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Pegula drew violations as gas driller; compliance record 'mediocre at best'

In the course of making his fortune, the Florida billionaire negotiating to buy the Buffalo Sabres contributed heavily to politicians in a position to advance his business interests and established a less-than-stellar track record in the environmentally dicey business of drilling for natural gas, The Buffalo News has found.

A News review of compliance records found East Resources, the company Terrence M. Pegula sold last summer for $4.7 billion, had a middling record of complying with environmental regulations in Pennsylvania, his base of operations. The company last year paid the largest regulatory fine in its history and was involved in a spill of toxic wastewater that resulted in the first quarantine of cattle in the history of natural gas drilling in the state.

"The compliance history of the company when it was in his hands was mediocre at best, and unfortunately, given the hazards of [hydraulic fracturing], mediocre isn't good enough," said Jan Jarrett, president of PennFuture, an environmental protection advocacy organization based in Harrisburg.

Pegula has made more than $630,000 in campaign contributions to Republican politicians and committees who support what one observer termed his "very, very conservative" positions on global warming and taxes and regulations related to the natural gas industry.

"He's mastered the political system in Pennsylvania. His company and his industry are getting special access and favorable treatment by the governor and Legislature," said James Browning of Common Cause Pennsylvania and author of a study last year that examined campaign contributions from Pegula and others in the natural gas industry and how they have influenced state government in Harrisburg.

The Philadelphia Inquirer last fall used Pegula and his wife as poster children for what's wrong with campaign finance law in Pennsylvania, which, unlike most states, does not limit how much individuals and special-interest groups contribute to state candidates. Pegula and his wife, Kim, gave Tom Corbett, the Republican candidate for governor last year, $310,000, making them one of the largest -- if not the largest -- donors to his campaign.

Pegula refused an interview request from The News.

Pegula appears to be closing in on a purchase of the Sabres from Tom Golisano for a reported $175 million. Pegula met Saturday with the executive committee of the National Hockey League in North Carolina, where the league is staging its annual All-Star Game today. The meeting is regarded as a precursor to formal consideration of sale by the NHL's Board of Governors in the coming weeks. There's a growing expectation that Pegula will assume control of the team sometime in February

Major driller

Pegula, 59, started his business empire with a $7,500 loan from friends and family to start East Resources in 1983. He acquired competitors and negotiated leases with landowners to grant him drilling rights on their property, and the company grew to about 300 employees by the time he sold it.

For years, East Resources and other companies operated shallow wells to extract natural gas. Pegula and many other operators hit pay dirt when advanced drilling technologies and a rise in natural gas prices made it economically lucrative to tap the huge reserves of natural gas found in the Marcellus Shale beneath much of Pennsylvania and portions of south-central New York, Ohio and West Virginia.

Multinational energy corporations began buying out operators like Pegula, and last May, Royal Dutch Shell purchased East Resources for $4.7 billion. Pegula owned 65 percent of the company, which means the sale netted him about $3 billion. Forbes ranks Pegula as the nation's 110th wealthiest person. He lives in Boca Raton, Fla., where he and his wife operate other businesses.

With that fortune in hand, Pegula started looking to invest in one of his passions, hockey. Last September, he gave his alma mater, Penn State University, $88 million to build a hockey rink and start a Division I program. At some point last summer or fall, he initiated conversations with the Sabres about buying the team.

Pegula remains involved with a number of other business ventures, including an energy company that holds leases on some 350,000 acres for drilling purposes.

While natural gas reserves are the source of relatively clean energy, extracting the gas comes at a steep environmental price.

The gas resides in shale rock deep in the earth and must be extracted through a process, commonly referred to as hydraulic fracturing, or "fracking," developed in recent years by Halliburton, which successfully lobbied to get the method exempted from review and regulation by the federal Environmental Protection Agency.

Here's how fracking works:

A vertical, then horizontal shaft is drilled, typically a mile or more into the earth. The shale rock is blasted with water, sand and more than 100 chemicals. The gas is released from the rock and pumped to the surface, as is much of the sludge water, which is then retained and treated.

