Author’s Note: The Rules for Frackers will be a series that highlights the tactics the Natural Gas Industry uses to gain access to shale plays across the country. The series will focus on the economics, politics, profiteering and media and academic manipulation that is occurring in the Marcellus Shale Play and have been occurring in other shale plays around the country.
“If you repeat a lie often enough, it becomes (
truth) politics” – Banksy
There is damning evidence that the natural gas industry is harmful for the environment. Since 2009, residents in Dimock, PA have been holding to their claims that their tainted groundwater was caused by locally owned Cabot Oil and Gas wells, and those claims were vindicated when water testing results were released last month. In what looks to have been a political stunt by EPA Region 3 Chief Lisa Jackson, the EPA prematurely released the water sampling data that was collected from over 60 homes, and in a report by Propublica, the EPA only looked at 10 samples of the whole data set. The EPA reported there were safe levels of methane combined with ethane inside some of the residents’ water wells, which proved that the methane migration was caused by drilling operations. What angered families in Dimock were the facts the EPA did not release. Propublica, the first to report on the political stunt, reported that “the results showed that the ground water was contaminated with dozens of contaminants, and carcinogens and heavy metals that exceeded the agency’s ‘trigger level’ and could lead to illness if consumed over a period of time.” The cancer causing agents, if consumed over long periods of time in small concentrations, were anthracene, flouranthene, pyrene, and benzene, an additive in diesel fuel. Other chemicals found inside the ground water included: heavy metals such as chromium, aluminum, and lead, and salts associated with gas drilling such as bromide and strontium.
However, what is not visible are the strategies gas companies use to gain access to a shale play, and the mass profiteering conducted by industry shills and business owners. Gas companies are employing strategies that are tearing apart communities, and they are playing a hand in destroying the primary housing market in the areas where they extract natural gas. These strategies include preying on poor and minority communities to gain access to shale play, completely over estimating the amount of natural gas in a play, which leads to the buying out of politicians and the profiteering on a local level.
The Community and Profiteering
For many Americans, owning a home is the quintessential American Dream, because it is a powerful symbol that shows that the individual or couple has status in their local communities, and it is a sign of wealth because for many Americans their homes are their main assets. Unlike a car, which depreciates value as soon as you take it off the lot, the home is supposed to appreciate value over the time of the mortgage because of an increase in the demand for that particular housing market or a modest increase in value that is proportionate with inflation. Throughout the United States, these approximations usually hold true, especially in affluent city neighborhoods or suburbs around major metropolitan areas. These rules, though, are not always the case when it comes to living inside shale plays throughout the United States.
When a natural gas producer wants to make a move on a shale play, the first two strategies they conduct are: preying upon poorer minority communities and “drilling for press releases” when the industry discovers a monster well. Gas companies deliberately tell communities that there could possibly be 30 to 40 years of reserves, which is the amount of recoverable gas at current market price with current technology, instead of telling communities that those figures are the total resources, the amount total amount of gas, recoverable and non-recoverable, in that play. “Drilling for press releases” is the other strategy gas companies’ use. When a company discovers a monster well, which has high initial production rates during the first 30 days of production, the gas companies’ calls up their Public Relations firms, such as Energy in Depth (an industry owned news site).
When I was at the Marcellus Shale Exposed Expo last month, I sat in on a lecture by Deborah Rodgers, a member of an advisory commission for the Dallas Federal Reserve Bank and a farmer in the Fort Worth, Texas area. She is a staunch critic of the economics behind the natural gas industry. The focus of her lecture was on the economics of gas drilling and she explained how gas companies make their initial moves in a play. Gas companies are notorious for preying upon poor and minority communities by paying members of those communities’ low one time payments, which do not include a price per acre, on a gas lease with the promise of royalty checks that will last for the life of the shale play. After the gas companies are done undercutting minority communities, and have established themselves, the companies will then move into the wealthier communities and offer lucrative deals that members of those communities cannot refuse. And this is where gas companies begin to lie about how much gas is actually inside a shale play, as argued by Deborah Rogers.
