06-12-00026-CV; RE:  The Crawford Family Farm Partnership:  “Now, therefore, it is ordered that TransCanada Keystone Pipeline, L.P., is restrained from entering on the Crawford Family Farm Partnership and from performing any and all on-site activities that disturb the surface or subsurface of the land, pending this Court’s determination of the petition for writ of mandamus or further order from this Court.”  Pdf file of Appellate decision:  Court_of_Appeals_Order[1]   
• Supreme Court of Texas – March 2, 2012, No 09-0901; Texas Rice Land Partners v. Denbury Green Pipeline-Texas.  In its Conclusion, the Texas Supreme Court states:  “Pipeline development is indisputably important given our State’s fast-growing energy needs, but economic dynamism – and more fundamentally, freedom itself – also demand strong protections for individual property rights.”  A copy of the 18-page decision can be downloaded at this link: http://stateimpact.npr.org/texas/2012/03/02/texas-supreme-court-reinforces-denbury-decision/
  

² Texas becomes a battleground in Keystone XL pipeline controversy, by Dave Montgomery, Dallas/Fort Worth Star-Telegram, February 21, 2012 – http://www.star-telegram.com/2012/02/21/3752596/texas-becomes-a-battleground-in.html

³ House votes to overturn Supreme Court Decision on eminent domain, by Pete Kasperowicz, THE HILL, February 28, 2012 – http://thehill.com/blogs/floor-action/house/213129-house-votes-to-overturn-supreme-court-property-rights-decision

See also:

• Property Rights Protection Act (H.R. 1433) – now referred to Senate – text of bill:

http://thomas.loc.gov/cgi-bin/query/F?c112:4:./temp/~c112YJt8wH:e533:

• Congressman’s Sensenbrenner’s (R-WI) website for comments:

http://sensenbrenner.house.gov/News/DocumentSingle.aspx?DocumentID=282349

⁴ Kelo v. City of New London, Wikipedia – http://en.wikipedia.org/wiki/Kelo_v._City_of_New_London

⁵ Oil and Gas Companies Are Allowed to Take Privately Owned Mineral Interests Without Compensation, Statement on Texas Rule 37 by Calvin Tillman, Former Mayor of DISH, TX.  February 2012.   Texas Rule37

NOTE:  This article is cross-posted on the Accountability Central website at this link:   http://www.accountability-central.com/voices-featured-commentators-and-bloggers/mike-benard-columns/  Accountability Central is part of the Governance & Accountability Institute, Inc.

Chesapeake Energy’s Cash Troubles;

Plus Nine “Most Likely” Takeover Targets in Shale Gas

Are We Watching the Tipping Point?

Perhaps Real Shale Gas “Insurgents” ARE the Industry?

Watching current events in the shale gas industry recalls the warning from Andy Grove, co-founder of Intel:  Success contains the seeds of its own destruction.

• Following persistent rumors in Oklahoma and Texas, Chesapeake Energy announced it will raise $10-$12 billion through asset sales in order “to get through the next year or so without going bankrupt,” according to Forbes magazine.¹  Chesapeake Energy is said to be the nation’s second-largest nat gas producer after ExxonMobil.
• Range Resources – once dubbed “king of the Marcellus” by Forbes – is on the ‘short’ list of nine Exploration & Production companies viewed as “most likely” takeover targets in a research report by UBS.²

Chesapeake Energy in Trouble?

At least two weeks before Chesapeake Energy announced updates to its 2012 operating plan, industry rumbles from Oklahoma to Texas suggested the company is in trouble.

The rumors came via folks connected to the energy industry; and they speculated that time and money are running out and, yes, maybe even bankruptcy is a possibility for Chesapeake.  These rumors noted that Chesapeake was already cutting contracts for drilling, and claimed that employees in Oklahoma City are worried about jobs.

Such rumors are just that and the reference to possibly “going bankrupt” in Christopher Helman’s Forbes piece (Feb. 13) was soon deleted from the lead paragraph – an exercise in measured reporting given the complexity of the company.

Junk Bonds

Yet, the company’s bond credit ratings are BB+, which is “non-investment grade speculative” – in other words, junk bonds.³

To add to its current challenge, Chesapeake is on the longer list of 13 “likely” takeover targets in the same UBS research report on Energy Sector Mergers & Acquisitions.² 

Chesapeake did not make the UBS short list of nine “most likely takeout targets” that includes Range Resources, Southwestern Energy, Anadarko Petroleum and Cabot Oil & Gas.  Instead, Chesapeake Energy moved into the “less likely takeout targets,” based on a number of factors detailed in the report (see footnote 2 under Links & Resources below for a copy of the report).

