Earlier this week I passed along a link to an article about a proposal for a severance tax on natural gas drilling in Pennsylvania. Since then I was talking with with someone who said (and was honest enough to admit it) that they didn't know what a severance tax" was. In case there are others like this individual, here's a general definition from the National Council of State Legislatures (NCSL) website:
"Severance taxes are excise taxes on natural resources "severed" from the earth. They are measured by the quantity or value of the resource removed or produced. In the majority of states, the taxes are applied to specific industries such as coal or iron mining and natural gas or oil production. They are usually payable by the severer or producer, although in a few states payment is made by the first purchaser. The taxes usually are imposed at a flat rate per unit of measure, with coal and ore mining taxes levied on a tonnage basis, oil production taxes on a per barrel basis, and gas production taxes on a per foot basis, although the rates may be graduated based on volume of production or value of the products. "Value" may mean market value in some states and gross value in others. Taxable net value or net proceeds are determined by deducting certain items from the gross value or gross proceeds. Examples of deductions include production costs, ad valorem taxes and royalties paid. Evaporation for gas wells also might qualify as a deduction."
Source: http://www.ncsl.org/programs/fiscal/severtax05.htm
Below is a map from the National Council of State Legislatures site that visually depicts states' severance tax policies as of 2006.
Source: Commerce Clearing House State Taxes, 2006.
A little more detail on individual state's severance tax policies can be found at: http://www.ncsl.org/programs/fiscal/severtax05.htm
If someone knows of a better explanation of this type of tax for the layperson, or a more up-to-date state by state comparison, please forward to me. Thanks!
Charlie
Charles W. Abdalla, Ph.D.
Professor of Agricultural & Environmental Economics
201-B Armsby Bldg.
Penn State University
University Park, PA 16802
814-865-2562 (office)
4:00pm 12/05/2008
Delayed quote data
From the Pittsburgh Tribune-Review
Marcellus gas estimate swells
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By Kim Leonard The Marcellus Shale region of Western Pennsylvania and bordering states could contain more than double the amount of recoverable natural gas than initially thought, a Pennsylvania State University professor who is a nationally known authority on the topic said Friday. Terry Engelder's revised outlook is sure to expand the level of strong interest in what lies beneath the Allegheny Mountain area. Dozens of locally based and out-of-town energy producers are leasing acreage in the region and drilling into land that was an inland sea 350 million to 400 million years ago. Engelder based his new estimate that up to 392 trillion cubic feet of the fuel could be captured over the next few decades on numbers from Chesapeake Energy Corp., one of the largest stakeholders in the Marcellus area. "Geologists are still attempting to size this play. We don't know yet how much gas is there, and how much can be recovered," said Engelder, a professor of geologic science who has studied Appalachian shale formations for more than 30 years. He first gave his new numbers this week in Pittsburgh, at a conference on Appalachian gas sponsored by energy information firm Platts. Oklahoma-based Chesapeake Energy, in a recent meeting with investors, said each square mile in the Marcellus area could contain 30 billion to 150 billion cubic feet of gas. Engelder used an average of that range, 90, to figure the entire 31-million-acre region might hold 4,359 trillion cubic feet of gas. If 30 percent of that gas were brought out of the ground, as Chesapeake anticipates, he said, that would be 1,307 trillion cubic feet from the entire region. And because another gas producer, Range Resources Corp. of Fort Worth, Texas, points out that not all the Marcellus acreage contains gas, even if just 30 percent of it proves productive, that's 392 trillion cubic feet. To put it all perspective, that's more than 13 times the 30 trillion cubic feet produced each year across the United States. Engelder and another geoscientist, Gary Nash of the State University of New York at Fredonia, first stirred the industry early this year with their estimate that 10 percent of a total 516 trillion cubic feet might be recovered. A 30 percent recovery figure may be more reasonable over time, based on petroleum industry figures, he said, but in any case