Banking on Shale Gas to Preserve Wetlands

October 20, 2011

By Nadja Brandt and John Gittelsohn | October 20, 2011 | Businessweek Online

Banking on Shale Gas to Preserve Wetlands

Flanked by drilling rigs and pipelines, many of the wetlands feeding into the Sabine River in East Texas have been damaged by energy companies trying to extract gas from the Haynesville/Bossier Shale formation. That destruction is an opportunity for a Houston company called Mitigation Solutions USA, which buys and restores damaged marshes, swamps, and bayous. “Demand’s strong,” says Terry McKenzie, the company’s president. “Luckily, in Texas we have the luxury of oil and gas.”

Federal environmental regulations require companies that destroy wetlands to create similarly sized wetland in the same watershed. While some choose to do the work themselves, many turn to a so-called mitigation bank such as McKenzie’s. After these companies knock down levees, fill ditches and canals, replace invasive plants with native species, and prove that the changes can be sustained over time, they receive “credits” that each represent roughly an acre of wetland.

These banks, often backed by private equity, pension funds, and university endowments, profit by reselling the credits to companies that destroy wetlands. Mitigation Solutions, which has 15 banks in three states, charges about $30,000 per credit at Patroon Bayou, near rigs drilling the Haynesville/Bossier Shale. Companies operating in sensitive areas close to cities have paid as much as $650,000 per credit, according to Forest Trends Assn., a nonprofit that promotes the preservation of natural habitats.

Mitigation banks took off in 2008 when the Army Corps of Engineers (which oversees mitigation efforts) and the Environmental Protection Agency made it the preferred method of replacing lost wetlands. Such companies restore land “on a large scale, whereas the individual developer can only do it on a smaller scale,” says Don Ross, chairman of EarthBalance, which has four banks in Florida.

The boom in shale oil and gas has offered salvation to mitigation banks, which have been battered by the housing bust, as many commercial and residential developments that might have needed mitigation were put on hold. Last year the Army Corps approved 104 new banks, up 17 percent from 2009, for a total of 975 today. Of those new banks, 23 percent were in Texas, Louisiana, and Mississippi.

At Resource Environmental Solutions in Baton Rouge, La., revenue climbed more than eightfold from 2007 to 2010, to $11.3 million, as the company has sold credits to energy companies such as BP (BP <> ), Petrohawk Energy, and Chesapeake Energy (CHK <> ). “We’ve been able to grow during poor economic times, and we’re hoping to see more in the future,” says Elliott Bouillion, the company’s chief executive officer.

In states with little oil and gas drilling, mitigation banks have struggled to stay afloat. Wetlandsbank Group, which has five banks in Georgia and Florida, won’t buy more land until the company is “more comfortable that the market is back,” says CEO Stephen M. Collins.

Some banks see an opportunity in the turmoil of the housing market. Ecosystem Investment Partners, a private equity firm in Towson, Md., that has mitigation banks in Louisiana, Virginia, Delaware, and Montana,plans to buy land and begin the two- to three-year permitting process so it can be ready to sell credits when the economy turns around. “The drop in real estate prices is great for those of us who want to invest in the future,” says David Urban, the company’s director of operations.

Skeptics of the mitigation program say that even under the scrutiny of biologists and the Army Corps, it’s difficult for restored land to fully replace natural habitats destroyed by development. Complex wetlands “support tiny little bugs, fungi, fish, and insects that then support the higher animals we pay more attention to—the salmon, the panthers, the wolves, and such,” says Jan Goldman-Carter, senior manager for wetlands and water resources at the National Wildlife Federation. “They all depend on that food chain to be intact. What you often see with wetland mitigation, it’ll look nice on the surface, but if you dig down it’s not nearly as robust.”

The bottom line: Drilling for shale gas has boosted mitigation banks, which sell credits for restored wetlands to companies that destroy swampland.

Brandt is a reporter for Bloomberg News. Gittelsohn is a reporter for Bloomberg News.