UBS researchers did note (emphasis added), “While CHK significantly outspends organic cash flow, the company is able to meet its cash flow short fall with proceeds from sale of non-E&P [Exploration & Production] assets, joint ventures, VPP [Volumetric Production Payment] and royalty trusts.”

This point is echoed in the Forbes piece which notes (emphasis added) that the company “is in a bind. … Chesapeake isn’t generating enough cash.”  And “… there’s no telling whether even Aubrey McClendon’s legendary financial finagling will be able to save the day.”

Forbes said Chesapeake’s updated financial plan “starts with the creation of a ‘volumetric production payment’ [VPP] structure tied to its Texas Panhandle Granite Wash Fields.”

Volumetric Production Payment – VPP

It characterizes VPPs as follows (emphasis added):

“These VPPs are a convoluted, but not unusual, structure whereby Chesapeake receives cash upfront (about $1 billion in this case) in exchange for delivering future volumes of oil and gas from the designated fields. … But for all intents and purposes it’s like issuing debt that needs to be repaid in oil and gas instead of cash.”

Deborah Rogers on Failed Production Models

I asked Deborah Rogers, founder of the Energy Policy Forum, for her assessment of the Chesapeake announcement.  She lives in the Fort Worth area and is described by another Texan as “wicked smart.”

Her financial career began in London where she worked in venture capital financing.  Returning to the United States, she worked as a broker with Merrill Lynch and Smith Barney.  In addition, she has served on the six-member Advisory Committee for the Federal Reserve Bank of Dallas.⁴

In public forums, she challenges the energy industry as a “failed production model.”  In her view, “I believe shale gas is more about exploiting capital markets than exploiting natural resources,” she says.

“It is about drilling for dollars in the financial markets.  Natural gas is simply a façade which enables this to occur more efficiently,” she says. “Hence the unmitigated disregard for disciplined drilling which would keep prices at viable levels.”

Assessing Chesapeake’s latest announcement, Rogers says (emphasis added):

“Firstly, VPP’s (volumetric production payments) are a form of off-balance-sheet financing that McClendon is trying to spin to sound like a clever accounting tactic. He has been using them for quite some time.”

“In my opinion, I think Chesapeake was essentially forced to resort to VPPs because other funding sources were drying up for them.”

“Nevertheless, debt is debt.  Whether you pay in cash or in production, you still have to pay at the end of the day and that is a form of debt no matter how much spin you care to apply. Chesapeake already has a great deal of debt so this will merely add more.”

“Likely Takeout Targets”

Elsewhere in the energy sector, there is a lot of takeover talk.  Matt Pitzarella, PR guy for Range Resources, tells Bloomberg/Businessweek, that the company doesn’t comment on such speculation.⁵

Pitzarella gained notoriety at an industry PR conference in Houston where he recommended the use of military psy-ops specialists as part of the shale gas industry’s effort to rebuild public trust.  At the same conference, a colleague of his – Matt Carmichael of Anadarko Petroleum – said (emphasis added), “we are dealing with an insurgency,” referring to citizen and property owner opposition in drilling communities.⁶

These remarks are on the public record (see footnote 6).  Given the industry’s behavior, why is it puzzled about the fact that it is losing public trust?  (The industry acknowledges it is losing in the court of public opinion.)

Meanwhile the financial underpinnings of the industry continue to shift – or slide, as the case may be.  Here are two excerpts from the UBS research report:

• Range Resources – “We believe it is a matter of when not if Range Resources is acquired.”
• Anadarko Petroleum – “… we believe Anadarko is a willing seller and note CEO Jim Hackett has been a seller in the past (Seagull Energy, Ocean Energy) and would be one of the biggest compensation beneficiaries amongst E&P [Exploration & Production] CEOs from a change in control.”

Perhaps some shale gas companies will wake up to discover a new kind of “insurgent” from their own industry – instead of among citizens and property owners.

 Links & Resources

^{1 “}Chesapeake Energy’s New Plan:  Desperate Measures For Desperate Times,” Forbes, February 13, 2012 by Christopher Helman – http://www.forbes.com/sites/christopherhelman/2012/02/13/chesapeake-energys-new-plan-desperate-measures-for-desperate-times/

The online lead paragraph was edited to delete the reference to possible bankruptcy.  Originally, it read:  “This morning Chesapeake Energy announced a new financial plan that it hopes will allow it to raise the billions in cash it needs to get through the next year or so without going bankrupt.”

The Forbes article also contains hot links to Chesapeake’s “new financial plan.”

² UBS Investment Research: Energy Sector M&A – pdf file:  EnergySectorMA    See especially pp. 1, 4-8.