the new estimate "is a whole heck of a lot larger" than the initial one. Producers working in the region will provide a more accurate picture over time, he said, adding he's trying to keep his estimates conservative. "The one thing we don't want to do is exaggerate what is there," he said. Richard Weber, CEO of Atlas Energy Resources LLC, told an audience at an Airport Area Chamber of Commerce event yesterday about the natural gas producers "flooding in" to the Marcellus regions. Atlas of Moon announced yesterday it has drilled 98 wells there. Equitable Resources Inc. is drilling 20 Marcellus wells this year, and plans 75 next year. "We believe Marcellus easily holds a 10- to 20- year supply of natural gas -- that's for the nation, based on current consumption," said Dave Spigelmyer, spokesman for the North Shore-based company. Range Resources and a partner opened a refrigerated gas processing plant last week in Chartiers, Washington County, and, "that starts to demonstrate that it's all for real," spokesman Matt Pitzarella said. Range estimates 15 trillion to 22 trillion cubic feet of recoverable gas are in its acreage, he said. While natural gas has fallen in price since June, "The people we are talking with have not reduced the wells they are looking at," said Bob Garland, Northeast regional sales manager for Superior Well Services of Indiana, Pa. He attended the Platts event where Engelder spoke. "There was a lot of excitement at the meeting," Garland said. Kim Leonard can be reached at kleonard@tribweb.com or 412-380-5606.
Nice to get a little good news!.................Ken Balliet, Natural Gas Resource Management Program |
Well..the bad news keeps coming...
PORTAGE, Pa. (AP, Oct. 23) - Some landowners eager to get a windfall from the rights to natural gas beneath their western Pennsylvania land are finding out that they may miss out.
Energy consultant Jackie Root told a group of Cambria County landowners Wednesday night that a sluggish economy and stock market slide has sapped interest in drilling on the Marcellus Shale natural gas formation beneath their land.
Landowners meeting with Root at Portage Elementary School heard that oil and gas leases that were going for $2,500 an acre a few months ago are down to $200 per acre.
Root's company sought lease proposals from 40 companies on the landowners' tracts.
But just two companies bid, and neither chose to bid on the entire 7,000-plus acres owned by the group.
Is the sky falling? Even as I read the above news article, I don't think so. As I gather my thoughts to write this I suddenly feel old. Here I am postulating (hopefully)sage advice from years of experience. But here's how my experience from many years in the timber business as a forester, then director of procurement, and later Vice President shakes this all out.
We all know that demand, and thus prices for oil and gas will normally ebb and flow. We are in a period of great uncertainty there is no doubt. We recently went through a period where the global market was seeking the "top" of the price for oil/gas. Many predicted $5.00, even $10.00 gas right? Well, we found out where the celing is in gas prices. Now the price is dropping . Gas is $2.87 today just down the street. Think it will stay there? I don't think so. It may drop some more but, I think gas will be at $3.25 - $3.50 in a sustainable world market.
The point is, I've seen good times and bad times for lumber prices. That correlates to a softening of the timber stumpage (standing trees) prices...BUT it AlWAYS came back quickly to pre-drop levels and then went higher. Here's why my long term view is optimistic.
One. Nothing has fundamentally changed the demand for energy in this country. Nothing has changed the need for growth in the economy for the future. Natural gas will continue to play a big part in that future. And if you have it on your property, whether its next year or three years from now, it will have increasing value in the long run. For many, the only question is "How long?"
And two. The Marcellus Shale play is the lowest cost play of over 23 shale plays in North America. The cost to extract a cubic foot of gas of marcellus gas and get it to market is a fraction of what it costs from any other source for gas. And our proximity to the hugh market here in the northeast also decreases the time it takes to recover investment cost since we are only a few hundred miles to it.
So..IMHO("in my humble opinion" for those not into electronic messaging) while we will see many ups and downs in the development of the play, we are still on very good footing and poised for growth once this period of adjustment is over.
