NYC Council calls for ban on drilling in watersheds

* Council urges Governor to exempt watershed from drilling

* Filtration system could result in increased water rates

By Edith Honan

NEW YORK, Nov 16 (Reuters) - The New York City Council called for a ban on gas drilling in its watersheds on Monday, saying accidental leaks could contaminate one of the world's largest unfiltered drinking water systems.

New York State has proposed new environmental rules that would allow drilling for natural gas in the multi-state Marcellus Shale formation, which is likely the nation's largest shale reservoir.

Geologists say it could satisfy U.S. natural gas demand for a decade or more and local business groups say it would provide much-needed revenue to the cash-strapped state.

But city officials said drilling should be off limits in watersheds that serve almost 10 million people in and around New York City, about half of the state population.

The council passed a non-binding resolution urging New York Governor David Paterson to declare the watersheds off limits to energy companies seeking to extract natural gas from the massive shale gas formation through a process called hydraulic fracturing, or fracking.

The watersheds account for about eight percent of New York's share of the Marcellus Shale.

"The (New York State Department of Environmental Conservation), at Gov. Paterson's direction, has put us on the hydro-frack fast-track," said the resolution's sponsor, Councilman James Gennaro. "We can't sell off our water supplies for some short-term financial gain."

A spokesman for the governor did not immediately respond to a request for comment.

The largest shareholder in the Marcellus Shale, Chesapeake Energy (CHK.N), said it would not seek to drill in the watersheds, following pressure from environmentalists.

"All of the discussion about the New York City watershed and the acreage there had become just a needless distraction, had taken away from the focus on where it should be," Matt Sheppard, senior director of corporate development at Chesapeake, told Reuters at a public hearing on the issue.

But elected officials said the company's assurances were not enough.

"They didn't just wake up one morning and pull out. They were forced out," said Council Speaker Christine Quinn. "And we want to make sure we send a clear message: lest anyone think they can come back around again, we ain't interested."

In hydraulic fracturing, a mixture of water, chemicals and other materials such as sand are pumped into the shale formation to split the rock and free the trapped gas.

Critics say this could result in contaminated ground water, but the industry maintains that strict safeguards prevent any danger to water supplies.

If drilling were permitted, some argue New York City would need a $10 billion water filtration system that would cost an additional $100 million a year to maintain and translate into a 30 percent hike in residential water and sewer costs.

Mayor Michael Bloomberg's office has said he would oppose any development that would compromise the safety of the city drinking water. (Editing by Ellen Wulfhorst and Todd Eastham)