August 30, 2011
Schools Fill Budget Holes With Fracking Revenues
By Ben Wieder, Staff Writer
In a vote of seven-to-one, the school board agreed to lease 160 acres of the district's land to Chesapeake Energy, the largest holder of mineral rights in the Marcellus Shale region, which lies underneath Pennsylvania and neighboring states. At $2,000 per acre, the lease terms grant the district more than $300,000 upfront. If Chesapeake successfully extracts gas from below the district's property, the schools would earn an additional 15 percent royalty on the profits.
School leaders say the decision was unrelated to major state cuts to education funding this year. But the school board vote was immediately followed by a discussion of the district's budget — the district saw a reduction of around $800,000 in state funding to its $30 million budget. Jerry Wessel, the district's business manager, says the natural gas lease will help the budget situation some in the short term but hopefully even more over the long haul. "That signing bonus could just be a decent drop in the bucket," Wessel says. "If there was a well under the high school — you could see a million dollars over a 20-year period."
Blackhawk is one of dozens of school districts across the country that have struck deals with natural gas companies, either for underground mineral rights or for rights to drill on the earth's surface. Many of the leases have come in Pennsylvania and Texas, two states that are experiencing an energy boom at the same time that they've been cutting state aid for K-12 education. Chesapeake Energy has signed many of the deals with school districts, touting that lease money can help school districts offset some of their recent budget losses. The company recently released a report showing that it paid more than $5 million last year in natural gas bonuses and royalty payments to eight Texas school districts.
Ed Ireland, executive director of the Barnett Shale Energy Education Council, a trade group that represents Chesapeake and other companies that drill in Texas, says natural gas extraction, which began earlier there than in Pennsylvania, has been a financial boon for schools in the region. "All the school districts have benefited in one way or another," he says.
Growing environmental concerns
The lease agreements come as concern grows about environmental risks associated with the process of hydraulic fracturing, or fracking, that is used to extract most of the gas in the Marcellus Shale region and other natural gas producing areas of the country. Accidents connected to natural gas drilling have contaminated the water supply in a few locations in Pennsylvania. Earlier this year, Chesapeake was fined $1 million by the state's Department of Environmental Protection for contaminating the water supply for 14 families in Bradford County. In December, Cabot Oil and Gas Co. was required to pay more than $4.5 million to the state and residents affected by a methane gas leak from some of its wells in Susquehanna County.
Energy companies and environmental officials in other states say the accidents in Pennsylvania represent isolated incidents, and that the practice is by and large safe. Pennsylvania strengthened well-casing and drilling regulations this past February to address the deeper wells and greater pressure associated with hydraulic fracturing. In addition to these new requirements, Pennsylvania is one of five states to add regulations in the past year that require energy companies to disclose some of the chemicals they mix with millions of gallons of water and sand and pump thousands of feet underground to break up the layer of rock in which natural gas is trapped. A U.S. Department of Energy report released this summer also recommended the disclosure of fracking chemicals, and called for testing of the air and water supply near drilling sites.
Legislators in New Jersey passed a bill this past session banning fracking in the state, although it was vetoed last week by Governor Chris Christie, who suggests instead a one-year moratorium on fracking and further study of the issue. New York, part of which lies in the Marcellus Shale region, has a moratorium on issuing permits for fracking while the state's Department of Environmental Conservation revises a report on the practice. There are indications that moratorium might be lifted soon.
Bringing leases to the public
While energy companies have touted the positive impact gas drilling has had on schools, Stephen Saunders, a Scranton, Pennsylvania-based oil and gas attorney, says companies in Pennsylvania initially avoided leases with school districts. Saunders says the companies were hoping to bring on other large landowners before entering into negotiations with schools that could bring public scrutiny.
By the time the Blackhawk district was approached by Chesapeake earlier this year, the energy company had already signed leases with other property owners. "The feeling is that it's pretty much inevitable that they're developing the area around us," Wessel says.
