The New Gold Rush II: The Smell of Money

By William Ecenbarger

Natural gas is almost odorless, but it has nevertheless filled the air of northern and southwestern Pennsylvania with a powerful scent. It is the smell of money.

If you're a landowner, a driller or a politician, it's an aroma that taps you on the shoulder, calls out your name and grabs you by the lapels.

The gas-rich Marcellus Shale formation is driving energy firms to Pennsylvania, and the state that was once a worldwide leader in fossil fuels is poised to regain its role as a leader in domestic fuel production.

Texas- and Oklahoma-based drilling companies are setting up headquarters in Pennsylvania and are locked in a bidding war. Their representatives are fanning out and offering steadily escalating prices to lease land so they can set up drill pads and tap into the Marcellus formation.

Land that was going for $25 an acre just two years ago is now fetching $6,000. And then there are royalties-a share of the well's income--on top of that. The speculators began by offering the minimum of 12.5 per cent royalty required by state law, but now 20 per cent is common and 25 per cent is showing up in newer leases.

A Pennsylvania State University study, which was financed by $100,000 from the gas companies, concluded that the development of the Marcellus natural gas reserves will drive $14.1 billion into the state's economy over the next year, create more than nearly 100,000 jobs, and has the potential to generate $800 million in state and local tax revenues.

A multi-billion business

The Penn State study forecasts a steady year-to-year increase in drilling and it projects a $25 billion contribution to the Commonwealth's economy in the year 2020. This level of activity would generate almost $1.4 billion in state and local tax revenue and create more than 176,000 new jobs in that year. 

Many environmentalists are skeptical of the claims, which they see as exaggerated and self-serving.

None of the state revenue projections takes into account a severance tax. Pennsylvania is alone among the 15 largest natural gas producing states in not taxing production. Gov. Edward Rendell proposed a severance tax in his fiscal 2009-2010 budget, but it was defeated and was not part of the delayed state budget settlement that the governor signed in October.

Some 2,000 Marcellus Shale gas well drilling permits were issued in 2009, nearly quadruple the total from the previous year. Actual drilling began on about half the sites.

Some of the exploration firms are relatively small, new, privately held and founded by wealthy individuals. Others are Fortune 500 companies, like Chesapeake Energy, which is the largest leaseholder in the Marcellus Shale, with 1.5 million acres in its portfolio. The company expects to have 28 rigs in operation by the end of next year and plans to drill 165 wells.

The development of the Marcellus, which many experts consider a revolution in America's energy industry, came about with little fanfare until 2008 when two geoscience professors surprised nearly everyone with estimates that the formation might contain more than 500 trillion cubic feet of natural gas. This was a dramatic increase over previous estimates.

A gas bonanza

They said that by using some of the same horizontal drilling and hydraulic fracturing methods that had previously been applied in the Barnett Shale of Texas, perhaps 10 per cent of that gas - about 50 trillion cubic feet -- might be recoverable.

The two academics--Terry Englander, a geoscience professor at Pennsylvania State University, and Gary Lash, a geology professor at the State University of New York at Fredonia-said that the volume would be enough to supply the entire United States with natural gas for about two years and have a wellhead value of about $1 trillion.

Both men are respected academics. Engelder first began exploring the Marcellus some 25 years ago under a National Science Foundation grant.

If the Marcellus Shale holds up to these optimistic expectations, Pennsylvania could have a significant increase in population and an enormous boost in income that might be sustained for decades - and  even into the next generation. But the combination of billions of dollars of revenue, the possibility of significant environmental issues, and the likelihood of rapid changes in communities and people's lives creates an explosive mixture.

Many local officials are concerned. One of them is MaryAnn Warren, a commissioner in rural Susquehanna County, where some residential wells have been polluted by drilling. The county, on the New York State border, has seen a dramatic increase in economic activity from the gas exploration. "I think it is a good thing," Warren said, "but I am worried about our natural resources."

Sportsmen are beginning to sound alarm about the drilling activity along the 12 counties that comprise Pennsylvania's northern border, which have long been prized for their pristine wilderness, hunting grounds and fishing streams.

"Today, if you were to visit this part of our commonwealth, you would be greeted by a different environment," says Robert Pennell, secretary of the Pennsylvania Council of Trout Unlimited. "You would find a proliferation of new roads being cut into the forests, with semis and tanker trucks hauling tons of heavy equipment and water to remote destinations. Not since the heyday of heavy timbering has there been such an assault on our northern forests."

Part III, Dangers to the Environment: Worries about fracking and drilling.