Will Utica, Marcellus remain non-starters in Empire State? New theory holds geology, not politics, thwarts NY fracking

Cabot Oil & Gas Map showing thickness of Marcellus shale, one measure

of it's viability. Other factors include depth, organic content,

thermal maturity, and myriad political and market factors    

A collection of factors stalled the Pennsylvania shale gas rush at the New York state border, including grass roots opposition, a market glut, the threat of local bans and --  above all -- the state’s reluctance to complete permitting guidelines without more information about health impacts. That, at least, is the familiar version of the story recounted through the popular press. But a group of activists – some uniquely qualified – are building an argument that something more profound and fundamental is at work: A lack of gas.

“Simply put, we now know that the Marcellus is likely only marginally productive in a few townships by the border - and may not be economic there until after 2020,” said Chip Northrup. “The Utica may not be here at all - or in a few pockets.”

Next week, Northrup, a former oil and gas investor from Texas, will publically make this case along with a select group of anti-fracking activists, some with industry resumes. The event is scheduled for 7 p.m. at Cornell University’s Hollister Hall Auditorium. In addition to Northup, presenters will include Lou Allstadt, a retired senior vice president for Mobil Oil, Jerry Acton, a systems analyst for Lockheed Martin, and Brian Brock, a retired geologist. The event will be moderated by Tony Ingraffea, a Cornell engineering professor specializing in fracturing mechanics that are integral to shale gas production.

The argument isn’t really about whether there is gas under New York – geologists agree that multiple gas-bearing formations, conventional and otherwise, lie beneath upstate’s countryside from the Catskills to the Allegany region. It’s a question of whether the broad mantels of Devonian shale, which hold prospects of drilling, fracking, and infrastructure development on an unprecedented scale, are economically viable under current or future market conditions.

Interest in New York’s unconventional reserves peaked in 2008, when the price of natural gas was three to four times higher than it is now. Since then, production of Marcellus wells coming on line in Pennsylvania and West Virginia has soared, contributing to a price collapse that is not forecast to change anytime soon. While this is a contributing factor, Northrup argues that the much-hyped future for shale gas as an economic engine for New York was a bust from the start. The team of presenters next week at Cornell will base this outlook both on analysis of available geological records and the status of leasing and development trends by major oil and gas companies. So far, only one major, Exxon Mobil, holds significant leases in New York – 50,000 acres in Broome and Delaware counties, near the Pennsylvania border. Moreover, Northrup said, analysis of well data filed with the DEC shows a range of major companies including Chevron, Gulf and others, tested upstate reserves prior to the “the fury” of the gas rush unfolded in 2008. “They kicked the tires and left well before the moratorium was in place,” he said.

Since the moratorium preventing high volume hydraulic fracturing began in the summer of 2008, midsize companies have faired poorly in their shale gas quest in New York. Norse Energy, a Norwegian company, was planning to tap Marcellus reserves in Oneida and Chenango counties. But officials recently announced they will close operations that remain insolvent after the company’s failure to sell pipeline rights of way and gas leases on 130,000 acres to pay debts. Chesapeake Energy, meanwhile, is letting its leases in New York expire after losing a legal battle to extend them indefinitely (through a process called force majeure) while waiting out the resolution to the state’s moratorium. Prior to that, Talisman, a Canadian company that was a big player in New York’s Trenton Black River boom, began shifting it’s operations from conventional resources in New York to Pennsylvania’s shale gas.

Interest from major oil companies is one of multiple measures of shale gas prospects, and it is not always a defining one. As Russell Gold recently reported for the Wall Street Journal, majors have not typically thrived in the natural gas business, and Shell Oil is selling off some assets in Texas after suffering from a market glut that has held prices down to below $4 per thousand cubic feet for several years. The industry moves in cycles, however, along with prices and demand, and independents play an important if not critical role in exploring resources that might otherwise go undiscovered as business cycles ebb and flow. Gold explains:

Smaller producers have tended to be more successful in shale than major oil companies, in part because they can move more quickly to lease up acreage before land prices rise and are more nimble at experimenting with different well designs to maximize output and drive down unit costs.

In short, smaller independents commonly venture where majors don’t. There is a lower barrier of entry to leasing, exploring, and experimenting in unproven areas, and rewards of discovery are greater. So are the risks.

This is a concern for Allstadt, who has led the push for a precedent-setting municipal ban (now being tested before the state’s high court) on drilling in Cooperstown. He has told me he does not generally fear the work of major oil companies, but he is wary of wildcatters – independents with limited capital who live or die in the world of speculative ventures. “They (Independents) play on the fringes,” Allstadt said. “They are the ones most likely to screw things up.” (Drillers have already left a legacy in upstate New York. Regulators estimate there are 57,000 abandoned and orphan oil and gas wells statewide, many of them left by firms that went broke or walked away from them.  Of these, the state has listed 4,722 as a priority due to health and safety risks, but lacks funding to plug them.  More on that here.)

