Big interest; huge potential
Gas leasing workshop attracts 550 peopleBy DAVID THOMPSON
Article Photos
Fact Box
Frequently asked questions about gas leasesand gas drilling in northcentral Pennsylvania
Q: What is driving the interest in gas drilling in the area?
A: Three factors are driving the interest: 1. The presence in the region of the Marcellus Shale formation and the natural gas reserves many believe it contains; 2. New technologies that make it possible to capture the gas; 3. The close proximity the formation has to the nation’s largest natural gas market, which is the metropolitan corridor running from Boston to Washington, D.C.
Q: Where is the drilling already occuring in Lycoming County?
A: Three locations, with the biggest location in the northcentral part of the county. Also there is a lot of activity in the Salladasburg area. More recently, activity is beginning in the Hughesville-Picture Rocks corridor.
Q: What are the potential economic gains for landowners?
A: Landowners may lease their land for gas exploration and receive royalties for any gas removed from their property and sold commercially. Landowners, as of Feb. 15, are being paid lease rates of $250 to $450 per acre for a five-year lease. The state requires that landowners receive a minimum of 12.5 percent in royalty payments for gas sold commercially, though that is negotiable and may be higher.
Q: Does the landowner have to sign the lease offered to him?
A: No. Landowners are sometimes told they are being offered a “standard industry lease.” There is no such thing. Landowners have the right to negotiate a lease that is mutually beneficial to both the landowner and the company. Often addendums are used to modify the terms of the lease and create conditions more favorable to the landowner.
Q: Outside of the economic benefits, what are some of the issues landowners can negotiate into their leases?
A: There are up to 37 addendums addressing subjects such as who is liable if someone is injured on the property during drilling operation, site restoration, pipeline installation, conditions of lease termination and methods of settling grievances. It is important to remember a gas lease is a binding legal document. An attorney versed in gas leases could be consulted before signing a lease.
Q: How will a gas lease affect ag-land preservation, conservation easements and other programs?
A: State law allows gas resource development without adversely impacting state agriculture preservation programs as long as no permanent buildings are constructed. The same holds true with the federal program CREP as long as the land is restored back to a farmable condition. A landowner must repay CREP money on any land that is not restored. The tax program Clean and Green allows land to contain a well head and access road without affecting program status. Prior to signing a lease, the landowner may negotiate for the company to pay any rollback taxes owed the government.
Q: Is it possible to lease my land without having my property disturbed by drilling?
A: Yes. You could negotiate a “no surface activity clause” into your lease which means a company can place your property in a drilling unit and drill on property adjacent to it.
Q: What is the level of disturbance my property will have during and after a gas drilling operation?
A: There is significant property disturbance during the operation, but, depending on the location, evidence of drilling varies after resoration is completed. Typically for wells being drilled in the Marcellus Shale, a 2 to 4.5-acre area is graded. State law requires a site to be restored within 90 days of the end of the operation. If the operation is in an open area such as a pasture or field, there will be little evidence drilling occurred. If it occurred in a wooded area, trees must be removed, so there will be more of a long-term change.
Q: What is the common length of a gas lease?
A: Typically, it is five years. Very often a clause in the lease will automatically extend it another five years, but that can be negotiated out of the lease. Attorneys typically advise including a “right of first refusal” clause in the lease, which allows the landowner to shop for better rates once the initial lease period expires. The clause would allow the gas company to match any offer the landowner receives.
A lease automatically is extended if gas drilling occurs on the property before the initial lease period ends. Once commercial gas production begins, the lease continues until production ends.
Source: Thomas Murphy, Penn State Cooperative Extension at Lycoming County
HUGHESVILLE — If there were doubts about central Pennsylvania’s potential as the next boom region for natural gas exploration and production, they were not evident Wednesday during a gas drilling open house and workshop at the Hughesville Volunteer Fire Department social hall.
The event, which was designed to provide information about gas leases and introduce landowners to the major players involved in the natural gas industry, attracted a standing-room-only crowd estimated at more than 550 people.
It also attracted a large number of gas drilling and land companies, some from as far away as Texas and Michigan.
The companies were more than happy to discuss gas leases with landowners in attendance.
Kevin Hackert, of Ludington, Mich.-based Western Land Services Inc., said his company is “definitely interested” in doing business in the region.
