Dickie Rambo’s story has a typical
hardscrabble Arkansas plot. Born and bred in Judsonia, in White County,
Rambo now lives seven miles outside of Searcy in a township so small
that he doesn’t even know what it’s called. He drove a truck for most
of his life; at the end of his career, he was earning about $11 an hour
before he was diagnosed with prostate cancer and retired on disability.
Over the course of 30 years, he slowly added to his land holdings — 40
acres in 1979, another 130 in 1994 — so he would have enough space to
graze cattle. “I’ve never made big money,” Rambo said. “Me and my wife
just pinched pennies.”

In 2005 all that changed, and rapidly.
Rambo never thought he was buying anything more than cheap swaths of
lawn. But he was also buying the minerals under them. They were
worthless at the time, but that was before energy companies determined
there was profit to be made by drilling in the Fayetteville Shale, a
natural-gas holding rock formation that has Pope, Conway, Van Buren,
Faulkner, Cleburne and White Counties at its heart.

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Rambo signed a lease with Chesapeake
Energy, the second-largest operator in the shale (Southwestern Energy
is the largest), and now his land brings in thousands of dollars a
month. His windfall for February was $5,000, and that number will
increase as even more wells are dug on his 200 acres. He bought a new
camper and a new tractor. Things are good.

Profitable as it has been, though, the
drilling has also caused Rambo headaches. It cut into his cattle
operations — he had to lease an additional 240 acres for grazing in
order to avoid cutting his stock. There is noise, and gas operations
spill beyond original expectations. “When they tell you that they’re
gonna take two or three acres, they end up taking a lot more than that,
because it takes roads and stuff to get into your property,” said
Rambo. “If you was sittin’ over here and you wasn’t drawing a penny off
of it, it probably would be irritating to some people.”

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So by and large, Rambo is pleased with
the development — it’s making him a wealthier man, after all — but
there’s more to his situation than a fat royalty check every month.

Rambo’s story speaks to the complexity
of the shale play, which has introduced a great deal that’s foreign to
the middle of the state. Activity by the land men and gas companies —
more than 550 wells have been drilled over two and a half years — mean
an uncertain future for some sleepy towns. To be sure, there has been
an influx of capital into many towns that never had much going for
them. A gas-company sponsored study released on March 13 predicts that
the economic impact of the drilling will amount to $17.9 billion.

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With the sheer speed of development and
the dazzling numbers, focus has tended to stray from the potential
costs of the drilling. There is increased chatter about what Arkansas
and its people may be giving up in the bargain. Some express concern
about the toll the drilling is taking on the environment. Some feel
jilted by mineral rights laws that have left them out of a rush for
land leases and royalties. Some are concerned that roads are
deteriorating and not being cared for properly. And all the while a
debate rages about raising a natural gas severance tax, which,
depending on one’s view, would either give greater economic stimulus to
the state or drive gas companies — along with their money — out of
Arkansas. Governor Mike Beebe has called a special legislative session,
set to begin Monday, to consider a proposal to raise the tax.

Whatever the outcome of the tax
dispute, drilling in the shale will likely be here for decades. Which
makes it worth asking: What are the tradeoffs for the companies’
estimated $17.9 billion boon to the economy?

It’s the environment, stupid

Some impacts on the environment are
obvious. Increased truck traffic means higher emissions, waste from
drilling has occasionally spilled during transport, and the noise
pollution is obvious to anyone who lives near a drilling rig.

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The Fayetteville Shale derives its name
from the type of rock that holds the natural gas that producers aim to
extract. (There is no drilling activity near Fayetteville, although the
rock formation comes to the surface there.) The challenge in taking gas
from the shale is that the layer of rock to be mined is thin; if you
were to drill straight down into it, it wouldn’t produce enough to make
it worth the trouble. But the shale is long; if you can dig a hole that
runs horizontally, then you can increase the amount of gas extracted.
Approximately 90 percent of the state’s natural gas wells are
horizontal, the state Geological Survey says.

