PHILADELPHIA — When the Pennsylvania shale industry gathered here for its annual conference last month, there were more empty seats than usual. But one absence stood out: Democratic Gov. Tom Wolf.
Gas drillers saw it as a snub. A Wolf aide insisted that it wasn’t, noting that the governor sent his secretary of economic development. But Wolf didn’t offer any reason for missing the conference, called "Shale Insight 2015."
His decision to skip it highlights the tension between Pennsylvania’s new governor and its shale drilling industry. And their fraught relationship has provided a glimpse of what life might look like for shale drillers after backing a losing candidate in a governor’s race.
Wolf’s predecessor, Republican Tom Corbett, was a close friend of the Marcellus Shale industry, and he diligently attended the shale conference. He skipped it only once, when flooding in central Pennsylvania demanded more attention in 2011. Even then, he appeared by video.
But Wolf unseated him last year with a commanding 55 percent of the vote, making Corbett the first governor to lose re-election in modern times. The result was seen as less a mandate for Wolf than a rejection of Corbett, who never recovered from unpopular cuts to education spending early in his term.
Still, he has remained steadfast in his promise to deliver a tax on natural gas production, called a severance tax. Wolf, a small-town business owner with a doctorate from the Massachusetts Institute of Technology, also called for more regulation of drilling. He’s pursued both since taking office in January, making Marcellus Shale drillers howl.
Wolf insists he supports shale drilling and wants to see it grow. But he also wants drillers to pay their "fair share" and wants the environment better protected.
"We are committed to seeing this industry succeed, but also to doing that in a safe and responsible manner," said Wolf spokesman Jeffrey Sheridan.
But industry representatives say his proposed taxes and regulations are scaring investment away from Pennsylvania to other oil and gas states.
"We’ve heard the rhetoric that ‘We want to see the industry grow,’" said Marcellus Shale Coalition President Dave Spigelmyer. "The actions have not matched that claim."
End of a ‘love affair’
Wolf’s supporters say he’s restoring a balance that was lost with Corbett’s enthusiastic embrace of the industry.
"It’s not the love affair that was there with Corbett," said Jan Jarrett, a veteran of Pennsylvania politics and policy with ties to many Democratic players. "But they’re not facing an implacable foe."
Sheridan dismissed Spigelmyer as "a mouthpiece for a trade organization," who doesn’t speak for everyone in the industry. As evidence of Wolf’s support for gas production, he pointed to a task force Wolf established to work out pipeline issues. He also pointed to Wolf’s decision to nominate an executive of shale driller EQT Corp. to the state’s Public Utility Commission.
Contentious relationships between governors and shale drillers are rare. Though the country’s oil and gas boom has been raging for nearly 10 years now, the shale industry has almost always enjoyed support from the governors in the states where it operates.
New York’s shale industry never got off the ground before Democratic Gov. Andrew Cuomo banned it. Republican governors from North Dakota to Texas have embraced the production renaissance powered by hydraulic fracturing, or "fracking," and have usually sought to dismantle regulations.
Corbett’s Democratic predecessor, Ed Rendell, differed with drillers over his desire for a severance tax. But otherwise, he was a big booster of the shale drilling industry as it moved from infancy to established status in the state.
Other Democratic governors, such as California Gov. Jerry Brown and Colorado Gov. John Hickenlooper (a former petroleum geologist), have defied environmental groups to embrace shale drilling. Even the Obama administration has labored to stay off the industry’s enemies list.
Governors are uniquely important to oil and gas companies. Exploration and production is regulated almost entirely at the state level. State rules override local ordinances in many places, and state agencies implement federal regulations. Even when they don’t have direct control over the agency that regulates oil and gas, governors still have a lot of say over funding and the overall tone of government toward drilling.
In Pennsylvania, the governor does have direct control over oil and gas regulation. And Corbett had an exceptionally close relationship with the industry.
Swift change
In 2004, Aubrey McClendon, then the flamboyant leader of Chesapeake Energy Corp., wrote a $450,000 check to help elect Corbett Greenwire, June 29, 2011). At the time, Corbett was an obscure GOP candidate for attorney general in Pennsylvania. The cash infusion helped Corbett narrowly win the race to be the state’s top lawyer and propelled him toward the governor’s mansion.
When he got there, Corbett deep-sixed talk of a severance tax, though he did sign a bill that included an "impact fee." That same legislation included a provision Corbett favored to take away the power of local governments to limit drilling. Corbett opened state lands to drilling and worked with legislators to block $2 million for a public health registry to track drilling-related complaints.
Closer to ground level, former state health department employees said they were silenced on drilling during his administration and told not to return phone calls from people complaining about gas development. And his appointees curtailed the authority of oil and gas inspectors to issue fines.
The industry stuck with Corbett even as his political stumbles earned him the title of most endangered governor for the 2014 cycle. Despite the bleak outlook, oil and gas interests funneled $1.5 million into Corbett’s re-election campaign, according to followthemoney.org. That made oil and gas one of his biggest industry contributors after lawyers and lobbyists and conservative groups.