Environmental problems are common, including the contamination of underground water, difficulties retaining and cleaning the sludge water used in the drilling, and the impact of drilling operations in what are usually rural areas. For example, the Allegheny National Forest is dissected by more than 2,300 miles of roads used by drillers that are heavily traversed by trucks and heavy construction equipment.

"If it isn't done exactly right, hydrofracking is a pretty big threat to water supplies, and our experience shows us that it often isn't exactly done right," said Jarrett of PennFuture.

Gas drillers maintain that fracking is safe and that their industry has been a huge jobs generator in Pennsylvania. While the industry claims that its Marcellus Shale operations added 77,000 jobs in 2008-09, an independent analysis by the New York research and consulting firm of J.M. Barth & Associates last year put that figure at closer to 3,000 in direct employment.

The prospect of jobs has piqued interest in tapping gas in the Marcellus Shale under portions of Central and Western New York, but then-Gov. David Paterson and the State Legislature last year imposed a temporary ban on fracking through May 15, pending further study.

Numerous violations

A review of studies and Pennsylvania public records shows East Resources had an average to below-average track record of complying with environmental laws and regulations among some 75 companies that drill into the Marcellus Shale.

The most detailed analysis was conducted last year by the Pennsylvania Land Trust Association, which focused on potentially serious environmental violations found by the state's Department of Environmental Protection from January 2008 to August of last year, the period when drilling of the Marcellus Shale took off.

The report found that East Resources Management LLC ranked third among about 45 drillers cited for violations during that period. Using a different measure, which takes the size of a company's operation into account, the violations worked out to about 4.1 per drill. That ranked the company seventh highest, well above the overall average of 0.65 violations per well.

A sister company, East Resources Inc., had a much better track record, and when data of the two companies is combined, their violations per well were slightly better than average, according to further analysis by The News.

The News also analyzed all Department of Environmental Protection violations from 2008-10, including both administrative and environmental violations, regardless of their severity.

In 2008, East Resources, operating under the two separate names, had more violations per well than the statewide average (0.5. versus 0.3) and significantly more than those of most other large operators.

That remained true in 2009, the last full year Pegula operated East Resources. The company averaged 1.2 violations per well versus a statewide average of 0.9. What's more, East Resource's rate of violations per well was significantly higher than most of the other large operators.

The violations picture improved last year, averaging 0.5 per well for East Resources versus 0.9 statewide.

Perhaps the most noteworthy enforcement action against East Resources came last May, when state officials ordered that 28 beef cattle be quarantined amid concerns they may have drunk toxic wastewater that spilled from a drill operated by the company in north-central Pennsylvania.

It was the first time livestock had been quarantined in the state as the result of a spill related to hydraulic fracturing; company officials maintained that the quarantine was unnecessary. East Resources was cited for four violations of environmental regulations; the same well was cited for five violations five months earlier.

The state Department of Environmental Protection has levied $129,241 in fines against East Resources since 1997, according to records obtained by The News. The largest fine was imposed in May 2010, for $29,000. The company's history of fines is regarded as middle of the pack within the industry.

Kathy Pedler, of the Allegheny Defense Project, agreed with Jarrett of Penn Future that East Resources has a middling track record when it comes to complying with environmental regulations.

"There are certainly some worse actors. But there are no good actors. The industry in Pennsylvania is destroying public resources and has absolutely no regard for what's held in common," said Pedler, whose research and advocacy organization often challenges industry practices in and around the sprawling national forest in northwest and central Pennsylvania.

Earle Robbins, who acts as a liaison between energy companies and landowners as they negotiate drilling leases, said East Resources has been a good company to deal with.

"They are better than many of the other companies we have dealt with," said Robbins, vice president of R&R Energy Consulting. "They have been very fair to work with and tried to do the right thing where they could."

Robbins said East Resources has also been a good corporate citizen in some of the communities it has operated in, making charitable contributions.

Officials from the Pennsylvania Department of Environmental Protection refused to discuss the fines or any other aspect of the company's compliance history.

Big contributor

Pegula is no stranger to state politics in Pennsylvania -- and has every reason to be involved because of what's at stake for his industry.