An example Ms. Rogers gave during her lecture was the Fayetteville Shale, in western Arkansas. In this play, gas companies first moved into minority communities, promising that there were 30 to 40 years of reserves, and they obtained gas leases by offering members of these communities a onetime lump sum payment between $500 dollars to a couple thousand dollars max with the promise of royalty payments for the lives of the well, which is supposedly 30-40 years. After the companies bought up gas leases in the poorer communities, they then moved on to the more affluent, white communities and were offering lease payments as low as $25,000 with the promise of royalty checks. The promises the gas companies made to the minority communities allowed the members of these communities to take out loans against their homes and churches. Rogers gave an example of a church in a poor community that needed major renovations and welcomed the gas company–and their royalty check–with open hands. The church was able to take out loans to renovate their building and use the property as collateral. What happened next devastated the community because the wells drilled in this particular area reached peak production within 6 years, and members of this community faced foreclosure because of mass loan defaults, including the church that conducted the renovations.
How did this happen? The gas company that was involved in swindling the community, Chesapeake Energy, promised that there was 30 to 40 years of natural gas in the shale area and production would be vibrant throughout the given time frame. The fact was that Chesapeake telling people that the reserves would last for decades based on “monster wells,” like the headline-grabbing Chesapeake well in the Barnett Shale formation in Arlington, Texas that produced 71 times more gas than the average Texas well.
The fact of the matter is that the Fayetteville Shale has an EUR (estimate ultimate recovery), which is the reserves for a shale play, of 1.15 bcf (billion cubic feet), which was released by Netherland, Sewell & Associates, a gas consulting firm stationed in Dallas, TX. What allowed Chesapeake to gain access to communities in the Fayetteville was that they claimed their EURs were between 2.4 and 2.6 bcf, and the gas producer claimed that their technology would allow them extract all of the gas. These claims were proven wrong because the Fayetteville play passed peak production, with the average well only producing 541 mcf, and out of the 742 wells drilled only 6% of those wells produced 1 bcf of gas without a single well producing over 1.7 bcf.
Nationally, and in the Marcellus Shale, industry claims contradict the information from governmental agencies, such as the United States Geological Survey (USGS) and United States Energy Information Administration (EIA), released last fall. The amount of recoverable reserves of natural gas in the country were reduced by close to 50%, from 827 tcf, in 2010, to 427 tcf, in 2011. In the Marcellus Shale play, we have seen similar reductions. The amount of recoverable reserves in the Marcellus was reduced by 66% during the same time period; the total reserves were 410 tcf , in 2010 and 141 tcf, in 2011. The original estimates of total reserves in the Marcellus Shale was put out by industry shill and Penn State Professor, Terry Engelder in 2009, and his estimate was 500 tcf. And at the end of March, Engelder hosted an industry lead conference at Penn State University, where more reserve estimates were released, but the numbers that Engelder’s henchmen released do not make sense. Two industry firms, ICF International and IHS Inc. boasted about Engelder’s original claim, which opened Pennsylvania up to political ineptness and profiteering. The firms went as far as claiming the reserves were between 460 tcf and 698 tcf of recoverable natural gas inside the Marcellus Shale, which completely contradicts the total amount of natural gas inside the country, let alone Pennsylvania. But to dig into Engelder’s claim of how much recoverable natural gas is in Pennsylvania, the former Department of Environmental Protection secretary, John Hanger was talking about the decline in individual well production, as the amount of natural gas produced inside Pennsylvania increased, the typical production from a “monster well.” In 2010, the amount of producing wells declined by 23%, but produced 572 bcf.. At the end of his article, he stated that “[a] small fraction of Pennsylvania’s total wells were producing 70% of the state’s total gas.” You can interpret that last statement as you wish, but it shows that wells around the state are reaching peak production. It shows that the swaths of natural gas are clustered throughout the shale, not uniformly distributed.
I tried to reach Dr Engelder by phone and by email to ask a couple of questions about the IFC and IHS reports released, and about his enterprise Appalachia Fracture Systems Inc. While researching Engelder’s gas industry consulting firm, I came across a powerpoint presentation he put together for former US Representative John Peterson (R), who had some of the worst environmental ratings while he was in office. It is also peculiar that Dr Engelder is an advocate for forced pooling, a method used by gas companies to extract natural gas, or any other minerals, without requiring natural gas companies to obtain mineral rights from the landowners. Surprisingly, Governor Tom Corbett is against forced pooling, but Engelder claims that pooling “maximizes the economic benefit, minimizes wasteful stranded gas minimizes the environmental footpring and provides just and fair compensation.” In the Pennlive.com article “Leading Marcellus geologist advocates forced pooling of gas over property rights,” Engelder attempts to pitch a sob story about a tragedy one landowner in Lycoming County brought upon the gas industry by not singing over his mineral rights. The article states that an estimated 5 billion cubic feet of gas, $20 million in revenues, was stranded by one holdout landowner, and Engelder was quoted saying, “this is not what the oil and gas conservation law of 1961 intended as an outcome.” The oil and gas conservation law of 1961 was specifically designed to protect citizens from the pooling of resources in formations lying above the Onondaga formation.