Tens of thousands of landowners have signed gas development leases with energy companies in dozens of counties across the state. Congratulations! I know what an ordeal it can be since I've been through the experience two times! But what now? Sit on the porch and wait for the drilling rigs to show up? My advice is NO! You need to prepare for the business of managing you gas royalty. Thats the message I took away from the National Association of Royalty Owners(NARO) meeting I attended in Little Rock .
Lessor or Royalty Owner?
Ok...before we go any further let's get our terminology straight. If you are now a lessor, meaning you have signed a lease, you are hopeful that sometime in the near future you will be a royalty owner (ie, receiving royalties from a well). Royalty owners may own land, or not, but they all have a royalty interest in a well. Royalty interests can be sold or divided to anyone you might choose. So far so good? In many states "mineral owners" own subsurface rights to all the minerals, which includes oil and gas. In Pennsylvania, I am told, oil and gas rights can be deeded separately from mineral rights. What is transferred in separations of mineral rights is typically controlled by the lease or transfer deed and is way beyond the subject of this blog. But the important thing is that as a Lessor, we need to start thinking of ourselves as "royalty owners". Yes, participating in a well may seem like a pipedream now, even after the substantial bonus check some received. But, there will be much drilling and chances are good that sometime in the near future you will start receiving royalties. The question is, between now and then, what can happen to your share of the market value of your gas.
Growing concern
Since the start of my involvement in the Marcellus Play over two years ago, one of my growing concerns has been "Who represents the interests of Lessors (royalty owners) in industry and governmental issues here in Pennsylvania?" The last 6 months has seen the Susquehanna River Basin Commission, DEP, and other state agencies promulgate regulations that will have lasting effects on Lessors (future royalty owners) for a long time. Local municipal and county task forces are looking at Lessor's large bonus payments and projected royalties with the objective of determining what is their fair share, ostensibly to cover the environmental, infrastructure, and social costs of gas development. The natural gas industry has been opening communications with stakeholders across the state in order to maintain a working relationship with landowners. But there was absolutely no leadership from any organization at the table that solely represents the Lessors on critical landowner vs. gas company issues. I don't know about you but as a Lessor (royalty owner wanna be), that scares me.
NARO
What is NARO? This spring I did a Google search, looking to see what organizations exist across the nation that represent Lessors and their interests to gas companies and local, state and national governmental agencies. The main organization that came to the top of the list is The National Association of Royalty Owners (NARO). So one day I called Mr. Jerry Simmons, Executive Director of NARO and had a nice chat about the needs of landowners in Pa and the NARO organization. NARO is the only organization that represents exclusively the rights of mineral and royalty owners. It was quickly evident that as new Lessors in PA, we have no clue as to the issues that are facing us as royalty owners. So I kicked in my $105.00 and joined, looking to learn more from the experienced royalty owners and in the hopes a Pennsylvania Chapter would be formed. Later this summer the Board of NARO asked me to speak at the NARO Annual Meeting in Little Rock on the topic of the Marcellus Shale in the Appalachian Basin. In the meantime NARO has been getting a great response from many states and the idea of an Appalachian Basin Chapter emerged from the newest members.
NARO Annual Meeting
Last week I attended the National Association of Royalty Owners(NARO) Annual Meeting in Little Rock(Ar) as a new member and as a speaker. The folks were so friendly and eager to discuss the issues we are facing and how they relate to their knowledge gained over decades of ownership of oil and gas wells in other states. After hearing about all about the issues one can have with just division orders, I knew I recouped my membership fee in that single 45 minute presentation. But the opportunities were many, both in presentations and networking to learn about the big picture of the oil and gas business from a mineral owners perspective. And let me be the first to tell you...we are in for a ride. You thought leases were complex and frought with pitfalls! Ha! We are just beginning. But the one thing that came clearly to me was that the todays Lessors need to think of their mineral rights as a business, and a big one at that!. As in any business, you need to learn all about it and know where to go for help understanding the issues from an owners perspective. Not the gas company perspective. Not the local governments perspective. An owners perspective. And to have access to that information when you need it. I also know that todays Lessors need to think of their mineral rights as a business, and they need to do it quickly! Regulations, taxes and other grabs at Lessor's bonus money and royalties are happening now. If you wait to become involved until your well is drilled, it will be far to late.
