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Deep in the hills of Pennsylvania, Terry Pegula's other world

Deep in the hills of Pennsylvania, Terry Pegula's other world

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ULYSSES, Pa. – A roughneck rappels down a wire after setting in place another 90-foot section of pipe on a rig that will drill a hole about four miles into the earth.

The 150-foot-tall rig chugs along in a rhythmic hum, boring at a relatively slow pace of 33 feet per hour as the bit hits tougher rock. In the coming days, drilling will slowly turn from vertical to horizontal, pushing through the shale below to tap the natural gas it holds.

Early next year, the next phase – hydraulic fracturing, or fracking – is expected to begin on the six completed wells on a 5-acre drill pad called Headwaters 145. Natural gas should start flowing by next summer from this mountain community in Potter County.

This is Terry Pegula’s other world, far from the heady lifestyles of the NFL and NHL.

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Drilling for natural gas is what made him a billionaire four times over and allowed him to purchase the Buffalo Bills and Buffalo Sabres, after he sold a sizable share of his operations to bigger companies. Many people thought he was out of the natural gas business after he made his fortune. But, behind the scenes, Pegula kept gathering land rights and in the past couple of years stepped up drilling for gas in the mountains of Pennsylvania.

His small company has amassed drilling rights on 120,000 acres of leased land in Potter County. And he is betting more natural gas riches wait to be untapped from the Utica shale.

In a rare interview – he is both media shy and untrusting of those be believes unfairly depict the oil and gas industry – Pegula said he never had any intention of retiring from the oil and gas business.

“You should say I never left it,’’ Pegula said.

It is ironic to some that Pegula’s wealth and his heavy investment in Western New York – including $200 million for his HarborCenter project – is based on fracking. What he oversees just a few miles over the border in Pennsylvania is illegal in New York under orders from Gov. Andrew M. Cuomo.

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Perhaps more ironic is this: The natural gas coming from Pegula’s wells in Potter County heats homes and businesses in New York. Two pipelines carry the natural gas across the state lines into New York and elsewhere.

Fracking is a dirty word for some.

“Especially here in Pennsylvania, there are documented cases of the harm from the fracking industry on our local communities, including to the public health and environment, and I would say that if anyone has been unfairly targeted it’s the communities living in and around natural gas developments,’’ said Joanne Kilgour, director of the Sierra Club in Pennsylvania.

Pegula makes no apologies for fracking. Finding natural gas and drilling for it has been his passion since getting out of college in 1973, just months before the Middle East oil crisis that sent gas prices soaring. Today, he strongly believes his industry makes the country less dependent on foreign energy.

"We have made our country significantly stronger in the less than a decade with these unconventional plays,” Pegula said. “We have just turned the world energy situation around."

Re-entering industry

Some believed Pegula was largely stepping away from the oil and gas industry when he bought the Bills in 2014 for $1.4 billion. He had sold a sizable share of his natural gas assets to Royal Dutch Shell for $4.7 billion four years earlier, netting him $3.3 billion. Several months before his Bills purchase was approved, Pegula’s flagship company, East Resources, received $1.75 billion for drilling rights on 75,000 acres of land in Ohio and Pennsylvania.

But five years ago, Pegula began focusing on Potter County, “quietly acquiring acreage little by little.” Potter County was on his mind because his years of experience and knowledge of the region told him there was potential in the Utica shale formation and another shale field closer to the surface.

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Nearly four decades earlier,  Pegula acquired old records of oil and gas drilling that occurred 140 years ago in the Appalachian region. He could make sense of the records because he earned degrees as a petroleum and natural gas engineer at Penn State and is a self-taught geologist. Pegula pored over those records and found the geological formations – the Marcellus shale – that were rich in natural gas.

“Sometimes I can’t sleep at night,’’ Pegula said of studying those records. “I just love it … Some of the (records) are over 100 years old. It’s priceless data. We built our business basically off that.”

Selling drilling assets had made him a fortune, but he still believed more natural gas was hidden in the deeper shale – the Utica formation – underneath Potter County. Geologists also believe this Utica shale that the company is concentrating on could be more productive – and profitable – than the better-known Marcellus shale.

What’s more, Potter County “was wide open” for gas exploration, Pegula said.

So in the past two years, he expanded the drilling and development work of JKLM Energy LLC, a closely held company named for his children. Pegula’s company is intentionally small to keep it nimble and avoid the bureaucratic obstacles of larger gas companies. He employs about 20 people at its headquarters near Pittsburgh. Among the executives is one of Pegula’s daughters, Laura Pegula, a geologist.

A natural gas hotspot

Up in the mountains and far from the main roads in Potter County, JKLM and its contractors are busy. Pegula’s company has gotten permits for 47 natural gas wells in Potter County, according to Pennsylvania Department of Environmental Protection records.

Some permits are for wells since drilled or fracked. Others are ready to be explored and possibly drilled in the months or years ahead, depending on the market and pipeline infrastructure.