To create a well, the mining company
sets up a rig that towers to a height of more than a hundred feet. The
apparatus supports a mechanized drill bit that bores into the ground
until it reaches the shale formation, at a depth of about 5,000 feet.
From there, the bit makes a 90-degree turn and runs horizontally for
another 4,000 feet. After the drillers remove the bit, they shoot water
at high pressure through the new underground cavity in order to create
perforations throughout its length. The water includes a chemical sand
mixture. The sand keeps the smaller holes from closing and allows gas to flow out of the rock and to the surface, where it is collected.

This process is not gentle on the
earth, and conservation groups are concerned. Conservative estimates
say it takes a million gallons of water to create a well. (By
comparison, the average American uses a million gallons of water over
the course of 18 years.) Drillers are creating ponds and buying from
municipal water works. Pending some last minute paperwork, Chesapeake
is also planning to pump water from the Little Red River during periods
of high flow. Questions have been raised whether water demand from gas
companies will strain the state’s fresh water supply.

Another area of concern is what happens
to the water used in the drilling process. Once water has been shot
through the well, it is contaminated. It contains not only sand, but
also hydrocarbons from the tapped gas, salty mud and other chemical
residues. Some of this water may be recycled for future projects, but
otherwise it is unusable and must be disposed of. The Arkansas Oil and
Gas Commission governs the disposal; the only method it allows is
deep-water injection at permitted facilities. (Companies can also haul
their water out of state.) This method is permitted by the federal
Environmental Protection Agency and is widely used, but there are
concerns that not enough is known about the process to say it won’t
affect groundwater.

In testimony given to the House
Oversight Committee last year, Amy Mall, a policy analyst at the
Natural Resources Defense Council, pointed to a number of exemptions
from the Safe Drinking Water Act given to gas companies injecting
wastewater into the ground. She also cited a 1989 study that found 23
cases of drinking water sullied by underground injection.

The Arkansas Department of
Environmental Quality (ADEQ) also has oversight over activity in the
Fayetteville Shale. ADEQ is required by law to conduct its own field
inspections, but it relies to a large degree on citizen complaints. In
2007 alone, ADEQ responded to 933 of these across the entire state.

According to ADEQ spokesman Doug
Szenher, most complaints are cleared up by sending a letter to the
offender, if he can be located. In more extreme cases, ADEQ may
initiate a consent order, which outlines penalties and corrective
actions that the violator must take. Only if he refuses to agree to the
consent order will ADEQ refer the violator for a further legal action.
The process can take months. Szenher said there are currently 10
pending consent orders at ADEQ.

While some have complained that ADEQ is
not proactive enough in pursuing fines, Szenher argued that the agency
needs to concentrate on fixing the problems it hears about in
complaints first.

Whatever the enforcement philosophy,
ADEQ barely has enough manpower to handle its current workload. In
November, Gov. Mike Beebe said that the state would have to hire more
inspectors to ensure compliance with environmental regulations. But new
hands won’t come aboard at ADEQ before the 2009 session — assuming the
legislature funds them.

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Some lawmakers are already gearing up
to put environmental issues at the top of the agenda. State Rep. Betty
Pickett (D-Conway), whose bill in 2007 to create environmental
regulations was dropped because of opposition by company lobbyists, has
already run into opposition this time around. A resolution she
introduced before the Joint Performance Review Committee that called
for state agencies to work with conservation groups and the gas
industry to regulate drilling activity was shot down before ADEQ had a
chance to give scheduled testimony at the March 14 hearing. The
resolution, which would not have had the force of law, proposed to
coordinate environmental oversight of the shale through the Oil and Gas
Commission.

“There are like 14 state agencies that
have some interest in the oversight of the drilling,” said Pickett of
her proposal. “All of those agencies want to do their job, but they
can’t do their job if they don’t know what’s going on. It boils down to
a notification system. All the laws are there to protect the
environment if everybody who is in charge could just be notified.”