Well, the good news for Lessors and all future royalty owners in the Appalachian basin as that the National Association of Royalty Owners(NARO) voted at its Annnual Meeting in Little Rock to accept the new chapter that has been organized to cover the Appalachian Basin! That includes all of Pennsylvania and West Virginia, and parts of New York, Ohio, Maryland, Virginia, Tennessee and Kentucky. Yes, it is a large area. As one of the founders, I think that the scope will allow us to reach more Lessors with greater diversity of solutions to the issues most of us will face. Issues that go far beyond who is leasing, where, and what is the bonus rate. Issues that require balance of interests between the complex relationships between gas companies and royalty owners who need each other to get the gas to market. And balance between the needs of local government and keeping your profit from your new business. Yes, it is a business and you are entitled to the profit because everyone needs to understand there will be expenses on the other side of your ledger. We need to get involved now because decisions are being made now. The only question is will you learn from the "school of hard knocks" or take advantage of the help folks from across the nation are offering you. Check out NARO. Sign up to get involved in some aspect of helping owners like you be a better mineral managers. Who would've ever thought it huh!...............Ken Balliet, Natural Gas Reseource Management
The recent wave of leasing for natural gas exploration presents many unique and important issues to Pennsylvania's forest landowners. Tens of thousands of acres of forest land have already been leased, with many more to follow. This summer, dozens of new wells will be drilled into the Marcellus Shale where energy companies hope to extract trillions of dollars of natural gas just in Pennsylvania alone. Eventually hundreds of wells will be drilled annually, resulting in four acre clearings popping up all over the countryside, along with an extensive network of pipelines to take that gas to market. Furthermore, thousands of landowners will have to deal with pipelines across their property, even if they do not participate in a well. What do forest landowners need to know in order to deal with the issues and opportunities natural gas extraction will present?
Add addendums that protect your forest value. Your lease will control all the "rules" gas companies need to follow on your leasehold for at least five years, typically longer. Carefully examine your lease and negotiate with the special needs of your forest in mind. For example, if you have fragile wet lands, take steps to be sure they are not damaged by machinery encroachments or water degradation. If you have high value timber, protect as many trees from damage as possible and negotiate to get full market value for your trees that need to be removed. There are many "clauses" in a standard gas company lease that may impact your forest. Generally, instead of changing each one, landowners add addendums that supersede the "standard" terms. Consider addendums that address forest concerns or answer questions such as:
· How will the market value of the trees to be removed be determined? Who will measure the trees and who will pay for it? What will happen to the trees after they have been paid for? It is much easier for land clearing companies to push over trees when they are still connected to the root ball. Will the company sever the logs from the roots? Sorting through a pile of large trees with root balls attached is hard work and very dangerous. Timber that has been pushed over will incur damages externally and internally. Be aware that such visible and unseen damage may reduce their market value.
· Specify what and how you want plantings done after the site is retired. Up to 75% of the site will be seeded to re-establish ground cover after drilling. What type of vegetation would you prefer? These openings often present fine opportunities for wildlife food plots.
· Well-planned forest roads can greatly increase the value of your property. Poorly-planned roads can be a drain on finances and an eyesore forever. Who will locate the new road? Consider gates and other "natural" barriers to control unwanted outside traffic.
Prepare a site plan to attach to your lease. Ask your forester to help plan the location of the well site and access roads with the gas company before you sign. It is much easier to get concessions before you sign than after. The location of a well site is very flexible. Modern rigs can drill up to a mile in any horizontal direction. The location of the well site should consider important factors such as: noise abatement, road placement and length, visual impact, streams and wetlands, timber value, recreational value, aspect, required pipelines, winter access, and many other factors. A site plan should contain at a minimum: topographic maps, boundary maps, timber stand maps, location of existing and proposed physical features (well site, access roads), location of sensitive or special protection areas, soil maps, E & S control structures, and identification information.