³ Wiki Bond Credit Rating – http://en.wikipedia.org/wiki/Bond_credit_rating

Investopedia on Corporate Credit Rating – http://www.investopedia.com/articles/03/102203.asp#axzz1mrj0fbhK

⁴ Energy Policy Forum, founded by Deborah Rogers – http://energypolicyforum.com/

• See also this post on Rogers’ assessment of the energy industry’s “failed production model” – http://www.spectraenergywatch.com/blog/?p=1160
• See also Arthur Berman, petroleum geologist and industry consultant, who is also a contributing editor for World Oil magazine.  Berman has written (emphasis added):  “I am disturbed that public companies and investment analysts make fantastic claims about the rates and reserves for new shale plays without calibrating them to the only play that has significant production history.  Almost every assumption used by the industry to support predictions about the Haynesville or Marcellus Shale plays is questionable based on well performance in the Barnett Shale.” http://www.aspousa.org/index.php/2009/08/lessons-from-the-barnett-shale-suggest-caution-in-other-shale-plays/
• See also a 36-minute video of Rogers’ presentation on this issue – http://www.youtube.com/watch?v=bYzU4bEfJ5U

⁵ “Range Resources at 56 Times Profit Cheap in Shale Boom:  Real M&A,” February 14, 2012, Bloomberg by Tara Lachapele and Mike Lee – http://www.bloomberg.com/news/2012-02-15/range-resources-at-56-times-profit-cheap-in-shale-boom-real-m-a.html

⁶ “Oil Executive:  Military-Style ‘Psy Ops’ Experience Applied,” November 8, 2011, CNBC by Emon Javers – http://www.cnbc.com/id/45208498

The CNBC coverage includes audio links for the comments made by Pitzarella and Carmichael.

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-shale-gas-bubble-chesapeake-energys-cash-troubles-plus-9-most-likel/  Accountability Central is part of the Governance & Accountability Institute, Inc.

Fracing Contaminates Ground Water; but Drill Anyway,

Says Brit at Adam Smith Institute;

Uninformed Discussion of Mineral Rights, Geology from

Advocate of Libertarian & Free Markets;

Ignores Domestic (NIMBY) Energy Cartel

A Brit writing in Forbes magazine says that fracing does contaminate ground water, but we should drill regardless.

Writer Tim Worstall is a Fellow at the Adam Smith Institute, a “libertarian and free market” think tank headquartered in London.  He also writes a column for Forbes.¹

His premise is that, as long as we understand the risks, we can choose to make a trade off for the benefits – such as an abundant supply of natural gas that is preferable to burning coal.

Worstall says, “We simply have to weigh up the costs and benefits of various courses of action and thus, if we’re to be rational at least, pick those that provide the most benefits as against the least costs.”

Trading risks for benefits is something we do in life.  So it can be a reasonable starting point for discussion.  Except the Worstall World, unfortunately, is not on Planet Earth.

Frac Fantasy World

The Worstall World is neatly bounded by what he considers to be logic, economic tenets and “Coasean bargains.”²  Complex issues such as mineral rights, property rights, geology and contamination are simple – or simplistic – in this fantasy world.

According to Worstall (emphasis added):  “And those who own the land above the shale that is frakked also own the gas (matters are very different in Europe where it is mostly the government which owns fossil fuels).  So when they receive royalties for the gas that is frakked they are being compensated for that pollution.  If they think that the royalties on offer are not sufficient to so compensate them then they are entirely free to refuse permission to drill. As indeed some do.”

He declares, “Everyone gets what they want ….”  Really?

For example (emphasis added):  “Those who prefer money to clean water will allow drilling, those who don’t will not.  Royalty rates and quite probably the natural gas price will change to reflect those individual decisions.”

In other words, if one property owner chooses to permit drilling on his property he makes his bet and lives with the consequences whether it’s a stream of royalty payments or contaminated water.  If his neighbor chooses not to permit drilling, that is his bet and he will keep his clean water but get no royalties.

Where to begin with our British colleague?  This charming exercise illustrates the difference between theory and skin-in-the-game reality.

Mineral Rights

Let’s start with mineral rights.  In Europe, Worstall suggests, governments rather than private property owners generally own the fossil fuels.  In the U.S., he believes, private property owners possess the mineral rights.  Even if they do – and not all do – there is nothing simple about mineral rights.

I can’t speak about European mineral and property rights; but as a former gas leaseholder in Pennsylvania, I ended up fighting a two-year eminent domain legal battle launched by Spectra Energy of Houston, Texas, which was backed in its “taking” of property rights by the Federal Energy Regulatory Commission (FERC).  (Eminent domain in the U.S. can only take place under the authority of government.)

We and about 150 other property owners had the mineral rights; but Spectra Energy took them in order to construct a 12 billion cubic feet underground natural gas storage reservoir (with pipelines, 5,000 hp compressor station and 13 injection/withdrawal wells).

