This blog chronicles and analyzes developments in the Upper Delaware Valley, with an emphasis on public affairs, politics and what people are doing to make this a better place. You can find news here as well as commentary - but don't expect neutrality. The award-winning editorial writer for The River Reporter from 2004 to 2012, I am an advocate for sustainability, self-sufficient economic growth vs. globalization and protecting the environment on which our health, prosperity and quality of life depend.

Sunday, January 6, 2013

Unconventional shale plays: the Last Little Thing

As noted in my post “Gas drillers’ debts prompt liens against leased property,” The New York Times has made available online a number of confidential documents written by insiders in the oil and gas drilling industry and financial analysts who specialize in it. Far from being tree-hugging, environmentalist tracts, these are emails and memos written by people working for companies many of which, publicly, are extolling unconventional shale plays like the Marcellus as the Next Big Thing.

Privately, the officials from these companies discuss the fact that gas drilling in unconventional shale is not profitable at current prices, and won’t be until and unless those prices get up in double-digit range. That means that the companies have to survive, not by producing gas, but by taking on debt or obtaining income from flipping leases, pledging future production, or attracting equity from investors. This tends to promote a hand-to-mouth kind of existence in which payments to contractors may all too easily fall behind, producing the liens discussed in the previous post. More generally, though, it means that making money relies on hyping the shale plays to the investors, lease or future production purchasers. And the insiders voicing their opinions in the New York Times document dump believe that such hype is poorly grounded in fact.

According to the documents, the extent and consistency of the fields is questionable, the rapidity of production declines understated, the extent of reserves and the lifetime of wells grossly overstated. And the flipping of leases depends on the “greater fool” mentality of any speculative bubble: it depends on how many people are left who can be convinced, without basis in fact, that the thing in question is valuable.

In a conference held in October of 2008, Chesapeake’s McClendon openly admitted that the company’s business model consists as much in flipping leases as in producing gas. He said, “I can assure you that buying leases for X and selling them at 5X or 10X is a lot more profitable than trying to sell gas at $5 or $6 mcf.” (Note that gas prices have fallen well below that mark since then.) The problem is, of course, that a lease is only worth anything if its possible to make a profit on selling the gas produced from it. As soon as potential buyers lose their confidence that this is possible—as the seller clearly has in this case—flipping will no longer be possible, and the bubble bursts.

In one internal memo, an employee of IHS Drilling Data, a research company that specializes in energy issues, writes that “the word I hear from every company” is that the Haynesville and Marcellus shales are “not economic.” In another, an official from Anglo-European Energy, an oil and gas company, writes, “After buying production for the last 20 years, hopefully I know the characteristics of great wells (flat decline curves, low operating costs, large production) and as you know the shale plays have none of these. The herd mentality into the shale will eventually end possibly like the sub prime mortgage did.”

An official at Suemaur Exploration and Production, a subsidiary of Dominion E & P, which is one of the largest independent natural gas and oil operators in the United States and Canada, writes in an email, “I am also a shale skeptic and think as an industry we are claiming we have a long-term solution to the American energy problem but do not bother to tell anyone the potential cost. I think we have a bunch of 25-year-old analysts driving the boat and people who should know better looking the other way while peeling off part of the pie.”

As the above selection suggests, the financial problems foreseen by the authors of the New York Times documents are not confined to the gas companies, those who invest in them, or even owners of leased properties. The American people, some of them think, are being taken for a ride by gas companies that are promoting a major switch to natural gas infrastructure while prices are low, in order to get a captive audience for it when prices rise—as they will, for instance, if the current push to develop LNG exports is successful.

The documents contain a March, 2011 exchange between a federal energy official and a geologist at Chesapeake, in which the federal official writes, “The way I see it, is if industry can get Congress behind natural gas through policy, then industry has US by the balls in terms of allowing development to continue as the shale wells that are already drilled rapidly deplete—higher prices, more money for industry, and more dependence on drilling.”

So much for the supposed patriotism involved in supporting the natural gas alternative as a primary focus for the U.S. Natural gas hype is not about finding a real solution for America’s energy problem; it is about diverting U.S. investment into the dying fossil fuel industry for a few more decades, providing them with one last round of profits while making it even more difficult and expensive to switch to sustainable fuels when the shale plays go bust.