Manage the opening of a well site or pipeline the same as a timber sale. Hire a consulting forester to help you plan and supervise tree selection and removal. Your forester may suggest adding other clauses to the scope of your gas lease related to forest management because it may be an opportune time to carry out an important activity. Gas companies may have to install costly temporary stream crossings that may also provide access to previously isolated forest management units. Look at each of your goals for your forest, and discuss if this event presents an opportunity to improve or implement a management practice. For example, pipeline borders can be "tiered" to provide habitat and multi-storied structure favored by some species. Slash piles can be left on the site for wildlife habitat. Herbaceous plantings can be selected for certain wildlife populations such as turkey and deer.
Pipelines and well-site openings will present other special management issues. Forest openings increase air pressure within those openings and cause an increase in wind-throw. Your forester can help you plan a site location or aspect that may lessen the chance of damage; or they can recommend stands with trees that are less susceptible to throw. Timely timber stand improvement operations can also be undertaken to minimize risk or damage. Openings in the canopy created by well activity may encourage unwanted local invasive plants such as hay-scent fern, multiflora rose and autumn olive. Footholds gained in these openings may provide easy access to the rest of your forest when the opportunity presents itself, resulting in the need for expensive spraying regimes. Openings also often result in moderate to severe epicormic branching; and bottomlands may incur frost cracking and sun scald, adding further degrades to your remaining timber resource. Trees highly susceptible to this damage should be considered for removal if they are in a merchantable timber class. Finally, find out how the company plans to control vegetation on the well site or pipelines. Aerial applications of herbicides for woody plant control are common and may require planning to minimize damage to sensitive areas from "herbicide drift".
In summary, when the landman knocks on your door looking for you to sign a lease, be sure to take your time and evaluate the impact on your forest land. Sit down with your forester and plan for all the "What if's". Take control of your lease by using addendums and a well thought out site plan, and always, always, always consult with your attorney before signing a lease....By Ken Balliet, From "Pennsylvania Forests" magazine 2008
For more information on natural gas exploration and leasing go to: http://naturalgaslease.pbwiki.com
The handwriting was on the wall when calls to landsmen with Chief Gas & Oil confirmed that their company was immediately pulling back unsigned natural-gas leases. Chesapeake Energy Corp. revealed its co-founder and chief executive, Aubrey McClendon, was "forced to sell substantially all his shares to meet margin calls," according to a Wall Street Journal article. McClendon owned about 33.5 million shares--valued at over $2 billion--as of Sept. 30, but was forced to sell 31.5 million of those shares--94% of his holdings--for $569 million. In Allegheny County, the Pittsburgh Airport Authority learned Thursday that natural-gas companies were not currently interested in meeting its proposed terms for the right to drill on 9,300 acres of Pittsburgh International Airport and county airport land.
The words when read locally were grim and to the point. The Columbia County Landowners Coalition told their members Sunday that "The offer before us with the Energy Company has been withdrawn because of events beyond our control. With the economy having taken a downturn and impacting many companies, some energy companies are not offering new leases or, in some cases, are offering lower prices than originally agreed upon."
Organizers added a note of optimism, saying "The Columbia County Land Owners Coalition will continue moving forward as the economy and offers dictate. Understand, however, that if you have signed a letter of commitment with us, you are not bound to us. That was purely a requirement to satisfy this particular Energy Company, and we have no intention of restricting any choices you may feel led to make, apart from us."
Organizer Bruce Anderson noted, "We remain united, and look to the future and all its potential. Our next meeting is Thursday October 16, 2008." Bruce said that he wants to let everyone know at the meeting what happened to slow down the signature process.
