Pursued by a well-financed posse, Butch Cassidy and The Sundance Kid wondered again and again, “Who are those guys?” Their wild west world — a place they understood and felt safe in — had become more memory than fact. Even at the very end, when Butch and The Kid faced certain death at the hands of hundreds of Federales Mexicanos, they and the audience believed the old ways would survive side-by-side with the industrial revolution. Because we didn’t understand industry’s insatiable hungers in 1908, we still ask in 2009, “Who are those guys?”
CHESAPEAKE ENERGY: Its own words and omissions.
Most readers of this column know that Chesapeake Appalachia is a natural gas drilling company that wants to hydraulically fracture and drill the Marcellus Shale. The Marcellus encompasses nearly 44 million acres and underlies a third of Ohio, bits of Maryland and Virginia, all but a thin wedge of West Virginia, most of Pennsylvania and stretches under and beyond the Delaware River into New York State.
Pro-water advocates point to reports that hydraulic fracturing and waste water disposal have resulted in contaminated ground water, ruined private wells, sick residents, explosions and poisoned livestock. “The Delaware River [Watershed] supplies water to 15 million people, including New York City and Philadelphia,” so Damascus Citizens for Sustainability and other conservation groups are pressing the Delaware River Basin Commission (DRBC) to produce Environmental Impact Statements and a comprehensive review of drilling’s cumulative impacts before any gas drilling applications are considered or approved.
But behind the scenes, what does Chesapeake tell its investors (or omit from the telling)?
First, Chairman and Chief Executive Officer (CEO), Aubrey McClendon, began his 2008 Annual Report to Shareholders with one of Charles Dickens’ most famous quotes, “It was the best of times, it was the worst of times…” One wonders that any CEO would willingly adopt a Dickensian mantle given the author’s depictions of hatchet-faced money-grubbers, but that’s Mr. McClendon’s look-out.
Chesapeake’s CEO tells his investors that, “As of December 31, 2008, [Chesapeake] owned interests in approximately 41,200 producing natural gas and oil wells; and had 12.051 trillion cubic feet equivalent of proved reserves…[In 2008], Revenues rose 49% from $7.8 billion to $11.6 billion….”
(I’m befuddled that he omitted mentioning his own annual compensation of $116.89 million which ranks him third amongst American CEOs even though his performance earned him a less stellar rating of 66 out 175. Also omitted was the Ontario Teachers’ Pension Plan’s “six-party lawsuit” demanding that Chesapeake rescind the $75-million bonus it awarded McClendon. I’m sure the omission was an oversight and so I’ve included it here.)
Also absent from his letter is the Class Action suit lodged against Chesapeake by investors for making “materially false and misleading statements” during a recent public stock offering.
And he skips any reference to the Court’s judgment that found Chesapeake had defrauded royalty owners in Texas out of $134 million in payments by under-reporting the amount of gas Chesapeake extracted from its lessor’s wells.
The 20 cows that dropped dead in Caddo Parish, Louisiana near a Chesapeake well also escaped Mr. McClendon’s notice.
Nor did I find any allusion to the recent Texas Supreme Court case which saved the drilling industry’s collective butt by saying company wells could drain gas from adjacent properties without fault because “subsurface trespass by frac” can’t be proved and therefore is not a ’cause of action’ in Texas courts. “Frac treatments may commence at the surface, but the real work occurs unseen in the depths of the well and rock formations, and only theory and hypothesis can be advanced in support of an alleged underground trespass.” (How, then, does the industry prove that frac treatments are safe when they’re carried out “unseen in the depths…?”)
In 2008, Chesapeake forecasted that their Marcellus Shale leasing campaign would be finished by 2010 with “approximately two million acres of leasehold in the play.”
Consistently, Chesapeake and other gas companies have said that moving forward at all possible speed with natural gas exploitation (without levying “deterrent” taxes or conducting scientific studies) is required by our national interest. On the other hand, in his letter to investors, Mr. McClendon states, “Because of lower natural gas prices in the fourth quarter of 2008 and first quarter of 2009, we have substantially reduced our drilling activities in the Barnett [Shale] from 43 rigs in August 2008 to around 20 today. We intend to maintain this lower pace of drilling until natural gas prices recover to more attractive levels.”
Apparently, the national interest is only provocative if it dovetails with Chesapeake’s ability to rake in maximum profits.
As long as we’re singing paeans to the National Interest, let’s see what Mr. McClendon has to say about sharing our national wealth with other multi-national corporations: “A key to Chesapeake’s Fayetteville success,” he attests, “was entering into a joint venture with [British Petroleum] in September 2008. In this joint venture, we sold 25% of our assets in the Fayetteville to BP for $1.9 billion in cash and future drilling carries.…Earlier in 2008, we had also sold to BP all of our Woodford assets in the Arkoma Basin for $1.7 billion.”