As noted in my post “What they’d be doing if they really thought it was a bridge” http://www.blogger.com/blogger.g?blogID=9122098558418781512#editor/target=post;postID=7997215950543860034 from November, 2012, I do believe we need to go on using natural gas for a while, and some of that almost certainly has to come from unconventional plays. But unconventional shale is not the Next Big Thing, it’s the last little thing from a dying industry. Let’s wrap it up, and move on to energy sources that can last us for millennia.

Thursday, January 3, 2013

Gas drillers’ debts prompt liens against leased property

An article published recently by Reuters ( uk.reuters.com/article/2012/12/27/chesapeake-mcclendon-idUKL1E8NQ2H720121227 ) reports that a number of contractors have filed liens against property that has been leased to Chesapeake Energy for gas drilling in Bradford County, PA. The liens were filed after the contractors experienced difficulty collecting payments for services rendered from Chesapeake. According to the article, such liens have been filed against properties leased by Chesapeake elsewhere in the country as well.

 Not only could such liens make it difficult for the property owners to sell their properties, but according to Stanley B. Edelstein, a Philadelphia construction law attorney quoted in the article, "Depending on the language in a mortgage, it could be an act of default."

 This new vulnerability is only the latest to be disclosed in what has been a series of revelations about the potential for financial trouble for owners of properties that have been leased for gas drilling. A number of major lenders, including Wells Fargo, the nation’s largest mortgage lender, and Bank of America, have adopted policies banning the granting of mortgages for such properties. Home insurance companies have also voiced concern, and in July it was reported Nationwide Insurance will not cover damage related to fracking.

With regard to the potential for liens, it could be argued that Chesapeake Energy, under the aegis of Aubrey McClendon, seems to have been uniquely badly managed relative to the various companies now drilling the Marcellus Shale, and that therefore the danger to future lessors to other companies is negligible. However, an  examination of documents recently made available by The New York Times (http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4-intro.html) would suggest that Chesapeake is just the weakest of the companies employing a deeply flawed business model in the Marcellus. That model has cash flow problems—just the kind of thing that leads to delayed payments to contractors—baked into the cake, and if it is as prevalent as the documents suggest, those who choose to lease their land for gas drilling are opening up their property to a significant risk of liens.

I’ll have more on the New York Times documents and the flaws they reveal in the structure of the unconventional gas drilling industry in an upcoming post.

Sunday, November 25, 2012

‘Stop, or the nig#$er gets it,’ aka the ‘fiscal cliff’

There’s a classic scene from the film “Blazing Saddles” in which the new sheriff of a Western town, finding the townspeople’s guns trained on him after they’ve found out, to their horror, that he’s black, puts a gun to his own head and says, “Stop, or the nigger gets it!” This being a Mel Brooks film, the townspeople immediately fall for the gag. People draw back in consternation, guns are lowered, and one woman cries out, “won’t anybody help that poor man!”

It’s no surprise to see such a con pulled off in a Mel Brooks film. It’s astounding to see it succeed in real life, with high stakes. But that’s exactly what seems to be happening in this country, with the so-called fiscal cliff.

Last year, in the Budget Control Act of 2011, deficit hawks in Congress demanded drastic, automatic government spending cuts to begin on January 1, 2013 in exchange for an increase in the debt ceiling at that time that kept the government from being shut down. In doing so, it picked up a gun and held it to its own head, along with those of all of the rest of us. Congress is now supposedly going to be forced to come up with a “Grand Bargain” consisting, if the people holding the gun get their way, of huge spending cuts largely aimed at the poor and middle class, or else a bunch of automatic cuts (aimed largely at the poor and middle class) will be enacted. It’s a self-manufactured crisis. It’s a gun Congress has elected to hold to its own head as an excuse to make draconian spending cuts of a dimension that economic experts tell us will send us right back down into recession. And all they have to do is put down the danged gun.

And if the electorate were in full possession of its wits, you’d think they’d be clamoring to their representatives to tell them to do so, given the potentially devastating impact not only of the automatic spending cuts and tax increases, but of any deals that might be struck to evade them, on the vast majority of the population during a precarious recovery.

Instead, the corporate media has done its bit to dull our senses by embracing the picturesque term “fiscal cliff” to describe the situation, as though the problem were an intractable and permanent feature of  the landscape toward which external forces are driving us. Whether through negligence or deliberation, the use of the term itself therefore has a propagandistic impact, while satisfying the media’s need to stimulate fear and excitement, sell papers and draw eyeballs to web pages and TV screens. "Fiscal cliff" in a headline is almost as good as "Lindsay Lohan."

