Wednesday, July 6, 2011

Cuomo: Okay, Let's Get Fracking, NY
...But First Some Inconvenient Questions

IMG_1621 by ad454
Then-gubernatorial-candidate Andrew Cuomo, at a rally in
Brooklyn, Oct. 27, 2010 —
a photo by ad454 on Flickr.
After three painful years of having to listen to all kinds of wild-eyed persuasiveness, New York State's Cuomo Administration on July 1 boldly announced it could finally see a clear way ahead to allow industry to develop its own landowners' shale gas.

To me, of course, that's great news.

But I'm already noticing that few observers have yet given much attention to all the ground that had to be given up, in order to move forward with this plan.

The most noticeable retreat is the now-presumably-indefinite frack ban in the unfiltered drinking water collection areas up in the Catskills Mountains (New York City water), and anywhere uphill of Skaneateles Lake (Syracuse water).  Don't look now, but those landowners just got their property rights shaken down — and not a soul dares to suggest that this oppressed minority really should be fairly compensated by the free-riding majority.  (Which just kills me.)

Secondly, and similarly, there is also a now-presumably-indefinite prohibition against any drilling directly over primary aquifers.  This is new.  This is a public decision which suddenly devalues, for oil and gas purposes, thousands of privately held acres sitting in a pattern approximately mirroring the major river valleys.  Industry could drill some of this by reaching horizontally from the sidelines.  But not all of it.  And so large volumes of this finite fossil fuel resource are now stranded indefinitely.  Basically,
the "public interest" is now putting off limits this privately owned natural resource, but without ever offering to buy (or rent) the rights.  Again, it just kills me how little concern is shown for these landowners.  In fact, most of these landowners probably don't even realize that they've just been stripped of significant rights, nor do they comprehend what it all might be worth, even just in current dollars.  I believe they would be pretty pissed off if anybody succeeded in explaining it to them.

[It also kills me how little of a demonstrable connection has been made between the actual drilling, and the actual fracking — and the presumed threat to groundwater.  I understand the political connection
— believe me.  But I don't understand the environmental connection.  If there is, in fact, a particular, realistic environmental risk from natgas development in these river valleys, then I say you've also got some highways to re-route, some railroads to shift, many businesses to relocate, a whole lot of private leach fields to plug, and even more road salt, pesticides and herbicides, and manure that you really should stop spreading in those areas.]

The third outpost where New York State really threw up a bunch of white flags is that leaders are now proposing to turn their backs on the state's own shale gas resources — that is, what's sitting underneath thousands of acres of state land — and also to turn their backs on the deals that the state already made regarding some of that land.  Running forward, the state itself is the landowner, and so I fully support that it is entitled to make up its own mind, just like any private landowner.

But what about the deals the state already made?
These are the 19,227 acres of state forest land New York State leased to the natural gas
industry for five years, starting 11/15/2006 — about half of which did, in fact, allow for
surface drilling operations:  Broome/Tioga 1 = Tracy Creek; Cortland 1 = Hewitt;
Cortland 3 = Kennedy; Cortland 9 and 10 = Tuller Hill; Tioga 1 = Fairfield;
Tioga 2 = Oakley Corners; Tioga 3 = Robinson Hollow; Tioga 4 = Anderson Hill;
Tioga 6 = Ketchumville; Tioga 7 = Jenksville; Tompkins 4 = Potato Hill;
Chemung 1C = Catlin; Chemung 2 = Maple Hill; Schuyler 4 = Coon Hollow;
Steuben 5A = West HIll.
In 2006 (a much earlier time and place, it turns out), New York State without much fanfare or controversy gave five-year leases to the natural gas industry covering 16 tracts of state forest land totaling 19,227 acres spread across seven different counties.  Chesapeake and Fortuna (n/k/a Talisman) were the winning bidders, and the state land was distributed in Chemung, Cortland, Schuyler, Steuben, Tioga, Tompkins, and Broome counties — some turning out afterwards to be located in very prime, Marcellus shale position.  (If you want proof, or all the details, go here.)