Wolf, by contrast, got a little more than $230,000 from oil and gas, according to the followthemoney.org figures. That’s not insignificant, but it’s a small fraction of what Corbett got, and even smaller compared to the $10 million the small-town business owner put into his own campaign. He came into office owing the shale industry just about nothing.
Change was swift. He reversed Corbett’s state lands policy, banning new leasing in state parks and forests.
Wolf’s pick for policy chief was John Hanger, a booster of gas production who had nevertheless lambasted the Corbett administration for lax enforcement of drilling rules. Hanger, the state’s top environmental regulator under Rendell, engineered a statistical change that attributed far fewer jobs to Marcellus drilling.
Wolf picked a chief regulator for the Department of Environmental Protection, John Quigley, who had blasted the Rendell administration’s handling of shale drilling, even though he had served in Rendell’s Cabinet E&ENews PM, June 21, 2011). Quigley said Pennsylvania had shown the world how not to handle shale drilling.
Quigley is chairing Wolf’s task force on pipelines, designed to head off conflicts as companies build the thousands of miles of pipelines needed to get the producers’ gas to market.
But drillers are chafing at a suite of regulations that Quigley’s DEP is pushing to provide more protection for parks and schools and close down some large water impoundments. The Marcellus Shale Coalition says the rules will cost them $2 million per well.
Both Quigley and Hanger have ties to the environmental group PennFuture. Hanger was its executive director before joining the Rendell administration. Quigley worked for the group before and after his stint as Rendell’s secretary of conservation and natural resources. Wolf also served for a time in Rendell’s Cabinet as revenue secretary.
Jarrett, now a policy consultant, succeeded Hanger at PennFuture when he left to become head of DEP. She defends the proposed regulations, saying all of the requirements and restrictions have been implemented before in other states.
"If they’re meeting the standard in one place," Jarrett said, "why can’t they be in place here?"
At an even more granular level, Wolf’s team revived the state’s Office of Environmental Justice and ordered it to review shale gas facilities that could increase the health and environmental risks in poor and minority communities.
Taxes at center stage
It’s the severance tax fight with the Legislature that has captured the headlines and animated the political class. It has also left Pennsylvania without a state budget for months (EnergyWire, Oct. 8).
Wolf remains on solid political ground, said G. Terry Madonna, a political scientist and pollster from Franklin and Marshall College. While Pennsylvania voters support Marcellus drilling, he said, they also want a severance tax.
"Wolf did something very smart," Madonna said. "He tied the severance tax to education."
Wolf announced his severance tax proposal earlier this year in a classroom after campaigning for it as a way to get money for schools. That also linked Corbett’s opposition to his biggest weakness — school spending.
Most Pennsylvanians also agree with Wolf on keeping drilling out of state parks and forests, Madonna said. The new regulations haven’t caught the public’s attention, he added, but Wolf’s constituents say they want the drilling to be safe and well-regulated.
The popularity of the severance tax hasn’t stopped industry leaders from being infuriated. The Pennsylvania Chamber of Business and Industry has run television ads attacking the tax as a job killer. Companies also note that despite being promoted as a tax to help schools, some of the money would be diverted for other purposes, such as renewable energy.
On Friday, the Marcellus Shale Coalition released an open letter to Republican legislative leaders opposing the tax, signed by more than 15 oil and gas company executives in the state. It said new taxes on the industry would "jeopardize Pennsylvania’s competitiveness" and possibly undermine efforts to bring new manufacturing to the state.
What the rocky relationship with Wolf means for drilling is unclear. It’s difficult to separate the possible consequences of tax talk or new regulations from the overall price slump in the industry.
"I think it’s cumulative," Spigelmyer said. But he said the threat of new regulations and taxes is driving companies to invest in other states.
But capital might not be the only thing that spreads to other states. If Pennsylvania companies manage to recover from the current price slump under a new layer of regulations, those rules might seem reasonable to other oil and gas states.
Wolf and shale drillers have kept their disagreements from turning into political war, which Jarrett says is wise. She notes that oil and gas companies will need Wolf’s help when it comes to clearing paths for pipelines and getting permits for a proposed "ethane cracker" plant west of Pittsburgh.
Republican politicians, though, are more willing to tie Wolf’s policies to industry’s woes, downplaying the role of the price slump.
Speaking at the Insight conference, GOP state House Speaker Mike Turzai said layoffs in the natural gas industry are "directly attributable to [Wolf’s] tax policy, regulatory policy and the world economy."
Sheridan, Wolf’s spokesman, called that "foolish."
Turzai, who joined Spigelmyer on stage at the shale conference for a chummy policy discussion, is considered likely to seek the GOP nomination to challenge Wolf in 2018. His appearance at the shale conference, amid Wolf’s absence, was a sign that industry is pinning at least some of its hopes on making Wolf the second governor in modern times to lose re-election.