After backing his “hostage” into the sheriff’s office and closing the door, Brooks’ sheriff relaxes, leans against it, folds his arms and says, “Oh baby. You are so talented, and they are so dumb.”

Indeed we are, if we continue to fall for it.

For more details on the fiscal cliff and the myth that austerity is the cure for what ails us, see:

Thursday, November 22, 2012

Perhaps more comfort needed on the road use law

HORTONVILLE, NY — Comments on the Multi-Municipal Task Force (MMTF) road preservation law at the Town of Delaware’s public meeting last night agreed almost universally that in principle, the law is a great idea and should be passed. But speakers also voiced serious concerns about the way the law handles certain specific issues, and noted that it has not been well explained to the public. The preference therefore was to have a vote on the law be delayed, and it was also suggested that a workshop or workshops be arranged during which the points of contention could be discussed.

 I’ve written strongly in support of this law here and elsewhere, and obviously agree with the first point. But I also understand some of the concerns voiced about the law, which, to the extent that it interacts with complex and lengthy program and technical manuals that appear not to have been posted online, is not all that easily understood. I therefore agree that some delay might be in order, along with some effort at public education on points of concern.

The three main areas of concern raised last night were the difficulty and possible expense of administering the law; the potential difficulties of enforcing the law; and a query as to whether the law may wind up affecting small businesses like home builders instead of just the larger firms like Millenium Pipeline that it is intended to capture.

With regard to the administration issue, at last night’s meeting, town superintendent Ed Sykes said they had filled out some sample paperwork at a workshop that had been held for MMTF members and it didn’t seem that bad to him. I simply don’t have the knowledge base to evaluate what the potential problems might be here, but a further discussion of how much additional work is involved, the degree to which it might prove necessary to increase payroll expenses, and the extent to which the money put up by road use applicants will be adequate to cover any additional personnel might be appropriate if workshops were indeed to be held.

 I believe the concerns about enforcement were greatly overblown, partly because there seemed to be a misunderstanding of what it is that actually needs to be enforced. People were talking as though the issue was identifying individual trucks as either adhering or not adhering to weight and size restrictions, as one has to do when roads are posted with weight limits. But in fact the whole genius of this law, as opposed to posting, is that it makes no effort to restrict individual trucks by size. It measures the overall road damage created by an industrial project, and charges to repair all that damage, regardless of how many trucks caused it or what size they are. As much damage as is done, that’s how much the company will have to pay. The company has to put up a bond ahead of time to cover repairs, and if it turns out after the job that more damage has been done than the size of the bond, it will also have to pay that.

Enforcement to this extent only requires measurements at two points in time: once before the job begins, and once afterwards. It’s not as though you have to have a lot of people out on the roads spotting individual trucks and making sure they are not too big. To be sure, some enforcement would be required in a couple of areas. First, the law calls for companies to stick to only certain routes. There is a possibility they will use routes that have not been approved, and some kind of oversight system would be needed for that. Second, there is presumably the possibility that someone will commence a project without filing an application in the first place. I think these are fairly limited and probably manageable problems. But again, there would be no harm at all in holding some workshops to explain this kind of thing to the public.

With regard to the question whether small construction firms could be caught in the law’s net, I can understand why somebody in the construction business might find the language of the law itself vague, with phrases like “unusually heavy traffic” and “above-normal wear and tear” to describe the activity for which businesses will need to pay for road repairs. However, I believe that the specificity of the law lies not in its internal definitions, but in its interaction with the program and technical manuals, as contained in Section 5 B: " The Town Highway Superintendent shall review such application and worksheet in accordance with the Program Manual and the Technical Manual. Within no more than thirty (30) days after receipt of a complete haul route application and project traffic worksheet, the Town Highway Superintendent shall notify the applicant whether the use of Town Highways will result in Concentrated Traffic."

Obviously, the key thing here is whether the methodology of those manuals succeeds in screening out small businesses. But that’s not possible to tell for sure without access to those manuals, and an explanation of the methodology. Here again, it seems to me that it is quite legitimate for concerned businessmen to want to sit down and be shown exactly how the methodology works, perhaps filling out sample applications with numbers that would be typical for the jobs they do, and seeing what results would emerge using the manuals' procedures.

