Drilling questions abound as gas companies' stock falls

By Matthew J. Perry
A year that looked like the first in a boom time is ending on a sour note.
When the prospect of local natural gas drilling first caused excitement in the spring of 2008, the story line was simple: the gas is here, the energy companies have the technology to extract it and will pay handsomely for landowners’ mineral rights. It suggested that land long underused could once again bring revenue for landowners, perhaps more revenue than anyone dared dream about.
But caution on the part of state regulators, coupled with a series of financial disasters that has punished the stock of most energy companies, has put those giddy dreams on hold. While landowners and energy industry experts believe that the Marcellus Shale, the gas-rich field, which extends along the state’s southern tier and into three other states, may yet produce more natural gas than originally anticipated, 2009 is not shaping up to be the year when drilling pads proliferate in Delaware County.
Every company with significant Marcellus Shale holdings has watched its stock plummet in recent months. Shares of Chesapeake Energy, Cabot Oil and Gas and Range Resources all peaked at a value of between $70 and $75 earlier this year; each was valued between $15 and $32 when the market closed on Monday.
Chesapeake was especially hard hit, dropping to a low of $9.84 before the company announced that it would significantly downsize its capital budget for 2009-2010. According to financial news sources, the most recent cuts add up to a 58 percent drop in the company’s capital allocations since July of this year, or just under $10 billion. A reduced capital budget, in turn, means less money to drill for gas, and fewer wells.
Michael Danaher, an assistant attorney general who addressed a landowners’ meeting in Delhi this month, stated that the downturn has had a direct effect on negotiations between the companies and landowners. “Gas company executives have said that even if they were negotiating leases in New York right now, the amounts they would offer [for signing bonuses] would be in the hundreds, not thousands.” That assessment is in stark contrast to a deal struck with landowners in Deposit, who received $110 million in bonuses for leases on 46,000 acres.
Leasing has all but stopped since the state has continued to review and update gas drilling regulations. But some question how much activity there will be in watershed towns even after the DEC’s environmental impact survey is released.
“They may not even be that concerned about the watershed,” Danaher said of the gas companies when asked about power struggles between New York City water quality advocates, who oppose drilling, and energy company advocates. “For them, the watershed is on the edge of the plate.”
That point of view is contested by Garth Battista, a member of the Central New York Landowners’ Coalition (CNYLA.) “The NYC watershed may not be smack dab in the center of the Marcellus sweet spot, but certainly in the western portions of the watershed near Walton, Trout Creek, Masonville, and Deposit. . . have a geologic profile that easily qualifies as ‘core’,” he says. “And when gas companies do a more thorough assessment of the Utica Shale, we’ll find that the Utica core is centered in the NYC watershed. This may lead to extensive drilling in eastern Delaware County, southern Schoharie, and even western Ulster County.”
Battista also doubts that the recent troubles of the energy companies will be permanent. “Just last year we saw them all revise their budgets mid-year, laying out hundreds of millions of extra dollars just because the time seemed right. That could happen again anytime,” he wrote in an e-mail. If pilot wells that have been drilled in Pennsylvania continue to produce yields that meet expectations, New York State could receive a second wave of development once the state regulations have been finalized. DEC Commissioner Peter Grannis has made it clear that his agency is geared to aid gas extraction, not prevent it.
In the meantime, the current bad news and restrictions on speculation likely will be used against landowners still hoping to sign leases. Coalitions such as CNYLC are telling their members to be patient, and argue that in the long term, outlook for gas extraction in New York is favorable.
“It will be interesting to see how long any standoff lasts,” says Battista.