DCS pioneers methane baseline study

Utilizing technology that has only recently become available, a study commissioned by Damascus Citizens for Sustainability (DCS) to obtain baseline ambient methane levels in Damascus Township, PA has just been completed (<http://www.damascuscitizensforsustainability.org/2012/11/damascus-baseline/).

The study shows that methane concentrations are currently fairly low and consistent throughout the township. It also includes a graphic illustration of methane concentrations in Damascus compared to a similar venue in Dimock, PA, where of course natural gas drilling has been going on for some time. Concentrations in Dimock look to be at least four times as high.

Of course, since no baseline study was done in Dimock, we have no way of knowing whether the difference in ground-level methane concentrations is due to drilling, or was there to begin with. But that lack of evidence just goes to emphasize how important it is to have studies like this done before drilling commences in any given area. And one of the exciting features of the Damascus study is that it is apparently fairly economical to conduct, meaning that other local towns should probably consider doing so.

That point was further underlined by the conversation last night at the second meeting of the Town of Delaware, NY's natural gas drilling commission. There, it was pointed out that a number of local water well drillers have commented that, in digging wells, they frequently encounter methane. Hence, it might be concluded that the people in PA who are claiming that drilling activity is responsible for high levels of methane in their water might just be looking for a way to make a quick buck.

It was also briefly conceded that, even if there is methane to begin with, drilling activity could make it a lot worse. But the point is that, without having baseline measurements, whether in water or air, of various contaminants related to drilling, there is simply no conclusive and universally persuasive way to prove the impact drilling may or may not have had. It might be interesting if, in addition to trying to come to a conclusion as to whether hydrofracking would be good or bad for the Town of Delaware, the commission would make some recommendations as to precautionary steps, like baseline studies, that the town could take with regard to drilling if indeed it does continue to adopt a welcoming stance. At least that way, residents who do wind up being damaged would have a strong basis for litigation.

And from the climate change point of view, the methane problem is not just local, but global. A study by Cornell's Robert Howarth concluded that shale gas is responsible for 20% more greenhouse gases than coal on a life-cycle basis, despite the fact that burning natural gas emits less carbon dioxide, because of the methane -- a far more potent greenhouse gas than carbon dioxide -- released during extraction. The study found that up to 7.9% of the methane escapes directly from the wells, leaks from pipelines, or is released in venting and flaring.

I would hope that a number more local municipalities follow the example of Damascus in taking the initiative, where economically feasible, to start taking measurements of the quality of our common resources -- air and aquifers. That quality is perhaps our most valuable asset. Our current economic system unfortunately has not found a way to put a proper monetary value on possessing it -- but that does not mean there will not be a huge monetary cost if we lose it.

A primer on the ad valorem tax: look before you leap

A few weeks ago, Jack Danchak wrote a letter to the Sullivan County Democrat touting the advantages he sees in natural gas drilling, including, among other things, income from the ad valorem tax on natural gas production facilities permitted in New York State.

The ad valorem tax is a property tax that can be imposed by New York municipalities on natural gas production facilities, to be paid by the drilling companies. There are all kinds of questions that can (and should) be asked as to whether any income from such a tax would be sufficient to offset other costs to the municipality, from damage to residential property values, to health costs, to demands placed on law enforcement and infrastructure. However, before considering those questions about the bottom-line net, it is important to take a look at the top line, and see how much the tax is likely to bring in, and how quickly it might do so.

I’ve done some preliminary research on this issue, starting with the online manual by New York’s Office of Real Property Tax Services (ORPTS, http://www.tax.ny.gov/pdf/publications/orpts/oilgasoverviewmanual.pdf). My provisional conclusion is that, given the way the tax is calculated, the current price environment, and the rapidity with which natural gas production declines, the ad valorem tax would not only take a while to click in, but could do so in such a way that drilling companies could avoid paying the tax on the majority of their production.

The ad valorem tax calculation starts with profiles created by ORPTS for each region or type of well. ORPTS bases these profiles on information provided by all the gas drilling companies in the region in question over the previous five years. From this data, it derives a Unit of Production Value (UPV), which is the net cash flow per mcf divided by a discount rate. This unit is then multiplied by the production of any given well in the year to be taxed to produce the assessed value.

The important point to note here is that to obtain the net cash flow, ORPTS subtracts various expenses including operating costs, depreciation, royalties and the like from gross income. Those who have been following natural gas prices and analysts’ commentaries on unconventional shale production costs know that this could create just a little bit of a problem.

For instance, Arthur Berman of Labryth Consulting, a Houston-based geological consulting firm, says that the breakeven point for unconventional shale drilling is around $8 or $9 per mcf. Now look at a graph of natural gas prices since 1975 (http://www.eia.gov/dnav/ng/hist/n9190us3m.htm). During that entire period, prices only broke the $7.50 level twice, once in 2005 and again in 2008, and for less than a year both times.

