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.


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.