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Pennsylvania Oil and Gas:

Past and Present

Western Pennsylvania has once again seen a revival in the production of gas energy resources. About three years ago the expansion of shallow wells (stripper wells) greatly accelerated, and within the last year seismic mapping and some drilling of the Marcellus shale has begun.

The Marcellus shale has been known to exist for more than 100 years. It is modern technology both in deep and horizontal drilling with modern fracturing techniques, coupled with the rise in natural gas prices that makes exploration and production profitable. A straight bore well may cost $300,000 to $800,000 dollars to develop; a Marcellus well with horizontal bores might cost $3,000,000. Deeper yet is the Black River/Trenton shale (and possibly other gas beds) which is being explored in New York and in Northeastern Pennsylvania; this shale bed is approximately three miles deep and requires very sophisticated seismic plotting and yet another “step-up” in drilling costs.

The Marcellus shale may contain more than One Hundred Trillion cubic feet of natural gas. It is believed to extend from northern West Virginia through parts of eastern Ohio, all of southwestern Pennsylvania, then generally curving in a northwest arc past State College, then into northeastern Pennsylvania and southern New York.

Statewide, Pennsylvania’s highest recorded gas production year was in 1989 at One Hundred Ninety One Billion cubic feet of gas. However, as production records are confidential for the first five (5) years of well production, it could be that Pennsylvania already has another record. The Henry Hub natural gas market price (set in Louisiana) on June 23, 2008 was $13.129 per mmbtu (one million British thermal units) which is around 1,000 cubic feet of gas. This is compared to the year low at $5.00 per thousand. The increase in natural gas pricing is a combination of demand, speculation and inflation which is occurring in all energy sectors, with petroleum in the lead. As the U.S. lacks an integrated energy policy, investors believe natural gas will replace some petroleum driven consumption. The largest consumption base for petroleum in the United States, however, is by automobiles. Natural gas auto “filling stations” are rare and vehicles powered by natural gas available to the general public are rarer yet [though there are some bus systems which have experimented with natural gas power as a replacement for diesel fuel.] The current projections for natural gas are for increased consumption in home heating, electrical generation and chemical stock conversion (p. ex. fertilizer). Those uses will likely continue to expand as natural gas is considered a “clean” carbon energy source.

Presuming the DEP will still view 640 acres (1 square mile) as a unitized field for Southwestern Pennsylvania and enforce the regulations requiring unitization for wells deeper than 3,800 feet (Marcellus shale is around one mile deep), deep horizontal wells might harvest 640 acres with five to seven wells. Wells must be spaced at least 1,000 feet apart (per DEP regulations for coal regions). A straight deep (non-horizontal) bore might be spaced on every 40 acres, or about 12 wells per 640 acres. A combination of deep/shallow straight bore wells (at 1000 foot spacing) would be around 24 wells in 640 acres. (Consider the surface impact of a well and all that is associated with a well on every 20 plus acres.) Actual well spacing and development is totally dependent on the geology and predicted success of a profitable bore. Success is more than just hitting gas, it means generating a profit for the gas company.

A landowner can find out what mineral rights you own. Oil and gas technically is not a mineral but is treated as a mineral for transfer/conveyancing purposes in Pennsylvania. The recorded transfer history is held in the county courthouse primarily at the Recorder of Deeds Office, sometimes at the Register of Wills or the Prothonotary’s Office. The determination of mineral rights is based on a title examination, beginning with the current surface owner and running back the “chain of title” to circa 1870 (sometimes earlier dependent on the mineral and where your land is located) .

Mineral extraction rights are:

a) reserved to prior owners in deed chain transfer language;

b) out-conveyed by specific or general mineral deed or assignment;

c) leased with narrow or broad lease terms.

d) held intact by the surface owner (in the farm community with successive inheritance fractional interests are common and must be researched, those records are not always in a Courthouse and require a genealogical search)

Leasing is the typical approach to contract with a gas exploration company. Most leases in Pennsylvania have a clause similar to this: “Right to lease for xxx number of years [generally not more than ten] and so long thereafter as oil and/or gas is produced in paying quantities.”

