Saturday, November 20, 2010

Not all shale leases are created equal

Some interest of note that shale gas developers are abandoning efforts in some counties where there was a lot of lease activity... impacting more than a few landowners who had thought they hit it rich.

From Wilkes Barre Times Leader:   First gas site owners sad at news.

So yes... it may not be surprising and the article will point out the leases had verbiage to the effect that the development was explatory..  Nonetheless, the article also points out that more than a few folks went out and spent their anticipated earnings already.  For the one property owner interviewed, his earnings amounted to $1,500 compared to $300K anticipated in the spring if the development had proceeded.  Read the news article to see that there was a lot of leasing activity going on before the developers got to this point.

So no.. I don't think this indicates most or even much of the development elsewhere in the state will cease or even slow, but am pretty sure there are some folks spending anticipated royalties that may not add up to what they think they do.  Those news stories will come.

For the folks in Luzerne County...  there is always a new technology over the horizon. 

On the other edge of the development though... despite the fact that I have heard industry representatives try to explain how Pittsburgh is on the edge of the pressure gradient for shale gas and thus probably not economically viable to develop, there is growing development west of us.  From the Columbus Dispatch today: Eastern Ohio swept by drillers land rush.  So I guess it works to the west of the City of Pittsburgh and to the east... But we are in some geologic void? 

From a workforce/economic development perspective, the most interesting Marcellus Shale story of the day is out of New York state where it seems the demand for truckers is having some bad impacts on the dairy industry which is seeing its workforce poached.  See this from the Hornell Evening Tribune: Area Farms Hurting From Marcellus Shale Boom. Who says rural journalism is dead?  Good stuff.. and stuff not being looked into elsewhere.   Where else is other economic activity being impacted by Marcellus-related development?  That is a big economic story for the state. 

Remember the tempest over security bulletins warning local police against anyone opposing development? Developments there.


Anonymous MH said...

But we are in some geologic void? 

Not geologic.

Saturday, November 20, 2010 11:14:00 AM  
Anonymous n'at said...

With current plays in the northern panhandle of WV, it's seems reasonable to consider leasing adjacent rights in eastern ohio - the "shore line" so to speak, of the marcellus formation.

I sense they're setting the stage for development of the Utica while they have the capital to do so. Once many of these wellheads are tapped, there will be a lag over several years while waiting for sufficient pipeline construction to convey all the gas to market. During such time, the drillers will need something to do...

Although, an argument could be made that these companies are setting themselves up for acquisition. Consol was the first (i think) to acquire significant holdings in a natural gas company with marcellus assets. Chevron and others have followed... dunno if AEP has, but they're tied so well to Consol I suspect they'll angle DOE funds for state of the art natural gas power electrical generation plants along the ohio to replace their coal-fired plants.

Saturday, November 20, 2010 12:02:00 PM  
Anonymous The Wiz said...

I've read 6 or 8 leases and none have said they were exploratory. And looking at the maps, this area looks to be on the very outer edge of known Marcellus shale. Also, every lease around here pays an up front "bonus fee" which is basically the full amount of payments due for the term of the lease, usually 5 to 7 years. Example, when someone gets $3000/acre for a five year lease it is actually $600/acre/yr and they get the full $3000 up front. In every lease I've seen but one, that amount is non refundable should the gas company withdraw. That one said that the money shall be refunded on a pro rated basis should they cancel the lease.

I'm figuring that the company signed these leases with a very small retainer because this area is in a border line area. They speculated that there would be productive amounts of gas and would pay the full bonus as soon as the gas production was proven. Didn't pan out, unfortunately.

Another problem is that some people get their first royalties (payments for actual gas produced and sold) and expect that to continue for years. Example, if they get a couple of checks for $20,000/month they quit their jobs and buy new cars, travel, build a new house. But the wells will drop in production rapidly after the first year, maybe down to $5000/month and then to $2000/ month the third year and even lower as time goes on.

Best to bank most of the first years income and maintain your previous lifestyle.

Saturday, November 20, 2010 9:09:00 PM  
Blogger C. Briem said...

Wiz man.. seriously.  The MSC folks owe you money for your coverage of marcellus issues in social media.  They really need to put you on retainer or something.  You're a one man 24/7 machine.

So what do you think about the claim that Pittsburgh is a marignal area for development because of pressure issues?  That is what I have heard personally from the industry reps coming to community groups in town discussing Marcellus issues. I don't believe it myself for the reasons you mention about the leases that were popping up not being contingent.

Your comment does hit upon what should be a huge issue in Pennsylvania.  Royalites, timing and the production curves for this new drilling.   At today's gas prices, how much acreage do you need to have in production to expect to receive the $20k/month in royalites you reference...  even in the beginning?   I note the lawsuits over royalites are already beginning.  I suspect there will be more.  Makes you wonder if some folks would not be a lot better off if they deferred royalites until gas prices are not as low as they are now.  Conversely folks who had the option to be first movers a couple years ago should have made a lot more in royalites. 

Sunday, November 21, 2010 7:23:00 AM  
Anonymous The Wiz said...

Royalties vary greatly due to many variables, ie production amounts, gas prices, pooling, unitization, gas quality, liquid content, transportation, lease language, and more. Too many leases allow the company to subtract any number of costs like treating, transporting, and marketing the gas. And there will be lots of lawsuits over how royalties are being calculated. (That'll make some Pittsburgh attorneys lots of mullah)

But anyone with 100 to 150 acres with ALL the land in production and a good lease should get at $10,000/month for the first year. There are several royalty calculators that are fun to do. You can put acreage, gas price, royalty % and other factors and see how it will play out over the years.

As for Pittsburgh proper. I'm not an expert and I haven't looked into that issue. Shale layers on not like a layer cake but more like a water bed with waves of varying thicknesses. Some areas are better than others and the characteristics of the shale and gas make a big difference. But I have a very hard time believing that there is not commercially viable gas under the city, especially when considering other layers like the Utica or Upper Devonian. It may be less desirable than other areas so it may developed later but I strongly believe it is there and will be developed eventually.

Last, I thought about applying to the MSC but I can't be a shill for the industry when I don't endorse all they are doing. I thought about becoming a land agent but after talking to a couple of them, I couldn't do it and sleep at night. A couple of weeks ago I talked to a couple of attorneys and we are looking into forming a partnership to represent landowners in negotiating leases. We hope to be up and running by the new year. I'll keep you posted.

Sunday, November 21, 2010 11:10:00 AM  

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