Marcellus Shale: The Real Price of Compulsory Integration In New York

Workers adjust a drilling rig at Anschutz Exploration Corp.‘s natural gas well in Big Flats, N.Y. Photo: Peter Mantiu
Workers adjust a drilling rig at Anschutz Exploration Corp.‘s natural gas well in Big Flats, N.Y. Photo: Peter Mantiu
The natural gas industry made Joe Todd an offer he couldn’t refuse.

He told them no, but New York State’s industry-drafted 2005 “compulsory integration” law made resistance pointless.

Todd had turned away a landman who tried last year to convince him to lease his property to a Denver-based gas driller. Then he received an official letter in January that said he had to surrender his subterranean property rights for a financial stake in the same Colorado driller’s new well operation less than a mile from his home in Big Flats, N.Y. He ripped up the letter and threw it in the trash.

The drilling started up anyway.

In September, Todd’s neighbors, Donetta and Paul Morey watched their well water turn black in their sinks and toilets. When they tried to test for methane by lighting a match near the well, a flame shot into the air, singing Donetta’s eyebrows and setting her hair on fire. She quickly pulled away and patted out the flames.

Todd turned to bottled water after his well water suddenly turned murky and smelly, shortly after gas drilling began. Photo: Peter Mantius
Todd turned to bottled water after his well water suddenly turned murky and smelly, shortly after gas drilling began. Photo: Peter Mantius
Two days later, the well water Todd and his family had relied on for 22 years suddenly turneddoes murky and smelly. So had the well water of at least seven other households in this stable, middle-class neighborhood just north of the Elmira-Corning Regional Airport. The residents suspected that their water problems were linked to the gas drilling, but state and local officials dismissed those suspicions.

Realizing that the burden of proving a connection was on their shoulders, Todd and the others started meeting regularly with an eye toward hiring an attorney and a water tester. Some members of the group, including the Moreys, had signed leases with the drilling company, Anschutz Exploration Corp. Several others, like Todd, had declined.

But the state’s compulsory integration statute cancels their right to refuse to deal with a gas well driller.

The legislation was a product of the Independent Oil and Gas Industry of New York, according to Christopher Denton, an Elmira attorney who has represented landowners in dozens of compulsory integration cases.

“This is IOGA’s statute,” Denton said of the industry trade group. “They drafted it, introduced it, got a sponsor for it and pushed it through with no legislative hearings whatsoever.”

The law “does some good” by improving on previous integration statues, Denton said, establishing a much-needed orderly procedure for assembling land for drilling. “But the substance provisions screw the landowner,” he added.

Legally, compulsory integration is similar to eminent domain, where a government can seize private property for a general public purpose such as a highway or a school. In compulsory integration, the government-supervised seizure of private property benefits a mining company.

In theory, both types of seizure are supposed to provide fair compensation for landowners. But Denton believes New York’s law is a miserable failure when it comes to compensation. “It’s really worse than eminent domain, where at least you get paid at 100 percent,” he said.

When Todd received his compulsory integration notice, he had three choices. He could have decided to invest in the well and assume the financial risks of a “dry hole” or expensive accident — what Denton calls the “J.R. Ewing” option. Under the second option, Todd could have chosen not to invest, but rather to have his share of well costs taken out of his future earnings. Instead, Todd by default took the third option. He has no responsibility for the well’s costs and is entitled to a royalty payment.

Denton calls the default option the “ostrich” because it requires the lowest level of commitment. The royalty rate typically paid to the ostriches is 12.5 percent — far below market.

Compulsory integration now plays a crucial role for gas drillers assembling sites in New York. No well can be drilled without a state permit. And no permit can be awarded until the drilling company creates an approved “spacing unit”  — typically 640 acres — at the proposed well site. The spacing unit is made up of property leased to the drilling company, plus property owned by holdouts who won’t lease.

Compulsory integration may only be applied if the driller obtains leases on property totaling at least 60 percent of the proposed spacing unit. After that threshold is reached, the company can force the holdouts to join against their will.

To some, that arrangement seems an outrageous violation of basic private property rights.

“It is a way to get around negotiating price with landowners, a way to acquire gas rights at below-market rates, and a way to force people into leases or lease terms they don’t want,” said Fractracker, a website managed by a group founded at the University of Pittsburgh’s Graduate School of Public Health.

