What Texas Can Teach Pennsylvania . . . And New York

[PA] Gov. Tom Corbett, whose successful campaign last year received sizable donations from members of the natural gas industry, has said he wants to make Pennsylvania the Texas of the natural gas boom.

Wilkes-Barre, PA Times Leader, March 31, 2011

While Pennsylvania continues to wrestle with the many issues and concerns over development of the Marcellus Shale natural gas reserves, there is a laboratory of sorts to which it can refer to understand how best to cope with the push and pull of different interests, constituencies, and pressures. While the Marcellus has, by far, a great potential, right now the biggest producing natural gas play in the country is in the Barnett Shale in central Texas.

According to this fact sheet (.pdf) the first test wells in the Barnett date back to 1981. It wasn't until the use of horizontal drilling and hydraulic fracturing techniques improved, however, that large scale drilling became feasible. By 2003, the Barnett gas boom was ready to take off. By 2007-2008, residents in counties overriding the Barnett were signing leases worth as much as $28,000 an acre, with royalties ranging from 15% to 25%. According to Ian Urbina of the New York Times, some of the leases are made by black churches as a way of generating much needed revenue.

In the fall of 2008, as the effects of the burst housing bubble began to reverberate through the finance industry, then the larger economy, the trading price for natural gas sank. Production was curtailed, and the value of the leases disappeared. According to a report in the Albany, NY Times-Union, the price has yet to recover.

In May 2008, well owners could sell natural gas for more than $10 per 1,000 cubic feet, according to the U.S. Energy Information Administration. In April 2010, that price had dropped to less than $4.

In an October, 2009 article in the independent Fort Worth Weekly entitled "Leasing Our Lives Away", reporter Jerry Lodbill began his discussion of leases for gas extraction on what one would hardly call an upbeat note:

So you've signed a gas lease. Congratulations: You've been taken for a fool. Certain material facts were kept from you that, had you known them, likely would have made you throw the contract in the trash where it belongs. Since you didn't, let's take a virtual tour of your new reality.

As with all legal documents, the devil exists in the fine print. No less for these mineral-right leases than anything else.

If a lot of your neighbors also signed, the gas company now has powers you were never told about. The lessee can essentially do whatever he wishes on the surface to produce the gas under your property. He can hold your property hostage for decades by performing inexpensive, nonproductive tasks. He can, and from all historical evidence will, pollute any surface location where he installs mineral extraction equipment. He does not care what you think about it.

Perhaps more ominous is the fact that he is not limited to extraction of minerals from a specific formation (such as the Barnett Shale) but may explore for deeper deposits that are said to exist under the Barnett Shale. In South Texas his brethren are still holding leases executed in the 1930s, leases that have so polluted the surface as to make the land unusable for its earlier purpose of cattle ranching. With the original target minerals now played out, these lessees today are exploring for and producing gas there. Equipment that is no longer functional still leaks carcinogens into the ground. The surface rights owners have been denied access to areas on their property. So, while you've been told verbally that there'll be no effects on your surface usage, that is not an enforceable contract provision, and the lessee, and his landman representative, knew it when he or she asked you to sign.

--snip--

And what will you get? Maybe the lease offer on your quarter-acre lot included a bonus of $25,000 per acre plus 25 percent royalties. If gas prices stay high that might get you about $208 per year in royalties, or about $12,450 total (including your bonus) over a 30-year payout lifetime.

Oh, and remember, that's the gross amount. It doesn't consider income tax and an ad valorem property tax increase due to all that gas you own. Of course, gas prices are in the toilet right now, and they're selling less gas than they'd expected.

In a story from March, 2010, we hear the drilling companies are being . . . pokey . . . about ponying up their payments on leases.

In August 2008, the Southwest Fort Worth Alliance, a collection of homeowners associations representing about 25,000 property owners, approved a natural gas leasing deal with Vantage Energy that provided for bonuses of $27,500 per acre and a royalty rate of 23 percent. For residents, it read like the sweetest deal ever in the Barnett Shale.

Homeowners were told that they’d get their money after a fairly simple process: Property titles would be verified by Vantage’s leasing agent, The Caffey Group; homeowners would fill out a tax form and sent it in to Caffey; they would go to a signing party and sign the leases; and bonus checks would be sent to their banks in a draft form that would be converted to cash within 30 business days.

David and Joyce Richey did all those things. They signed their lease on Sept. 13 of that year. Their bonus was calculated at $8,800 for their quarter-acre property, and a draft for that amount was sent to their bank on Sept. 16. They then waited for the check to clear.

On Nov. 6, however, the draft was returned unpaid. And now the Richeys are part of a lawsuit against Vantage and Caffey alleging breach of contract, fraud, antitrust violations, and deceptive trade practices toward themselves and other property owners.

--snip--

The suits thus far center on deals that were negotiated by SFWA with Vantage and by South East Arlington Communities of Texas in April 2008 with XTO Energy. In mid-October of that year, the drilling companies — XTO, Vantage, Chesapeake, and others — pulled their offers off the table for property owners who hadn’t signed. By March 2009, they were back in those neighborhoods, but by then offering deals with zero bonuses.

Petroff contends that the drillers didn’t like the record levels that bonus offers had reached and, in violation of antitrust law, teamed up to drive prices down. A hearing on May 6 in a Tarrant County district court will determine if the plaintiffs have legal grounds to sue over antitrust issues.