As a science professor at Penn State University, questions of Terry Engelder’s academic integrity and who he has financial ties with must be raised because his estimates and the business he conducts outside of teaching completely coincides with the industry, not academia. Terry Engelder sits on the Marcellus Shale Advisory Commission with the likes of Jim Cawley, Pennsylvania Lieutenant Governor, C. Allan Walker, former CEO of Bradford Energy and current secretary of the Department of Community and Economic Development, and Terry Pegula, owner of the Buffalo Sabers and East Resources, a natural gas company with a long history of environmental violations. And it is clearly evident that Engelder has left science and any academic integrity he once had at the door for profiteering off the Marcellus Shale Industry. In Dory Hippauf’s “Connecting the Dot’s Series,” (Parts 1 and 2 in this month’s Raging Chicken Press) she shows that Engelder is the principal co-owner, with Gary Lash of SUNY, of Appalachia Fracture Systems, a consulting agency for geologists, engineers and landowners.
In Southwestern Pennsylvania, one of the poorest areas of the state, profiteering is happening on the local level. Landmen are deceiving customers into singing over their mineral rights to gas companies, and these landmen are vicious when their unethical business practices are exposed. But to expose these creatures for what they are we must look into the legal relationships between the homeowner, their lender, and the gas companies.
New York Bar Journal
Last winter, the New York State Bar Association released a case study, “Homeowners and Gas Drilling Leases: Boon or Bust,” that examined the legal repercussions when a homeowner was to sign their mineral rights to a gas company or land man. The document explains the; legal terms of rent, space, use, and lease terms; who is responsible for any environmental liability; and how the homeowners’ homeowner’s insurance and mortgages are affected.
When a homeowner is about to sign their mineral rights to a gas company, there are a set of terms he or she should be aware of, which are: the rent, the space, the use and the lease terms. The rent is the amount of money per acre the homeowner will receive from the gas company–ranging from a few dollars to tens of thousands of dollars per acre–and royalty payments. The space consists of the entire subsurface area of the property and “undesignated portions of the surface lands,” which could be used to store equipment and the physical infrastructure that would have to be installed to access and operate the drilling rig. The lease terms usually run for five years, but the gas company has the power to indefinitely extend the lease if the space is “capable for production”, which is broadly defined as an operating work site, and as long as royalty payments are made, the lease can be extended indefinitely for decades.
According to the study, “[a] residential mortgage prohibit[s] borrowers from committing waste, damage or destruction or causing substantial change to the mortgaged property or allowing a third-party to do so, [which] includes gas drilling.” A homeowner’s mortgage also prohibits the storage of hazardous materials, above or below ground, on the property. Hazardous substances include the storage of “gasoline, kerosene, other flammable or toxic petroleum products, volatile solvents, toxic pesticides and herbicides, and radioactive materials.” The homeowner is also prohibited from allowing a third-party to “do anything that affects the mortgage property by violating environmental law,” which states “federal, state and local law that relates to health, safety and environmental protection.” The article goes on to state that a farm or house with contaminated well water may not sell, and a property that runs the risk of inside or outside explosions from migrating methane will not sell. Even if a homeowner had the most extensive homeowner’s insurance, “broad risk form” or “special form,” the activities natural gas companies conduct and the liabilities those processes pose will not be covered.
Since signing a gas lease without the consent of your bank, or lender, the homeowner is can risk defaulting on the property, but as described in Chesapeake’s and Range Resources’ From 10-K documents, the gas lease can be used as collateral for the mortgage loan. The banks have the power to order a borrower to cease the operations on the property and to repay the loan. If this happens, the borrower/homeowner can be stuck between a rock and a hard place because “gas companies have pledged the gas leases as collateral for loans or brought in investors based upon the potential income the gas lease can produce.”
If an environmental accident did happen on a homeowner’s property, the burden of responsibility is forced onto the hands of the homeowner because of the Haliburton Loophole. The infamous loophole, inserted into a 2005 energy bill by, then, Vice President Dick Cheney, allows the gas companies to withhold the ingredients of the frack fluid, which also means that frack fluid cannot be regulated. Since frack fluid cannot be regulated, it shifts any financial liability away from the gas company and onto the homeowner. It then becomes the homeowner’s responsibility to get involved in a legal battle with the gas company, and it is the homeowner’s responsibility to prove that it was the gas company that broke the environmental laws, stated previously. In most cases though, the homeowner becomes exhausted financially because of court fees or exhausted mentally and is unable to continue with the lawsuit.
