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Local Landowners May Profit From Underground Gas

July 20, 2008

By Joe Napsha, The Pittsburgh Tribune-Review

Jul. 20–Bill Fawcett might learn this week if his North Huntingdon farm is sitting on a gold mine of natural gas reserves thousands of feet underground.

“You don’t know if they have gas (underground). They could miss it by a few feet,” Fawcett said.

A driller for Penneco Oil Co. of Delmont began last week to bore about 4,000 feet underneath a small piece of Fawcett’s 63-acre farm in the Westmoreland City section of the township.

Fawcett is one of thousands of landowners in the region caught up in the rush by natural gas producers looking to lock up mineral rights in Western Pennsylvania and drill for natural gas. The push is fueled by higher natural gas prices and the enormous amount of gas experts say is trapped in the Marcellus Shale formation, a 600-mile “play” that runs through the region, as well as Ohio, West Virginia and New York.

Landowners are finding that lease prices for their mineral rights and royalties paid on gas produced are skyrocketing.

“It’s been unbelievable as far as the interest” in signing leases for mineral rights, said Terrence Jacobs, chief executive of Penneco Oil Co. The “big driver” is the price of natural gas, and it’s been up substantially the last five or six years, said Jacobs, whose family-run company has been in operation for 40 years.

Longtime gas producers in the region are competing with oil and natural gas companies from Oklahoma and Texas to buy mineral rights, Jacobs said. Penneco is buying up mineral rights to keep up with the competition, even if they don’t intend to drill immediately because of the limited availability of rigs and drilling equipment, he said.

“There’s a frenzy going on (for mineral rights) … and it’s a pretty speculative play,” said Michael Hillebrand, vice president of Huntley & Huntley Co., a Monroeville-based producer that typically drills about 80 wells a year. Huntley & Huntley has four Marcellus Shale wells in Allegheny and Westmoreland counties that are producing gas, he said.

Natural gas in the Marcellus Shale formation has been valued at $1 trillion dollars, plus or minus a billion dollars, according to Penn State’s Workforce Education and Development Initiative. Penn State geosciences professor Terry Engelder and a New York colleague estimated there could be between 168 trillion cubic feet and 516 trillion cubic feet. The nation produces about 30 trillion cubic feet of natural gas annually.

It’s too early in the exploration stage to determine how much of gas lies underneath Western Pennsylvania, or how much that would bring in royalties, Engelder said. But local property owners might be in for higher royalties than other areas because the shale here is deeper underground, which could mean that more gas is stored at higher pressures, he said.

The state law requires that landowners receive a minimum royalties of 12 1/2 percent of the sale of the natural gas.

“Royalties are likely to be substantially greater than upfront checks” for leasing the mineral rights, said Thomas Murphy, of the Penn State Cooperative Extension Service in Williamsport, Lycoming County.

The price of natural gas leases have jumped 1,900 percent in just about two years — from about $15 an acre in 2006 to $300 an acre in February 2008, Murphy said. The it took another big leap in March, rising from $300 to $1,500 an acre, Murphy said.

“It’s on a pace to reach $2,500 to $3,000 an acre in Clearfield County,” Murphy said.

Fawcett said he missed out in the jump in lease price because he signed a lease more than a year ago. But, getting top dollar for a lease might not be most important factor in the long run, Fawcett said.

“Integrity is what I look for,” Fawcett said. Penneco has gone above and beyond the state’s requirements for drillers, Fawcett said. “If you deal with above-board companies and have a say (in the lease), it all works out,” he added.

Most of the companies are paying more than the state minimum for the royalty payment, Murphy said. “Fifteen percent to 16 percent is the new benchmark.”

Even so, landowners have to be educated about the intricacies of the leases, if they are going to get a good deal, he said.

The Penn State Cooperative Extension has conducted seminars statewide for about 14,000 landowners over the past three years to give owners “baseline information” about drilling and leasing.

Landowners should not sign the standard lease the natural gas companies provide, but they should tailor it to their specifications, said Fawcett, who has another well on his property that is producing natural gas.

“The standard lease is, ‘everything for them, nothing for me,’” Fawcett said.

But, if a property owner takes too hard of a stance, the gas producer might make a move elsewhere, he said.

“You can make your lease too bulletproof, so restrictive that your scare them (natural gas producers) away,” Fawcett said.

Mineral rights owners looking to increase competition for their resources can tap an online service created by a Delmont money manager.

Resource Trading Online offers landowners an opportunity to list their mineral rights for lease, which will help to “level the playing field” when owners deal with natural gas producers, said Peter Dochinez, who owns the Greensburg-based Resource Trading. By generating competition for those mineral rights, that could boost the money being offered to landowners in the form of higher lease prices and a higher percentage on the royalties, Dochinez said.

“We are sort of turning things upside-down in the oil and gas industry in the manner in which leases are transacted,” Dochinez said.

The Web site has a list of about 5,000 acres of mineral rights available, and the online transactions began last week.

Dochinez’s online service generates its revenue from gas producers that sign a deal with one of its clients. If a gas well produces, Dochinez said his company will receive “a small percentage” of the production value, paid by the gas company, not the landowner.

“We’re providing a resource where they can go to one place and find multiple people in given areas that are interested in having someone acquire their mineral rights,” he said.

One person negotiating the lease of natural gas rights is Thomas Wandrisco of Hempfield, who has a 117-acre cattle farm in Derry Township, Westmoreland County.

Wandrisco said he’s attended seminars and read about leasing mineral rights, and discovered he has a lot to learn before signing a contract.

“You have to have an attorney … one who’s dealt with oil and gas (leases) for 25 years, ’cause there’s a lot of things that, as a layman, you’re not really used to,” Wandrisco said.

Wandrisco said he has had offers of more than $100 an acre for his mineral rights.

“I hope to come out of it with a good hand,” Wandrisco said.

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