Even though Pennsylvania has more underground nat gas storage reservoirs than any state in the continental U.S., FERC, a federal judge and Spectra Energy declared this project “vital” to public interest.

In fact, it was vital to Spectra Energy’s business model because the company wants to cash in on what it views as the Marcellus Shale ‘gold rush.’

This isn’t free market capitalism, this is an energy cartel comprised of corporations and government, because the power of eminent domain allows corporations – backed by government – to control pricing and competition (i.e., “just compensation,” what constitutes “public interest,” and what you might prefer to do with your property asset).

There is no energy related eminent domain “taking” action that I am aware of where the private property owner can just say ‘no thank you.’

There is no “Coasean bargain” here.  No free choice.  No free market.

By the way, in the U.S., some states like New York can compel property owners to be integrated into a drilling unit even if they choose not to participate in drilling.  It is called compulsory integration, and it is another form of eminent domain.

Then there is geology.

Geology

Contrary to what Worstall seems to think, the earth is not solid rock, nor are layers below the surface hermetically sealed.

Paul Hetzler, a former Environmental Engineering Technician with New York’s Department of Environmental Conservation (DEC), says it succinctly: “… all geologic strata leak to some extent.  The fact that a less-transmissive layer lies between the drill zone and a well does not protect the well from contamination.”³

“A drinking water well is never in ‘solid’ rock.  If it were, it would be a dry hole in the ground,” Hetzler notes.  “As water moves through joints, fissures and bedding planes into a well, so do contaminants.  In fractured media such as shale, water follows preferential pathways, moving fast and far, miles per week in some cases.”

Even global energy giants like Schlumberger have published textbooks and technical papers that acknowledge such significant risks of shale gas extraction as aquifer contamination and earthquakes.  From one Schlumberger textbook (emphasis added):

“Despite recent advances in the cementing of oil and gas wells, many of today’s wells are at risk. … The environmental impact of contaminating a single fresh water aquifer is extremely serious.”⁴

One might have hoped that Mr. Worstall at the Adam Smith Institute in London would bring more thought to a serious issue.

He could, for example, look at leadership benchmarks among shale gas executives.  How many, he might ask, have chosen shale gas drilling on their own property?

Gas Exec NIMBYs 

Libertarians and free market advocates might be surprised to learn that today’s shale gas executives are the new NIMBYs (Not In My Back Yard).  Despite queries to energy companies and industry associations, I have been unable to identify ANY executives who have such operations on THEIR property.

So we have a free market world where gas execs want these operations on your property, not their property.  Wonder why?

And please – theorists should refrain from arguing that execs live in the cities and drilling is in the country.  Is it possible that anyone still believes that?  Shale gas companies drill everywhere – from school yards to grave yards to front yards. High-volume hydraulic fracturing takes place in rural, suburban and urban locations (e.g., Fort Worth to name just one location).  

Mr. Worstall’s logic fails to grasp this.  In fact, he is rather flippant on this subject (emphasis added):  “Myself I tend to thinking that [alternatives to fracing are] worse than having to truck drinking water into a few sparsely populated rural areas: but I agree that this is an opinion, not a fact.”

Perhaps Mr. Worstall’s own website offers an explanation.  It states: “Tim Worstall is an Englishman who has failed at many things.”⁵  

Links & Resources

¹ Fracking Does Contaminate Groundwater:  Carry on Drilling Regardless, by Contributor Tim Worstall,  Forbes magazine, December 10, 2011 –   http://www.forbes.com/sites/timworstall/2011/12/10/fracking-does-contaminate-groundwater-carry-on-drilling-regardless/3/#

• Worstall profile in UK Guardian: http://www.guardian.co.uk/profile/timworstall

² “Coasean bargain” is a term that takes its name from British-born Ronald Coase who received the Alfred Nobel Memorial Prize in Economic Sciences in 1991.  Professor Coase is the research advisor to the Ronald Coase Institute; and he celebrated his 101^st birthday in December 2011.  According to the Institute’s website, its mission is (emphasis added):  “To better understand how real economic systems work, so that individuals and societies have greater opportunities to improve their well being.”

http://www.coase.org/aboutronaldcoase.htm          http://www.coase.org/abouttheinstitute.htm

http://www.econlib.org/library/Enc/bios/Coase.html

• According to a Wiki entry, “The [Coase] theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining.”  Link: http://en.wikipedia.org/wiki/Coase_theorem

³ Fracing WILL Contaminate NY’s Acquifers – Former DEC Environmental Engineering Technician – Comments from Paul Hetzler, former Environmental Engineering Technician with New York’s Department of Environmental Conservation (DEC) at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-fracing-will-contaminate-nys-acquifers-former-dec-environmental-engineer/

⁴ Does Cement Crack? – Part 2:  Contains Schlumberger textbook reference & source – http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-does-cement-crack-part-1/

⁵ Tim Worstall Website – http://timworstall.com/about/

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-fracing-contaminates-ground-water-but-drill-anyway-says-brit-at-adam-smi/   Accountability Central is part of the Governance & Accountability Institute, Inc.