When the gas industry in Pennsylvania sought a milder version of New York’s compulsory integration statute for drilling in that state’s Marcellus Shale — the leasing threshold was 75 percent instead of 60 percent — it met vehement opposition and died.

In New York, opponents never had a chance to mobilize because there were no public hearings before the bill sailed through, Denton said. Albany attorney Thomas West claims on his website bio that he “played a key role” in winning passage of the 2005 bill. Denton agreed, saying, “Tom West shepherded it through the Legislature.”

At the time, West served as a lobbyist for Chesapeake Energy Corp., and he has continued to represent the drilling company since then. He’s also represented Chesapeake and other drillers at dozens of compulsory integration hearings in Albany. And in 2008, when the gas industry began to see enormous potential in tapping the gas-rich Marcellus Shale in New York with a controversial new type of hydraulic fracturing, or fracking, West helped craft amendments to deal with technical obstacles, according to a June 2008 blog posting on his firm’s website. “The primary impetus for this bill is the industry’s interest in the Marcellus Shale,” the blog explained.

By then, drillers had already started mining the Marcellus in Pennsylvania with the latest fracking techniques, which involve drilling horizontally and using sand, dangerous chemicals, explosives and 5 million of gallons of water per well. Drillers have been no less excited about potential riches from the formation in New York, but the state Department of Environmental Conservation has held off on permits until it finishes its rules to deal with the harmful side effects of the latest fracking techniques.

Marcellus drilling is on hold until the DEC releases those rules, and may not begin before July 1, 2011 in any case. Gov. David Paterson issued an executive order Dec. 11 that bans high-volume horizontal hydrofracking — the preferred method for tapping the Marcellus — until that date. Paterson also vetoed a bill that would have placed a moratorium on a broader range of drilling techniques in New York through May 15, 2011.

While they wait for access to the Marcellus mother lode, Anschutz and others have obtained permits to drill horizontally in New York’s Trenton Black River formation, a less tempting target roughly twice as deep as the Marcellus. In order to create the spacing unit needed to obtain a permit to drill the Black River in Big Flats, Anschutz began seeking leases on at least 60 percent of the land in its proposed 640-acre spacing unit. The drilling site just off Yawger Road is a 61-acre parcel owned by John Dow, an aviation services executive, and his wife Daphne Dow.

After securing a lease on the Dow property and another on a 180-acre parcel owned by Chemung County, Anschutz was more than half way to its golden threshold of 60 percent. It received another boost when Gale E. Wolfe, Chemung’s Director of Environmental Services, leased her 31-acre horse training facility, which sits adjacent to the Dow property.

A landman for Anschutz scoured Todd’s Big Flats neighborhood for additional leases and met with some success, including the Moreys. “Some gentleman came to our door,” Donetta Morey said. “He was a nice looking man who seemed honest. We did not get a lawyer. They misrepresented themselves quite well, and we fell for it.”

The landman who signed up the Moreys, Jason C. Marks, indicated in the Moreys’ leasing documents that he was a member of the Northern Appalachian Landman’s Association, which was organized in 2004 in Olean, N.Y., and bills itself as “the voice of the Marcellus landman.” Efforts to reach Marks through NALA were not successful.

Anschutz easily surpassed the 60 percent threshold before applying for and receiving a drilling permit in December 2009. At that point, the DEC set a cbeompulsory integration hearing for Jan. 13, 2010, in Albany, and Thomas West, representing Anschutz, sent out notices to the holdouts. Drilling began in February, according to the DEC website. Eventually a second well, Dow 2, was drilled. Jim Monaghan, a spokesman for Anschutz, said the wells have been prepared for production without the use of fracking and are near the production stage. Monaghan said the company, which is owned by Denver billionaire Philip Anschutz, was surprised to hear allegations that the drilling activities harmed local water wells. “The allegations didn’t square with our folks’ knowledge of hydrology,” Monaghan said. The company expects the DEC to continue its investigation and fully supports those efforts, he added.

Bonnie and Joe Todd show a jar of blackened water from their well in Big Flats, N.Y. Photo: Sue Heavenrich/The Marcellus Effect
Bonnie and Joe Todd show a jar of blackened water from their well in Big Flats, N.Y. Photo: Sue Heavenrich/The Marcellus Effect
According to the DEC’s well database, Dow 1 reaches down more than 9,000 feet before angling horizontally for another 3,000 feet to points directly under or near the properties owned by the Todds and the Moreys. The community’s water problems didn’t develop until September, several months after the drilling began, and there’s still no incontrovertible evidence that their water problems are connected in any way to the well drilling.

