Playing the shale game
Playing the shale game
Pushing away overhanging vines, David Phillips muscles aside a rusty metal plate taller than he is and nearly as wide as his outstretched arms. In this Lee County community once known as Coal Glen, trucks wallow through General Timber Inc.’s lumberyard, shuttling wood to be creosoted against rot. Phillips, an employee, peers into the hole before him. As silent as a sarcophagus, it breathes dank air into the daylight. Rails, like a train’s, slope down into utter blackness. “This,” he says, “is as far as we go.”
There’s no marker, just weeds and bushes. A few miles away in the crossroads of Gulf at the general store where J.R. Moore & Son has sold groceries, feed, hardware, clothing and shoes since 1935, customers look puzzled when asked about this place. At 9:30 on a May morning in 1925, windows for miles around rattled and bilious smoke belched from the mouth of the Carolina Coal Co. mine, also known as the Farmville Mine. Superintendent Howard Butler, the 29-year-old son of the owner, rushed in to rescue trapped miners but was almost killed in a second blast. Dragged to safety, he staggered back to try again just before a third explosion tore through the mine. He barely survived. Fifty-three others didn’t.
Coal Glen has vanished from maps and, with it, memory of North Carolina’s worst industrial disaster. By the time of the explosion, at least a dozen mines had operated around here, going back before the Revolutionary War. Many ended in blasts, bankruptcy or both. More than 200 died in explosions. Those at the nearby Egypt Mine in 1895 and 1900 killed 40. The 1925 blast left 38 widows and 79 orphans. In clutches around freshly dug graves, murmurs spread. Something deep underground, the superstitious whispered, guarded its wealth. The devil was gas.
This spring, rumors circulate again. Outsiders bearing papers are knocking on doors. Some people, educated and savvy about commerce and law, sign confidently. Among them are Howard Butler’s son Daniel, whose business card reads “minerals and real estate.” Others, including the elderly with dim eyes and weak hearing, put their names to confusing words and phrases. “The lessee is hereby granted the right … ”
On June 16, more than 250 people stream into the old Lee County courthouse in Sanford until the fire marshal blocks the door, stranding dozens outside. A young woman from the local Agricultural Extension Service office introduces a man from Raleigh, James Simons, who explains that he’s the chief state geologist. He starts with a laugh. “My boss wants to know, ‘What are y’all doing down there, trying to sell shares?’”
Senior geologist Jeffrey Reid, his short-sleeved white shirt open at the collar, describes something beneath the surface eight miles west of town that he calls the Cumnock Formation. To most here, Cumnock is a wide spot in the road two miles from the Coal Glen shaft, just a rusty old camelback bridge over Deep River, volunteer fire department and Bud’s Barbeque. Reid explains that it’s no surprise that the killer at Carolina Coal — gas — is abundant here. Gas and coal are geological cousins. But now, he tells the gathering, there are new ways to pry it from the porous rock. Some geologists think there might be enough down there to meet the natural-gas needs of the whole state for 40 years.
Others warn of the vagaries of the natural-gas industry. Mining laws must be changed, Prices fluctuate. A lawyer cautions them about unscrupulous speculators and legitimate wildcatters — the men and companies that come in first, gambling millions in high-risk exploration but extracting correspondingly high returns if they strike it rich and sell their finds to production companies. Some who signed in haste sheepishly begin studying their folded hands. Their misgivings will come into clearer focus a few weeks later when, back in Raleigh, state Utilities Commission analysts help compute the value of 40 years’ worth of natural gas — about $80 billion in 2010 dollars.
The meeting over, a soft murmur trails the crowd out the door. Unlike those earlier times, the whispers aren’t about a malevolent force deep in the earth. They are about prospects for new lifeblood in a region long skirted by the state’s urban prosperity. About potential disappointments and false hopes, deals and money to be made — maybe, some say, even riches. This time, the devil is in the details.
Other than chirping sparrows and the nearly imperceptible rustle of a water moccasin slithering through damp leaves, there’s only the moan of a distant truck on Boone Trail Road — U.S. 421. A weedy path winds through woods to a small creek, then tops a hill above the sluggish Deep River west of Sanford. Several thousand feet below is the epicenter of the most promising gas deposits in the state and maybe the Southeast — the Cumnock Formation.
About 250 million years ago, in the Triassic period, some of the first dinosaurs — coelophysis, a 7-foot-tall tyrannosaurus rex look-alike, and his kin — roamed here when this was Pangea, the only continent. The vegetation was less dramatic than the pterodactyls circling above, but when it comes to natural gas, it was more significant. Giant ferns and segmented trees that looked like colossal bamboo sprouted in steaming swamps that grew larger as Pangea drifted apart to form today’s seven continents. As plants died, they settled to swamp bottoms, and pressure from deepening sediment above and heat from the Earth’s core below cooked and compressed them into coal, oil and natural gas.
