Tuesday, February 05, 2008

Gas Lease Crap Shoot Final Exam

Multiple Choice. Select your answer from the options below.

(1) If we sign a natural gas lease for drilling on our land we will all be ________.
(a) rich
(b) sorry
(c) really rich
(d) really sorry
(e) not nearly as rich as we thought we would be

(2) The best way to assess the financial and environmental impact of drilling for gas on your land is by ________.
(a) reading between the lines in your lease agreement
(b) second guessing the motivations of the gas company in question
(c) asking your neighbor what he overheard down at the restaurant
(d) making something up yourself

I will let you know what your score is in 20 years after we see how this all shakes out.

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The county that I live in seems to be at the epicenter of a mad natural gas rush. Apparently just about all but the southeast quarter of Pennsylvania has a layer of Marcellus Shale underneath it which contains a large quantity of natural gas. The geologists have known all about it for a long time, but up intil very recently nobody had the technology to capture this gas economically. The problem seems to be that unlike other gas bearing formations which are more permeable, this formation does not release its gas unless it goes through a fracturing process. In the past few years the technology was devoloped in a simular shale deposit in Texas (Barnett Shale) where water and sand and sometimes nitrogen are pumped into the shale under extremely high pressures. The hydraulic pressure fractures the shale, and the sand holds the cracks open after the water is pumped back out so that the gas has an evacuation route.

Last year all of a sudden we started to get all these land men knocking on the door wanting us to sign a gas lease. Back then they were offering 25 dollars an acre as a signing bonus, then 1/8th of the value of the gas in royalties. Now, a few months later, after several sucessful wells have been drilled, 3 or 4 within 5 miles of us, we have heard that the offers have increased to $700 an acre. Initially we decided that we were not at all interested in being involved in this process and had largely dismissed it. But in light of the higher stakes we decided that we had better take a good hard look at the whole thing in order to make the best decission we can. The hardest part of balancing the risks and rewards in this game is that there is no reliable information that I have found regarding what kind of financial gain is likely. I was at an informational seminar put on by the Penn State Ag Extension last night, and one of the speakers had worked up some figures. I thought "Now we are getting some good information" until someone asked if that was the average gas production from one of these wells. The speaker then told us that it was a wild guess. So I think I could have made up my own number and been just as close. The only ones who have this production information are the gas companies, and they aren't saying because it would be the equivilent of shouting out "GOLD!"

I was able to get some better information about the environmental risks involved with the drilling process. It sounds to me like these drilling outfits are pretty well regulated by DEP, and it does not sound like the risk of environmental damage is very high. One down side however is that drilling a well does involve quite a bit of surface space during the drilling and fracing process, maybe as much as 5 acres. After the process most of that land is restored to an arable condition, but there would bo some loss of land to roadways and wellheads, etc.

So anyway, we have yet to sign a lease and are continuing to try to gather enough information to make a good decision about this. If the process will run counter to our attempts to be good land stewards in significant ways then that would be a deal breaker. If any of you have experience with natural gas drilling I would love to hear what you think of it.

4 Comments:

Blogger Haymaker said...

I have no experience in the matter, but the last thing I'd want to have happen is for a neighbor to get 'taken' by what sounds like a decent price. Someone up there ought to publish a high 'going rate' in the newspaper to set the market.

2/05/2008 10:36:00 AM  
Anonymous Anonymous said...

I went thru something similar with developers this year. I told the hubby I did not want to spend THIS year worrying and looking for a new place, let's price ourselves so high that we won't even be considered. And sure enuff they forgot us and everyone else too as the real estate market changed at the same time the offers were coming in. Point is, we didn't spend the summer dwelling on it and had a great growing season. Built a greenhouse and now putting in the pool. Your deal sounds like more of a sure thing, hope this site helps you...

"Landowners and Oil and Gas Leases in Pennsylvania" copy/paste in your fave search engine...

PS...I have been checking your site almost daily to keep myself jazzed about the natural pool/cistern I am putting in, so here I came today looking for the lastest pics of hmm... your new ice skating rink?

2/05/2008 10:15:00 PM  
Blogger Enjoy Gas said...

I don't know the thickness of your shale or its gas content, but in Fort Worth Texas the shale is about 400 ft thick and contains some 150 billion cubic feet of gas per section (640 acres). If half that gas reserve is recovered at $10 per thousand cubic feet, the value of the gas under our properties would be $1 million per acre. No wonder the land companies are paying almost $20,000 per acre and 25% royalties here.

Like any contract, knowledge is power. Find out what they plan to do and why before you sign. Here for example, it requires a well every 20 or so acres to get half the gas released.

2/24/2008 09:00:00 AM  
Blogger Lindse94 said...

HAve a farm in Meshoppen and we have heard the offers are up to $2,000. We got a few recently for $1,500 an acre, but are going in with a group.

3/30/2008 06:03:00 PM  

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