In fact, the DEC has all but dismissed the residents’ suspicions. “Pre-existing methane was already present at shallow depths when the wells were drilled,” the DEC said in a “fact sheet” dated “November 2010.” It was “unlikely that gas from deeper formations could migrate through multiple well casing strings into any aquifers near the surface,” the agency added.

The Town of Big Flats and Chemung County have said they didn’t have sufficient evidence and authority to take action against the well operators.

“Everybody we talk to is putting it back on us,” said Karen Farrell, who like the Moreys and Todds has lived in the neighborhood for more than 20 years. “It seems that everybody is in cahoots.”

Big Flats Supervisor Teresa Dean said the town’s options are limited to giving the residents information on procedures and prices for hooking up to the town’s water system. “Our hands basically are tied,” she added, because the DEC has jurisdiction over gas well drilling.

Dean said the DEC’s conclusion that methane was present near the surface even before the wells were drilled seemed defensible. She said Mike Nicolo, a resident who lives near the Todds and Moreys, had well water problems and “could light his faucet” about 10 years ago. Nicolo confirmed to DCBureau that he’d had water problems before he hooked up to town water several years ago. But he said he’d never had his suspicious water tested and he’d never stopped drinking it.

Jim McDermott, on the other hand, said he did have his well water tested before he moved into the Big Flats neighborhood about a year ago. It was clean. In the middle of September, his water went “milky.” The DEC has since warned him that it contained “combustible gas.”

Kathleen Shoemaker, co-owner of Pump Doctors, a local well services company, said methane, which is odorless, had rarely if ever turned up in the Big Flats wells her company had worked on since 1983. She told DCBureau she thought the nearby gas wells might have played a role in the latest cluster of well water problems.

“At one point in September when a gas well on Yawger Road capped off, we had a number of incidents show up — two wells with methane and one that blew black stuff,” Shoemaker said. “Whatever happened, something created pressure to push things up into the water table.”

Todd conceded that Shoemaker’s diagnosis was hardly definitive. But he questioned how the DEC could dismissively assert that well casings failures were “unlikely” when the same “fact sheet” states that the casing tests weren’t finished. Gas well casing failures have been identified as culprits in water well problems in Cleveland and Dimock, Pa.

And researchers for Garfield County in Colorado found higher numbers of contaminated water wells near deep gas wells drilled in areas with extensive natural faults. In some cases, the molecular structure of the gas from tainted water wells matched that of the deeply buried gas, suggesting migration to surface water supplies, according to a 2009 report in ProPublica.

Pennsylvania regulators have ordered the drilling company in Dimock to spend millions of dollars to build a water pipe to serve the affected residents. The company, Cabot Oil and Gas, has challenged the ruling. Todd said he’s frustrated that New York’s environmental regulators have been comparatively laid back about the water well problems in Big Flats.

Meanwhile, he continues to have to buy bottled water by the case and make regular trips to the laundromat. Donetta Morey says she lacks good alternatives to taking showers in the tainted water, and she just puts up with the skin rashes that result. As the DEC draws closer to completing its rules for high-volume hydrofracking of the Marcellus, Denton said the state Legislature should consider overhauling the compulsory integration statute to make it fairer for landowners who are forced to surrender property.

Todd said he wondered what a gas drilling boom might mean to New York’s Southern Tier.

“If what happened to us in Big Flats happened in the Trenton Black River (before the latest high-volume hydrofracking techniques), what if they do the Marcellus here?” he said. “The more I see of it, this is an invasion. It scares the hell out of me.

“If it can happen to my well, it can happen anywhere.”

Peter Mantius

Peter Mantius

Peter Mantius is a reporter in New York. He covered business, law and politics at The Atlanta Constitution from 1983-2000. He has also served as the editor of business weeklies in Hartford, CT, and Long Island. He is the author of Shell Game (St. Martin’s Press 1995), a nonfiction book on Saddam Hussein’s secret use of a bank office in Atlanta to finance billions of dollars in arms purchases from Western countries before the 1991 Persian Gulf War.

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