“Natural-gas deposits are usually formed by marine life,” Simons says. “This is unusual because it was of terrestrial origin — freshwater lakes — but the principle is the same. What we had here was a complete system consisting of organic material, the ability to cook it, stone with the porosity to store it and cap rock to keep the gas from moving up to the surface and evaporating.”
Truth is, discovery of natural gas in North Carolina is no discovery at all. Dead coal miners found out the hard way. This region, consisting of Chatham, Randolph and Lee counties, is North Carolina’s only coal-producing territory. It was here in central North Carolina, not the state’s western mountains where most would expect lodes of fossil fuels, that the Confederacy turned for coal. But it had its drawbacks. It burned smoky and sulfurous, and Union sailors could easily spot the blockade runners it fueled from miles away.
Only a handful know its history today. Worth Pickard is one. A few miles from Cumnock, down Carbonton Road is a driveway with an old, blue Chevrolet S-10 pickup at the end. He grew up here, as did generations of Pickards before him. Thirty years or so after the 1925 explosion, he was a sidekick of the hero of Coal Glen, Howard Butler — “one of the finest men that ever lived,” selling drilling equipment and drilling water wells. The Butlers and others operated the Carolina Coal mine off and on until the early ’50s. In 1959, Pickard, 81, started his own company. He drilled water wells but also sank a few shafts for petroleum geologists looking for oil. He holds up a vial of black crude from one.
“Looks a lot like axle grease,” he says. “One guy in the ’80s probably spent more than $1 million. He brought in 9,000 feet of pipe. I asked him what he was going to do, and he said he was going to drill down that far. I said, ‘Oh no, you ain’t.’ They drilled down to 5,400 feet and pulled out. No jacklegs are going to find what’s down there.” The chief state geologist agrees. “Previously, they were looking for what we call coal-bed methane gas and oil, but not what we now call shale gas.” In Simons’ imagination, the earth 4,000 feet down “would be almost like a reddish cake with dark layers of shale icing between layers. But with shale gas, it’s not just sitting there — it’s encased in the shale. If you just drill through it, you get very little, if anything.”
That, Reid adds, has been the problem until now. “The coal mines here were quite gassy. It was methane mixed with coal dust that caused the explosions. In the ’80s, when hydrocarbon prices were high, people drilled a bunch of vertical wells blindly in the Deep River shale basin, looking for oil. They had the cart before the horse. They weren’t thinking about gas.” He was. A Texan by birth and petroleum geologist by training, Reid went to work for the state in 1986. He plowed through old geological charts and reports and prowled the woods and fields of Lee and Chatham counties. He listened to voices of experience such as Pickard’s and developed, his friends say, a near-obsession with the mineral trove beneath Lee and Chatham counties, often working on his own time. What was missing were methods to gauge how much there was down there and how to profitably extract it.
One answer can be found in a clearing in the depths of the woods near the Deep River. It is Butler No. 3, a wellhead with its reddish paint showing smudges of rust. This is a test well — “shut-in,” as wildcatters say, meaning it’s under pressure but sealed. Here and at another similar well, along with seismic and other data, Reid and other geologists have sufficient evidence to convince wildcatters that there are profitable quantities of gas below.
“Gas has been there all along,” Reid says. “The change of thinking comes from our new geochemical and seismic data and the availability of horizontal drilling and hydrofracturing.” Neither technology is revolutionary. Drillers go down, then drill horizontally into layers of gas shale, the icing between the layers of Simons’ underground cake. Developments such as underground drilling motors and methods of precisely tracking a drill’s position and guiding it thousands of feet underground, even while drilling continues, have made horizontal drilling lucrative. Gas would still be trapped in the rock, though, except for advances in hydraulic fracturing — “fracking” — in which liquid under tremendous pressure is forced into fractures, opening them and releasing gas. How much gas? Not even geologists are sure.
The vast, rambling underground terrain they call the Deep River Basin extends 150 miles from South Carolina north nearly to Virginia. Not all of it is gas-rich though. Simons, Reid and other geologists put the upper end at about 50,000 acres. The most promising target in the Cumnock Formation is the Sanford sub-basin — about 20,000 acres northwest of the city. Near here, as a boy, one man went down to the devil’s depths. Today, when it comes to the business of natural gas in these parts, few know the details as well as he does.