If Berman is right, there has never been a five-year period during which there would have been positive cash flow on unconventional shale wells. Of course, we do not know whether ORPTS would take into account all the factors Berman is looking at, and probably won’t until and unless they actually start having to do a profile. But it certainly raises a red flag.*

So what would happen if the DEC started permitting gas wells in 2013? First, the process involves a delay. It wouldn’t be until 2014 that ORPTS would collect the production data from 2013 to construct the appropriate profile; in January of 2015 ORPTS would set tentative UPV values and set hearing dates, and it wouldn’t be until May of 2015 that assessors could put the natural gas properties on their tax rolls.

Second, of course, with horizontal hydrofracking, ORPTS would have to construct a brand new profile, whether for the new formation (Marcellus) or for hydrofracking wells as a class. But of course, they won’t have a five-year history. Most likely, they will just start out with one year, go on to a two-year average in the second, and so on until they cumulate to five years. That’s how they did it with the last class they added, Trenton Black River.

But it is highly unlikely that gas prices will rise fast enough in one year that Marcellus wells will break even in 2013. And that means, the UPV for that year, should production commence in 2013, could very well be 0. In that case, it will not be possible to tax the wells in that year. Indeed, on the basis of the natural gas price chart referred to above, there is a real possibility that the UPV will remain at zero for several years

Meanwhile, wells will be producing gas. And because production drops sharply in the initial years, that means the bulk of the gas may well be extracted from the ground without the municipality being able to collect a dime.

It’s difficult to get a hard number on how severe this effect could be here because, although drilling in the Marcellus has been occurring in Pennsylvania since 2005, the state did not require companies to report production until 2010. We do know that it declines over 60% in the first year in another unconventional shale formation, the Barnett Shale, and another 50%-plus in the second year.

For the Marcellus, I found one preliminary analysis of production declines (http://www.sooga.org/studies/Marcellus%20Shale%20Decline%20Analysis%20-%202010%20-%20Brandon%20Baylor.pdf) that projects that out of 2.3 billion cubic feet produced in the first 10 years in a typical well, about a third will be produced in the first year and more than half in the first three years. If gas prices remain low for the first three years, the municipality could, in effect, forfeit its opportunity to tax the majority of that well’s value over 10 years.

Meanwhile, the town will still have to pay all the expenses incurred by hosting natural gas drilling activity. Unless prices suddenly soar through the $8-$9 per mcf level, that will leave a lot of costs that town taxpayers will be hit with. And though cash flow may rise to a taxable level at some point in the life history of the well, the majority of the well's production value may avoid taxation altogether.

Certainly, there are a number of unknowns here. We need to get more reliable estimates of actual production declines in the Marcellus Shale, for instance. And it would be nice to get some idea of whether ORPTS net cash flow calculations include the various factors Berman is including when he comes up with his $8 or $9 per mcf break-even point. But we think the above considerations, at the very least, should alert municipal officials to the fact that the ad valorem tax may not necessarily be a panacea for a town’s financial woes. Local towns should not let themselves be lured by the tax into hosting an activity that will impose expenses for which they find out too late they cannot be reimbursed.

*Those who are not familiar with the work of Berman, Deborah Rogers et al might be wondering why gas drilling companies should continue to drill if they have a negative cash flow. The answer is that they don’t make their money from selling gas; they make it from flipping leases, expanding and overvaluing their reserves to raise their book value and selling equity. It’s a shell game.

On the vacuity of “as long as it’s safe”

As noted in the post “DEP turns a blind eye to drilling contamination?” below, the Pennsylvania Department of Environmental Protection’s (DEP) Oil & Gas Division, when requesting lab results for water samples submitted in connection with drilling contamination complaints, has been using a system of codes that effectively screens out a huge portion of the results that are actually available and relevant

I have read quickly through the deposition taken by the law firm, Smith and Butz, that disclosed this information, and I have to say that at this stage, there is no way to conclude whether or not the practice in question is a matter of deliberate fraud. It might just be good old-fashioned bureaucratic bone-headedness. But the question as to whether it is deliberate or merely negligent should not distract us from the bottom-line conclusion that, for whatever reason, this is one more case in which the state protector is failing to do its job of protecting.

Proponents of drilling repeatedly claim that there no evidence of contamination by hydro-fracking. Well, any purported lack of evidence* is obviously meaningless if nobody is making any meaningful effort to collect it. And the practice disclosed in this case is just one more example of a systematic, institutional inadequacy in the collection of evidence about the environmental impacts of drilling.