Pickett said she might ask Gov. Mike Beebe to present the resolution to the legislature.

The death of Pickett’s resolution is
not exactly a surprise. Some watchdogs have urged a different path of
action. “Gas companies are very sensitive to publicity,” said James
Bradbury, a Texas lawyer who has represented landowners in Fort Worth,
where there is drilling similar to that in the Fayetteville Shale. “If
you get enough people making calls for change, they will bend. Rather
than mapping out a strategy at the legislature or ADEQ, what’s probably
more effective is calls by citizens and landowners to see better
practices, because they’re very hard to legislate.”

Paradise and profit

imperiled

Robert Fulks, a mustachioed,
gruff-voiced retiree who worked for 35 years in construction,
represents a cross-section of the players who have an interest in the
Fayetteville Shale. His family has owned land in Central Arkansas for
generations; he tells stories of ancestors settling down in Quitman
after the Civil War. He’s deeply concerned that gas drillers will mar
the back of his 30-acre plot in Bee Branch, in Van Buren County, where
he keeps a cabin with his wife, Roxianne.

“I’m sorry to see the old country go,”
he said as he drove around the county pointing out the numerous
well-pads that dot the landscape. Rigs stood on the pads during the
30-day period it takes to dig a well; once the gas was tapped, the rigs
moved out and left a bare patch of gravel, a gash through what was once
solid forest. The pad could be there for as long as 30 years, the
estimated time it takes to empty a gas well.

Fulks also bemoaned the murky state of the creeks, many of which had been muddied by silt run-off from drill-related digging.

Is gas drilling a positive or a
negative? Fulks called it a draw. “There’s some people in the world
that all the money in the world don’t make happy,” he added. “I’m one
of them.”

But Fulks is not so sentimental about
the landscape that he isn’t getting in on the action: He intends to
profit from a second patch of fallow land in Morganton that he
inherited from his father. He hopes that drillers will eventually build
four pads on that plot. As long as the gas companies don’t try to
encroach on his Bee Branch haven — and he says he’ll take them to court
if they do — he is happy with them drilling on the 34 Morganton acres.

Fulks has already leased out portions
of the land at $600 an acre and reserved a 20 percent royalty payment
on the value of any gas that may be extracted in the future. He
purchased a used Jeep with the payment. He hasn’t seen any royalty
money yet.

But he won’t be able to make money off
the entirety of his property. State law separates land ownership from
mineral rights ownership; just because you own a plot of land doesn’t
necessarily mean you own what’s under it. Fulks doesn’t have mineral
rights on 20 of the 34 acres under his Morganton land. Lease payments
on the 20 acres will go elsewhere.

The confusion has been finding out
where. According to his research of government records, the Morganton
mineral rights are owned by the estate of W.L. Pickens of Dallas. The
problem is that Fulks has no idea who either Pickens or his heirs are.
Pickens bought the rights before World War II and, as far as anyone can
tell, never lived in Van Buren County. Fulks doesn’t own the mineral
rights to his 30-acre Bee Branch plot either. They passed through a
series of similarly shadowy owners.

Mineral owners are required to pay
property taxes. If the property taxes have not been paid and the
landowner makes a claim to the mineral rights, the state sends a letter
to the mineral rights owner at his last known address. If there’s no
response, the state will issue the landowner a limited warranty deed to
the mineral rights as long as he pays back taxes and proves land
ownership.

Fulks went through this process, but
gas companies refuse to honor his state-issued deed and question its
legality. For now, lease money for land where mineral rights ownership
in question is put into a state-controlled escrow account.

Jerry Bradshaw, the mineral leasing
officer for the state land commissioner, said that the problem of
mineral rights severance isn’t as extreme as some people make it out to
be. He doesn’t have hard figures, but he estimates that 85 percent of
landowners in the affected area also own their land’s mineral rights. A
spokesman for Chesapeake said that about 80 percent of the landowners
it deals with have mineral rights.