On the outskirts of Southern Pines, 30 miles south of Sanford, in a pristine forest of tall Carolina longleaf pines, the den of Daniel Butler’s house overlooks a lake with surroundings as preened as a golf course. Here, he and his family ride to the hounds. Jumps and barrels line the Butlers’ long, meandering driveway through the woods. Another family tradition is preserved in the chunks of Coal Glen coal embedded in the stone chimney above his mantle. “As a kid, I remember riding down in the coal shuttle cars with my dad when he was still operating the mine. It went all the way under Deep River, a thousand feet.” That was in the early ’50s, shortly before Carolina Coal closed for good after one last, futile effort to make money. The Butlers — grandfather Bion, father Howard and, now, son Daniel — had an affinity for land, timber and minerals.
Daniel Butler owns mineral rights to 2,715 acres at ground zero of the prime gas lode near Cumnock and the Deep River. He’s the biggest of the new breed of natural-gas players here, but he’s not alone. Quietly at first, then in a frenzy beginning last spring, wildcatters and speculators moved in, sometimes blanketing landowners with mailed, ready-to-sign leases and prewritten bonus checks or, in other cases, only promises. By fall, Reid estimated that more than 8,000 acres had been snapped up, from quarter-acre backyards to tracts of hundreds of acres. They were owned by mineral-rights investors such as Butler, who also has holdings in Pennsylvania and West Virginia, but also by an inordinate number of elderly people, such as Helen Seymour, a 95-year-old widow with 100 acres on Pocket Creek, not far from Worth Pickard’s place.
Modern energy demand — natural gas generates half the greenhouse gases of coal and by 2015 will produce a quarter of the nation’s electricity as coal drops to 44% — was coming to bear in an incongruous spot. Local historians say the elderly of Lee County are a product of its stability. Census figures bear that out: 15% of the population in 2009 was 65 and older, compared with 12% statewide, and 57% lived in the same house from 1995 to 2005. Many local families date to Colonial days.
Johnnie Belle Blakley, 97, is a widow whose voice cracks as she strains to talk with a visitor. She has signed — in a jagged, illegible hand — leases on more than 800 acres to Denver, Colo.-based WhitMar Exploration Co. and Charlottesville, Va.-based Amvest Oil & Gas Inc., the two biggest natural-gas operations here. Through September, WhitMar held more than 130 leases in the Deep River basin, and Amvest, nearly 90. “They’ve done a lot of testing out here,” says Larry Blakley, her 71-year-old son, who operates eight poultry houses. He refers to test oil wells drilled in the ’80s. “Found a little oil and gas, but never amounted to nothing. Now this bunch is thinking they’re going to move on anyhow. We haven’t sold the chicken farm yet.”
Many residents have found themselves facing a legal morass. Some are heirs of owners who, desperate to pay their taxes, sold mineral rights to coal speculators in the ’30s during the Great Depression. They still own their land but not what’s under it. Local opportunists jumped into the game, attempting to coax owners into signing agreements, similar to real-estate sales contracts, that would allow them to tie up large tracts, which they would then attempt to sell at inflated prices to wildcatters. The practice recently had attracted the N.C. Secretary of State’s Office, which was investigating whether securities and real-estate laws might be violated. Others were simply vulnerable.
“If someone approaches you and says, ‘You’ve got a gold mine under your front yard and we’re just going to get samples,’ there’s a certain naiveté,” Sanford Mayor Cornelia Olive says. She is a member of a longtime Lee County family, and her mother is in her 90s. “In older people, there’s a certain innocence. If you’re told, ‘You have an opportunity to leave your wife and family well fixed if we find natural gas — and we certainly will under some of your land,’ they’ll sign.”
Executives of WhitMar and Amvest won’t discuss their operations, though Butler, whose leases are with WhitMar, describes the Denver company as one of the nation’s top wildcatters. Wildcatters take the biggest risks in a game in which the ante weeds out the weak. Test wells — two already drilled on Butler holdings — typically cost upward of $2.5 million, and at least four successful ones are needed to lure production companies. Those companies take risks, too, including betting on gas prices. And the new technology opening up the Lee County gas fields could prevent them from flourishing. As extracting natural gas from shale has become more common, prices, as high as $25 per 1,000 cubic feet five years ago, recently had dropped to less than $4.
