Trustee board wonders: Will law allow OU to say no to fracking?

OU legal and financial officials told members of the Board of Trustees Thursday that while the university is trying to stake out a position that it can veto any attempt to drill for oil and gas on its land, they don't know for sure whether state regulators will read a new law that way.

Ohio Substitute House Bill 133, which changed the rules on drilling for oil and gas on state-owned lands, is "very vague," Nicolette Dioguardi, OU associate director of legal affairs, told the board.

She said that based on the wording of the law, university officials believe they will have the last word on whether to allow drilling on OU-owned land, and they plan to assert that position. Whether the state will agree with that stance or not, however, remains to be seen, she suggested.

State regulators have interpreted a similar law, H.B. 278, as barring local governments from regulating oil and gas drilling operations in municipal or county limits in any way.

Stephen Golding, OU's vice president for finance and administration, however, echoed Dioguardi's assessment, saying the university will act on the assumption that it can say no to drilling if it so chooses.

"I would say that we are taking that position," Golding said, though he, like Dioguardi, said it's still unclear how the state will interpret the dictates of the new law.

"We're trying to do a delicate balancing act, if you will," he explained. "There are no rules… We are staking out a position. The question is, will that position be upheld?"

Dioguardi added that the board has a "window of opportunity" prior to June 30, to enter into leases under the terms it wants with any drilling companies. After that, the new commission process will kick in.

The state of Ohio is currently being eyed by the oil-and-gas industry for possible widespread drilling for oil and/or natural gas in deep underground shale beds, using the controversial "horizontal hydraulic fracturing" technique. It's popularly known as "fracking."

However, recent maps released by the Ohio Department of Natural Resources showing the prime Utica shale prospects in Ohio exclude Athens County from that area. Experts, though, seem to agree that nobody will know the local oil and gas resources until someone drills one or more exploratory wells. No permit applications for any such wells have been filed for Athens County.

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'World's Biggest Fracker' Pockets $1 Billion in Shady Deal

But it gets worse.  McClendon arranged the financing of some of these loans through EIG Global Energy Partners, a global equity firm that also finances deals for Chesapeake.  The potential for conflict of interest is obvious; you can imagine a quiet quid pro quo where McClendon gets cheap terms on his personal loan and EIG gets a piece of one of Chesapeake’s billion-dollar financing deals.  I’m not suggesting McClendon or EIG made such an arrangement.  I’m suggesting that it’s possible to imagine it happening.

And then there is the issue of disclosure.  You would think that when the CEO of a publicly-traded company takes out a billion dollars worth of loans against company assets, it would be disclosed in the company’s Securities and Exchange Commission filing. Henry Hood, the general counsel for Chesapeake (who also happens to be an old college buddy of McClendon’s) told Reuters that indeed it is, buried deep down in the fine print, and that the company’s disclosures are "fully compliant all legal and regulatory requirements." But if that’s true, it was news to the shareholders Reuters interviewed.

In the coming days, financial journalists are going to have a lot of fun following up on this story.  Among the questions worth asking:     

1. If Chesapeake plays this fast and loose with disclosure on McClendon’s loans, why should we not assume they are also playing fast and loose with disclosure about chemicals that are injected underground during fracking operations or the disposal of polluted flow-back water?

2. Where is the Securities and Exchange Commission on this?  How is that the CEO of a publicly traded company can take a billion dollars in loans, use the wells as collateral, and not disclose it in any significant way to shareholders?  Does the name Bernie Ebbers mean anything to anyone these days?

3. How long are Chesapeake’s stockholders going to tolerate a CEO whose first priority is to pocket billions for himself, rather than maximize profits for shareholders?  As Frances McKenna, who writes about the accounting industry for Forbes put it, the company’s response to questions about McClendon’s secret billion dollar loans "is not only disingenuous, it’s borderline delusional."  One Wall Street analyst I talked to today was even more blunt: "Long term, it is in the best interests of shareholders for someone else to be running the company."