Like last night’s speakers, I think that the MMTF road use law is important to have in place regardless of whether fracking activity—the prospect of which provided the incentive for developing this law—ever comes to the county. But also like them, I think it is reasonable to ask for a small delay while the law is better explained to those members of the public who are concerned, and amend it as necessary to iron out any snarls that are discovered, and would recommend a workshop or workshops during which this could be done.

Tuesday, November 20, 2012


This photograph, titled "Sunrise at Lily Pond," was taken, and sent to me, by Scott Rando of Shohola, PA.

Wednesday, November 14, 2012

What they'd be doing if they really thought it was a bridge

I have a concession to make. I think we need natural gas as a bridge fuel. But what I find infuriating is that the people in government and industry who say that we need natural gas as a bridge fuel don’t behave remotely as though they really believe it. They behave as though it’s a resource that we should use as exhaustively as possible for as long as possible.

I think we need natural gas as a bridge fuel in the sense that right today, if we completely stopped using fossil fuels in general and natural gas in particular, we would not be able to supply the planet’s human population with even its most minimal needs. But if you think it’s a bridge, then you should be formulating a plan, with a specific timeline and quantitative goals, according to which fossil fuels, including natural gas, will be phased out, and conservation measures and alternative energy sources phased in.

Instead, we hear people talk about how many hundreds of years of natural gas they think we have. We hear them talk about how, after they’ve finished draining the Marcellus dry, they can access the Utica shale. We hear them planning long-term retooling of various industries to use natural gas.

That’s not bridge thinking. That’s a “we can keep on doing this forever” fantasy.

Here’s what bridge thinking would look like:

  1. Project the nation’s energy needs out to some date, no later than, say, 2050, on the basis of current trajectories of demographics and usage patterns.
  2. Look at conservation measures that we know to be currently available, and set out a series of deadlines and goals for implementing these as broadly and completely as possible, out until 2050.  If there’s a quantitatively respectable way to estimate additional conservation savings that might be incurred due to the impact of innovations not yet known, add that in too.
  3. Recalculate the nation’s energy needs, assuming that the conservation goals are met.
  4. Set your ultimate phase-out targets: e.g., by 2050, no more than 5% of our energy needs should be met by natural gas (that doesn’t have to be the number – but if you really think it’s a bridge, that number had better be pretty small). Develop an annual schedule of how much the percentage of usage satisfied by natural gas would have to decline between now and 2050 to meet that goal.
  5. Applying the percentages from step 4 to the nation’s total energy needs established in step 3, figure out how many mcf of gas will have to be produced each year to meet your phase-out goals.
  6. Calculate how many wells should be operating, year by year, in order to produce the natural gas set in step 5 – which obviously at some point in the not-too-distant future would have to start diminishing.
  7. Take a look at the environmental sensitivity, productivity of wells and costs of drilling in various areas, determine where it makes sense to drill between now and 2050, and where it does not, and develop an optimum schedule and map of such drilling activity.
Obviously, a similar series of steps should also be taken not only for other fossil fuels, in terms of phasing them out, but for various alternative energy sources, in terms of phasing them in.

When and if President Obama, other politicians like Governors Corbett and Cuomo, or the various industry cheerleaders present a plan like this, and make an effort to actually implement it, I will also listen respectfully to talk about needing natural gas as a bridge fuel.

But as it is, the people who throw around the phrase “bridge fuel” are mostly just talking out of both sides of their mouths.

Monday, November 12, 2012

Long, wonky post on the legality of road use laws OR Why I disagree with Bethel

An article in the Sullivan County Democrat a couple of weeks ago reported that the Town of Bethel has decided not to go ahead with the road use preservation law proposed by the Multi-Municipal Task Force (MMTF), of which it is a member, on the grounds that the law stands on shaky legal ground.

I am not a lawyer, but the town’s position on the legality of the proposed law puzzles me, in light of the New York State Department of Environmental Conservation’s (DEC) SGEIS on horizontal hydrofracking issued in September of 2011. That document concludes that damage to local roads is a major adverse impact to be expected from the heavy traffic associated with fracking, and proposes as mitigation laws and road use agreements that sound almost exactly like the model law produced by the MMTF (See the DEC SGEIS at http://www.dec.ny.gov/data/dmn/rdsgeisfull0911.pdf, starting on hard-copy page 7-137, digital pdf page 987.)