Profiteering off of Individual Homeowners: An Example
As I mentioned earlier, Southwestern Pennsylvania is one of the poorest areas of the state. According to the latest Census data on poverty, in Greene and Fayette counties, the percentage of households earning under $30,000/year was 41% and 45% respectively. And in Washington, Westmoreland, Butler, Armstrong, and Indiana counties the average percentage of households earning under $30k/year was 33% (Data obtained from NY Times 2010 Interactive Census Map). Southwestern and Western Pennsylvania is poorer than the Southeastern section of the state, and in the Marcellus Shale region, most of the natural gas wells are concentrated in the Southwestern corner.
One landman in general, Mike Knapp, an industry propagandist and owner of Knapp Acquisitions and Production, is a small fish in a parking lot puddle, but he is the equivalent of a grave-robber profiteering off of the Shale every chance he has. Mr. Knapp sells his services, in red-light district fashion, to MDS Energy, a small natural gas company located in Armstrong Co. that conducts vertical gas drilling. Mr. Knapp is the prototypical middle man, he obtains gas leases or mineral rights from local homeowners, and flips these leases to MDS Energy for profit.
On Mike Knapp’s website, he explains that he offers his services for MDS only, and if you were to pull up MDS Energy’s records, you will see that the company has 14 drilling rigs and 15 violations, which cost the company $47,500 in fines. Violations include: discharge of pollution material into commonwealth waters, stream discharge of drill cuttings, oil, brine and or silt, failure to prevent sediment or other pollutant discharge into waters, failure to minimize accelerated erosion, drilling within 200 ft of a building or water well, failure to case and cement to prevent migrations into fresh groundwater, failure to plug well upon abandonment, tophole water discharged improperly, and multiple failures of erosion and sediment plans.
Mike Knapp and MDS Energy are both playing a hand in destroying the property value of local homeowners, and possibly destroying the mortgages those homeowners hold. As stated in the previous section of this article, contaminating fresh groundwater, and allowing the migration of methane and chemicals inside or outside the home will automatically count as a default. It is my strong belief that Mr Knapp did not disclose this information to his customers because if he did disclose this information in his contracts or MDS Energy’s From-10K, the information would have deterred the homeowners from signing the gas leases. Throughout Pennsylvania, there are many “Mike Knapps” running around, deceitfully obtaining leases from homeowners, and then profiting off selling the leases to their contracted gas company, while the homeowners are footed the responsibility of cleaning up the environmental damage.
There is a reason why I am going after Mr Knapp. As a guest on the Pittsburgh Post-Gazette’s shale program “Pipeline” and a frequent troll on their Facebook page, Mr Knapp is bringing this unwanted attention to himself, because on top of profiteering on people who are less fortunate than himself, he is living by the mantra “if you tell a lie long enough, it becomes truth.” Mr Knapp is using his blog site, Knapp Acquisitions and Production Shale Gas Blog, to propagate his lies, because Mr. Knapp should realize that his gig is going to be up. Whenever, the 29-year-old Knappy is confronted on his page, he shows his “disorderly conduct” and immaturity by repeating redundant lies that is put out by the gas industry. During his Pipeline segment, he says he is proud for being a mouthpiece for the industry on Pipeline’s Facebook page by saying, “his job in defending the gas industry is a personal endeavor to make sure people are given the correct information.” Well Mr. Knapp, as an independent journalist, I feel that it is my responsibility to call out and keep the pressure on vulture capitalists such as yourself and Terry Engelder.
This article one part of a mini-series that I will be reporting on, and in my follow-up article to this, I hope to explain how the natural gas industry is starting to get in bed with banking firms on Wall Street. In this article, I hope I have explained what strategies gas companies use to embed themselves into a community, exploit the total amount of natural gas in a play, and how the burden of responsibility is placed onto the homeowners, and away from the gas corporations.
Sean Kitchen | Raging Chicken Press Social Media Envoy, Kutztown University student, co-founder of Occupy Kutztown
I am an senior Environmental Science Major at Kutztown University and currently an intern with a state union in Harrisburg. I dedicate my free time to writing and grassroots activism. You can find my twitter address is @RCPress_Sean so send me a tweet!