Wednesday, August 21, 2013

A Big Frack You

I come from the land of the Marcellus Shale, a type of rock that, below the soil level, holds pockets of natural gas, perfect for the technology called hydraulic fracturing or fracking.

If you drive through my rural hometown, you'll see signs both for and against fracking:

The people who are in favor of drilling are usually motivated by money, and who can blame them? The area is far from wealthy, with little industry and a farm economy that declined long ago. If you own land and someone tells you it could give you a living, with little or no effort on your part, wouldn't you at least be tempted by that?

And there should be money in letting someone drill on your land. In 1982, Congress passed a law that requires energy companies to pay landowners at least 12.5 percent of the value of any oil or gas extracted from their land. Sounds great, right?

Well, it turns out the energy companies can't be trusted to share fairly, even when people want to let them drill. A ProPublica investigation shows frack drillers routinely cheat people out of the money they are entitled to.

They do this in a variety of ways. You can't say they're not creative:

  • Sometimes it's small print in the contracts that allows the driller to deduct "expenses," including marketing expenses that are paid to other subsidiaries of the same company. And the landowner usually has no right to audit or question the expenses. Other companies deduct expenses even when their contracts don't allow it.
  • Another trick is to not sell the gas at all, but to instead use it to power equipment that processes other newly drilled gas. No sale, no royalty payment, right?
  • Other times, the companies set up subsidiaries that buy the fuel at a reduced price. The royalty is paid to the landowner based on that price. Then the fuel is resold at a higher, market-based price.
These tricks are yet another fine example of how absentee-landlord capitalism works. All the companies had to do was share 12.5 percent of the money, and everyone (or at least the people who don't oppose fracking for other reasons) would have been happy. But no, the companies had to maximize their profits by screwing their partners.

The energy companies admit as much:
Anderson acknowledged that many landowners enter into contracts without understanding their implications and said it was up to them to do due diligence before signing agreements with oil and gas companies.

"The duty of the corporation is to make money for shareholders," Anderson said. "Every penny that a corporation can save on royalties is a penny of profit for shareholders, so why shouldn’t they try to save every penny that they can on payments to royalty owners?"
It's good to see them hoist on their own petard like this. The message is clear: Don't sign contracts with liars who can't wait to get their hands into your pocket.

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