Hancock Gas Lease

Governor Paterson has unveiled his budget proposal for the year beginning April 1. With nearly $1 billion of new taxes and fees, one can only assume it’s an April Fools joke. Some of this is targeted specifically at gas leases. As reported by ABC News:

A 3 percent tax on natural gas extraction from the Marcellus Shale formation in the Southern Tier and in central New York using horizontal wells, raising $1 million starting in 2011-2012.

This isn’t a lot of information, but it does imply a few things.

• Since it says “gas extraction”, I take it to mean taxes on actual gas coming out of wells, as opposed to just leases themselves. Note that some lease contracts make the landowner responsible for these taxes. If you’ve signed a lease you should check on this; if you’re considering it, make sure you understand what the deal will be.
• If they expect to derive tax income from gas drilling, it strongly suggests that they do intend to have wells drilled in 2010, and actively producing gas.
• If they expect $1 million dollars in revenue from a 3% tax, the math says that they expect $33.3 million dollars of gas to be pumped in fiscal 2010.

Drilling company East Resources is invoking the fine print of their leases, putting payments to landowners on hold. They’re claiming that they’re unable to make payments because of tight fiscal times, and apparently there’s a clause in the contracts that allow them to defer payments. Luckily, that same clause allows the landowners to terminate the lease at their own discretion.

In late October, East Resources of Warrendale, Pa., mailed about 1,000 letters to those with whom it has lease agreements….

The affected parcels total about 40,000 acres, he said.

In part, the letters state, “Because recent economic conditions in the nation’s financial markets have reduced our ability to obtain extensions of credit, we are at this time not in a position to make payment to you.”

Leaseholders are given the option of voiding their leases with the company or extending the payment terms.

At this stage, [John Sieminski, the drilling company's general counsel] said, most of the respondents are willing to extend the payment terms. He also said there is no time limit in which the landowners must reply.

“No time limit was imposed, just as we hope they wouldn’t impose one on us,” he said.

However, [Elmira attorney Christopher] Denton says he would advise his clients to void their leases with East Resources and start over again, with a keener eye on long-term planning.

“You can’t worry about the money that’s lost. You don’t know if you will get the money anyway because ‘as soon as possible’ is not a legal term,” said Denton.

Considering the hardball that the gas companies play, it seems to be asking a lot, expecting land owners to sit tight.

It seems that when unfortunate homeowners in Broome County face foreclosure due to tax debts, the government is taking the owners’ mineral rights. PressConnects presents a somewhat confusing story:

Sarah Vroman … owns about 22 acres in the Town of Sanford and lost her property for back taxes. After she worked out an agreement to pay them earlier this year, the county returned the property, minus the mineral rights. … Broome County legislators unanimously passed a resolution in August to return her property, but it made no mention that mineral rights were being withheld. That decision was made by Kevin Keough, the county’s director of real property, who said he was following procedure in the interest of taxpayers.

The county could end up reversing an administration decision it made to keep mineral rights on foreclosed property of more than five acres.

While it’s unfair to other taxpayers if someone gets away without paying taxes, if the issue is resolved, we can’t imagine any moral justification for keeping their property. Broome County’s policy fleshes out more of the picture that we don’t really own our land, we just rent it from the government.

Many people who have pursued leases have done it alone; others have formed coalitions in landowner groups. The Sullivan County Democrat reports that there’s a third approach: land brokers.

“The difference between us and a coalition is that in a coalition they try to gather as many acres as possible. They then turn around and try to sell them to a gas company…When they [the gas companies] sign the coalition, it’s one parcel, one contract, one deal.”

[Mike Schwartz, broker for RSL Group] went on to explain that, with RSL, “every landowner and every piece of property is different. I’m a broker. It’s my job to get you as much as I can from the buyer. In this case, the landowner is the seller, and the gas company is the buyer. I work for the seller only.”

This sounds like an interesting approach. As you can see if you look through our archives, leasing gas rights is very complicated — and if you get it wrong, the consequences can be serious. Perhaps the expertise of firms like Mr. Schwartz’s can help our neighbors make money while effectively protecting the environment. (Naturally we have no specific knowledge of this company, and can make no endorsements.)

We’ve written before that the prospects from gas drilling are likely to have slowed down, if only temporarily. Here is further evidence, from the National Post:

Flashy unconventional natural gas plays attracted considerable excitement this summer, but observers — as well as the largest U. S. natural-gas producer — now expect drilling and spending plans to be axed as new discoveries are resulting in a glut of gas hitting the market. …

“The development has been so rapid that it probably overran the market a little bit,” said Richard Smead, project manager and co-author of a recent report, North American Natural Gas Supply Assessment, prepared by Houston-based Navigant Consulting Inc. for the American Clean Skies Foundation. “Right now we have enough supply. We probably have more than we need in the short term.”