4. How close to bankruptcy is Chesapeake?  The company already projects a $10 billion revenue shortfall this year, thanks in part to rock-bottom natural gas prices (caused, in part, by over-drilling in the rush to cash in on the fracking boom).  But the company’s complex accounting methods make it almost impossible for analysts and stockholders to determine what the risks really are.  The fact that the CEO is taking out billion-dollar loans and not openly disclosing them only furthers the perception that everything is not as it appears at Chesapeake – that the company is Enron with drilling rigs.  I mean, Enron might have been a bunch of crooks, but when they went down, at least they didn’t leave a legacy of toxic drinking water and industrial wastelands.

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ALEC and ExxonMobil Push Loopholes in Fracking Chemical Disclosure Rules

One of the key controversies about fracking is the chemical makeup of the fluid that is pumped deep into the ground to break apart rock and release natural gas. Some companies have been reluctant to disclose what's in their fracking fluid. Scientists and environmental advocates argue that, without knowing its precise composition, they can't thoroughly investigate complaints of contamination.

Disclosure requirements vary considerably from state to state, as ProPublica recently charted. In many cases, the rules have been limited by a "trade secrets" provision under which companies can claim that a proprietary chemical doesn't have to be disclosed to regulators or the public.

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Rules on drilling in parks got more lenient

A year ago, state officials considered creating rules for oil and gas drilling rigs in state parks that were much more stringent than the rules they now have proposed.

The rigs would have had to have been placed at least 1,500 feet from campgrounds; 1,200 feet from lakes, streams and drinking-water wells; and 900 feet from trails, picnic areas and sites of historic value, under rules discussed in May, according to documents released yesterday.

Two weeks ago, the Ohio Department of Natural Resources released proposed rules that would keep the rigs at least 300 feet from most of those areas.

Information about the previous discussions comes from emails and documents that were shared among agency officials drafting mineral-rights leases and drilling guidelines for parks and other state lands.

Other emails contained a list of state parks, forests and wildlife areas in eastern Ohio that could have been offered to drilling companies as early as January. That never happened.

Officials also shared copies of draft leases and drilling guidelines with an Ohio-based oil and gas company — Chagrin Falls-based Reserve Energy Exploration Co. — in November.

“We look forward to hearing your thoughts and suggestions,” wrote Gene Wells, the agency’s real-estate administrator, in a Nov. 4, 2011, email to Joseph W. Haas of Reserve Energy. The Sierra Club’s Ohio chapter had asked to see the same leases in October. The environmental advocacy group then filed a lawsuit on April 9 demanding to see the public records.The Dispatch asked to see them this spring. “These emails confirm my earlier suspicion that ODNR has been consulting with the oil and gas industry on their rules all along,” said Jed Thorp, manager of the Sierra Club’s Ohio chapter.

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Opposition to Fracking in Virginia

Many Virginians support a ban on the controversial practice of hydrofracking in the George Washington National Forest.

Hydrofracking, more commonly known as just fracking, is a process of horizontally drilling for natural gas by pumping chemicals, sand and water to separate the gas from the rock.

The National Forest Service has been weighing whether or not to allow the practice in the George Washington National Forest as it weighs a new management plan for the land.

The Forest Service had a public comment period to solicit input and received 6,700 comments from Virginians.

The Shenandoah Valley Network and the Land, Air Water Stewardship Action Group analyzed the comments and say 70% of the comments support a ban on the drilling.

The Community Alliance for Preservation in Rockingham County also supports a ban on hydrofracking pointing to use of the national forest land for drinking water and recreation.

Executive Director Kim Sandum says "It's an inappropriate location. It's the source of our drinking water. It's the area where lots of recreation opportunities happen. Hunting, fishing, hiking. And those uses are incompatible with hydrofracking."

Sandum says she's not surprised by the number of Virginian's in opposition to fracking.

"It just shows how many people enjoy the National Forest and I'm not surprised that that many - I would think maybe even more - would be interested in having the ban because of the other uses that would be prohibited," Sandum said.

Of the nearly million acres that are in the George Washington National Forest, nearly half of them are on the Marcellus shale formation, which is a very large deposit of natural gas.

http://www.whsv.com/news/headlines/Opposition_to_Fracking_in_Virginia__148675355.html