There are few things I enjoy more in life than summer in upstate New York. The trees are so green and alive. The lakes are crisp and refreshing and the air is just so clean. The peacefulness of it all is always such a treat to see when I come back home to New York and spend time visiting my parents.
That being said, there has been a battle brewing in the state for the past few years. In one sense this peaceful place has now become ground zero in the fracking debate and in another, it is the final frontier left to be conquered by the practice. This week that debate was brought again to the forefront as President Obama visited the state, and in particular the southern tier, under which lies the resource rich Marcellus Shale.
The President, despite his environmental leanings, is an advocate of natural gas development. He sees the economic benefits as being a net positive. That stance, however, doesn't sit well with everyone which is why his visit to the region will be met with anti-fracking protests. Dodging protesters wasn't exactly what I had in mind for my own peaceful vacation to the region.
What is interesting about the whole ordeal is that New York's Governor, who isn't exactly supportive of the fracking process, is actually starting to see the President's point. In fact, Governor Andrew Cuomo has recently said that, "The president's point that fracking has economic benefits, energy benefits for this country is inarguable." He went on to say that, "Every area that has participated in fracking will tell you it has seen increased commercial activity and it has an economic boost effect." With statements like that, it has me wondering if this fracking skeptic is about to crack.
Governor Cuomo has presided over a moratorium on the fracking process which is now in its fifth year. He is still waiting for final word on the health impacts of the process. During that time its neighbor to the south, Pennsylvania, has enjoyed an energy drilling boom, which has really helped to fuel that state's economy. Meanwhile New York's southern tier economy has continued to stagnate.
The real question, if Cuomo does eventually crack to the pressure and lift the moratorium, will it be too late to deliver much of a boost to New York's economy? The nation's number two natural gas producer, Chesapeake Energy (NYSE:CHK), has recently given up on its battle to hold on to leases it had signed more than a decade ago. Two years of legal battles and a very uncertain regulatory climate has given the company second thoughts as to whether or not New York will ever be worth it.
Not only that, but now under new leadership, Chesapeake is abandoning its old ways of building an energy empire no matter the cost. Instead, the company is focusing its efforts on the core of its core acreage, which are those producing the highest return. Right now, that isn't natural gas but instead areas like the oil rich Eagle Ford shale of Texas.
Still, for some producers, like Cabot Oil & Gas (NYSE:COG) and Range Resources (NYSE:RRC) for example, the Marcellus is a very high return play, even if it is only natural gas. In fact, Cabot has said that the best drilling locations in the Marcellus can produce rates of return that rival or exceed all of the top oil or natural gas liquids producing regions in the U.S. even at current natural gas prices. However, the company already has 3,000 future drilling locations, meaning it will have its hands full for a long, long time before it would even need to look north into New York for future drilling locations. Similarly, Range has its hands full drilling on its acreage in Pennsylvania. The company can grow its production by 20% or more per year without even giving a thought about New York.
As Cuomo pointed out, the economic benefits of fracking are inarguable, these drilling companies also must see an inarguable economic benefit from drilling in New York. There are few companies that can actually deliver real profits from current natural gas prices, with the key being a low cost structure which leads to high well economics. Even if Cuomo cracked and allowed New York to frack, it would likely be highly regulated, which could actually price it out of the range of many drilling companies that are more focused now than ever on actually producing economic results. So, even if this fracking skeptic does crack and lift the moratorium it might not have the immediate economic boom that many hope, which is a shame because despite the wonderful summers, the economic winter in the region just never seems to end.