The result, he says, will be a slowdown in exploration and production in unconventional North American shale plays. …

It doesn’t make financial sense to produce gas at certain wells when prices dip below US$7.50, [Aubrey McClendon, chief executive of Chesapeake] said.

“If those prices stay out there for very long, the industry will have to restrict its capital expenditures.”

The area is already richer to the tune of $100 Million, as reported by the Press & Sun-Bulletin.

So far, the deal has made about 500 residents in eastern Broome and western Delaware counties richer by roughly $110 million. Although drilling isn’t likely to start until after a public environmental review by state officials is completed next year, lump-sum checks have already begun arriving.

The article goes on to point out, however, that the management of these newfound funds can be difficult, and that residents need to remember about its income tax impact come next year.

Where stakeholders previously had problems with property taxes — now it’s income taxes.

“Your whole mindset is different,” said Decker, who is $2.77 million richer — minus 42 percent taxes.

…

There is no question the rush for natural gas in the region carries the potential for a monumental economic transformation. But how sustainable it is depends on how well people handle their newfound wealth, said Jim Thorne, an investment officer at M&T Bank.

“If a person goes out and buys a helicopter and a fast car and suddenly finds out taxes are due, it will be short-lived,” he said.

Just a bit south of us in Dimock, PA, gas drilling has already begun. The Press and Sun-Bulletin reports that Cabot’s estimates predict some $23 Billion of gas per year at current prices, just beneath Susquehanna, PA only, yielding some $2.9 Billion in royalty payments.

Drilling operations are ramping up in Dimock, Pa., less than 25 miles south of the Broome County border. Residents there, who signed away their mineral rights for $25 an acre, are tolerating dust, noise and traffic from oversized rigs while hoping the bustle of work will produce fat royalty checks. …

[Dimock] has become a bustling destination point for rig-toting 18-wheelers, water tankers and oversized excavating equipment.

They pass the house of Pat Farnelli, who owns about 20 acres with her husband, Martin, on Carter Road. … Success of the drilling “will make the difference on whether we can keep our house,” said Pat, apple-cheeked, imperturbable and, more than anything, hopeful. “Everybody on this road could use the royalties.”

…She can see the tip of a derrick poking through the treetops about a quarter-mile away. She’s become accustomed to the round-the-clock cacophony coming from the hillside, illuminated by lights during the night. For her, it’s a sign of hope more than an irritation.

She cheerfully describes the commotion as “a hodgepodge of noise — screeching, banging, mechanical noise a lot like quarry noise, but more varied. But nothing we can’t stand … as long as it doesn’t affect the water quality.”

And indeed, it’s not all easy:

Less dramatic but equally problematic are threats to water, including spills and the disposal of millions of gallons of contaminated waste water and other products from drilling.

Contractors working for Cabot are cleaning the remnants of an 800-gallon diesel fuel spill in Dimock earlier this year. Work crews are evaluating the extent of contamination in the ground after emergency responders contained and vacuumed what they could from the surface.

While the company is expecting to complete 30 wells this year and drill 80 more in 2009, Dinges acknowledged in his report that permitting regulations regarding water consumption and disposal is slowing the process. That issue will likely grow for Cabot and other firms as waste from Marcellus production grows exponentially with expected production in the Appalachian basin in coming years.

…even without taxes. In Vandergrift Borough, PA, a small town of about 5,500 people, gas well leases have really helped out the town and its schools. The Pittsburgh Tribune-Review reports:

There are well-founded concerns about gas wells — especially those located near homes.

But there can be substantial benefits to taxpayers. In Vandergrift, the borough will see royalties of about $40,000 a year. And taxpayers in at least a half-dozen other municipalities and school districts in the Valley are reaping gas-well revenues ranging from $4,000 to $25,000 a year. …

If each of the three wells bring in $1,000 in royalties each month, the borough will get about $36,000 a year in revenue. …

Vandergrift gets about $4,000 to $5,000 worth a year in free gas — for its maintenance garage that houses eight or nine vehicles.

“Whenever you can get a new source of revenue — and it helps us hold down taxes — that’s good,” DelleDonne said.

The article cites many more examples of revenue from gas leasing producing income for towns and schools, and saving substantial money for taxpayers. So even those people not leasing their own lands will benefit to some degree.