Those high rates are little consolation
to people who don’t own the mineral rights. “There are just going to
have to be some rules made by the legislature as to who gets mineral
rights and who don’t,” said Fulks.

Rep. Pickett said she knows of no
active legislative group working on the issue. She sponsored a bill in
2007 that would have restored dormant mineral rights to landowners, but
it died in committee. “It was modeled after National Conference of
State Legislators model legislation,” said Pickett of the proposed law.
“There’s a precedent for it, as long as you give those people due
process in losing those mineral rights, if you can find them. The
argument against the legislation is that you just can’t take someone’s
property, under any circumstances.”

Small-town change

In unincorporated Albion Township,
where Chesapeake has Arkansas offices, the gas station has reopened to
serve hot lunches to the blue-collar crowd. Business wasn’t terribly
brisk on a recent afternoon, but several workmen came in to pick up a
bite. One of these was Randy Coyle, a house builder. He said the
drilling has not affected his business very much — many drillers stay
in temporary housing — but that overall it has been a positive for
Searcy, the seat of White County located eight miles down the road.

Buck Layne, head of the Searcy Chamber
of Commerce, agreed. “We are certainly benefiting from the Fayetteville
Shale play,” he said. “We can identify about 60 oil and gas companies
that are in White County. We think that represents about 1,000 jobs.”
In addition to drilling companies such as Chesapeake, service companies
that do contract work on rigs have also moved to Searcy. These include
BJ’s Service, Weatherford, and Liberty Pressure Pumping. (Liberty has
been penalized by Texas authorities for building facilities without a
proper permit.) Halliburton has also leased properties and begun to
establish operations in Searcy.

Layne said jobs indirectly related to
the drilling, while more difficult to identify, have also had a
definite impact. “There’s some new apartments going in and some new
construction. Quite a bit, relative to Searcy.” Several new restaurants
have moved into town or are preparing to in the future. Sales tax
revenues were up 11 percent in 2007 from the previous year. “This is
the closest thing to a boom our county has ever experienced,” Layne
said.

Some drilling companies have taken a
direct role in the community. Chesapeake, for example, donated $200,000
to Arkansas State University-Searcy to create drilling courses and a
rig simulator.

From Clinton, the seat of Van Buren
County, where Petrohawk has a state base, Mayor Roger Rorie offered
nothing but positives about the companies. He said that they offered
invaluable cleanup assistance after the Feb. 5 tornadoes.

But in conversations with people who
live around the drilling, one negative constantly comes up: Local roads
were not designed to withstand so many heavy trucks, and traffic is
awful. In some cases the problem can transcend the mundane. Last
December, two children were killed in White County when a truck
transporting a rig crossed the center line and hit their parents’ car.

Safety has been an issue for White
County Judge Michael Lincoln, who oversees roads. In addition to adding
truck traffic on commonly used routes, drilling companies have built
side roads — essentially dirt paths — that cut into leased property and
lead to rigs. Occasionally the roads go in more than a mile, which
makes it difficult for medical personnel to reach the rigs if there’s
an accident. “One concern I have with those side roads is with our 911
system,” said Lincoln. “A lot of those side roads don’t specifically
have a 911 addressing system. We’re trying to make first responders in
White County aware of what drilling is going on.”

Lincoln also has to deal with the
headache of how to pay for roads that increased usage has worn down. He
said that the county takes care of gravel road repairs itself, but that
it gets some help for drilling-related damages on hard surfaces. “We
have a gentleman’s agreement [with the gas companies] that if it’s
related to their direct use of the roads, then whatever materials we
use to get it back to the shape it needs to be in, they pay for.”
Chesapeake estimates that it has paid more $300,000 in road cost
reimbursement since January 2007.

A looming battle:

The severance tax

A $300,000 road tab pales in comparison
to the billions of dollars the state needs for highways. Some state
officials, including Gov. Mike Beebe, want gas companies to contribute
to that cost by paying a higher severance tax on the gas they take from
the ground.