Natural gas reserves in Marcellus Shale are among the largest in the world, and drillers in Pennsylvania operate in a favorable tax and regulatory environment -- and want to keep it that way.

Pennsylvania and New York are the only major fossil-fuel-producing states in the nation that do not impose a tax on natural gas extractions, which run as high as 15 percent of the market value. Former Gov. Edward Rendell pushed unsuccessfully during his recently completed term to join other states in taxing natural gas extractions in order to deal with budget problems and fund work to remediate the environmental problems associated with fracking.

Long before Rendell made his move, natural gas interests had opened their checkbooks to fight efforts to tax and better regulate their industry. They contributed $2.85 million to state candidates from 2001 to March of last year, according to a study by Common Cause Pennsylvania.

The industry spent an additional $4.2 million on lobbying since 2007, when Pennsylvania began to require the reporting of those expenses.

Most of the donations and lobbying expenses have come since 2008, when drilling in the Marcellus Shale began to escalate.

Pennsylvania is one of only 11 states that does not limit campaign contributions. Moreover, the Common Cause study noted that online data on contributions is available in an unwieldy system that makes it more difficult to track donations.

As a result, the study said, "Big political donors wield extraordinary influence over the political process in Pennsylvania."

Donations cited

The Common Cause study found that Pegula, his wife and his company ranked as the second-largest contributors within the natural gas industry, giving $427,500, accounting for 15 percent of all donations.

Browning, co-author of the report, said Pegula subsequently contributed another $100,000 to Corbett's successful gubernatorial campaign. In total, Browning said, Pegula, his wife and company have given $525,000 to state candidates since 2001.

The last two Republican candidates for governor, who have both taken stances supported by the natural gas industry, received the lion's share of those contributions. Corbett, who took office last week, received $310,000, while Lynn Swann, the former Pittsburgh Steelers star, got $191,000.

The size of those donations dwarf what is permissible in most other states and at the federal level.

While Pegula has invested mostly in gubernatorial candidates, he contributes to others, as well.

Last August, he gave $25,000 to State Sen. Joseph Scarnati, who, at the time, was playing a key role in negotiations to determine whether the state would tax natural gas extractions. Scarnati does not face re-election until 2012.

The timing and amount of the donation prompted strong criticism from Alex Kaplan of Common Cause Pennsylvania, who who termed it "a stark attempt to buy influence during a crucial time for a severance tax."

Those negotiations collapsed, giving the natural gas industry a major victory.

Pegula and his wife are also major contributors at the federal level, with donations of $106,350 since 2006.

Pegula and his wife each gave $30,400, the maximum allowed under law, to the National Republican Senatorial Committee on the same day last September. They've given $34,250 to national and state Republican committees over the years. Other recipients include newly elected U.S. Sen. Patrick Toomey, R-Pa., former U.S. Sen. Rick Santorum, R-Pa., and an oil industry political action committee.

e-mail: jheaney@buffnews.com

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Pegula in Pennsylvania

Details on the operations of the prospective owner of the Sabres

• Built East Resources into one of the largest natural gas drillers in Pennsylvania, tapping into huge reserves in the Marcellus Shale that lies beneath three-quarters of the state.

• Sold the company last summer to Royal Dutch Shell for $4.7 billion, but remains active in the industry through another company he owns.

• Drillers tapping natural gas in the Marcellus Shale use controversial fracking process; East Resource has a middling track record of complying with environmental regulations, including 175 violations the past three years and nearly $130,000 in fines since 1997, most of them in the past five years.

• Pegula has contributed more than $500,000 to politicians in Pennsylania, including $310,000 to the campaign of the newly elected governor. Also a significant federal donor.

"He's mastered the political system in Pennsylvania. His company and his industry are getting special access and favorable treatment by the governor and legislature." – James Browning, Common Cause Pennsylvania

"The compliance history of the company when it was in his hands was mediocre at best, and unfortunately, given the hazards of hydrofracking, mediocre isn't good enough." – Jan Jarrett, president, PennFuture

"They are better than most of the other companies we have dealt with. They have been very fair to work with and try to do the right thing where they could." – Earle Robbins, R & R Energy Consulting