Allegheny County's Park gas offer includes $3.5 million bonus
County also would collect royalties for Deer Lakes drilling
December 14, 2013 11:07 PM
Piping and storage tanks at one of the natural gas wells in Cross Creek County Park in Washington County.
The fishing and boat landing area at Cross Creek Park.
By Janice Crompton / Pittsburgh Post-Gazette
Allegheny County stands to gain $3.5 million in signing bonuses and potentially more than $70 million to lease the acreage beneath Deer Lakes Park for gas well drilling.
According to documents that the Post-Gazette requested from energy giant Range Resources, the company, in conjunction with driller Huntley & Huntley, forwarded a proposal to county Executive Rich Fitzgerald last month, calling for a one-time signing bonus of $3,000 per acre for the park's 1,180 acres and a 17 percent royalty rate on all future gas sales.
Though the signing bonus is a guaranteed, upfront payment, a Range spokesman said royalties realized from drilling depend on pipelines and other infrastructure near the park in West Deer and Frazer.
"The county stands to receive $35 million given current infrastructure availability in that part of the state, with the potential to exceed $70 million," said spokesman Matt Pitzarella, who said royalties could continue to be collected for more than 30 years. "All with zero impact on the park."
Mr. Pitzarella said the proposal included no drill rigs on county property. Rather, the land beneath the park would be accessed through horizontal drilling with drill rigs on neighboring properties.
Mr. Fitzgerald has been largely mum about the proposal, and said he would not confirm details about it while negotiations with the company are ongoing.
"These are private negotiations," he said.
However, Mr. Fitzgerald said he would like to use half of what he hoped would be a $3 million to $4 million signing bonus to pay for improvements at Deer Lakes, where he said many of the park buildings are in disrepair. All of the six restrooms in the park have been padlocked and need major improvements, he said.
"The shelters are in deplorable condition as well," he said.
The other half of the bonus payment -- about $1.75 million if the county accepts Range's offer -- could be used to shore up other county parks.
"I think a lot of that money would go into the parks," said Mr. Fitzgerald, who would also like to see improvements at Wagman Observatory in Deer Lakes.
Pipeline capacity in the area is limited right now, Mr. Pitzarella said, which could stifle production until more infrastructure is built. Once the pipelines are full of gas, drilling usually stops.
The companies have already constructed four well pads in the area surrounding the park, Mr. Pitzarella said, with 19 wells drilled over the past five years and more on the way.
In other words, the county's property will soon be completely encircled by gas wells.
"We are constructing additional pads near the park, with or without the county's lease," Mr. Pitzarella said. "If they are not in this unit, they will become what is commonly referred to as a doughnut hole, meaning they are surrounded by producing leases and thereby locked out of royalties."
Along with a financial agreement, Mr. Fitzgerald wants "site-specific enhancements" around the area where the drilling will occur.
"We're going to try to control the environmental aspect of what's going to occur anyway," he said about drilling around the park land.
'Now we're threatening county parks'
No matter what safeguards Mr. Fitzgerald negotiates, one public official doesn't think it will be enough to protect the public land.
State Sen. Jim Ferlo, D-Highland Park, says the environmental and unknown impacts of Marcellus Shale drilling outweigh any benefit -- including tens of millions of dollars.
"I'm adamantly opposed to drilling," Mr. Ferlo said. "I work with Rich Fitzgerald. I respect him, but I think he's taking the quick way out. We've seen this at the airport and now we're threatening county parks."
Earlier this year, the Allegheny County Airport Authority signed a lease with Consol, a Washington County-based energy company, to drill at least 47 wells on 9,263 acres at the Pittsburgh International Airport. The county will receive a $50 million bonus payment and an 18 percent cut of all gas sales. The county estimates those royalties will yield another $450 million in the next 20 years.
Mr. Ferlo said he's concerned that Mr. Fitzgerald will use revenues generated by drilling at the airport and county parks to plug budget holes, but he wants the county executive and others to delay further drilling until the impact on the environment is known. He's proposed a statewide moratorium, but acknowledges that it has little legislative support.
"I think it's reasonable to take a step back and let's really get an assessment of the environment and find out what the impact has been, socially and environmentally, before we continue to have this gold rush mentality," he said.
The Cross Creek example
The deal being offered to Allegheny County is similar to one accepted by Washington County from Range Resources in recent years to drill at Cross Creek County Park, located mostly in Hopewell and Cross Creek townships.