“The companies acted together at the same time, and we have some interesting evidence that we can’t share at this time saying they did,” Petroff said. “The competition was fierce in 2008, and the prices went sky-high. But then [the drilling companies] looked at each other and said it doesn’t make sense to pay that kind of money.

“But they had binding contracts in place, and you can’t nullify a contract just because gas prices went down,” he said.

The state of Texas, and its various agencies, seem to be piling on landowners who may not want to lease their land.

The Texas Railroad Commission has issued a ruling allowing more than two dozen east Fort Worth landowners who didn’t sign a mineral rights lease to be forcibly included in a drilling plan, a move that gives producers added leverage against leasing holdouts. It is the first time the commission, which regulates the oil and gas industry in the state, has used a 1965 law to take such action, called a force pooling, against small land owners. Experts said the ruling is particularly applicable in urban areas, where hundreds of small tracts often must be assembled, or pooled, into a drilling unit. Jacqueline Weaver, a University of Houston law professor who has written extensively on Texas oil and gas law, said the issues involved are important enough that they likely will have to be resolved by state courts. Historically, she said, the Mineral Interest Pooling Act has been used to protect small land owners from getting squeezed out of drilling units, rather than forced into one.

The collapse of gas prices and the drillers no longer exploiting leases in some areas, including land leased by those churches, have had other, complicating factors, according to the Urbina story linked above:

The impact of the downturn was immediate for many.

“Ruinous, that’s how I’d describe it,” said the Rev. Kyev Tatum, president of the Fort Worth chapter of the Southern Christian Leadership Conference.

Mr. Tatum explained that dozens of black churches in Fort Worth signed leases on the promise of big money. Instead, some churches were told that their land may no longer be tax exempt even though they had yet to make any royalties on the wells, he said.

It isn't just about a boom going bust.

The federal Environmental Protection Agency plans to rewrite its rules for air pollution from gas and oil drilling in response to a lawsuit from the San Juan Citizens Alliance. EPA officials held a public meeting Tuesday in Denver to solicit input on updated rules. They held a similar meeting Monday in Arlington, Texas. The effort marks the first major update to several air-quality rules for the industry in 10 to 25 years, in some cases. Environmental groups hailed the development. "Those of us who live in the Four Corners region are getting slaughtered by the air-quality impacts. It's not acceptable," said Mike Eisenfeld of the San Juan Citizens Alliance, who testified at Tuesday's meeting. A gas industry advocate urged the EPA officials to be careful with the rules. "How many lives would be lost or quality of life degraded if we didn't have affordable energy to heat our homes in the winter; generate electricity to power dialysis machines, life-support and medical diagnostic equipment; and fuel to safely transport our loved ones?" said Kathleen Sgamma, director of government affairs for the Western Energy Alliance. Regulations that are too onerous will push gas exploration overseas, where the rules are more lax, Sgamma said. The EPA should focus on vehicles and power plants, which pollute more than gas and oil equipment, Sgamma said. The EPA is looking at four air-quality rules governing the emissions of volatile organic compounds and sulfur dioxide from new gas-processing plants, plus toxic-emissions from glycol dehydrators and other gas and oil equipment. The two toxic emission rules would apply to both new and existing equipment. The EPA had not updated its rules, as required by law, for many years. WildEarth Guardians and the San Juan Citizens Alliance sued the agency, and the EPA came to terms on a settlement with the environmental groups in January. "That's kind of a slam dunk. It's kind of hard to win a case like that," said Bruce Moore, an EPA official from North Carolina who led Monday's meeting. The settlement calls for new air-pollution rules to be in place by Nov. 30, 2011. Volatile organic compounds and nitrogen oxides form ozone when they interact with sunlight. Ozone causes lung problems in humans and makes it hard for plants to grow. The toxic chemicals at issue are familiar to residents of the gas patch: benzene, toluene, ethylbenzene and xylene, as well as hexane, Moore said.

Along with the risk of air pollution, there is the reality of damage to ground water.

A North Texas oil and gas company that recently came under scrutiny from the U.S. Environmental Protection Agency is also the subject of an environmental lawsuit filed by Texas Attorney General Greg Abbott.

The EPA recently announced that it is including two counties in North Texas’ Barnett Shale in its study of hydraulic fracturing’s impact on groundwater.

At least in part, the EPA is looking at operations of Plano-based Aruba Petroleum Inc., said Wise County landowner Tim Ruggiero. He says he documented water well contamination when Aruba drilled on his 10-acre plot of land and that an EPA official visited his home on Thursday.

Even as Pennsylvania deals with the on-going development of its natural gas resources, and its new Governor desires the Commonwealth be industry-friendly, the lessons from north-central Texas should be a guide for developing a comprehensive resource-extraction policy in light of the reality of the potential from the Marcellus Shale. New York, where there currently exists a ban on hydraulic fracturing (although Gov. Andrew Cuomo has signaled his intent to lift it after careful study from the state Department of Environmental Conservation), should also take both Texas' and Pennsylvania's experiences as object lessons for developing the same kind of policy prior to any lifting of the ban on drilling. While the allure of dollar signs can be blinding, it is incumbent upon elected leaders to lead, which includes balancing the preferences of all actors. This is not a call for banning gas drilling or hydraulic fracturing. Rather, it is a call for elected leaders to take information available from the experience of the Barnett Shale boom in Texas and apply it to their approach so that everyone - landowners, gas companies, potential employees, and the state - can benefit all the while keeping an eye on minimizing environmental damage and limiting the amount of litigation that might come from the activity.