Fracking Once Lifted Pennsylvania. Now It Could Be a Drag.

Source: By Peter Eavis, New York Times • Posted: Tuesday, March 31, 2020

Natural-gas companies operating in the state were looking shaky before the coronavirus hit. Local economies are now at risk.

Credit…Ross Mantle for The New York Times

CARMICHAELS, Pa. — The last time the global economy was in free fall, an economic savior showed up in southwestern Pennsylvania. Energy companies, which had discovered a way to get at the state’s vast natural-gas reserves, invested billions of dollars in the region, cushioning the blow of the Great Recession.

“There were just so many jobs,” Debbie Gideon, a retired community banker, recalls. “It was crazy.”

But 12 years later, as the region braces for the coronavirus recession, natural-gas companies are much more likely to weigh on the local economy than to rescue it.

Even before the latest shock, gas operators were reeling from self-inflicted wounds. They had taken on too much debt and drilled so many wells that they had flooded the market with gas, sending its price into a tailspin.

To conserve cash, the firms have been frantically slashing investments, cuts that will pummel local suppliers and contractors. “Every time one of these slowdowns occurs, they beat down every vendor they can,” said Steve Stuck, president of Jacobs Petroleum in Waynesburg, which supplies diesel to the natural-gas operators.

To many businesspeople and residents, the bet has paid off, not least by creating many well-paying jobs in struggling parts of the state. And though the industry, which Pennsylvania has allowed to operate through the coronavirus emergency, goes through ups and downs, they expect it to remain an important part of their economy for years to come.

Credit…Ross Mantle for The New York Times

“I don’t think we’ll ever get to the bust, because we have 40 to 60 years of gas,” says Mike Belding, a former Marine helicopter pilot and now a commissioner for Greene County. “That’s past our lifetimes.”

But there are strong signs that this natural-gas shakeout could grind on longer than others. And if it does turn into a rout that leads to large layoffs and business closures, Pennsylvania may have to reassess its great shale experiment.

“There is not a lot of knowledge of how fragile these companies are,” said Veronica Coptis, executive director of the Center for Coalfield Justice, which has often been critical of the coal and shale industries. “And when the companies start to struggle financially, the people who get hurt the most are the employees.”

The debts of those two companies and Southwestern Energy, another shale business focused on Pennsylvania, have increased by a combined $7 billion since 2008. Their operations generated far too little cash to pay for their investments. In fact, the three companies’ capital spending exceeded operating cash flows by $14 billion in that period.

The frackers now have fewer friends on Wall Street. “All they’ve done is destroy shareholder value,” said Ben Dell, managing partner at Kimmeridge, a private-equity firm that specializes in energy. “For the Marcellus guys, it will all stop with bankruptcy.”

An EQT well pad. The debts of EQT and two other companies fracking in Pennsylvania have increased by $7 billion since 2008.
Credit…Ross Mantle for The New York Times

For years, though, the natural-gas expansion has breathed confidence into the regions where the drillers were active. Pennsylvania was able to play a part in the fracking revolution that has provided Americans with a bounty of cheap gas and oil.

Despite the clouds over the sector, President Trump struck a bullish note in October at an industry conference in Pittsburgh. “I was here three years ago; you’re much happier now,” he said. “You’re much wealthier, and you’re providing a lot more energy than you used to.” Mr. Trump’s unequivocal support for oil and gas could help him in Pennsylvania against former Vice President Joseph R. Biden Jr., his likely Democratic opponent in November, who has recently struggled to communicate a clear position on fracking.

Larry Allison Jr., a co-owner of a crane company in Williamsport, a town in the center of the state, said his natural-gas-related business was down 30 percent from its peak, but added that the industry still created high-paying jobs: Crane operators earn $35 to $40 an hour. “Everyone’s making $10 per hour more than they were before,” he said. Activity in the natural-gas industry slowed slightly after the coronavirus outbreak began, Mr. Allison added later.

Another EQT well pad can be seen below houses in Marianna.
Credit…Ross Mantle for The New York Times

And Mr. Stuck’s fuel business has ballooned in size over the past decade, an expansion that was in part financed by loans from Community Bank in Carmichaels. “We would never have been able to employ local people from local universities for good competitive-wage jobs,” he said, “It’s been unbelievable to see the impact. And we’ve been through three downturns.” He says natural-gas companies’ demand for his services has not yet dropped because of the coronavirus outbreak.

Residents in gas-producing counties have received royalties for allowing shale operators to extract gas from and run pipelines across their land. “A lot of people made money,” said Ms. Gideon, the former banker. “I was happy for them; they had scraped by for years.” And the copiously flowing gas has lowered utility bills.

But now the shale-gas operators are trying to adapt to a harsher environment. They have cut the cost of drilling and fracking, which involves forcing liquids into the ground at extreme pressures to release gas by fracturing rock formations. Moving vast quantities of sand, used to prop open the fractures, has become more efficient, and operators are saving money by sharing water.

There is one big hope for some of the Pennsylvania gas companies. It’s the giant plastics plant that Shell, with the help of large tax breaks, is building in Beaver County in the southwestern part of the state. The plant takes ethane, a natural-gas byproduct, and breaks apart its molecules, which are then used to make plastic. The plant is expected to consume large amounts of gas from local wells, but Shell has not said exactly when it will come on line.

Construction in July on a Shell plant that will produce plastic from ethane in Beaver County, Pa. 
Credit…Ross Mantle for The New York Times

One option the operators can try is cutting production to support prices. Pennsylvania’s rig count, a yardstick for new well drilling, is 24, half what it was a year ago, according to Baker Hughes. And natural-gas prices could benefit from the sharp drop in oil prices. That’s because the scaling back of drilling by American shale-oil operators will also reduce the amount of “associated” natural gas that those wells produce along with oil. But the economic downturn is expected to depress demand for the gas overall.

If the gas companies go into a long downturn, many in the community worry that it might become harder to get them to pay for legal settlements, cleanup costs, and wear and tear on local infrastructure.

In clearing ground for a road down to drilling site in 2018, EQT cut down some old Osage orange trees on land owned by Rose Friend. The company was building a road on her land because it had acquired a lease from another energy company.

Ms. Friend, 82, a former teacher who sings in a church group, said she didn’t want the road access to be directly opposite her farmhouse in Marianna, Pa., which has been in her family for 101 years, and tried to stop the company. The access was eventually moved 50 yards down the hill, and Ms. Friend’s daughter, Karen LeBlanc, is still negotiating with EQT over a payment to replace the trees.

The view from Ms. Friend’s kitchen window in Marianna.
Credit…Ross Mantle for The New York Times

“They just came in and took over,” Ms. Friend said. “I don’t do things that way.” The company did not respond to requests for comment.

One way the companies help cover the costs of infrastructure improvements is through a state impact fee that is distributed to local governments. The fee peaked at $252 million in 2018, but the revenue for 2019, not yet paid out, is expected to decline by 21 percent to $198 million.

Counties and municipalities that have come to rely on the revenue are getting ready to cut or forgo projects. “It is not a crisis,” said Mr. Belding, the Greene County commissioner, “but it is concerning.”

Ben Casselman contributed reporting.