The murmurs — the rumors — are back, too, in some cases fed by speculators to drive up the prices of the leases they hold. Fifty miles away on the campus of N.C. State University in Raleigh, Ted Feitshans, a lawyer who teaches agricultural economics, has tried to calm some of the excitement. “Scams? Any time money’s involved, you’ve got a large opportunity,” he says. “There may be riches here, but they certainly won’t be overnight. Developing a new gas field is a major investment that takes time — and luck.” But the whispered tales of quick riches that have traveled along Lee County back roads and been repeated over soft drinks in country stores like J.R. Moore & Son have just enough grounding in fact to keep them alive. But how natural-gas money actually flows back to the landowner is complicated.
Payments are in two parts — exploration, or “bonus” payments, and royalties if wells go into production. Bonus payments, Feitshans says, have ranged up to $3 an acre in North Carolina. There are reasons they’re low here. The hot spots are elsewhere: the bedrock formation known as Marcellus Shale, mainly in western Pennsylvania, New York and Virginia, and the Haynesville Shale in Louisiana and parts of Texas. They are so gas-rich and large — Haynesville covers 9,000 square miles, compared with 1,400 for the Deep River Basin — that they’ve generated bonus payments of up to $20,000 an acre. “If you’re buying rights in the Haynesville Shale, you have a pretty good idea how much gas is there. But nobody has ever tapped gas successfully in North Carolina, so there’s a lot of uncertainty.” The second source of money for gas-lease sellers — royalties— are negotiated, but with plunging natural-gas prices, how much producers will pay depends on how low prices go.
Then there’s the price of uncertainty — typical mineral-rights leases can be renewed for up to 20 years — which can be high for the farmers and retirees of Lee County. Signers can find their land tied up and themselves sharing liability if things go wrong. “What happens if a driller messes up your neighbor’s well and you’re held liable?” Feitshans asks. “And in the gas industry, there are a lot of mom-and-pop operations not well-financed. I suspect we’re going to have a huge shakeout in the industry with the drop in prices, and in the worst case, you could have your lease tied up in bankruptcy procedures.”
But of all the details that stand between Lee County — “Faith, Family and Country” is its motto — and the natural-gas equivalent of a gold rush, the most devilish is a simple one: What they propose to do here is illegal.
David Phillips tugs the metal plate back over the gaping hole where 53 miners went down to their deaths. Now, the tunnel is filled with water that leaks in from the sluggish Deep River, hidden behind tree-shrouded banks a quarter-mile away. The mine slopes under the river, and that’s how drilling for natural gas would work in these parts “Fundamentally, the reason horizontal drilling is barred is that it creates a trespass,” Feitshans says. “You’re going under somebody else’s property.” Complicating the issue is that North Carolina forbids what the law calls “injection of fluids into underground strata” — fracking. The concerns are more than theoretical.
In the 1940s and ’50s, Texas drillers stole more than $100 million in oil from neighboring leaseholders using horizontal drilling, and in 1990, Kuwait was accused of stealing Iraqi oil by the same method. Other states have passed laws establishing rules for horizontal drilling, but North Carolina oil-and-gas laws date to the mid-’40s when such techniques were of little concern. Even the state’s “extraction tax,” currently ½ mil per 1,000 cubic feet of gas — less than a hundreth of a penny — reflects the notion that natural gas would never be an economic factor in the state.
Uncertainty over whether the law will be changed is another reason wildcatters are reluctant to pay more for exploration rights. State Rep. Jimmy Love, a Sanford Democrat, has co-sponsored legislation that would clarify horizontal-drilling law and permit hydraulic fracturing. “Nobody ever made a profit here coal mining, but natural gas would bring in people who recover the gas, and people who own the land might get royalties. Some places I’ve heard of, that’s a lot of money.”
Others, though, are skeptical of a natural-gas stampede. Pending lawsuits in Pennsylvania and elsewhere contend that fracking, which injects materials such as ceramic particles to allow gas to escape from shale, can cause water and air pollution and even seismic tremors. An aborted coal-mining effort here in the ’80s left scars — and suspicions, Olive says. “They tried surface mining and made a mess and left it. One thing I fear is that gas explorers won’t stop to consider the damage that could be done.”
On Plank Road, a few miles west of Sanford, Doris Swain has heard of the legal dilemma. She and husband James have leased to WhitMar 44 acres handed down from her great-grandfather. Once, she says, her father farmed these fields above the Cumnock Formation. Corn still rustles in the fall wind, and soybeans slowly brown in the fields. “This company we signed with was the first to come around and sort of stirred up a lot of people.” She’s 77, and her understanding of gas leases is rudimentary. “A gentleman from the company went over it with us, but I don’t understand it all. I know if they drill and find something, you get money from it.” The devil might hide in those details, but Swain figures she’s got a defense. “The Lord knows all about this, and I’ll just leave it in his hands.”