Drilling on Campus: Marcellus Shale boom puts colleges at crossroads
First of two parts
November 6, 2011 4:00 AM
An abandoned storefront in Bethany, W.Va. Other than Bethany College, there are very few working establishments in Bethany. Administrators hope to reinvest royalties earned from their natural gas lease with Chesapeake into both the institution and the surrounding community.
Mike Morgan is a superintendent for Mashuda Corp., the company building the well pad next to Bethany College's campus in Bethany, W.Va.
Student housing at Vulcan Village, a 10-building student apartment complex, is part of a lease agreement between The Student Association Inc. at California University of Pennsylvania and Antero Resources Appalachian Corp which allows subsurface drilling on the South Campus.
By Bill Schackner Pittsburgh Post-Gazette
Now a junior, Jenna Kemmerle knows her way around California University of Pennsylvania's campus, the shortcuts to its red-brick classroom buildings, the walkways approaching Old Main.
But this she didn't know: Land where she and hundreds of CalU students live and play is part of the Marcellus Shale drilling boom.
Ten months ago, The Student Association Inc., an organization affiliated with the university, approved a lease for subsurface drilling on land it owns that includes tennis courts, baseball and soccer fields and an apartment complex where 768 students, including Ms. Kemmerle, live.
The deal may be the first Marcellus Shale lease affecting a state-owned university in Pennsylvania, and it shows how drilling is starting to alter the financial landscape at colleges struggling to maintain their missions in a bad economy.
It also illustrates how a drilling lease can remain under the radar. Even the school's president, Angelo Armenti Jr., said he did not know a deal had been struck. The lease, approved in a closed meeting, was never announced on campus.
Ms. Kemmerle, 22, of Dover, Del., is neither fan nor foe of hydraulic fracturing -- or fracking -- the process used to extract natural gas from rock. But she was surprised to learn from a reporter that a group better known for managing student activity fees had approved fracking deep below what CalU describes as part of its South campus.
"I do live up here," said the education major as she stood outside her Vulcan Village housing complex. "I'm surprised they didn't send out an email or anything to let us know."
State-owned universities in Pennsylvania cannot yet keep income from the sale of natural gas beneath their campuses, although proposed legislation would change that for those schools, which include CalU and 13 other universities belonging to the State System of Higher Education.
While each has been hit hard by state funding cuts, the current rule that income reverts to the state has lessened incentive for such deals and thus postponed what some expect will be a touchy campus debate about the money versus environmental risks.
But there is nothing right now that prevents an organization affiliated with one of those universities from quietly negotiating a deal for land it controls and keeping the money, even if students who live on the property are unaware of the plan.
CalU's Student Association Inc., a student nonprofit, granted Antero Resources Appalachian Corp. subsurface drilling rights on just over 67 acres.
At its Jan. 25 meeting, the association's 13-member governing board -- more than half students and the rest associated with the university -- approved the lease, including language requiring that the terms be kept confidential.
A university spokeswoman, when contacted recently by the Pittsburgh Post-Gazette, initially said the association would not say whether it had a lease or had been approached to sign one. But the group changed course, eventually providing the lease.
The association says it is legally separate from CalU and not required to disclose the information, even though its offices are on campus and its executive director is a CalU employee.
Pennsylvania Common Cause, a government watchdog group, says taxpayer-funded state universities and their affiliated groups have at least an ethical obligation to disclose such decisions to their students. Barry Kauffman, the group's executive director, said the State System ought to look at the issue given potential for future leases involving other member universities.
"Parents send their students to these universities with some kind of perception that the university will be looking out for their best interests," he said.
"We can't really comment at this time," spokesman Kenn Marshall said.
An association official said an announcement was unnecessary since no well pad will be on the property, and a CalU statement said if drilling occurs it will be so far below ground that "there should be no effect on university activities."
Other schools, including several in West Virginia, are moving ahead on drilling deals.
• West Liberty University, a state campus near Wheeling, hopes to pay for a new science center with an upfront payment of as much as $1.4 million from Chesapeake Energy for a subsurface drilling lease covering 279 acres.
The payment equals more than 10 percent of West Liberty's endowment, valued at $11.5 million last year, and the 18 percent royalty payments from any gas removed "would be a nice annuity," said Jeff Knierim, West Liberty's vice president for community engagement.
• Just up the road, Bethany College, a private campus in Bethany, says its 1,300-acre deal with Chesapeake will help enhance the school's academic programs and endowment. A well pad is being built on college-owned land adjacent to but separate from the school's picturesque campus. It is nearly a third of a mile from the closest building, a fraternity house.