Fracing WILL Contaminate New York’s Acquifers,

Says Former DEC Environmental Engineering Technician;

Also, Beware of Water Testing by Shale Gas Companies

“Hydraulic fracturing WILL contaminate New York’s aquifers (emphasis added).”

Not MIGHT – WILL contaminate, according to a former Environmental Engineering Technician with New York State’s Department of Environmental Conservation (DEC).

Paul Hetzler spent three years with the DEC’s Region 5-South managing scores of groundwater remediation projects from 1994-1997.  Region 5 serves nine counties in the Eastern Adirondacks and Lake Champlain area.  It encompasses the northeastern tip of New York State and includes three-quarters of the Adirondack Park.

Paul Hetzler, former Environmental Engineering Technician with NYS DEC.

  “If you were looking for a way to poison the drinking water supply, here in the Northeast you couldn’t find a more chillingly effective and thorough method of doing so than with hydraulic fracturing.”  Hetzler initially made his remarks in a commentary published in the Watertown Daily Times.¹

He notes, “all geologic strata leak to some extent.  The fact that a less-transmissive layer lies between the drill zone and a well does not protect the well from contamination.”

“A drinking water well is never in ‘solid’ rock.  If it were, it would be a dry hole in the ground.  As water moves through joints, fissures and bedding planes into a well, so do contaminants.  In fractured media such as shale, water follows preferential pathways, moving fast and far, miles per week in some cases.”

He makes three key points among others:

• “If your well goes bad, neither you, nor your children, nor their children will ever be able to get safe, clean water back.”
• “Chemicals injected into the aquifer will persist for many lifetimes.”
• ‘’Drill for gas, absolutely, but develop safe technologies first.”

In a follow-up exchange, he told this writer:  “I don’t claim that every potable well in a hydraulic fracturing zone would become contaminated, but some certainly will.”

“Subsurface conditions vary considerably, and the results of injecting pollutants into the aquifer at a particular point are hard to predict,” he adds.  “Even small heterogeneities [differences] in a stratum can lead to different outcomes.”

“Pumping rates also influence whether a well takes a hit – two neighboring wells might become contaminated while a third remains OK.”

Hetzler made a recommendation, coupled with a warning:

“Since contamination can show up months or even years after a pollution event, I’d advise all residents near a hydrofracturing operation to get monthly lab analysis on their water for several years after drilling ceases.  Obviously this is quite a burden.”

Water test results, he warns, may depend on who does the testing.  Based on Hetzler’s DEC experience, he does not have complete confidence in gas companies – described here as “RPs” or “Responsible Parties.”

“One would like the gas company to pay for this, but I’ve seen RPs (responsible parties) use tactics that reduce the likelihood of detecting contamination, such as using inappropriate methods (e.g. EPA 602 for wastewater instead of a 503.1 for drinking water) or having method detection limits set above safe drinking water thresholds, which leads to a meaningless report of ‘nothing detected’ (above a very high level).  You have to be right on an RP in everything they do.”

Hetzler said he has written to the DEC and filed a public comment regarding the draft Supplemental Generic Environmental Impact Statement (SGEIS).  Public comments will be accepted up until January 11, 2012.²

Today, Hetzler works for the Cornell Cooperative Extension as a horticulture and natural resources educator.  He does not speak for Cornell or the Extension office.

 Links & Resources

 ¹ “Hydrofracking sure to contaminate water” – Watertown Daily Times, December 13, 2011.  Reference link:  http://www.watertowndailytimes.com/article/20111213/OPINION02/712139975  Pdf file: Watertown Daily Times | Hydrofracking sure to contaminate water

² Public Comments should be made by January 11, 2012 on the revised Supplemental Generic Environmental Impact Statement (SGEIS).  Following are links and sources for information.

• New York State Department of Environmental Conservation:  High-Volume Hydraulic Fracturing Comments – Comments can be submitted by following instructions on the DEC website at this link:   http://www.dec.ny.gov/energy/76838.html

• In addition, consult this user friendly citizen guide for assistance in responding to the DEC online.  You’ll find analyses by many knowledgeable folks including Chip Northrup, energy industry investor, and Lou Allstadt, former Executive VP of Mobil Oil Corporation: http://www.sourcewatch.org/index.php?title=DSGEIS_Responses

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-fracing-will-contaminate-nys-acquifers-former-dec-environmental-engineer/  Accountability Central is part of the Governance & Accountability Institute, Inc.