Currently gas producers pay only
three-tenths of a cent per thousand cubic feet of gas to the state on
natural gas production — one of the lowest rates in the nation.

But the idea of an increased severance
tax has been highly controversial. An association of royalty owners,
concerned that the tax will reduce payments from gas companies, has
come out against it. Some legislators have also been vocal in their
opposition. Only nine votes are needed to defeat the tax increase in
the Senate, where the state Constitution requires a three-fourths vote
to legislate most tax increases.

For years, the consensus has been that
getting the legislature to enact a severance tax was an impossibility.
But the outlook changed dramatically in January. Sheffield Nelson, a
Little Rock lawyer and former head of Arkla Gas, proposed a ballot
initiative to leapfrog the intransigent legislature. His initiated act
would put a 7 percent tax on gas, calculated on the price of gas at the
time of extraction. The proposal would earn between $60 million and
$100 million for the state annually. Arkansas made $619,417 last year
at the current severance tax rate.

The attorney general’s office approved
Nelson’s initiative. He must get 61,974 voter signatures to ensure its
placement on the ballot. The initiative would use 80 percent of
severance tax revenues on roads and highways and 20 percent on higher
education.

Nelson’s proposal spurred Beebe into
action. Though the governor previously favored waiting until the 2009
legislative session to move on the tax, he quickly began private
negotiations with gas producers on an increase they’d accept. He wanted
a meaningful rate — he wasn’t willing to go below 5 percent — and he
wanted it to go just to highways and roads. The latter condition was a
reflection of dwindling state coffers — as fuel prices increase and
drivers use more fuel-efficient vehicles, gasoline taxes become a less
reliable way to fund highways.

There has been a robust debate about
the optimal level of taxation. Proponents of a severance tax increase
have two big gas-producing states, Texas and Oklahoma, as handy
benchmarks. Those states charge a rate of 7.5 percent and 7 percent
respectively. But gas companies have complained that Nelson’s proposed
7 percent rate does not account for exemptions they receive in those
states. In Oklahoma, horizontal wells drilled after 2002 are exempt
from severance tax for four years or until gas production pays for the
cost of the well. Texas offers a complex severance tax reduction that
depends on drilling costs.

Nelson argued that the legislature
could add any necessary exemptions to the initiative once it passed.
But gas companies said that an increased tax could cause them to reduce
production. At a February meeting of the Conway Chamber of Commerce,
Southwestern Energy Harold Korell said, “If we pay more in severance
tax, the equation is simple: We’ll drill less wells.”

Nelson is cool to that threat, however.
At the January press conference introducing his ballot initiative, he
said, “When you’ve invested $1 billion in an industry, you don’t turn
and run because of a severance tax.” He has repeated that argument
since. Last month, he invited Korell to debate the tax. Korell declined.

As Nelson continued to broadcast his
proposal to whomever would listen, Beebe’s negotiations with the gas
industry continued. The prospects for a special legislative session
didn’t look good on March 4, when Beebe said that talks with the gas
companies had stalled. He said he might have to work on his own ballot
initiative.

That possibility seemed to light a fire
under gas producers. Days later, on March 11, Beebe announced an
agreement with gas companies on a 5 percent severance tax, with a lower
rate of 1.5 percent for three to four years on new wells, plus a low
tax rate for existing low-production wells. He began lining up enough
legislative votes to justify a special session, which he’s called for
March 31. If his proposal doesn’t pass, the ballot initiative will be
on and voters can expect to see petition gatherers at May primary
polling places.

It remains to be seen whether Nelson
and Beebe will combine forces to put the proposal on the ballot —
though Nelson has seemed open to Beebe’s announced compromise, even
though it means giving up a share of the money for colleges. But the
prospect of an initiative has already been enough to spook the state’s
anti-tax forces. On March 5, Tim Griffin, the former U.S. Attorney from
the Eastern District of Arkansas, created a committee to fight against
a ballot question that would raise the severance tax. That is surely
only the opening salvo of a long battle if the tax is to become an
issue in November.