November 24, 2010 6:00 AM
Pennsylvania Shale Boom: Drilling for Trouble?
Posted by Ed Shanahan
In September, 13 families from tiny Lenox Township in northeastern Pennsylvania sued Southwestern Energy Company. The plaintiffs, whose homes sit atop a slice of the 95,000-square-mile bedrock expanse known as the Marcellus Shale, allege that in drilling for natural gas, Houston-based Southwestern contaminated the local water supply with chemicals that caused them to suffer neurological disorders and gastrointestinal illnesses. It isn't the first lawsuit to label Marcellus drilling a health hazard. And if the recent rush by energy companies angling for access to the natural gas lodestone keeps up, it's unlikely to be the last.
While the shale grab has been on in earnest since 2008, the blizzard of big deals lately has been dizzying. "These shale transactions, in terms of the sheer enormity of the dollars involved, are really quite phenomenal," says James Rice, who heads Akin Gump Strauss Hauer & Feld's energy and global transactions practice. "There's been an explosion of work from natural gas."
Rice is putting it mildly. On November 9 Chevron Corporation announced that it was acquiring Moontownship, Pennyslvania–based Atlas Energy Corp., a leading independent shale gas producer, for $3.2 billion in cash and the assumption of $1.1 billion in debt. Advising on the deal: Skadden, Arps, Slate, Meagher & Flom (for Chevron) and Covington & Burling, Jones Day, and Wachtell, Lipton, Rosen & Katz (for various Atlas entities). Earlier deals included Consul Energy Inc. buying Dominion Resources's Appalachian natural gas exploration and production operations for $3.5 billion, with Akin Gump and Wachtell representing Consul and Baker Botts advising Dominion; and Royal Dutch Shell PLC (Vinson & Elkins) buying Pennsylvania natural gas operator East Resources Inc. (Baker Botts; Thorp, Reed & Armstrong). And in a $41 billion deal that closed in June, Exxon Mobil Corporation, with Davis Polk & Wardwell advising, bought Texas-based XTO Energy Inc. (Skadden), acquiring leases on 280,000 Marcellus acres in the process.
Buying into the Marcellus Shale is one thing. Getting at the gas—which energy companies like because it burns cleaner than coal or oil—is another. Extraction involves hydraulic fracturing, or "fracking," a process in which millions of gallons of water, mixed with sand and chemicals, are pumped thousands of feet into the earth to split the rock. Technology has only recently made it possible, in the words of one big-firm lawyer, to efficiently "suck the fuel from the stone" in this way.
All that sucking has given the rural towns of the Marcellus region, which runs across Pennsylvania, southern New York, West Virginia, and eastern Ohio, an economic jolt. Many residents have benefited, whether by leasing property for drilling, landing shale-related jobs, or having rig workers shop at otherwise struggling local businesses. "I really think that oil and gas are one of the few bright spots in the economy for Pennsylvania," says Reed Smith litigation and environmental law partner Nicolle Bagnell, one of about a half-dozen lawyers at the firm working full-time on shale-related matters.
Not everyone agrees, and some locals are fighting back. Their complaints focus mainly on fracking, which is controversial because energy companies need not disclose what chemicals the drilling fluid contains. There are also claims that shale-splitting is sending methane into local aquifers. Advocacy groups like the National Resources Defense Council and Frack Action, an upstate New York organization whose spokesman is actor Mark Ruffalo, have pushed drillers to divulge what's in the fracking fluid, and regulators have begun to listen. In June, New York imposed a fracking moratorium while officials review the relevant state regulations. The federal Environmental Protection Agency has launched a thorough fracking study. And in October, Pennsylvania governor Ed Rendell banned drilling on 1.5 million acres of state forestland that sits atop the shale.
Banning drilling seems extreme to Peter Cambs, of Great Neck, New York, plaintiffs firm Parker Waichman Alonso and one of the Lenox families' lawyers. "My clients aren't against drilling," he says. "But when all of a sudden your water turns brown and you can light your sink on fire, you expect the gas company to take responsibility for ruining your water."
Southwestern, which says in a motion to dismiss that the claims have "no factual basis," has hired K&L Gates to fight the suit. The firm has some 30 lawyers doing shale work, and has clearly gained from the Marcellus surge. With litigation partner Walter Blunt, Jr., in a lead role, K&L Gates also represents the Marcellus Shale Coalition, helping group members navigate the regulatory and litigation landscape.
The firm is also defending Texas-based Cabot Oil & Gas in a suit filed last year by 12 families in Dimock Township, Pennsylvania. That suit is notable, in part, because some of the plaintiffs appear in Gasland, a documentary that has aired on HBO, was a Sundance Film Festival prizewinner, and is the source of a much-viewed YouTube clip in which a Dimock man sets water from his kitchen faucet ablaze.
A Pennsylvania Department of Environmental Protection spokeswoman says that Cabot has been cited at least seven times since 2008 for fracking-fluid spills in Dimock. The DEP has also fined Cabot repeatedly, most recently in April, after finding, following a water-well explosion, that faulty oil-well casings leaked methane into groundwater. The state is billing Cabot $30,000 a month until the problem is fixed and has said it must pay $11.8 million for a new public water line. Cabot refuses. Says Blunt: "We're aggressively contesting the water line. The methane there is not something that's new. It has nothing to do with the development of oil and gas in that area."
While the fights rage on, lawyers in the field don't see Marcellus deal fever dying. After all, one recent report said that shale gas is likely to account for half the country's natural gas supply by 2035. And even though deposits in other regions are spurring deal action, too, many energy companies have Marcellus on their minds. "Natural gas is still blossoming," says Blunt. "Litigation won't curtail their efforts."
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