NYS Senate Committee Told:  Picture a Niagara Falls of Wastewater from

Fracing with No Comprehensive Plan to Safely Deal with It;

Flowback Frac Water Not Designated ‘Hazardous’

DEC Outlines ‘Options’

But Will NY Senate Committee Act?

The New York State Department of Environmental Conservation (DEC) promises  high-volume hydraulic fracturing can be done “safely.”¹

Based on that promise, how will New York State deal with the billions of gallons of toxic wastewater that eventually will be produced?

To understand the challenge, picture Niagara Falls with one-half million gallons of water per second pouring over it.

Then consider 62,000 estimated hydraulic fracturing wells in New York State, producing 62 billion gallons of toxic wastewater.  This could easily be what New York citizens face if Democrat Governor Andrew Cuomo opens the door to hydraulic fracturing in New York State.

This was part of the testimony of Sandra Steingraber, Ph.D. (biology), author and Distinguished Scholar in Residence with the Environmental Studies department at Ithaca College.  She was among 14 individuals from government, industry, academia and environmental organizations testifying by invitation only for the New York State Senate Standing Committee on Environmental Conservation.²

Held in Canandaigua, New York, the subject of the 6-hour public hearing was “to examine waste water produced from hydraulic fracturing.”  The committee and the hearings are chaired by State Senator Mark J. Grisanti (R, 60^th District).  He was joined at the Canandaigua hearing by State Senator Patrick Gallivan (R, 59^th District).²

“The volume of wastewater generated by fracking is immense,” Steingrabber told the Senate Committee on December 12.³

She explains (emphasis added):  “In the Marcellus Shale, between four and nine million gallons of water are required to frack a single well.  At least one million of these gallons returns to the surface as wastewater.”

“Sixty-two thousand gas wells are envisioned for New York State,” she testified.  “If all those wells are fracked only once – a highly conservative assumption – the total amount of wastewater generated is the number 62…with nine zeros after it.” 

 62 Billion Gallons of Toxic Wastewater

“To visualize that amount of water, consider that 500,000 gallons of water go over both sides of the Niagara Falls every second.  The amount of wastewater that would be generated in New York State from fracking, if we decide to permit it, is equal to the volume of water cascading over Niagara Falls for 35 straight hours.”   

Sandra Steingraber, Ph.D. (biology)

“So, imagine standing in front of the Niagara Falls for 35 hours.  Now imagine that all the cascading water you see is radioactive and full of toxic chemicals, and your job is to figure out where to put it so that it won’t come in contact with any person or any other body or water or the soil or the air.  Forever.”

A key question is whether the DEC has a plan for all that toxic wastewater?

Steingrabber notes (emphasis added):  “The where-to-put-it question is not adequately addressed in the [DEC’s] draft generic Environmental Impact Statement, which does not put forth a comprehensive plan for waste disposal nor explicitly prohibit fracking waste from entering sewage treatment plants.”

In fact, water treatment plants are part of the DEC plan.

DEC ‘Options’

Speaking earlier in the day, DEC Deputy Commissioner Eugene Leff (Remediation & Materials Management) testified, “We have identified many measures to protect our drinking water, our air, our land and our streams.”⁴

He said (emphasis added):  “At this point in time, besides recycling, the disposal methods anticipated to be proposed for both flowback water and produced water are injection into disposal wells or processing at water treatment plants.”

Despite the DEC’s statement that water treatment plans are an option for the disposal of hydraulic fracturing wastewater, Leff noted (emphasis added), “Presently, there are no plants that are authorized to accept waste water from high-volume hydraulic fracturing in New York.”

He added:  “However, a facility dedicated to the treatment of wastewater from the drilling industry may be proposed.  And existing plants may seek to address these industrial wastewaters – or other technologies could be developed to treat such waste water as the use of this technology continues.”

As it turned out, invited speakers at the hearings included representatives from waste management companies who described “other technologies” they say will safely manage the toxic wastewater issue.  Such technologies include:

• Desalination
• Onsite decontamination using closed loop systems
• Forward osmosis using polyamide membranes.

Regarding the promise of these various methods, Steingraber said while the volume of wastewater may be compressed, the total mass of toxic, radioactive chemicals remains the same – only more concentrated (emphasis added):

“Newton’s laws of nature still apply:  matter can neither be created nor destroyed; elements like arsenic are absolutely persistent; radionuclides don’t just disappear.”

“The volume of the wastewater may decrease, but the total mass of toxic, radioactive chemicals stays the same and, indeed, is even more concentrated within the smaller volume of fluid that remains.  And this even-more-poisonous material still requires transfer and injection in underground wells or disposal somewhere.”

