Recession Puts the Brakes on Upstate Natural Gas Hype

One of the nation's biggest natural gas deposits, the Marcellus Shale, runs right through upstate New York. Last year, energy companies paid land owners huge bonuses for the drilling rights.

Here's Noel Van Swol, a property owner in Long Eddy, New York, speaking last March.

VAN SWOL: This is like Texas and Oklahoma during the oil booms in the early 20th century.

REPORTER: Well, it's been almost a year, and there's no drilling. WNYC's Ilya Marritz reports that a bureaucratic snag and the recession have put big natural gas projects on hold indefinitely.

REPORTER: Roger Willis had grand plans for the Marcellus Shale. He was going to grow his company, and hire new people. Natural gas was going to make it possible. Now, he sees those dreams slipping out of reach.

WILLIS: It's sort of a perfect storm with the price of energy dropping compounded by the lack of credit and just the uncertainty and then there’s the economy in dire straits.

REPORTER: Willis is President of Universal Well Services, a company that supplies heavy equipment and manpower to energy companies in New York and Pennsylvania. He says economic conditions are forcing the companies he depends on to slow down or cancel their plans for new drilling...which is terrible news for United Well Services.

WILLIS: When a company doesn’t drill that affects us more than probably anybody else in the supply chain.

REPORTER: Last Summer, energy companies got drawn into a bidding war for land in the Catskills and Southern Tier of New York. In July, just as interest reached fever pitch, Governor Paterson hit the brakes. He acknowledged concerns about water contamination, and ordered an environmental review, which is underway now. Two months later, Wall Street imploded and energy prices slumped.

Even though New York State will probably complete the review this spring, Willis isn’t confident much new drilling will actually happen. He's now reconsidering plans to open two new offices, and a $50 million equipment purchase.

WILLIS: We are sitting on that knife right now. You know we have to buy the equipment, these large pump trucks, and the blenders and the electronics and all that and the equipment’s very expensive.

HOGAN: The need is still out there it's just been moved into the future for some time.

REPORTER: Mike Hogan is an oil and gas consultant based in Western New York. He's confident upstate’s natural gas resources will be developed, in time. The Marcellus Shale is huge, and it's close to the country's biggest natural gas market: New York & the eastern seaboard. But the price of natural gas has dropped by two thirds since July, and Hogan says the current price of about $6 per thousand cubic feet is not enough to develop the Marcellus Shale.

HOGAN: I don’t think so long term. There will be exploration although I think it will be much less intense than what it may have been at $7, $8, $9 gas.

REPORTER: Theoretically, energy companies could just sit on the land they've leased, and wait for conditions to improve. But while the economy says, Hey, slow down, there's a certain amount of time pressure. Here's Rick Kessy of Fortuna Energy, speaking last fall before an assembly committee in Albany.

KESSY: The leases are of a determinate period, typically about five years. If we can't act and develop within a period of time, we need to go back to the land owner and deal with them.

REPORTER: Here's the thing. Standard lease terms say if a company doesn't put drill bits in the ground within five years, it loses all mineral rights. Another reason energy executives want Albany to give the green light soon.

Environmentalists say they are pleased things are going slow in New York. But oil and gas consultant Mike Hogan says two Houston-area clients became impatient with the review process and sold their stakes in the Marcellus Shale. The delay does not play well with energy company CEOs.

HOGAN: You know, they're responsible to their stockholders and they can't go to their stockholders and say, we're gonna tie up three quarters of a billion dollars in New York State and not get a return on that for six years while the state authorities decide what they want going to do.]

REPORTER: What would happen if New York didn't have this timeout? South of the border, in Pennsylvania, there are close to 20 Marcellus Shale wells already drilled or in development.

Industry people say Pennsylvania still has too much regulation, compared with Western states. But at least one oil and gas giant thinks it may be worth the trouble. Last September, the most profitable corporation in the world, Exxon Mobil bought a stake in Pennsylvania's Marcellus Shale.

For WNYC, I’m Ilya Marritz

Natural Gas Drilling: Is New York Ready?