Nor can one argue that the DEC simply ignored legal issues; indeed, it cites chapter and verse of New York State transportation law in order to provide the basis for its suggestions. For one example, on page 7-137, it says:

“NYS Vehicle and Traffic Law § 1640(a)(5) provides that, 'The legislative body of any city or village, with respect to highways … in such city or village … may by local law, ordinance, order, rule or regulation … exclude trucks, commercial vehicles, tractors, tractor-trailer combinations, [and] tractor-semitrailer combinations from highways specified by such legislative body.” Part 10 of this same section allows legislative bodies of a city or village to 'establish a system of truck routes upon which all trucks, tractors and tractor-trailer combinations, having a gross weight in excess of ten thousand pounds are permitted to travel and operate and excluding such vehicles and combinations from all highways except those which constitute such truck route system.' Part 20 of this same section allows for the establishment of weight, height, length, and width criteria, for which vehicles in excess of such standards may be excluded from highways or the setting of limits on hours of operation of such vehicles on particular city or village highways or segments of such highways.”

Nor is the DEC alone in believing that road use laws and agreements of the type proposed by the MMTF are legitimate. New York Municipal Insurance Reciprocal (NYMIR) also has a supportive document online at http://www.nymir.org/pdf/NYMIR%20Marcellus%20Roads%20FINAL.pdf.

Among the many municipalities insured by NYMIR are a number of towns in Sullivan County, and one of the things it insures them against is lawsuits. In other words: if people do sue towns that adopt the road use preservation laws, NYMIR will have to pay up. So it is highly motivated to squelch any laws that it thinks may be challenged.

Instead, the NYMIR document devotes an entire section to providing the authority in law for local road use laws and agreements such as those described in the SGEIS (and the MMTF), starting on page 3. In defense of provisions that require road users to pay for repairs of any roads they damage, the NYMIR document cites Highway Law Section 320 in saying, “From a legal standpoint, the Highway Law has long held those responsible for injuring the highways liable for the damage that they have caused.” Like the DEC, it also enumerates a variety of relevant local powers derived from the NYS Vehicle and Traffic Law, supporting for instance the right to establish certain haul routes, implied in municipalities' right to “Exclude Certain Vehicles based upon weight, length, height or limit hours of operation (N.Y. Veh. & Traf. §§ 1660(a)(28), 1650(a)(4-a), 1640 (a) (20).”

According to the Democrat article, it was sections of this precise same law that were cited by the Town of Bethel as being of concern, specifically 1600 and 1604. Do those sections somehow offset or override the other sections I have quoted? Let’s look.

Section 1600 says “The provisions of this chapter shall be applicable and uniform throughout this state and in all political subdivisions and municipalities therein.” But note,  it is not municipal road use laws that have to be uniform; rather, it is the provisions of the state law, of which this is a section, that have to be applied uniformly. And those provisions, as we have seen from the quotes above, specifically permit any municipality to construct its own road use laws. They also contain some strictures to which all such laws must conform: for instance, though any town may exclude certain vehicles from designated roads, all towns must make exceptions for deliveries and pickups of property along the designated highways. But the uniformity described here has nothing to do with disallowing towns to come up with a variety of different local road use laws.

What about section 1604? Admittedly, it contains the assertion that local authorities have no power to restrict vehicle operators’ free use of the road. But that assertion is preceded by the opening clause: “Except as otherwise provided in this chapter." And we've already seen some of what is “otherwise provided in this chapter," namely section after section supporting the rights of local municipalities to create road use laws and agreements restricting traffic of certain designated types.

The one issue for which I have not been able to track down any legal basis is the idea that municipalities have the power to require companies to pay to upgrade roads before using them. However, the proposed road use law, at least in the versions posted on the Tusten and Highland websites, actually offers two options: requiring a company to pay to upgrade roads on its haul routes before it starts operations—in which case it would not have to pay for repairs afterwards—or requiring it to pay for repairs after damage has occurred. It is not clear to me what determines which option is chosen, but it looks as though, if a company refuses to pay for an initial upgrade, it can still be held accountable for any damage incurred after the fact -- for which, according to NYMIR, there is strong basis in law.

I don’t know all the legal points the Town of Bethel is concerned with, and I may well have failed to cover some of them here. But on the basis of the information I've found, it's hard to agree that there is a serious legal problem with the proposed road laws.

The New York State Vehicle and Traffic law can be read in its entirety at http://ypdcrime.com/vt/index.htm.