The total income from signing bonuses was $8,988,368.54.  If you include delay rental (then fixed beforehand by the state's bidding specs at only $5 per acre per year), then the total income rises to nearly $9.5 million.  That's with no
royalty — and, as it turns out, no chance of royalty — since, to my knowledge, not a single well of any type has yet been drilled on or near any of this land.

In 2008 — 20 months into these 60-month-long leases — NYS put up a temporary de facto ban on shale gas development statewide.  Now it's 2011 — Year Five of these five-year leases — and NYS has finally proposed to get its ass moving on shale gas.  But shale gas won't happen until 2012, at the earliest, by which time these leases will have expired (assuming there won't be any last-minute success in exploring more conventional horizons). 

Meanwhile — in a desperately short-sighted attempt to appease the frackophobic lynch mob — all surface operations atop all state land just got thrown under an indefinite ban (but only if shale gas is the objective).

The DEC Mineral Division's 2010 annual report on state lands leasing — downloadable as a PDF here — reports that all these 2006 deals were made effective 11/15/2006, which means, absent development, they will expire soon, 11/15/2011.  A close observer would be able to surmise that
Chesapeake, or Talisman, or successors to whom they may have assigned, are now facing a very delicate decision on deadline:  Should they seek a refund on any part of their $9.5 million?  Or should they simply chalk it up to bad planning — in an effort to keep the political peace necessary for New York to finally open up its privately owned shale gas prospects?  Or should they get ahold of the state in order to formally claim extensions on their five-year terms — due to the unforeseen event of "force majeure," or superior force, represented by the three-plus-year-long regulatory disruption over shale gas?  Lastly, if such extensions are won, should they assert that these deals from 2006 effectively grand-father in shale gas drilling operations on state lands?

These are all great questions that nobody is asking, and I would like to suggest that the silence is conspiratorial among New Yorkers — few of whom want to rock the boat we're all sitting in.  But, really, the question boils down to this — what do us New Yorkers want to do about the $9.5 million our state took from the private sector in 2006, in a deal for which it afterwards used its regulatory power to welsh on? 

It's one thing to have natural disasters, famine, civil unrest, wars, or regime changes rewrite the rules of the game between two private parties.  I understand that.  That happens all the time.  And it's one of the risks of doing business — although you don't often consider the developed world to be such an unstable banana republic sort of place. 

But, in the case of disruptions which have in fact been caused by New York State, this is a situation where one of the deal makers itself unfairly used its regulatory power to change the rules of the game, right in the middle of the game.  Nobody cries for the gas companies — I understand that.  But the American system of justice doesn't ever openly propose to distinguish between unfairness against a little guy, and unfairness against a behemoth. 

And it shouldn't.

These same questions of fairness can also be now asked about the state land put out to bid during auctions held in 2003, 1999, and even prior.  The last time I looked at these numbers, I calculated that NYS had already put 51,764 acres of public land under lease to winning bidders, out of which 32,537 acres were still active under older leases because those leases continued to be indefinitely held by production (HBP), long past their face-value primary terms.

Now New York wants to say — Sorry!  No shale gas development on that land!  How do you figure?  How is that going to look to a judge?  You ask me, I say New York is going to owe a significant refund on the $9.5 million deal from 2006.  And New York is going to have to grandfather in all the HBP acreage from prior auctions, leaving it open for shale gas drilling, running forward — despite all the promises it has made in order to settle the irrational passions of the frackos.  To do anything else is to openly do injustice under existing deals.

1 comment:

Anonymous said...

Excellent analysis Andy.
Unfortunately most folks still do not understand how much they and the environment stand to lose without this gas development. Economic strength allows for a good environment and the health and welfare of the people. It is impossible without money and right now many New Yorkers are broke.