Washington County receives a 17.5 percent royalty rate, based on a lease renegotiated last year for the 2,700-acre park, the largest in the county. Currently, the county is receiving about $500,000 per month in royalty payments for the approximately 30 wells that have been drilled there. Another 15 wells are in the works, all drilled by Range.
"The county is going to see a huge spike when we get all these wells online," said Mr. Pitzarella, who estimated that the park could generate as much as $190 million for county coffers in the next 10 years.
Between royalty payments and bonuses at Cross Creek, the county has so far netted $8.8 million since the first lease was signed in 2003. The county has received another $9 million in Marcellus impact fees from the state for its 686 wells.
"It was a surprise. We knew there would be a profit, but we were surprised with the royalties we got," said Washington County Commissioner Larry Maggi. "We never thought it would be that much."
Mr. Maggi said the county was wary at first about signing a lease, especially one that allowed so much drilling in the "beautiful and pristine" park, which features a 253-acre, man-made lake, pavilions and outdoor activities.
"In Washington County, we have a history of being ravaged by industry," with coal mines, steel mills and other industry that leave behind environmental damage and abandoned industrial sites. "I think we learned from that."
The county also learned from the mistakes that were made at Cross Creek, including one wastewater spill in 2009, several environmental violations and the accidental clear-cutting of more than 100 trees by a Range subcontractor in 2011.
"I walked on that site and my head exploded," county planning director Lisa Cessna recalled of the day she realized that several acres of mature trees had been mistakenly clear-cut. "It was a bad day."
Mr. Maggi said it would be "ludicrous" to imagine no accidents ever occurring in an industrial operation such as natural gas drilling.
"Things happen. You can't forecast the future," he said. "You try to minimize it as much as you can. The revenues were worth the risk."
Still, the park sustained no other major damage, Ms. Cessna said, due to environmental and other controls that were worked into the lease agreement. The company and county negotiated a settlement to replace the lost trees and provide construction help for park improvements.
The county has the final say on all drill rig and pipeline locations, Ms. Cessna said, and it has worked with Range to keep them out of sight to those visiting the park.
"We have control over every single thing," said Ms. Cessna, who has had to walk nearly every inch of the park to inspect operations and lay out a plan for a pipeline that wouldn't intrude on neighbors. "It can be labor-intensive but it's worth it in the end."
'You have to protect the environment'
In August, Mr. Fitzgerald toured Cross Creek to get an idea of what to expect if drilling is allowed near Deer Lakes.
Mr. Maggi said he advised Mr. Fitzgerald to negotiate safeguards into the lease agreement.
"I told him -- you have to protect the environment. The environment was paramount in our lease," Mr. Maggi recalled.
Mr. Maggi said Mr. Fitzgerald and a group of staffers and county council members that he brought with him "could not believe they were sitting in a pavilion looking at a pristine lake," Mr. Maggi said. "They were surprised by the small footprint it had in the park."
Mr. Fitzgerald said he took note of the environmental caveats in the county's lease and though there won't be any surface drilling in Deer Lakes, he wants to ensure that neighbors also don't experience any damage. Because of the local topography, the park is higher than the surrounding land, so any spills or damage would be unlikely to enter park property.
"These are the kinds of things we're negotiating and working with the company on," Mr. Fitzgerald said. "There were lessons we were able to glean [in Washington County]."
The revenues from drilling in the county park have been split between Washington County's general fund and its park department, allowing for major improvements at Cross Creek, such as an expanded playground, new shelters and a new boat dock.
A 3-mile perimeter walking trail is being built and the county is also planning a new boat launch, fishing pier, shelters and a playground at another location in the park near Thompson Hill Road, Ms. Cessna said.
The county's other parks also have seen improvements due to the added revenue, and officials are now considering whether to sign a non-surface lease agreement for property beneath Mingo Creek County Park in Nottingham.
Mr. Fitzgerald said he would like to replicate some of the in-kind work being done by Range in Cross Creek, like paving roadways and providing labor for various other park improvements.
He hopes to take county council members on a visit to Deer Lakes so they can see for themselves what the extra revenue would mean for park users.
"We saw the improvements in Cross Creek that were made," said Mr. Fitzgerald, who hopes to finalize the lease with Range sometime next year. "That's one of the things we'd like to look at too."
But if his neighbors to the north decide not to drill in Deer Lakes, that's fine by Mr. Maggi, who said he is happy to continue touting Washington County as the "energy capital of the East."
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