Bloomberg News

Gas Price at 10-Year Low Dashes New York Dream of Riches

April 11, 2012

Regulators have held up drilling in New York state while Pennsylvania and Ohio welcomed companies such as Chesapeake Energy Corp. attracting investment worth billions of dollars. Photo: Daniel Acker/Bloomberg

Regulators have held up drilling in New York state while Pennsylvania and Ohio welcomed companies such as Chesapeake Energy Corp. attracting investment worth billions of dollars. Photo: Daniel Acker/Bloomberg

New York is unlikely to enjoy the energy boom that swept neighboring Pennsylvania because a collapse of natural gas prices has dulled the enthusiasm of companies waiting for regulators to permit drilling.

For almost four years, state officials blocked a drilling technique known as hydraulic fracturing, or fracking, that is opposed by some environmentalists. Pennsylvania and Ohio allowed producers such as Chesapeake Energy Corp. (CHK:US) and Talisman Inc. (TLM) to employ the method, and have attracted billions of dollars in investment. Like those states, New York sits atop the gas-rich Marcellus Shale formation and its portion may hold enough gas to supply the U.S. for three years.

Since New York began developing gas-drilling rules in July 2008, prices have plunged more than 80 percent to a 10-year low, making it less attractive for companies. Residents hoping to earn royalty payments of the kind that turned Pennsylvania landowners into millionaires have lowered their expectations, said Gary VanDriesen, spokesman for a coalition of land owners in central New York.

“A windfall they thought they had coming soon is something that’s a memory to them,” VanDriesen said in an interview. “The older ones figure ‘well, my children or my grandchildren will benefit from it.’’

Treated Water

The Marcellus Shale, a formation stretching from New York to Tennessee, may contain a two-decade supply of gas for the U.S. Drillers tap it by pumping millions of gallons of chemically treated water underground to break up rock and free trapped gas.

Companies spent about $20 billion on leases, drilling rigs and royalty payments in Pennsylvania from 2008 to 2010, and fracking in Ohio is forecast to add $5 billion to economic output by 2014.

New York officials say they plan to complete rules for gas fracking this year. However, Talisman, which has about 250,000 acres under lease in New York, is unlikely to be an active driller in the state until prices rebound, said David Mann, a spokesman for the Calgary-based company. Oklahoma City-based Chesapeake has scaled back drilling in Pennsylvania portions of the Marcellus.

‘‘People think that General Patton with an army of drilling rigs is waiting at the border,’’ Tom West, a lawyer in New York’s capital of Albany who represents gas producers, said in an interview. ‘‘That’s not going to happen. It’s going to be a very slow ramp up.”

Draft Rules

Environmental groups and New York City Mayor Michael Bloomberg have said drilling shouldn’t occur near watersheds, including reservoirs that supply 1.3 billion gallons (4.9 billion liters) of drinking water a day to New York City. Bloomberg is founder and majority owner of Bloomberg LP, parent of Bloomberg News.

Those concerns were incorporated by the Department of Environmental Conservation into draft rules, which include a 4,000-foot buffer zone between drilling rigs and watersheds for New York City and Syracuse. The aim is to protect the environment while capturing the economic benefits of drilling, according to department chairman Joseph Martens.

The latest version of the standards released in October were an improvement over prior drafts and may be “the most comprehensive set of rules in the country,” Kate Sinding, a senior attorney with the Natural Resources Defense Council in New York, said. Still, regulators failed to adequately deal with disposal of drilling wastewater or to assess the cumulative impacts in rural areas, she said.

‘Massive Undertaking’

“This is a massive new undertaking,” Sinding said in an interview. “It’s one with a huge variety of potential risks. We don’t think it’s either unusual or inappropriate that it should take a good number of years.”

What happens next depends largely on the price of natural gas, said John Martin, principal consultant with JPMartin Energy Strategy LLC in Saratoga Springs. In July 2008, the month New York said it would begin developing rules for fracking, natural gas averaged $11.068 per million British thermal units on the New York Mercantile Exchange. Gas for May delivery was $2.031 yesterday, down 32 percent this year.

“In 2008 the conditions were all different,” Martin said in an interview. “Investment would have rolled in. I don’t see anybody drilling wells right now.”

Marcellus Shale

The Marcellus Shale may contain 490 trillion cubic feet of gas, enough to heat U.S. homes and power electric plants for two decades, Terry Engelder, professor of geosciences at The Pennsylvania State University in University Park, said. New York may have about 13 percent of the reserves, Engelder said. It’s the world’s second-largest field behind South Pars, shared by Iran and Qatar across the Persian Gulf.

New York’s geology is another hurdle. Based on wells in northeastern Pennsylvania, New York’s shale probably will produce primarily methane or dry gas, said Peter Fasullo, principal at energy consulting firm En*Vantage Inc. in Houston.

Gas that includes liquids such as ethylene, used to manufacture plastics, and propane can fetch twice as much as dry gas.

“The New York play is very lean,” Fasullo said in an interview. “Right now, there’s really no incentive to drill that gas.”

Producers can break even in Marcellus Shale at $4 per million Btu compared with fields in Wyoming and Arkansas, where companies need $5 and $6 to turn a profit, according to an April 2011 report from Goldman Sachs Group Inc. (GS:US)

Early this year, Talisman began shifting resources out of Pennsylvania and into wells in Texas and other fields that also deliver liquids along with gas, Mann said.

Scaled Back

Chesapeake scaled back in dry-gas fields to 24 rigs from about 75, and expects to steer 85 percent of capital to liquids- rich wells this year and next, up from 10 percent in 2009, Senior Vice President Jeff Mobley said at a March 27 conference.

“We expect our dry gas shale production to continue to decline,” Mobley said. “Our growth from this point forward, it’ll be 100 percent focused on the liquids-rich plays. ”

Fracking has been used to drill more than 4,400 wells in Pennsylvania since 2009. Companies spent about $11.5 billion in Pennsylvania’s shale in 2010, including $346 million in royalties to property owners who leased their mineral rights, according to a July report from The Pennsylvania State University College of Earth and Mineral Sciences.

Deeper Utica Shale

In Ohio, companies including Chesapeake, Devon Energy Corp. (DVN:US) and Exxon Mobil Corp. (XOM:US) are drilling in the Utica Shale, which is deeper than Marcellus. The Utica prospect will support 65,680 jobs and add $4.9 billion to Ohio’s economic output by 2014, according to a Feb. 28 study by the Ohio Shale Coalition.

“The money that would have gone into New York from 2008 to 2012 went somewhere else,” Martin said. “That money is lost.”

Once rules are in place, New York may realize $1.9 billion in gas investment including $152 million in royalties in 2015, according to a June report from the Manhattan Institute, a New York research group. The report was released in June when gas averaged $4.516 per million Btu.

“I don’t believe that the chance was missed at all,” Richard Laskey, founder of the Central New York Landowners Coalition, said in an interview. “It’s inconceivable to me that they’re going to leave all this gas in the ground.”

To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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Companies Mentioned

  • CHK
    (Chesapeake Energy Corp)
    • $26.14 USD
    • -0.01
    • -0.04%
  • GS
    (Goldman Sachs Group Inc/The)
    • $173.72 USD
    • -0.24
    • -0.14%
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