Chesapeake Energy & Penn State’s Robert Watson: Who Are Those Guys?


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:  bob@pnge.psu.edu 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 whose unemployment rate climbed to 8.3% in June 2009.  (The average income of the bottom 90% of Pennsylvania taxpayers actually declined by 4% from 2001 to 2005.)

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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7 thoughts on “Chesapeake Energy & Penn State’s Robert Watson: Who Are Those Guys?

  1. Jim Barth

    Excellent column, Liz. I would just add some further words concerning the overwhelming international aspect of the gas and oil industry.

    You mentioned BP International and
    StatoilHydro, but the fact is there are companies from Kuwait (Barnett Shale), China (CNCP was in negotiation with Chesapeake), Germany, France (Chesapeake negotiations), Holland etc. in all the plays, everywhere; and if they are not there yet, they will be.

    Secondly, you don’t mention Liquified Natural Gas, which is an international commodity that Chesapeake is extremely interested in producing. In the August, 2008 conference call on second quarter earnings, McClendon speaks clearly as to his awareness that Europeans and the international market pay twice as much as the U.S. domestic market for gas. He wants as much a part of that lucrative market as he can get, therefore, what is stopping him from taking our domestically produced gas, liquifying it, and shipping it abroad?

    Lastly, these shale plays are global, they underlie the entire earth’s surface. With the technological advances in drilling and fracturing since the mid-nineties, the entire earth is a giant ripe fruit, especially once retail prices establish a highly profitable base line, such as we saw peak in July, 2008.

    Since the shale plays are nearly everywhere, I would hope that common sense and “best industrial practices” would lead to choosing areas of least impact to our planet and society. Instead, the focus has become our watersheds that supply major populations. It is past time for people to start demanding accountability and truth from the gas and oil extraction industry.

  2. Bill Flaherty

    The areas of least impact are high plains states like Colorado, Utah, Wyoming, New Mexico – desert states, where nothing grows but sage and where very few Americans live. But the environmental groups in California file a lawsuit to stop every – every – well that is drilled.

    And by-the-way – having 2,000,000 acres doesn’t mean the land will have 2,000,000 wells. What the people of the east don’t realize is that these wells last 30-50 years, then the land grows back to it’s normal self. The forest which surrounds my land in Massachusetts, covered with mature Oak and Maple trees, was once a farm for a farmer who cleared all the land and made the “Farmers walls”

    All people are short sighted.

  3. Jim Barth

    I’m not certain what Bill Flaherty is responding to, since no one said that the Marcellus under the Delaware River Basin is going to be horizontally drilled/hydraulically fractured to the tune of 1 well per acre, but I can give him a factual statistic based upon an actual lease between my neighboring hunting club and Chesapeake
    Appalachia, LLC. That lease allows Chesapeake to build nine four plus acre well pads, and drill up to four wells per pad on about 1,100 acres. That is 36 wells total, and an average of one well per 30.56 acres. Of course, these are horizontal wells, and as I mentioned, the four wells per pad will most likely extend 3,000 or so feet out in four directions from each of the nine well pads, in an attempt to recover all the gas under those 1,100 acres. With this technology, they don’t have to space the 36 wells across the surface, they drill horizontally underneath.

    Whether or not the average well life will be 30 years, the fact is, these wells start off with a bang, and then diminish swiftly. They run dry quickly. They will be fracked multiple times in an attempt to resuscitate the recovery, but when they get plugged is anyone’s guess.

    As far as those Western States being ideal for drilling, I suggest he watch “Rural Impact” on YouTube (in 5 or 6 parts), or “Land Out of Time”, or visit http://www.journeyoftheforsaken.com. Ask anyone whose land has been drilled out there, and they’ll tell you where the gas companies can go, and they “ain’t” no California environmentalist. All Flaherty has to do is Google satellite images of Eunice, N.M., the Jonah Gas Field in Wyoming, or Andrews, Texas for even worse examples of the kind of density of drilling that I referred to, that will be on my neighbors property in Pennsylvania. Also, even in those States, where do they drill? RIGHT ON THE COLORADO RIVER! They need the water to hydraulically fracture the wells.

    There is so much more I can say to Bill, but really, Bill, you ought to do some research, because people like me in the DRB who have been fighting this for the past 1.5 years, and people in those States you mentioned, have gone through a lot of hell. We do know what is coming down the pike, unless we stop it.

  4. Pingback: Drilling, Hydro-Fracking, Journalism & Bias « Breathing is Political

  5. Anonymous

    My name is Robert W. Watson, emeritus Associate Professor of Petroleum & Natural Gas Engineering AND ENVIRONMENTAL SYSTEMS ENGINEERING. The perception of the above article is that I am a no-holds bar proponent of the Marcellus Shale. Of course that is baloney given that I preach the development of energy in such a way as to minimize its environmental impact. The real issue to me has little to do with natural gas or its development, it is that the United State has no energy policy other than the importing of foreign crude and the exporting of billions of dollars and of course, the exporting of our kids to protect our access to this foreign oil. Much has been made about renewable energy — to this point in time the investments in these so-called alternative fuels have produced about 1-% of the energy used. The truth is that we are at least a generation removed from the technology necessary to spur this conversion from hydrocarbons to the so-called renewables. What do we as a society do — we can bankrupt ourselves by importing not only oil; but also natural gas. We can convert food into fuel while a billion or so people starve. We can apply imminent domain and use our coastal areas as wind-farms. And of course, we can use our young men and women to intervene in every conflict across the world convincing ourselves that we are nation building and protect our access to “cheap” oil/gas. We can also develop our own energy resources.I have no preference — our house is designed to use oil/gas/electricity and can easily be converted to wood/coal/geothermal. And if I clear-cut my wooded lot, I can even use solar.
    Whatever the geniuses who are in Washington decide let me know.
    Robert W. Watson PhD PE

  6. lizbucar Post author

    Thank you for responding, Mr. Watson to my August 1, 2009 article, “Chesapeake, Robert Watson: Who are those guys?”

    The question I raised which you have still not answered is, “Who funded your study which sang kudos to the economic impact of drilling in the Marcellus Shale without considering the costs of such enterprise.” My especial concern was that you flew in the face of most fiscal pundits by recommending against the severance tax.

    So, although I appreciate your time, you have not addressed the issues raised by my article or others like it.

    I’ll leave it to our readers to compare the results of the study which have been pilloried by many groups and the comments you posted here. Liz

  7. Pingback: Hodgepodge: Sullivan County Leases, David Jones « Breathing is Political

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