There is also, for instance, the nondisclosure agreement problem: in case after case in which contamination and health impacts have been claimed, out-of-court settlements have been made that prevent the public from ever finding out the true substance of the claims or the evidence for them. And then there’s the lack of pre-testing problem: in case after case, contamination is alleged, and because homeowners have lacked either the foreknowledge or the financial means, or both, to test their wells before drilling has commenced, the drilling companies can get away with saying the toxins were there before they started.

The DEP case reveals another problem: issues as to the safety of drilling involve expertise in biochemistry and health issues that the general public simply does not have. If you make a complaint to your state regulators, and they test your water, and they issue a report with 8, or 10, or 12 results, how are you to know that there may be a total of 24 or more substances that should have been tested for? Surely your state environmental regulator ought to be an entity you can trust in this regard. At least in the state of Pennsylvania, that is clearly not the case.

The idea that drilling can be done safely rests, among other things, upon an entirely bogus reliance on a legal and regulatory system that, when it comes to calling big corporations to account, is almost entirely broken in this country. And it is particularly amusing and ironic that the very individuals who are willing to put their wide-eyed faith in the government when it comes to assuring us of the safety of natural gas drilling, are frequently just those who think it should be starved until it’s small enough to drown in a bathtub.

I imagine Smith and Butz, the law firm representing the homeowners alleging contamination in this latest PA case, will go on to depose the individuals who actually used the codes in question to request water testing, and hopefully provide us with more information about what has been falling between the cracks and why. And maybe these particular cracks can be sealed (though not, most likely, as long as Tom Corbett is governor).

But whatever happens with this problem, the broader institutional weakness will remain. Whether drilling can be done safely depends not only on technological matters—which present their own set of issues—but regulatory issues. And there are no foreseeable circumstances under which regulation should be trusted to ensure against an eventuality as catastrophic as the contamination of our aquifers. One more reason why we should move as rapidly as possible to energy alternatives that do not carry that kind of risk.

*Claims that there is no evidence of water contamination due to horizontal hydrofracking also ignore, among other things, the USGS’s recent confirmation of earlier EPA findings that hydrofracking has caused water contamination in Pavilion, Wyoming (http://www.businessweek.com/news/2012-09-26/diesel-compounds-found-in-water-near-wyoming-fracking-site), and the fact that there is an abundance of evidence that there has been contamination related to the entire fracking-related drilling lifecycle, even if not specifically related to the fracturing itself.

PA DEP turning a blind eye to drilling contaminants?

The Cannonsburg, PA law firm of Smith Butz, in connection with litigation it is conducting with regard to alleged water contamination caused by natural gas drilling activities in Washington County, is claiming that the Pennsylvania Department of Environmental Protection (DEP) is systematically and deliberately ignoring test results that could provide valuable information with regard to such contamination.

In a letter to DEP Secretary Michael Krancer, the firm bases its charge on a deposition taken in September from DEP Bureau of Laboratories Technical Director Taru Upadhyay. In the course of the deposition, it was revealed that the lab typically tests for a long list of metals in keeping with EPA standard methods, but only a fraction of the results are delivered to the client—in the context of the deposition, the Marcellus Shale Drilling, Oil & Gas Management department of the DEP.

The limitation is due to the use of certain standard codes in making testing requests to the lab, including 942, 943 and 946, that specify only a restricted list of substances. Code 942, for instance, limits the reporting to only 8 out of 24 metals for which test results are available on a standard basis. In effect, the DEP Marcellus Shale drilling office is apparently asking not to be shown certain test results. In turn, any individual filing a complaint regarding water contamination is barred from seeing those results, and indeed has no way of knowing that such data is even available.

It is not clear from the documents whether it was Marcellus Shale Drilling, Oil & Gas Management that developed the codes in question, or whether the same codes are used by other DEP departments.

In its letter to Krancer, Smith Butz maintains that the results screened out pertain to substances known to be hazardous and associated with Marcellus Shale drilling. Included in code 942 results are barium, calcium, iron, potassium, magnesium, manganese, sodium and strontium. Excluded are results for silver, aluminum, beryllium, cadium, cobalt, chromium, copper, nickel, silicon, lithium, molybdenum, tin, titanium, vandium, zinc and boron.

The law firm also wrote a letter to State Rep. Jesse White (D-Allegheny/Beaver/Washington). White is calling on the U.S. Attorney’s Office and any other appropriate law enforcement agency to pursue an investigation of the DEP to investigate the matter, as well as to the National Environmental Laboratory Accreditation Program (NJ-NELAP), to investigate whether the DEP’s conduct and practices violated the accreditation standards for the DEP laboratories.