In addition to a market evaluation, Northup said the presenters at Cornell will offer geological data that shows underwhelming results for shale gas samples collected from wells drilled in the 1990s and the early part of this century targeting conventional formations – mostly the Trenton Black River. Operators had to drill through the Utica and Marcellus to get to the Trenton Black River, which provided a small boom of its own when natural gas prices began rising several decades ago. The Marcellus is generally thought to be too thin and too close to the surface to be effectively developed in western New York, where most of the Trenton wells are drilled. But some geologists have argued that the prime drilling fairway of the Utica shale, which is providing productive wet gas and oil wells in eastern Ohio, may overlap the Trenton fields in western New York. Northup argues the opposite. “If those had shown Utica potential, all the majors would be here - and they never were,” he said. Take into account these factors, plus limitations imposed by natural barriers, topography, and regional no-drilling zones the state has imposed for ecological reasons, the much-touted drilling fairway for shale gas extending into New York’s Southern Tier “looks more like a putting green,” Northrup quipped on a recent appearance on Liz Benjamin’s Capital Tonight.

Terry Engelder is a geologist from Penn State whose career has been defined by his knowledge of Devonian shale. In a series of calculations in 2008 and 2009, he estimated that the Marcellus contained enough recoverable gas – nearly 500 trillion cubic feet -- to last decades, and his very public encouragement to investors and the media served as a catalyst to the gas rush in Pennsylvania. Now, with prices a fraction of what they were, Engelder is cautious about assessing the economic breakeven point of New York’s shale reserves, which, he said, “need careful evaluation.” In an email this week, he responded to my requests to assess the validity of claims by Northrup’s team that New York’s reserves are too small and problematic to be worthwhile.

Now it may turn out that shale gas in New York will not work for less than, say, $5.00/MMcf, BUT the the state should thoroughly evaluate this possibility and not have a bunch of born-again anti-frackers shout the industry down before sensible geologists and engineers really understand what the possibilities are.  

His dismissal with the anti-fracking movement aside, Engelder’s cautionary theme is a contrast to brimming enthusiasm he expressed along with lawyers, elected officials, landowners, and landmen that reflected a sense of giddiness over prospects of the shale gas boom in 2008. Interest in New York peaked in the summer of 2008, after a coalition of landowners near the Pennsylvania border landed a deal with XTO Energy (later bought by Exxon Mobil) to open 50,000 acres for development for $110 million plus royalties. Although that acreage remains undeveloped due to the moratorium, Engelder’s estimates were supported by production figures as the shale gas rush took shape in Pennsylvania over the next few years. By early 2009 drilling proponents in Pennsylvania and New York began looking for political leverage to encourage government support of the industry. As the economy sunk into recession, the case for jobs seemed to be the hot button. Stakeholder-funded studies purported to show economic potential that, in retrospect, stretch the limits of good sense in some cases.  An enthusiastic Broome County legislature paid University of North Texas scholars for a study that concluded Broome County was “fortunately located in the epicenter of the play” and shale gas development would produce 4,000 wells that would bring $15 billion to the economy, create 16,000 jobs, generate $792 million is salaries and $85 million in tax revenue.  The study encouraged county officials – before a single well was drilled or land leased -- to budget $5 million of expected lease payments on county-owned land near the landfill. Five years later, the county is yet to collect a dime from its shale gas assets, whatever they may be.

Engelder’s predictions remain controversial. And while early production numbers in Pennsylvania have met and in some cases exceeded them, questions about production have given way to questions about sustainability. (Will Bunch, of the Philadelphia Daily news, explores unmet expectations in Pennsylvania’s gas rush here, and Kevin Begos, of the Associated Press, looks at the concern of pension fund managers over the long-term profitability of the industry here.)

Chris Denton, an attorney who represents landowner coalitions, has seen the rise and fall of gas prices and corresponding interest in shale gas leases in New York. He pointed out that geological assessments are unique, piecemeal, and often proprietary, so it’s hard to usefully extrapolate figures from conventional wells, many which are in western New York, to the parts of the Marcellus shale thought to have the greatest potential, which are more toward the east. “I don’t really pay much attention unless it’s hard data from wells,” said Denton, who added that there is no mystery to why shale gas has not taken off in New York while it’s flourishing just across the boarder in Pennsylvania. “We’ve spoken with a lot of interested parties, and as it stands, it’s really too easy for them to go someplace else. They tell us, ‘call us after the moratorium’s been lifted.’”

For every argument against shale gas, it’s easy to find a countervailing argument. Theories about the geology in New York bring a chicken-or-egg quality to the discussion. Denton says the geology has not been proven because of the moratorium. Northup says the lack of interest – based on available geological data -- makes it politically comfortable for Governor Andrew Cuomo to extend the moratorium indefinitely.

The argument for or against the geology aside, there are new signs that Northrup has correctly pegged the political atmosphere. In an interview earlier this week in the Syracuse Post Standard, DEC Commissioner Joe Martens told reporter David Figura the health review needed to complete the state’s permitting policy is “going to take some time… We really don’t feel that there is any great urgency. People really want to be satisfied that this can be done safely and that's what [Department of Health Commissioner] Dr. Shah is trying to get to the bottom of.”

Will the geology of New York support a full-scale gas development by major energy companies or even speculative exploration by wildcatters? For now, a number of influences – including markets, political pressures, and unproven geology -- have created a feedback loop that favors the status quo.