Lots of discussions around "Non-disclosure clauses. Here's Ross Pifers opinion:
"I read through this thread and want to offer my thoughts on the topic. Anyone who is presented with a non-disclosure clause should review this clause with an attorney to understand the exact terms and consequences of the non-disclosure clause. The landowner should understand what information is covered by the non-disclosure clause and what will happen if that information is disclosed. The landowner also needs to be aware of the applicability of the non-disclosure clause to other individuals, such as family members, who may have knowledge of transaction.
In most cases, a landowner who agrees to a non-disclosure clause and then "anonymously" posts the information on some type of lease tracker has violated the non-disclosure clause.
As one poster noted, a non-disclosure clause cannot prevent a landowner from disclosing the substance of negotiations prior to the execution of the lease agreement. Until a lease agreement is signed, the landowner has no obligation to the gas company.
One poster stated incorrectly that all information in the leasing process is a "business secret" owned by the gas company. Any information that is exchanged or created during the negotiation process is not a "business secret." There are two parties to the leasing negotiations (the landowner and the gas company), and either is free to share any information unless contractually prohibited from doing so. Contrary to the incorrect poster, the landowner does not need permission from the gas company to disclose the substance of lease negotiations.
Is agreeing to a non-disclosure clause a bad thing? For landowners as a whole, non-disclosure clauses are not good because they will impair the free flow of information. An individual, however, will make his/her own decision based on his/her own interests. I see no reason for a landowner to agree to the clause if the landowner is not receiving anything for it. If the gas company is willing to pay a premium to include the clause, then it may make sense for the landowner to agree to it. This, of course, may have the effect of depressing future lease rates for others in the area."
Ross H. Pifer, J.D., LL.M.
Director, Agricultural Law Resource & Reference Center
Penn State University, The Dickinson School of Law
Its time to tackle this topic. Here goes...many Pennsylvania landowners are joining landowner groups and coalitions driven by news reports of very high lease rates and a strong desire to maximize profits. Many landowners also fear the complex lease process and find some comfort in being with a group. While the benefits of joining a group are often compelling, many landowners are unaware of the pitfalls and the long term costs that they may incur by their actions. However, with a little knowledge about groups, and help from their attorney, many landowners can make an informed decision about the best way to market their leasehold.
Generally I can boil down most groups into three types of loosely defined landowner organizations. BEWARE your group can have important variations! But in order to aid communications, I will call them as follows:
· Landowner Information Sharing Group - is a group that bands together to simply share information about what companies are leasing in their area, what the current rates may be and the potential for special terms and sample addendums. No attempt is made to market the group acreage. Group leaders are all volunteers. Landowners can individually benefit from their leaseholds market value. Timely information to the group may allow energy companies to loosely gather larger blocks of land, but each lease still needs to be negotiated separately. This organization has the weakest bargaining power.
· Landowner Coalition - is a group that works together to become informed, maximize contiguous acres, and market their combined leasehold. They may have a voluntary or paid leader or consultant to make the bid proposals to the energy companies. Payment to consultant is only made IF the landowners lease through the coalition. While landowners are strongly encouraged to sign with the group, there is no binding legal document to compel them to do so. Landowners can benefit from their leaseholds market value, or choose to sign with the coalition if the terms are more favorable. The drawback is that the energy company may offer less to a coalition since the members are not legally bound and many may not sign. This leaves the job of filling in the holes to the landmen.
· Landowner Bargaining Unit - is where all parties have signed pre-agreements or pledged that they will accept the lease terms agreed upon by the majority. This guarantees to the energy company that the "negotiations" are binding to the entire group and eliminates individual negotiations. This group has the strongest negotiating position with energy companies since it eliminates thousands of hours of negotiations and lease preparations with perhaps hundreds of landowners. Since all landowners will sign for the exact same rental fees and royalties, landowners in the bargaining unit will receive the average market value of group. Leaseholds with superior market value may receive less, but marginal acres will receive more than that what they would individually on the open market. Hence these groups may tend to attract more leaseholds with marginal market positions. Generally there is a fee associated with this group. It could be an up-front fee per acre or a percentage of the royalty, or both.