Bethany declined to say how much it will earn, but President Scott Miller said Bethany should be able to stay true to its liberal arts mission "if what's down that hole comes out the way we think it's going to."
• Alderson-Broaddus College, a school in Philippi, has retained a mineral rights consultant and hopes by March to reach a deal involving 1,800 off-campus acres to which the college owns mineral rights. The money would help fund millions of dollars in campus enhancements, including several new athletic programs such as football and a plan to freeze tuition and fees.
It's hard to predict the earning potential of these deals, still in their infancy and heavily dependent on the volume and quality of something buried a mile or more underground. But a look at Texas suggests how lucrative the arrangements can be.
A lease signed by the University of Texas at Arlington in 2007 guarantees a 27 percent royalty on gas removed from the Barnett Shale deposit beneath campus. In the two years since drilling began, it has produced $8.8 million, on top of a $791,000 signing bonus.
The money is going to student scholarships, faculty endowments and campus construction. In addition, the company donated more than $6 million to the school in the past two years toward a new arena and other projects.
"It's been a major boon, especially at a time when state funding is down," university spokesman Jerry Lewis said.
But in exchange for those hefty payments, Arlington allowed a well pad to be placed on its campus, about 400 feet away from a YWCA child-care facility and the school's continuing education and workforce development building.
Some say no thanks
In southwestern Pennsylvania, colleges have not put down well pads on campus, though one company wanted to do just that at Waynesburg University, said Roy Barnhart, the school's vice president for business and finance.
This is the first collaboration between the Pittsburgh-Post Gazette and PublicSource, a non-profit investigative news group in Western Pennsylvania. Learn more »
"We were approached a year or so ago," he said. "They wanted to set their drill rig within a couple hundred feet of one of our dormitories."
The idea was nixed for reasons including truck traffic to and from the well pad and bright lighting required to illuminate the site at night.
"We would have had residents in our dorm trying to sleep essentially in daylight," Mr. Barnhart said.
Waynesburg said no.
"It was a very short conversation," he said.
Some opponents of drilling on or near campuses worry that turning down such offers could become increasingly difficult for schools in need of money.
Critics warn that pursuit of a financial windfall could carry a heavy price if something goes awry with deep vertical drilling that then extends like fingers horizontally.
David Masur, director of advocacy group PennEnvironment, said colleges promote an image of themselves as pristine and tranquil places in which to learn.
"Imagine students sitting down in a quad and instead of looking out over green lawns and historic buildings, they're looking at drilling rigs and flaring wells," he said, conjuring up what he called a worst-case scenario.
Keeping a well pad off campus may look better, he said, but it doesn't alleviate concerns over groundwater contamination and the presence of heavy equipment traveling roads near campuses.
"Do you really want to have a compressor station, thousands of truck trips close to students?" he asked.
Colleges pursuing those agreements see it differently and say adequate safeguards make the process safe.
Alderson-Broaddus President Richard Creehan had a simple answer for those who say campuses should walk away from gas leases.
"Get in the real world," he said. "You need to seek funding sources to have your college remain strong and viable. In the real world, it means you look at all options on the table."
At CalU, The Student Association's lease with Antero shows that even a relatively small amount of acreage can be a moneymaker.
Even if no drilling occurs, the up-front payment of $202,920 is helping with a $750,000 transformation of a farmhouse on association-owned land separate from the land leased for drilling. The farmhouse will be turned into student meeting rooms and a banquet hall.
Leigh Ann Lincoln, the association's chief financial officer, said the 18 percent royalty payments from any gas extracted will reduce future student activity fee increases.
It also may help transform farmland the association now owns into student athletic fields, a pavilion with parking, a par-three golf course and possibly homes for retired faculty.
The deal was struck just months before California and the 13 other universities belonging to the State System absorbed the biggest hit yet in a decade of sliding state support: an 18 percent cut for 2011-12 that meant a loss of $90 million in state aid and federal dollars under the state's control.
Mr. Armenti, CalU's president, said in a recent interview that he did not know about the Student Association's lease, finalized in January, until asked about it last month. He also said he didn't need to know, saying he's convinced the process is safe and he's confident the association acted in students' interests.
Mr. Armenti said when Antero approached him a couple of years ago about a lease, he suggested the company contact the association, since the university could not keep the proceeds from such a transaction.