She urged the Senators to take two first steps:

1. “First, waste that is hazardous should be called hazardous waste and treated as such.”
2. “Second, a human health impact assessment must precede and inform the decision whether or not to move forward with fracking.  To skip this step and risk exposing New Yorkers to inherently toxic chemicals without their consent is a violation of basic human rights.”

She pointed out that “a slight-of-hand legal exemption” excludes hydraulic fracturing flowback fluid from the designation “hazardous.”  Yet dozens of the chemical constituents used in fracing fluids are designated as “hazardous.”

She explains (emphasis added):  “By any definition known to toxicology, the wastewater from fracking operations is hazardous.  Hydrofracking fluid sprayed in a forest in West Virginia, for example, defoliated and killed more than half the trees, and elevated the sodium and chloride levels of the soil by 50 fold. When spilled on the ground, fracking waste sows barrenness where nothing will grow.  Those ancient Roman conquerors who salted the fields of their enemies would be impressed.

“Fracking wastewater is also radioactive. According to the DEC’s own findings, flowback waste contains radium-226 at more than 200 times higher than the limit safe for discharge into the environment and more than 3000 times higher than the U.S. EPA drinking water standard.  And yet, the sGEIS does not ensure that this truly hazardous fluid is treated as a truly hazardous substance, nor does it attempt to make it less hazardous.

At the conclusion of the hearing, Senator Grisanti thanked all who participated and said:  “I’m glad that the testimony that was presented here today will be in the record.  It is something that the DEC has to take a look at, has to move forward on it.”

Senator Gallivan said, “Clearly this is an issue of our times; and perhaps the most significant thing that we will face in our time in the Senate.  So it is not something we take lightly.”

He also thanked Senator Grisanti who, he said, “is traveling throughout the state and conducting numerous hearings.”

Citizens, property owners and groups can submit written comments to the DEC by close of business on Wednesday, January 11, 2012. This is important because it is the instrument by which the state says it will regulate this industrial activity.⁵

 Links & Resources

¹ “We are going to do this safely,” stated Department of Environmental Conservation (DEC) Commissioner Joe Martens – Refer to ”NY Promises” on Spectra Energy Watch at this link:  http://www.spectraenergywatch.com/blog/?p=1321

² New York State Senate:  Public Hearing To Examine Waste Water Produced from Hydraulic Fracturing – http://www.nysenate.gov/event/2011/dec/12/examine-waste-water-produced-hydraulic-fracturing

• State Senator Mark Grisanti’s Website: http://www.nysenate.gov/senator/mark-grisanti
• State Senator Patrick Gallivan’s Website: http://www.nysenate.gov/senator/pat-gallivan

Audio/Video Files of Senate Public Hearing on Hydraulic Fracturing Waste, Canandaigua, December 12, 2011 – Shaleshock Media has posted audio and video files of the hearing which allow you to listen and/or watch selected speakers at this link:  http://shaleshockmedia.org/2011/12/13/public-hearing-on-hydrofracking-waste/

See also this link: http://blip.tv/rss/bookmarks/247763

³ Sandra Steingraber, Ph.D. New York State Senate testimony – You can download this pdf file of Dr. Steingraber’s testimony  Steingraber NY Senate Testimony 12_12_11.  In addition, Shaleshock Media has posted audio and video files of Dr. Steingraber’s testimony at this link: http://shaleshockmedia.org/2011/12/14/13-sandra-steingraber-canandaigua-fracking-waste-hearing-12-12-11/

• Sandra Steingraber’s Website: http://steingraber.com/

⁴ New York State DEC Deputy Commissioner Eugene Leff (Remediation & Materials Management) – Shaleshock Media has posted audio and video files of Commissioner Leff’s testimony at this link: http://shaleshockmedia.org/2011/12/14/2-eugene-leff-dec-deputy-commissioner/

⁵ Public Comments should be made by January 11, 2012 on the revised Supplemental Generic Environmental Impact Statement (SGEIS).  Following are good sources for information.

• New York State Department of Environmental Conservation:  Revised Draft SGEIS (September 2011) – http://www.dec.ny.gov/energy/75370.html

• New York State High-Volume Hydraulic Fracturing Comments – http://www.dec.ny.gov/energy/76838.html

In addition, check out this “how to respond” guide to the DEC online.  It offers a user friendly guide for the lay person to understand and respond to the SGEIS document and New York State’s proposed fracing regulations.  You’ll find analyses by many knowledgeable folks including Chip Northrup, energy industry investor, and Lou Allstadt, former Executive VP of Mobil Oil Corporation: http://www.sourcewatch.org/index.php?title=DSGEIS_Responses

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/voices-featured-commentators-and-bloggers/mike-benard-columns/  Accountability Central is part of the Governance & Accountability Institute, Inc.

