Has New York Already Missed the Marcellus Shale Drilling Boom?

To answer the question posed in the headline with brutal honesty: Maybe.

Disturbing Observation #1: Yesterday the New York State Senate unanimously confirmed Joe Martens to lead the state’s Department of Environmental Conservation (DEC). The DEC, for those who don’t live in New York, is the agency charged with overseeing drilling in the Marcellus Shale—in fact oversight for all oil and gas drilling in the state. New York has been caught in a holding pattern on Marcellus Shale drilling for over two years, and New York’s landowners are growing weary of the delays in adopting new regulations for drilling in the Marcellus, meaning no permits for drilling in the Marcellus have been issued.

Will the confirmation of Martens, who previously led the Open Space Institute and someone who in the past has been quite vocal in his opposition to any drilling, be a help or a roadblock for drilling in New York? That’s the topic of discussion in an opinion piece in yesterday’s New York Post. As the Post points out (and as MDN has previously commented), there are two faces to Mr. Martens:

Since being tapped for the DEC, he’s mostly sounded pro-growth—declaring, for example: “I intend to make sure that the DEC is responsive to business and that we work together to avoid regulatory stalemate.” Martens also suggested that the DEC would issue new drilling regulations before the expiration of the moratorium this summer.

But anti-drilling ideologues have used concerns that the new drilling method, hydraulic fracturing or “fracking,” could contaminate water supplies for much of the state, including New York City—and Martens has played to them, too: “We won’t undertake drilling until we’re confident it can be done safely. And protecting water supplies is, at the essence, our highest priority.”*

New York is currently under a Marcellus Shale drilling moratorium until June 2011, issued by then-Gov. David Paterson last year, to give the DEC more time to review and revise their own draft regulations. Martens now says as newly appointed head of the DEC (and contrary to a speech he delivered less than a year earlier), that New York will not need to wait until a federal Environmental Protection Agency study on hydraulic fracturing is completed in 2014 before drilling can begin in New York. The problem: Mr. Martens says different things at different times to different audiences. Which Joe Martens should New Yorkers believe?

Disturbing Observation #2: Last Friday evening MDN attended a meeting in Binghamton, NY sponsored by the Joint Landowners Coalition of New York, titled “Marcellus Shale in Our Community: What’s in it for All of Us.” One of the panelists was Michael Joy, a practicing attorney who also teaches oil and gas law at SUNY Buffalo, and someone who also holds a Ph.D. in geology. He is well-familiar with drilling in New York, including the prospect of drilling in the Marcellus.

At the close of the evening, an audience member asked the question, “If drilling in New York is allowed to start tomorrow, would energy companies even bother to show up and drill at this point?” Michael Joy’s response was startling for MDN. His response, in essence, was that yes, drilling will happen, but not at the levels seen in places like Pennsylvania. He predicted a “muted” response once drilling in the New York Marcellus is allowed to begin. As evidence of his prediction, he said that at the national meetings held twice yearly in Houston for independent oil and gas producers, no one talks about New York. In fact, he called New York persona non grata among the drilling community. Why? Because of the delays and extreme opposition in New York City about drilling in the state.

MDN Conclusion: MDN is an advocate for safe drilling in New York State, and hopefully it will happen soon, notwithstanding the contradictory positions of Joe Martens. When it does happen, leasing activity will begin again in earnest and landowners will make some respectable signing bonuses—perhaps on the order of $5,000 per acre. But the real money is when energy companies actually drill. And that’s real money not only for the landowners in the form of royalty checks, but real money that will flow into local municipal tax coffers, real jobs that will be created, and a real “trickle down” effect of more business for restaurants, hotels, and all manner of local stores and businesses. That’s what happens when drilling occurs—that’s what’s already happening in Pennsylvania. And therein is the rub.

Energy companies look at New York with more regulation, more taxes and a big uncertainty of when, or even if, drilling will happen. And they have made their decision. They’re drilling, happily, in Pennsylvania. They’ve located branch and even headquarters offices in PA. Midstream companies—those that build pipelines and processing plants—have built infrastructure in PA. Special wastewater treatment plants have been built in PA. Trucking companies have located in PA. The list goes on. If you’re an energy company looking at an uncertain New York with more regulation and higher taxes, or an already-established PA with infrastructure in place, what would you do?

Is there any hope that this gloomy scenario can change? MDN is the eternal optimist! Once drilling begins (and MDN does believe it will begin, but probably not until 2012), there’s the possibility that early wells will show high output levels. If the wells on average in New York produce more than wells in other locations, energy companies will make a beeline to drill here. Also, much of the richest Marcellus Shale deposits in New York are along the border area between New York and Pennsylvania. If the pipelines and wastewater treatment plants and general infrastructure are just across the border in PA, perhaps energy companies will take advantage of it with their drilling operations in New York.

But the great pity is that by delaying drilling in New York for more than two years, there are economic benefits that this state will now never realize. Offices, operations and a great deal of infrastructure is now permanently established in Pennsylvania. So in that sense, yes, New York has missed the drilling boom.

But, there is still hope. No one knows what the future holds. MDN believes drilling will happen in New York—someday. And yes, drilling companies will drill here. But initially there will not be a huge influx of drilling activity, which is unfortunate. Let’s hope that newly minted Gov. Andrew Cuomo is able to keep Joe Martens in check so all New Yorkers can benefit from safe natural gas drilling in the Marcellus.

*New York Post (Mar 8, 2011) – Will Cuomo say no to drilling jobs?