What are other considerations?
Power! Many landowners feel that joining a group will give them greater bargaining power with the landman because of the larger block of land being negotiated. Some landowners take this to extreme and feel the group can ask for the sky and get it. It is true that by grouping together, landowners offer companies more acreage, faster, and with less expense in making contacts and negotiating separate leases. However, landowners need to take into consideration that:
· Energy companies are looking for contiguous blocks of land to form drilling units. Land that is not contiguous, or blocks that are full of holes (acreage not in group) reduce the value of the group leasehold. Groups with poor organization or density may be poor choices.
· Landowner groups can become too large and magnify perceived shortcomings which can reduce the leasehold value to you. Remember, no lease...no money!
· Make sure the group has a well defined leadership structure and written policies concerning: who decides what the final terms or lease proposal will be accepted; how will that group or individual make that decision; do you have any chance at giving input to that decision. These are important considerations if you are going to be bound by their decision.
In general I think landowners may also feel they lack the basic knowledge to effectively negotiate a lease and find comfort in negotiating within a group. This was especially true a year ago when information about lease rates and terms was very sparse. Today there are several good informational web-sites to help become informed and newspaper coverage has been keeping most landowners informed of the trends in rates and terms. However landowners need to understand that several factors may make signing a group lease a less desirable option. One is financial strength. A financially secure landowner may walk away from a lease of tens of thousands of dollars, whereas a retiree living on social security may vote to sign at a much lower rate. An absentee landowner may sign a lease without protection for the land, but a third generation owner may find the lack of environmental protection in the lease a deal breaker. The list goes on and on. But the main caution is that if you join a group:
· Be sure that other landowners in the group have similar goals and values as you and that you can have some input into the decision making process. That can be very difficult, especially in larger groups.
· Understand that the more a group deviates from the "standard" lease, the more they move out of a companies comfort zone, the greater the risk of rejection or diminished lease rates. Larger groups trying to be everything to everybody can sprawl into undesirable locations, or "over-addendum" the value of their acreage and leave their members with a poor lease or without any lease at all.
· Make sure you can "take or leave" the group or coalition lease without cost or obligation.
Working with a consultant
This is a bit tougher since again there are many "consultants" popping up and many operate differently. Some landowners feel that hiring a "consultant" to lead the group through the decision-making process is a win-win situation. However, before you do it's important that you check their references . Get a few names to call, go on-line and search the internet for articles or ask the energy companies about the consultant. Be sure you understand what the consultant will do for you. Will they simply negotiate the lease and get you to a signing by the highest bidder? Or will they be there when the trucks show up to start drilling and represent you in any "discrepancy" between what you thought you signed and what you actually signed?
Here's the most important part. How much is it going to cost you for the consultant's services? Always know exactly what your cost will be. A "fee per acre" is easily calculated. A percentage in royalty is not. A one percent royalty fee may not sound like much but understand that it may easily be a half a million dollars on one well over a twenty year period! If there could be several production units on the group leasehold, multiply by the number of possible units. Now figure that each production unit could have over twenty(20) wells on it, so multiply that number by 20. The final figure could be millions per year!
Enter into a contract with the consultant that specifies the terms and the payment for services. Make sure that the consultant cannot charge other parties for the same thing you are paying them for. For example, the consultant may not collect a percentage or fee from the energy companies in addition to what you are paying him/her, without your consent. All costs of the deal must be visible to all parties and all bidding must be open and fully transparent to the group. Be sure the consultant is a viable business entity in the Commonwealth of Pa.
I know I keep stating this but....understand that the Marcellus play is just getting started. As the play matures, lease rates will continue to go up in some areas, and down in others. Those leasing five years from now may well find lease rates in excess of $8,000 per acre or more in some locations. No landowner group or consultant has a crystal ball that can tell where those areas may be with certainty. However understanding the workings of different groups can help you choose how you market your leasehold wisely.
Good Luck!...................Ken Balliet, Natural Gas Resource Development Program
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