"If it's an opportunity to bring in revenue for your students, I don't know why you wouldn't look at it, especially now that funding sources are drying up," said Nancy Pinardi, the association's executive director and CalU's acting vice president for student affairs and dean of students.
"We don't have many alternatives," she said. "This is an alternative."
Ms. Lincoln said the subsurface work wouldn't be noticed. "They told us it's so far down, we wouldn't even know it existed," she said.
Other campuses have been in Marcellus Shale discussions to varying degrees.
Penn State University, which as a state-related school is free to keep gas earnings, signed a deal last year with Chesapeake covering 87 acres in Terry, Bradford County. Because the land is used for forest research, the lease is limited to subsurface work, Penn State spokeswoman Lisa Powers said. Terms were not disclosed.
Though it nixed a campus proposal, Waynesburg has a lease on land in Aleppo Township, Greene County covering 12 acres yielding an upfront payment of $43,000, Mr. Barnhart said.
And Geneva College, Westminster College, St. Vincent College, Butler County Community College, La Roche College and Washington and Jefferson College all confirm that they at least have been approached within the past few years. None to date has signed a deal.
Butler County Community College received seven approaches within several months but ultimately decided it was best not to rush into a decision, said Nicholas Neupauer, the school's president.
Leases on the school's terms
School administrators who have signed agreements say they studied the issue thoroughly and put in place safeguards including limits on where drilling can occur and how much access trucks will have to college property.
Bethany, for one, says its lease signed earlier this year followed three years of study by the college and its board of trustees. The deal allows extraction beneath the 1,300 or so acres Bethany owns, but the college said it insisted from the start that no well pads would be allowed on the school's 400-acre campus. The drilling instead will take place on farmland donated to the college a century ago.
Mr. Miller said the lease will help the college avoid financial worries that led some liberal arts schools to abandon their mission, becoming universities and expanding into new programs for the revenue they produce.
But not everyone is happy.
"Keep Bethany College Beautiful -- No Fracking Way," was the call of 300 alumni, students and local residents who formed a Facebook community after the college deal was announced.
Mr. Miller said Bethany concluded that drilling would occur in the area whether Bethany signed a lease or not.
Striking its own deal enabled the college to negotiate safeguards to protect any aquifer or watershed and to advocate for investment by Chesapeake in the community.
"I want people 10 years from now, when there is a different president, to say [the deal] benefited Bethany College for the long term," Mr. Miller said.
Harry Chambers, 45, whose family owns a general store in tiny Bethany, said he knows some residents and students do not want fracking's impact nearby, but he also knows Marcellus Shale could help landowners make their property economically viable.
He doubts drilling will affect the college.
"I would bet you 90 percent of the students couldn't tell you where that well pad was gonna be," he said. "If they didn't happen to come in on [Route] 88 north, they won't even know it's happening except maybe for a couple weeks of noise while they're drilling the hole."
Historically, gas wells and even mines are not foreign to Pennsylvania's state university campuses. Generations ago, Slippery Rock students brought back coal from a university-owned mine to heat campus buildings, school spokesman Karl Schwab said. Indiana University of Pennsylvania once had gas wells that helped serve the campus.
While the law has long required that money earned from gas and oil production must revert to the state, legislation working its way through the House and Senate would allow the 14 State System universities to use the earnings.
The House bill, whose lead sponsor is Matthew Baker, R-Tioga, and a member of the State System's board of governors, would allocate 60 percent of the proceeds to campuses with deposits and 40 percent to the others; the Senate version flips that ratio, and its lead sponsor is Sen. Don White, R-Indiana.
At least four State System schools -- California, Indiana, Lock Haven and Mansfield -- are built atop Marcellus Shale, said Mr. Marshall, system spokesman. Clarion and Slippery Rock also may be above a deposit.
Gov. Tom Corbett has expressed support for campus drilling, a position that rankles fracking opponents. They see irony in a governor who is a proponent of cutting state university appropriations on the one hand and encouraging them to drill on the other.
Eric Shirk, a Corbett spokesman, said the governor's suggestion that those schools could turn to drilling for extra revenue was "very preliminary" and completely separate from budget decisions made when the state faced a $4.2 billion deficit.
For his part, Mr. Armenti said he sees no indication that subsurface drilling has led to problems. A law change would simply allow state universities like his to benefit from what hundreds if not thousands of landowners in Pennsylvania already are legally allowed to do.
He and other State System presidents have had to deal with continuing erosion of state support.
"I'd be happy as a lark if we were able to have an alternative source of revenue," he said.