A well can cost $10 million or more to build. After waiting up to six months to get a permit from Pennsylvania, the land is cleared and roads are created. An initial crew drills down the first 2,500 feet or so. Next, the big rig comes in to drill down in a vertical and horizontal well that ends in a well 8.5 inches in diameter before cement casing is added to reinforce it.

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Water goes to the drilling site from a tank facility that handles the 700 to 800 truckloads necessary for the process. Drilling can take about a month, followed by about 10 days of fracking.

Beyond the drilling, the company has built pipelines, a 72,000-barrel storage facility and spent an undisclosed amount of money on local roads that lead to JKLM sites, company and local officials say.

On a recent visit to Headwaters 143, two wells painted red sat in the middle of what had been a sprawling drilling pad just a couple months ago. The gas flows – increased and lowered depending on supply and demand – to a metering site about a half mile away where it then connects to a pipeline that takes it to New York and several other states.

It could take up to a year for Pegula to learn whether Headwaters 143 will produce what drillers hope.

“Being a month in, we’re confident enough to continue drilling wells,’’ said Jake Long, JKLM’s operation manager.

Pegula gets especially involved in work related to geology and rock structures and the gas discoveries, said Long, who has worked with JKLM about two years.

“He’s still very rooted in what his passion was, which is oil and gas, which is what brought about the sports teams and real estate development. He’s still involved with what got him there and what he’s done his whole life,’’ Long said.

That people are now realizing Pegula’s firm is increasing its drilling operations – and is the only major player actively operating in Potter County – is not a surprise to Pegula watchers over the years.

“I would say a lot of what JKLM is doing right now remained below the radar for a long time … I’m sure the people in Allegany County (in New York) are looking southward with a little bit of envy,’’ said Terry Engelder, a professor emeritus of geosciences at Pennsylvania State University.

Fracking ban in New York

Cuomo in December 2014 banned fracking in New York State, a month after getting elected to a second term.

He had been under intense pressure from environmentalists, who followed him around the state to protest his appearance at public events and his own campaign fundraisers. The governor ultimately accepted the advice of his health commissioner, Dr. Howard A. Zucker, who said fracking presented “significant uncertainties” over public health protections.

“I’ve never had anyone say to me, ‘I believe fracking is great.’ Not a single person in those communities,’’ Cuomo said in 2014.

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Environmentalists say fracking endangers water supplies because of the chemicals used in in the process. They also say fracking causes noise and air pollution.

And in Pennsylvania, they have waged legal, legislative and public relations battles with fracking companies. They also dismiss Pegula’s claims that critics unfairly target an industry he believes has strengthened the national security.

Kilgour of the Sierra Club said renewable energy sources could better flourish if communities and governments invested in them “rather than the boom and bust” oil and gas industries.

Additionally, a decision by the state’s highest court in Pennsylvania earlier this summer could bring new pressure on the commonwealth to become more strict when issuing permits to drill, fracking critics like Kilgour believes.

Run-ins with state

Pegula’s company has had run-ins with environmental regulators over the years.

In 2015, the groundwater of six private drinking wells in Potter County became contaminated after an unauthorized foaming agent was used to try to free a drill bit that became jammed in a well bore 570 feet below the surface. The company was fined $472,000 and gave $100,000 to 11 public water supply systems to install devices to monitor water quality.

After that incident, JKLM began holding monthly meetings with area stakeholders – in and out of government – to provide details on its local operations, said Paul Heimel, vice chairman of the Potter County Board of Commissioners. He complimented JKLM for continuing those meeting.

Heimel, who has never met Pegula, backs gas drilling in Potter County, in part because Pegula’s company brought jobs and tax revenues to a county that most gas explorers had largely ignored, he said.

“I think JKLM was one of the first companies to recognize the bounty of natural gas that’s locked into the Utica shale layer,’’ he said. “They became very aggressive in acquiring gas mineral rights from private owners and putting together significant acres. They were just very wise to get on that early.”

Defending fracking

Tapping the natual gas deposits is more than just profits for Pegula.

To begin, the United States no longer relies on energy imports “from many of our enemies,” he said.

“It’s made us much stronger in the world economy and with guys like Vladimir Putin.”

His bottom line: the United States will be pushed back to energy imports if fracking is banned altogether.

“I can tell you where it’s going to come from … It’s going to come from the Middle East, it’s going to come from Russia and the friendliest name you’ll hear is Australia,’’ Pegula said of the nation's energy supplies.

He bristles at people who believe renewable energy sources like wind and solar can replace oil and gas in the coming half-century.

“The numbers aren’t there,’’ he said,

Pegula acknowledges becoming wealthy in the process, but he notes so too have landowners who have leasing and royalty deals with drilling firms. At the same time, consumers and businesses have enjoyed lower energy costs because of the boom in domestic-produced natural gas.

But Pegula said he doesn’t expect to be be drilling new New York because of Cuomo’s ban.

“It saddens me, but I don’t see it changing. They better hope we continue to produce energy in other states because they’re going to need it,'' he said.





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