In other parts of the country, that public scrutiny has started to make some lease negotiations more difficult for energy companies. The Fort Worth Independent School District was among the first in the country to lease its mineral rights, signing its first agreement in 2006. Since then, the district has earned more than $13 million in revenues from oil and gas extraction. But this past winter, approval of a batch of 18 leases with Chesapeake was delayed by three months at the urging of a community group.
The Fort Worth League of Neighborhood Associations commissioned a report about the potential environmental impacts of gas drilling and suggestions on ways to mitigate the potential release of toxic and greenhouse gases associated with drilling. Libby Willis, president of the group, which represents several neighborhoods in and around the city, saw the negotiation of that large batch of leases as a moment when the district had leverage with Chesapeake to call for greater safety restrictions. "After that, you're toast," Willis says.
Willis' group presented its report to the school board. The board approved the leases without adopting any of the report's recommendations, although a few members indicated that they were interested in considering them for future leases. Willis says she was disappointed by the outcome, and that the purpose of the study wasn't to convince the board to reject the leases. "We have not been anti-drilling," she says. "We have been pro-responsible drilling — especially when we're talking about the safety of children."
Ireland, director of the Barnett Shale trade group, says energy companies are sensitive to environmental and quality-of-life issues surrounding gas drilling. "The companies have definitely become more responsive to public concerns," he says, citing innovations such as sound blankets, used to absorb some of the noise of drilling where it could bother neighbors. He says that leases with school districts frequently include provisions about well placement and that districts could negotiate for disclosure of the chemicals used in fracking, although he isn't aware of any instances where that has occurred.
School districts in north Texas have mostly embraced drilling and the revenue it brings, Ireland says. Many have used their mineral income to construct facilities that he says would be the envy of other schools across the country. The Birdville Independent School District used $7 million of its gas revenues to establish a scholarship fund for attendance at a nearby community college.
In Michigan, leaders at the Adrian School District, 45 miles southeast of Ann Arbor, are hoping for a similar windfall from an energy lease they signed this spring. "We have a list of $20 million worth of things that could use improvement," says Kathy Westfall, the district's chief financial officer.
But when they first brought the oil lease to the attention of the public, it elicited a strong response at school board meetings. Community members, including an order of Dominican nuns, raised concern about the environmental impact of potential drilling. After three public meetings, the board finally approved a lease in April, albeit under the condition that no wells be placed on school property and that the energy company, Savoy Energy, not use fracking. The gesture was mostly symbolic, since the company wasn't likely to have used the process of hydraulic fracturing anyway, but it reflects how politically charged the term has become.
'Enlist the help of a good lawyer'
During the public debate about the oil lease in Adrian, the school district turned to the state's Department of Environmental Quality, which sent a representative to a school board meeting to discuss the state's environmental regulations and answer the questions of community members. While the department doesn't provide advice to school districts considering a lease, Hal Fitch, director of the department's office of geological survey, says leases that could affect schools are given more scrutiny by the department.
"If we get a permit application with proximity to a school, we pay special attention to it," Fitch says.
Representatives from regulatory agencies in Texas and Pennsylvania say they, too, don't provide advice to school districts about safety provisions to seek in lease negotiations. "Our advice," says Katy Gresh, a spokeswoman for Pennsylvania's Department of Environmental Protection, "is always just to enlist the help of a good lawyer."
Wessel, the Blackhawk business manager, says that he was aware of environmental concerns surrounding fracking when the district entered into negotiations with Chesapeake, but that he and leaders at other schools he's consulted with think it's the responsibility of the DEP, and not schools, to ensure that drilling is conducted safely.
That assumption runs contrary to the thinking of Saunders, the oil and gas lawyer, who thinks that in Pennsylvania, at least, regulators have been behind the curve in terms of safety requirements. The smartest school districts, he says, have successfully negotiated with energy companies for some safety measures of their own, including water testing.
"You can't get what you don't ask for," he says. "I wouldn't recommend that any landowner simply rely on state regulations to guarantee that there aren't going to be any violations."