As to the amount of our National Interest and Wealth that Chesapeake’s sharing with Norway’s StatoilHydro,** Mr. McClendon announced proudly, “After acquiring 1.8 million net acres, Chesapeake began looking for its third shale joint venture partner. This search culminated in a $3.375 billion transaction with StatoilHydro, one of the most innovative, well-respected and largest of the European international energy companies. This transaction, in which we sold a 32.5% interest in our Marcellus assets, was completed in November 2008. StatoilHydro had been seeking an entry point into a big U.S. shale play and had independently arrived at the conclusion that the Marcellus was the best shale play in which to invest….Today, Chesapeake is drilling with 10 rigs in the Marcellus. We plan to end 2009 with at least 20 rigs drilling and project 30 rigs drilling by year-end 2010 and 40 rigs drilling by year-end 2011… In addition, we also are engaged with StatoilHydro in searching for additional shale gas plays around the world in a 50/50 partnership.”
In a more innocuous statement, Mr. McClendon offers this prognostication, “I also see our company continuing as an industry leader in innovation and technology, underpinned by a work force and asset base second to none.” In part, he is alluding to Chesapeake’s “Energy in Training” intern program [which] maximizes [Chesapeake’s] college recruiting efforts and encourages students to enter the [drilling] industry while still learning.”
Which leads me to wonder about the validity of Pennsylvania State University’s (PSU) July 2009 study, “An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play,” co-authored, among others, by Timothy Considine (University of Wyoming, whose state is home to the Mowry Shale in Wyoming’s Powder River Basin) and Robert Watson (Pennsylvania State University, whose state is home to the Marcellus Shale.)
Those coincidences alone are enough to ask “Who are those guys?” but what really piqued my interest was that the study cites no funding sources and sings hosannas for a projected economic boom in Pennsylvania without addressing the costs of environmental degradation. (Costs that are already emerging in Fort Worth, TX, Dimock, PA, Hickory, PA and the state of Wyoming.)
The copy of the study I’ve linked to is located at PA Marcellus — a consortium of drilling companies. The Study’s authors (1) oppose legislation that will force drilling companies to reveal the toxins used in drilling and frakking; and (2) suggest that levying a production tax on the industry will burden Pennsylvania with lost revenues because, the authors predict, such State actions will deter companies from drilling in Pennsylvania and lead to slowed exploitation of the Marcellus Shale.
At last count, more than sixty organizations have already opposed the Study’s assertion that a tax would impede exploitation of the Marcellus Shale. In fact, opponents say, drilling companies are salivating at the prospect of drilling into the Marcellus’ rich heart.
Anyone — including drilling company employees — who tracks down the entities who funded this propaganda in a prestigious American university will win a gift from CottageWorks.
In the meantime, who is Robert Watson, one of the study’s two lead authors? He is the Director of Penn State University’s Consortium for Petroleum and Natural Gas. Penn State’s website describes The Consortium thusly, “The Consortium is industry driven and focused on identifying, expanding, and creating new value-added markets for petroleum and natural gas-based products. Research is also being done to identify and develop new technologies to increase the efficiency and/or productivity of petroleum and natural gas exploration, production, and refining.”
Perhaps he knows who funded his study. The PSU website lists his email address as: firstname.lastname@example.org and his phone number as 814-865-0531.
So who are these guys? They’re the people who pay Congress to enact drilling-friendly legislation with provisions like the Halliburton Loophole. They’re the people who help establish drilling-friendly curricula in publicly-funded universities. They’re the people who benefit to the tune of billions of dollars when publicly-funded universities write studies supportive of their private industry.
More important, who are the People of Pennsylvania whose lives are, according to PSU, improved by Penn State’s cosy relationship with the natural gas drilling industry?
They’re the people whose children will pay at least $12,538 to attend and live on PSU’s University Park Campus this next academic year. (It’s not clear that the University’s tuition calculator incorporates a proposed 3.7% tuition hike.)
They’re the people who “..lost nearly 202,000 manufacturing jobs since 2001, according to the Alliance for American Manufacturing…”
They’re the people who are being conned into a poker game where drilling companies hold all the chips (jobs) and make all the rules.
Disclaimer: As a New York State resident who’s lived three decades in or near the Delaware River Basin, these observations about PSU have been spurred by this particular study. I have no doubt that similar instances of Corporate Cronyism exist at the State University of New York.
Coming soon: Discussion of gas drilling leases recently signed in Wayne County, Pennsylvania.
*There is great debate about when and where the “real” Butch and Sundance died.
** Of their lucrative deal with Chesapeake, Statoil Hydro says at their website, “The holding covers 1.8 million acres in the Appalachian region of the north-eastern USA. The acquisition is part of a strategic agreement between the two companies to jointly explore unconventional gas opportunities worldwide. The agreement covers more than 32,000 leases in the states of Pennsylvania, West Virginia, New York and Ohio. Chesapeake plans to continue acquiring leases in the Marcellus shale play. StatoilHydro has the right to a 32.5% participation in any such additional leasehold. With this transaction StatoilHydro has acquired future, recoverable equity resources in the order of 2.5-3.0 billion barrels of oil equivalent (boe). StatoilHydro’s equity production from the Marcellus shale gas play is expected to increase to at least 50,000 boe per day in 2012 and at least 200,000 boe per day after 2020. Both companies believe that the development programme could support the drilling of 13,500 to 17,000 horizontal wells over the next 20 years.”
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