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Pegula made his fortune by tapping into the fracking frenzy

New Buffalo Bills owner Terry Pegula owes his good fortune to a thin layer of pitch-black rock that lies about a mile underground – and to the controversial process used to extract the natural gas trapped within it.

It turned Pegula, a self-made billionaire, into one of the country’s wealthiest people. It gave him the money to buy the Bills, as well as the Buffalo Sabres, and still left him with enough to invest $170 million to build the HarborCenter hockey and hotel complex next to First Niagara Center.

That rock is part of the Marcellus Shale, a massive geological formation that stretches from New York down through Pennsylvania and into West Virginia, and it’s loaded with natural gas.

So much gas, in fact, that it touched off a frenzy within the energy industry after drillers discovered a controversial drilling method called hydraulic fracturing – which blasts millions of gallons of chemically treated water at high pressure into a well – that allowed them to tap into vast stores of gas that previously were unreachable. Once the wells reach the gas-rich shale layer, the drill bit gradually turns so that it runs horizontally through the shale, often for more than a mile, allowing it to access natural gas deposits along the entire length of the well.

Pegula rode the fracking frenzy to transform himself from a successful businessman who had built his own drilling company from scratch into a fabulously successful businessman who was able to sell a majority of his company’s assets in 2010 for $4.7 billion. Pegula’s share of the proceeds: a $3.3 billion fortune that made him one of the richest men in America.

It was that fortune that allowed him to spend $189 million to buy the Buffalo Sabres later that year and to donate $88 million to his alma mater, Penn State University, to build a new ice arena and allow the school to launch a Division 1 hockey program. It gave him the financial wherewithal to launch the HarborCenter project, with its hotel and dual ice rinks aimed at turning the area around First Niagara Center into a mecca for youth and amateur hockey events.

But what wasn’t widely known until this summer was that Pegula didn’t unload everything in the deal that sold his East Resources to Royal Dutch Shell in 2010.

Pegula, who famously said at his introductory news conference as the Sabres owner in 2011, “If I want to make money, I’ll drill another well,” kept on doing just that.

Pegula continued to quietly drill for shale gas, hiring a pair of rigs to drill wells on tens of thousands of acres of land he controlled in Ohio and West Virginia.

And in June, when he needed a couple of billion dollars more to buy the Bills, he sold 75,000 acres in Ohio and West Virginia, where he controlled the drilling rights – covering an area that would be roughly equivalent to a parcel 10 miles wide by 12 miles across if it were stitched together – for another $1.75 billion.

The wells Pegula already had drilled on that land were producing about 163 million cubic feet of natural gas each day, enough to supply about 2,300 homes with all of their natural gas needs for a year. The wells, which can cost upwards of $5 million to $6 million apiece, tapped into the Marcellus Shale in West Virginia and the even deeper Utica Shale in Ohio.

With those wells already producing, and its buyer planning to drill wells two or three times faster than Pegula already was doing, the Sabres owner was able to command a premium price for his acreage when he sold it to American Energy Partners, a company run by former Chesapeake Energy chief executive Aubrey McClendon.

While Pegula’s first deal with Shell brought him an average of $7,230 for each of the 650,000 net acres that were part of that deal, American Energy Partners paid a price that was more than three times higher – $23,333 per acre – for the 75,000 acres that it agreed to buy in June.

And Pegula still controls plenty of land to drill even more wells. Pegula said companies he controls own more than 250,000 net acres of land – the equivalent of 390 square miles – in Colorado, Wyoming, Pennsylvania and New York, including about 110,000 acres where his businesses control the mineral and oil and natural gas drilling rights.

“We are not going away,” Pegula said in a statement when the sale to American Energy Partners closed in early August. “We are oil and gas finders and are proud of our accomplishments.”

In fact, the $5 billion payday that Pegula has reaped from his natural gas ventures is a far cry from his modest beginnings in the business.

Pegula, who grew up in a rented house in the coal mining town of Carbondale, Pa., north of Scranton, started working when he was 14, driving a water truck at a strip mine. His family, including his grandparents, came up with enough money to send him to a prep school 15 miles from his home. Pegula told the Philadelphia Inquirer in 2010 that he often hitchhiked to and from school. Other days, when he couldn’t find a ride, he walked.

He went on to Penn State, starting off as a math major and switching to petroleum and natural gas engineering after winning a scholarship. After graduating in 1973, he went to work for Getty Oil in Texas, and then came to Olean two years later after joining Felmont Oil Co.

He founded East Resources in 1983 and gradually built it into a significant player in the natural gas industry. By 2000, the company had made its first gas discovery in the productive Trenton/Black River field in Central New York and north-central Pennsylvania, and the firm added to its holdings by acquiring Pennzoil’s Appalachian assets for $30.6 million.

By 2008, East Resources was one of the biggest players in the Marcellus Shale, which was becoming one of the hottest natural gas plays in the nation, thanks to fracking.

Horizontal drilling allows drillers to tap into vast amounts of gas with a single well, which can run through a mile or more of the gas-rich shale layer. When the wells are fracked, the pressure from the water creates tiny fissures in the rock that allow gas from the surrounding rock to escape into the well.

Because horizontal wells are so expensive, costing $5 million or more to complete on average, Pegula turned to New York private equity firm Kohlberg Kravis Roberts & Co. and sold them about a third of his company for $350 million in June 2009.

That gave Pegula the cash he needed to ramp up drilling in the Marcellus, going from one horizontal well at the time of the KKR deal to 69 horizontal wells that were producing more than 9 trillion cubic feet of natural gas at the time he sold much of East Resources to Royal Dutch Shell in May 2010.

Pegula, who is notoriously closed-mouthed about his business, then quietly went about drilling on his remaining land. The acreage that he sold to American Energy Partners had 33 producing wells and 24 miles of pipeline that helped bring the gas from those wells to large interstate pipelines that ran nearby.

email: drobinson@buffnews.com

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