“We are looking at planting a flag in Pennsylvania,” Hackert said.
“The initial drilling that other companies have done — it all looks very promising,” he said. “There is money to be made by landowners with leases and royalities.”
The development of new technologies has made it possible for significant amounts of gas to be extracted from the dense shale located two miles beneath the ground, said Earle D. Robbins, director of the Penn State Cooperative Extension office in Tioga County.
Add to that the number of industry players interested in the region, and a perfect economic storm could be created for landowners, he said.
“If the shale play turns into something substantial, it could create very significant economic benefits for the region,” said Stephen W. Rhoads, president of the Harrisburg-based Pennsylvania Oil & Gas Producers, a non-profit group representing the state’s independent oil and gas producers.
“It’s a very active area with a lot of competition and a lot of potential,” he said.
New technologies include fracturing —”fracing” in industry terminology — which is a process in which highly pressurized fluid is pumped into the ground to create fissures that allow gas trapped in the rock to be released, Robbins said.
Horizontal drilling is a new process that allows gas companies to more efficiently capture gas freed by the fracing process, he said.
“It’s really changing the landscape,” Robbins said.
“It costs significantly more to drill a horizontal well, but in other areas of the country, the horizontal drilling is where they’re seeing the biggest production,” Hackert said.
Although it is not yet known if there is enough gas trapped in the shale formation — called the “Marcellus Shale” — to be profitable, gas companies are investing more than $1 million per gas drilling operation with the hope that there is, Robbins said.
That is because the Marcellus Shale has qualities similar to the Barnett Shale in East Texas.
The Barnett Shale, which is a large production gas field, is one of the shale formations where fracing and horizontal drilling technologies were pioneered and perfected. The technology was used elsewhere, primarily out west.
Companies are hoping those technologies will be as successful with the Marcellus Shale.
“What has caused this (interest in Pennsylvania) is what’s happened in Texas,” Robbins said.
“The Marcellus Shale looks similar to the Barnett Shale,” Hackert said. “We see some of the same characteristics.”
So far, two companies, Texas-based Chief Gas & Oil LLC and Range Resources — Appalachia LLC, have drilled gas wells in the county.
Chief has drilled four wells and has permits to drill four more, according to the company.
According to company spokesperson Kristi Gittins, the company plans to drill the next four wells horizontally.
Range Resources has drilled three wells and intends to drill more, according to Carl J. Carlson, company director of community and government relations.
“We plan to bring a much larger drilling rig to Lycoming County in the next few weeks to drill the first horizontal shale well in the county,” Carlson said.
Rhoads said landowners should remember that it is still not known whether the shale will be productive enough to sustain continued industry activity.
“There is a big ‘if,’” Rhoads said. “Everyone knows this shale has gas in it. The problem is the wholesale price (of gas) has got to be high enough to sustain the amount of capital it takes to drill a well.”
There also are issues of how to get gas to market once it is discovered in significant quantities, he said.
While Rhoads advised landowners to be cautious about the activity, others seem more optimistic about the region’s prospects.
“I think every one of the wells (that have already been drilled) have hit gas,” Lycoming County extension educator Thomas Murphy said. “It would appear the wells would be commercialized, although there is no guarantee of that.”
“Range (Resources) believes the Marcellus Shale has the potential to have a significant economic impact on Lycoming County was well as other parts of Pennsylvania, primarily in the form of new jobs and royalty income flowing to property owners,” Carlson said.
Carlson said the latest horizontal wells drilled by the company in Pennsylvania have yielded 3 million to 4 million cubic feet of gas per day.
If prices now being offered landowners are any indication, gas companies are the most optimistic.
Land that only a few years ago was being leased for $2 or $3 per acre for a five-year lease is now being leased for a hundred times that amount, Robbins said.
In one instance, landowners in Wayne County banded together and hired a conultant to negotitate for them. They got $750 an acre for land previously offered at $25 an acre.
The Wayne County situation is extreme. Still, it is a sellers market that is seeing unprecedented money being offered landowners, Robbin said.
According to Murphy, landowners in the area are commanding between $250 and $400 per acre for a five-year lease. That rate is the total the landowner receives for the life of the lease and is not a “per year” rate, Murphy said.
“There is a lot of potential for everyone,” Rhoads said. “If this development shows there is a significant resource, there’ll be a lot of investment here.”
