Chesapeake royalty payouts surpass $1B

ULSTER - Some call it "wealth creation."

But no matter what term people use, it's hard to ignore the numbers.

During a public hearing of the House Republican Policy Committee co-chaired by state Rep. Tina Pickett (R-Bradford/Sullivan/Susquehanna) this week in Ulster, the amount of money being paid out in the natural gas industry was one of many topics during the approximate three-hour proceeding.

"Since January 2008, we've paid nearly $1.1 billion to Pennsylvania landowners in lease bonus payments and royalties," Brian Grove, director of corporate development for Chesapeake Energy's Eastern Division, told a panel of several state representatives.

He also noted that, since January of last year, Chesapeake has paid more than $270 million to companies in the Commonwealth for work on Pennsylvania natural gas wells.

"And we're early in the (Marcellus natural gas) play," he added.

And Stephen Rhoads, director of external affairs for East Resources, Inc., shared East's payouts. The royalty payout in 2010, he said, is estimated at $60 million.

He also spoke of East's capital investment. In 2009, there was $160 million in well drilling and pipelines and $75 million for lease acquisitions and, in 2010, he said there will be $470 million in well drilling and pipelines and $50 million for lease acquisition.

Anthony Ventello, executive director of the Progress Authority, based in Towanda, noted how payments in the "leasing frenzy" have grown, from $25 or less an acre to $5,700 to $8,000 an acre. "...now we are hearing of some leases totaling $15,000 an acre," he said.

Pickett talks about severance tax

The issue of a possible severance tax was also brought up during the hearing. J. Scott Roberts, deputy secretary for mineral resources management for the state Department of Environmental Protection (DEP), was in favor of it, noting that a "reasonable" severance tax paid by operators in the natural gas industry would assist in covering the cost of additional DEP staff members and resources, for example. He noted that the department hired 37 new staff members in 2009 and is in the process of hiring another 68 this year; in addition, he said, DEP has opened new offices in Williamsport and Scranton to oversee drilling operations in the northcentral and northeast areas of the state.

When asked for comment Friday, Pickett offered her opinion about the enacting of a severance tax.

"As to the severance tax, I believe the timing is too soon," she said in an e-mail. "There is a great amount of investment being made by the companies in the area with very little product going to market. I liken it to a large manufacturing plant developing in the area with only one or two product lines operating. If a tax is imposed, it is vital that a significant portion of it come to the rural areas where the drilling is taking place. And it is important that Pennsylvania's overall tax picture be addressed to keep our state competitive in the job market.

"As for the spring road damage experienced this year, it is important to note that the rebuilding of state and township roads that were damaged has been paid for by the gas companies and private contractors were hired to do the work," she continued. "We are receiving significant road construction without using taxpayer dollars and are able to use our liquid fuels dollars to do other maintenance and bridge building in the area. Governor Rendell does have a severance tax in his budget proposal for the upcoming year's budget, but he proposes that all of the dollars go to the general fund. We do not want that to happen."

'Aqua Renew' discussed

Meanwhile, Grove talked to the panel of state representatives during the hearing about the Chesapeake's "Aqua Renew" program.

He said that, in order to address impacts being made to the roads and tackle the issues of water consumption and disposal, Chesapeake developed the "Aqua Renew" operating process.

"Aqua Renew is a new operating process that we've implemented to filter and reuse the wastewater that is generated from all phases of our operations - drilling, completion, and natural gas production," he said, reading from his written comments. "This program has been a tremendous success on many fronts."

He noted that it reduces long-haul truck traffic and dramatically reduces the need for treatment and disposal of wastewater.

An article in the company's in-house magazine notes that, on average, the "Aqua Renew" pump filtration system, which is being used throughout the Marcellus Shale, is able to filter and reuse 3.8 million gallons of produced water a month in Marcelllus Shale fracing operations, and it makes the claim that the "Aqua Renew" program is "helping to right the long-standing industry assumptions that produced water is unusable."

The article notes that, at each well site, produced water is collected and stored in on-site holding tanks where it is pumped through a 20-micron filter designed to remove any suspended solids or particles, and the filtered water is then either stored in on-site tanks or transported to the next well scheduled for hydraulic fracturing. The water is tested for salt content and total hardness to determine the rate at which it can be blended with freshwater to ensure proper quality and quantity for reuse, according to the article.

In addition, Grove noted that the company has "implemented a major shift in well completion operations" by relying much more on the use of water reservoirs, or water impoundments, with portable surface water lines run from the reservoirs to well sites. The reservoirs are centrally located to the wells they are serving. "This dramatically reduces traffic in the area of the well and reduces overall travel miles for the water," he said.

"Additionally, we are taking a very hard look at moving more and more water from permitted source points to these impoundments via underground fresh water pipelines," he said. "In the next several months, we will be completing an engineering study of our entire operating area and hope to move forward with these plans, where it is feasible, to dramatically cut back on the need to move water over large distances via trucking."

And Grove discussed "something we're very sensitive to" - housing.

"Recent reports have indicated a housing shortage in Bradford County brought on by an influx of gas industry workers," he said. "Chesapeake is sensitive to this issue and in response, we will begin construction in the next several weeks of a local housing and training facility in Athens Township."

And Ventello noted that the Progress Authority is sponsoring Recovery Zone bonds to help finance a new 65-room hotel project in North Towanda, representing $5.5 million of new investment.

Pickett, meanwhile, seemed to think the hearing was a success, and she commented on the legislators' tour in the county Friday.

"I believe, overall, the legislators attending (and we had a few more come today for the tour) appreciated the opportunity to be in the area and to be able to mingle with locals to ask them questions, to take the tour to view the actual operations in Bradford County, and to get an update from the industry and from DEP," she said on Friday. "Of the legislators on the tour today, only two of us (Rep. (Sandra) Major and myself) represent districts where the Marcellus exists. The others were all from areas of the state outside the Marcellus Shale map. Several mentioned talking with small business employees or hotel personnel or others they had a chance to encounter while they were here. The various members all have their own viewpoints too and a variety of questions. And it is always enjoyable to bring legislators to the Endless Mountains from other parts of the state. Often they come back for personal visits."

Eric Hrin can be reached at (570) 297-5251; e-mail: reviewtroy@thedailyreview.com.