A press release from the office of Rep. White can be viewed here: http://www.pahouse.com/PR/046110112.asp

The letter from Smith Butz to Krancer can be viewed here: http://www.scribd.com/doc/111821139/Krancer-Letter

A copy of the actual deposition can be viewed here:

http://www.scribd.com/doc/111821978/Taru-Upadhyay-Depo

Gas commission meeting rescheduled

The meeting of the Town of Delaware's natural gas drilling commission scheduled for tonight at 5:30 p.m. at the Hortonville firehouse has been cancelled. The next meeting will be next Monday, November 5.

Green grow the dollars

UPDATE 10/31/12: the Agriculture and Sustainability meeting, originally scheduled for Thursday, November 1, has been postponed to Tuesday, November 13.

At 1:30 p.m. on Tuesday, November 13, at a meeting of the Legislative Committee on Agriculture and Sustainability at the Government Center in Monticello, NY, Sullivan County’s Office of Sustainability will be fighting for its life. At issue is funding that will decide whether the county can move forward and break ground as a leader and full participant in the green growth industries and lifestyles of the 21st century, or be left in the economic backwaters of an outmoded and increasingly desperate way of life.

Admittedly, the idea of allocating county funds to anything but today’s bills is particularly tough during a period of major financial crisis such as that we currently face, with double-digit tax increases in prospect. Some might argue that matters such as climate change and sustainability are too distant and abstract to worry about in the midst of such an emergency. But even stipulating that premise for the sake of argument*, that way of thinking misses the point.

The plain truth is that the only way you can extract yourself from a deficit on any long-term, ongoing basis is to make your economy grow, and economies are made to grow by bold investment, not by nickel-and-dime cheeseparing. Businesses grow by investing money in new directions, new lines and new means of production. That’s not to say that improvements in efficiency and elimination of waste are not important. But any company that is trying to survive purely by cutting expenses is clearly on its way out the door. The same applies to government.

The steps the county, its communities, businesses and households can take to attain sustainability are all part and parcel of the most vibrant economic trends in the nation—indeed, on the planet—today. Technologies, energy sources, products and services that are part of renewable cycles are what’s up-and-coming around the globe. These practices also, by definition, reduce expenditures in the long run, because they are all about the efficient use of resources. If we fail to connect with such trends, that financial emergency we’re all so worried about is likely to become permanent.

So we must invest somewhere in order to extract ourselves from the current budget bind, and it looks like the place to put our money is the economic trend of the future: green. And maybe that’s also the answer to another question I’ve heard bandied about a lot recently, that of branding. How can we brand Sullivan County to appeal to businesses, tourists, entrepreneurs, homeowners? How about green?

Brand us as not only a rural retreat, but a rural retreat committed to maintaining its open spaces, recycling its resources, generating local energy, constructing zero-energy buildings, making innovations in energy-efficient, low-emission transportation. Brand us as the little engine that could, an area that started out poor and disadvantaged but nevertheless showed others the way in creating a viable way of life that respects and nourishes natural cycles. Do that, and we will have an identity that will be immensely attractive to tourists, second-home purchasers and entrepreneurs from nearby metropolitan areas. And that, in turn, will allow us to incubate business, attract business and create jobs.

 It is this opportunity, as well as a commitment to good environmental stewardship that was opened up when the legislature passed the Sullivan County’s Green Vision Statement and the Climate Smart Communities Pledge. It is this opportunity that the development and implementation of the Sullivan County Climate Action Plan (CAP), with which the CAP Advisory Committee is tasked, should be all about. To take advantage of it, actions will be required at the county level, at the town level, and by businesses and consumers, and it is the business of the CAP advisory panel to enlist the help and participation of all these sectors and facilitate their actions. But seed money is required, among other things to fund a technical support staff to help the volunteer members of the panel, and that’s what Sullivan County lawmakers are being asked for on November 1.

Some of the projects for which funding is being requested will start to generate savings almost immediately, like energy management for county buildings and facilities. Others will take more time, like the collection and analysis of energy use data from Sullivan County towns needed as a basis for developing plans to increase efficiency. But all aim in the same direction: helping us to grow out of the deficit. I hope Sullivan County legislators have the vision to see it as such, and to help the county take its next step toward a better future.


*I am deliberately avoiding here the argument as to whether climate change itself is an emergency—the most dire one we face. I believe it is, and have argued about it elsewhere. But I don’t think anyone has to agree with that belief in order to understand the advisability of investing in this area.

Volunteers sought for emergency shelter in Tusten

Town of Tusten Superintendent Carol Wingert has sent out the following appeal in light of the impending hurricane:

As you all know we have a major storm facing us and the strong possibility of lengthy power outages. If people are out of power too long, we may have people in need of shelter. I am asking for volunteers to man our Emergency Shelter if need be. We will need people to help set up, cook, clean, prepare, and take down. If you can help in any way or know someone who can, please forward to me your contact information, (phone/email) so that I can create a list of folks to contact.

Thank you and please stay safe. ~Carol Ropke Wingert