Therefore, it is not unusual that a single well on a farm tract preserves to that original lessee (and therefore the current assignee of that lease) all oil and gas and development rights so long as one well has remained active (referred to as “held by production”). This is typically determined by the payment of some royalty annually or, alternatively, payment of a “shut-in” lease payment (in lieu of active production) to the oil/gas owner. The determination of mineral rights rapidly becomes technical and examination of title is a basic requirement to answer the questions associated with ownership. Oil and gas companies will perform a title examination and require “good title” to at least a majority of ownership as a condition of leasing. Most modern leases require that the owner/lessor warrants title and conditions direct payment on non-disputed ownership, with rights of escrow in the event of dispute and/or non signatory gas ownership.

State law sets a minimum royalty of 12.5% [1/8 th] on the value of production. There are varying definitions associated with the value of production. There are also potential issues associated with the taxation of production and how taxes would be shared or divided, also transportation expenses, compression expenses, b.t.u. value, and cleaning expenses (well head vs. market pricing). Royalty is negotiable; for example, the Pennsylvania Department of Natural Resources (near the Uniontown area) secured a 22% royalty for deep well operations; the Pennsylvania Game Commission in the Greene County area secured a 17% royalty for deep well operations; the DNR also received a $2,500.00 per acre lease fee, the Game Commission a $125.00 per acre lease fee. There are significant variations in acreage rental fees and production royalty percentages and the factors are many; p. ex. total controlled acreage available to lease, existing acreage under lease, adjoining or distant, seismic analysis, access ease, water issues/stream crossing, location of transmission lines, drilling rig availability, time frame of company development, competitor interest, and projected development costs. Most important of all is the projected market pricing for gas and the predicted market demand.

In addition to shallow and deep wells there is also being developed, locally, through the CNX Gas Company [which is owned approximately 80% by Consol] coal bed methane gas. In 1983 the Pennsylvania Supreme Court (on behalf of U.S. Steel) ruled there is an ownership right per coal ownership of the methane gas associated with the coal. So far it does appear this ruling does not necessarily give to the coal company (or its assignee) the same surface rights that it would have as associated with coal extraction. So far, CNX has been offering compensation for surface development for drilling platforms, road constructions and/or pipelines, however, the language of the original coal severance must be examined. (Disclaimer: this general statement is not intended as a legal opinion to any individual.)

From the perspective of farmers/ranchers there are also the surface impact issues (please reference above to potential well spacing calculation), current and into the future of: roads, gates, fencing, barriers, access points, bio-security, well site locations, number of wells, acreage disturbance, pipe depth, surface obstructions, future subdivision impacts, future use impacts, animal/crop production interference (permanent and temporary), concurrent and separate easement use, timber destruction, noise (during drilling), water and soil controls, topsoil preservation, restoration, maintenance, “on site“ water use, and, often neglected, your new vista (now called a “viewshed).” Also, consider the future after production stops; what about road and tank removal and surface restorations. What about an option to retain a well for farm use? Oil and gas companies prefer to deal with specific individual variations by using addendums so they can consistently provide to lease prospects the “standard lease” and negotiations begin from there.

The value of your lease to a company is dependent on multiple factors, some discussed above. Neighborhood groups, especially for deep well unitization (also called pooling), can help both you and the gas company. I do suggest isolating gas rights to depths, much as we have done in the past with the separation of coal rights between shallow (Waynesburg/Redstone), mid (Pittsburgh/10 foot), and deep (Freeport). I do report that many gas companies demand complete control of all gas depths as a lease condition and cooperative agreements for joint developments between deep and shallow producers will likely become common.

Respectfully,

Kris A. Vanderman, Esq.

Authored July 1, 2008
Kris A. Vanderman, Esq.,
Co-Owner - JNK Ranch ™
Locations: Charleroi / Perryopolis / Bentleyville, PA