6,000 Attend DEC Public Hearings on Hydraulic Fracturing

in New York;

Public Comment Period Extended 4 Weeks;

Challenge:  Trust an ‘Untrustworthy Industry’?

Nadia Steinzor of Earthworks was among nearly 600 who spoke at DEC public hearings in November.

Nearly 6,000 attended eight public hearings in four cities on the subject of high-volume hydraulic fracturing, sponsored by the New York State Department of Environmental Conservation (DEC) in November.

Speaking on the record at these public hearings were nearly 600 individuals who spoke for an allotted 3-minutes each.  Both attendance and speaker numbers are from the DEC.  (See breakdown below in text.)

The DEC called it an “unprecedented turnout” in a press release; and, at the same time, it announced a 4-week extension of the comment and feedback period – from December 12 to January 11.¹

Participation at the public hearings – which for many required 3-4 hours or more of travel time – validated DEC Commissioner Joe Martens statement in the press release that, “The turnout of 6,000 people at the hearings demonstrates how strongly New Yorkers feel about this important issue.”

The odd note was that the four-week extension of the public comment period came as a single sentence at the end of the press release.

As New York Democrat Governor Andrew Cuomo appears ready to open the door to shale gas extraction, the next significant event and activity is to submit written comments to the DEC by close of business on Wednesday, January 11, 2012. This is important because it is the instrument by which the state says it will regulate this industrial activity.

For more information, including guidance on how to do this online, see the second footnote below under Links & Resources.²

Public attendance at the DEC hearings was as follows, according to the DEC:

Dansville (2 meetings, Nov. 16):               1550 attendees                150 speakers

Binghamton (2 meetings, Nov. 17):         1905 attendees                154 speakers

Sheldrake (2 meetings, Nov. 29):              600  attendees               144 speakers

NYC (2 meetings, Nov. 30):                        1900  attendees              126 speakers

TOTAL                                                              5,955                                 574

One of the many speakers at these public hearings was Nadia Steinzor, Marcellus Regional Organizer for Earthworks’ Oil & Gas Accountability Project.  In her allotted 3 minutes, Steinzor thanked the DEC for the opportunity to speak; and acknowledged the difficulty of addressing “modern-day, industrial gas development of the type and on the scale that the state has never seen before.”

She cited gaps, however, in the state’s draft documents – calling them “critical flaws” – “such as no consideration of economic costs, no plans for hazardous waste disposal, sidelining of local zoning rights, no consideration of cumulative impacts, the use of waste pits, and paltry setbacks.”

Steinzor noted:  “One of the biggest holes in the SGEIS is a complete failure to analyze health impacts.  The DEC has ignored direction from the EPA, requests from hundreds of health professionals, and growing evidence nationwide of the health problems experienced by communities exposed to oil and gas development – bloody noses, respiratory distress, skin rashes, dead livestock and pets, cancer clusters, and more.” 

She concluded:  “Unfortunately, if the many critical flaws in the SGEIS and draft regulations are not fixed, New York will actually be just like every other oil and gas state: trusting an untrustworthy industry that’s rarely held accountable for damage or required to prevent it. …”

A pdf file copy of Steinzor’s complete comments can be downloaded under the third footnote below.³  Meanwhile, citizens, property owners and groups should provide input to the DEC no later than January 11.²

Links & Resources

^{1 ‘}Unprecedented Turnout at DEC Hearings on High-Volume Hydraulic Fracturing’ – DEC press release (December 1, 2011):  http://www.dec.ny.gov/press/78799.html

² Public Comments should be made by January 11, 2012 on the revised Supplemental Generic Environmental Impact Statement (SGEIS).  Following are good sources for information.

New York State Department of Environmental Conservation:  Revised Draft SGEIS (September 2011) – http://www.dec.ny.gov/energy/75370.html

New York State High-Volume Hydraulic Fracturing Comments – http://www.dec.ny.gov/energy/76838.html

In addition, check out this “how to respond” guide to the DEC online.  It offers a user friendly guide for the lay person to understand and respond to the SGEIS document and New York State’s proposed fracing regulations.  You’ll find analyses by many knowledgeable folks including Chip Northrup, energy industry investor, and Lou Allstadt, former Executive VP of Mobil Oil Corporation: http://www.sourcewatch.org/index.php?title=DSGEIS_Responses

³ Testimony of Nadia Steinzor of Earthworks Oil & Gas Accountability Project before New York State Department of Environmental Conservation –   NY DEC Testimony NSteinzor

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/voices-featured-commentators-and-bloggers/mike-benard-columns/  Accountability Central is part of the Governance & Accountability Institute, Inc.