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Source: Rochester Democrat and Chronicle

Has New York missed the gas-drilling boom?

BY JON CAMPBELL
ALBANY BUREAU

Posted: February 23, 2012
Originally Published: February 17, 2012

Energy companies swept through the Southern Tier and into the Catskills in 2008, eager to lease natural-gas rights from landowners sitting above the resource-rich, suddenly accessible Marcellus Shale formation.

Close to four years of regulatory review and a de facto moratorium later, New York’s portion of the Marcellus remains untapped by high-volume hydraulic fracturing.

Now, natural-gas giants like Chesapeake Energy and Consol Energy are pulling back on shale-gas drilling in other states and focusing on so-called “wet” gas not found in New York. It’s largely because natural-gas prices have dropped to lows not seen since 2002.

It all raises the question: Has New York missed the gas-drilling boom?

Most experts say no, but several said low natural-gas prices could have an effect on the pace drillers set in New York should the state allow high-volume hydrofracking.

“Everything is dollars and cents,” said John Holko, president of Genesee County-based Lenape Resources, a gas company. “When prices are higher, you have more cash flow and ability to take risk. When you have lower prices, you have less free cash flow and you’re going to be risk adverse.”

The state Department of Environmental Conservation began creating a regulatory structure for the technique used with gas drilling in July 2008.

Then, natural gas in the United States sold for an average of $10.79 per thousand cubic feet at the wellhead, according to the federal Energy Information Administration. As of November 2011, it sold for $3.35.

The price plunge is caused by a glut of natural gas in the market, in part because of a steady increase in the amount of shale gas produced in other states. That’s good news for consumers, but it has forced some gas companies to shift their strategy in order to turn a profit.

“These are cyclical industries,” said John Felmy, chief economist of the industry-backed American Petroleum Institute. “When you have an increase in supply like we’ve had with a lower price, that makes a lot of projects non-economic.”

Since the initial rush of leasing activity in 2008, gas companies have cooled considerably toward New York.

Firms like Chesapeake and Schlumberger, an oilfield-services company, have pulled employees from the Southern Tier in recent years. New lease offers to landowner coalitions have been virtually non-existent.

While both industry and landowner representatives credit that to the state’s extended regulatory uncertainty, the type of gas available in the New York portion of the Marcellus hasn’t helped.

Parts of the Marcellus formation in Ohio and western Pennsylvania have “wet” gas, which contains less methane and more other hydrocarbons, such as ethane. Those hydrocarbons can be separated and sold, giving the opportunity for more profit.

In New York, the Marcellus is believed to contain “dry” gas, which is almost entirely made up of methane.

Environmental groups say the slow down in drilling activity should allow for the DEC to take its time with its regulatory review. Gas companies have pushed the agency for a resolution, while environmentalists say there are too many unanswered questions about the safety of hydrofracking and its potential effect on the state’s landscape.

“It’s another good reason why there’s no need to rush,” said Eric Goldstein, a senior attorney for the Natural Resources Defense Council and a member of the DEC’s hydrofracking advisory panel. “It wouldn’t surprise us if the industry itself begins to recognize that the gas isn’t going anywhere, since there’s reduced incentives in terms of pricing.”

Permits for high-volume hydrofracking can’t be issued in New York until the DEC completes its review and renders a decision on whether to proceed. DEC Commissioner Joseph Martens and Gov. Andrew Cuomo have both said that the decision is months away.

Martens, meanwhile, told reporters earlier this month that price fluctuations are having no impact on the pace of his department’s decision-making process.

“It could certainly affect the pace of (natural-gas) development in New York should we get to that point,” Martens said. “But in terms of our pace, we’re not paying attention to the price of gas.”

Trying to predict the future price of natural gas — which, unlike oil, is less beholden to global conditions — can be a futile exercise, according to Kajal Lahiri, a University at Albany economics professor.

“People are saying natural-gas prices are falling, but these are very temporal things,” Lahiri said. “Two years down the road you could see it shooting up. It’s a function of a lot of different factors, like demand.”

Demand in New York is a reason for gas companies to be encouraged, according to Holko, the president of Lenape Resources. New York accounted for 5 percent of the nation’s total natural-gas consumption in 2009, higher than all but three other states, according to the Energy Information Administration.

Opportunity exists to change some of New York’s electric infrastructure, such as various coal-burning power plants, to natural gas, according to Holko and Lahiri. Others have pushed the possibility of establishing natural gas as an export market to places where prices are higher, such as China.

“I think from an opportunity perspective, natural gas as a commodity in New York is extremely valuable because New York is so reliant on natural gas as an energy source,” Holko said. “There are additional opportunities being that close to market that may benefit the economics.”

But just like the country as a whole, natural-gas prices at the wellhead have fluctuated considerably in New York, according to the DEC. The price per thousand cubic feet jumped from an average of $2.19 in 1999 to $8.94 in 2008.

In 2010, the most recent data available from the DEC, it was back down to $4.65 and has likely fallen since.

“We’ve always contended that when it comes to the industry’s motivations, it’s always the same thing: profit,” said William Cooke, government relations director for Citizens Campaign for the Environment.