Gas drilling has come to the area and I believe it is in earnest and here to stay. It is an event hugely impactful on the natural environment, the social environment, and the financial environment. Whether you're for it or against it, it should not (and if you live here cannot) be ignored.
If you live here, cannot) be ignored. The coming discussion is about how we respond to it.
What is up for consideration is Leasing our land for Gas extraction. I'm recommending that we consider it now.
Formerly, leasing the property meant drilling on the property. The consensus among the board is that mineral exploration anywhere on the property is unacceptable under any conditions. I fully agree and cannot condone gas or oil drilling on the land. Now however, leasing the property does not mean drilling on the property.
A non-surface-disturbance lease is a lease that allows the Gas company to extract the gas from under our land without touching any part of the surface of our land. They don't normally do this with large landowners. They do this with landowners that have too small a parcel of land to legally allow drilling operations.
But....after looking at how gas is extracted here, visiting the drilling operations, and looking at the surrounding neighbor's lands and leasing patterns among them, I had a thought that there's a good chance they would consider it with us. Three reasons for this:
Getting the gas from under the property without disturbing the surface of the property is accomplished with a relatively new technology - horizontal drilling. This is a technology whereby the drill rig is located on a neighbor's land and they drill down and turn the drill head horizontally to drill under the lands contiguous to the land on which the drill rig is located.
This creates a large area (called a "Pool") from which gas is extracted from many different landowners surrounding the well, but only one landowner has the disturbance of the well activity. That is what's going on around here - a single drill pad of 5 acres, with up to 6 wells on it, each of which drill straight down 7000 feet, then turn in different directions for another 4000 feet and drain a "Pool" of approx. 1 square mile (640 acres) from a single drill pad.
About a month ago I approached the two major gas companies drilling in the area (there are 12 currently operating around here). I approached them as a steward of the property - no negotiations, no authorization to speak on behalf of anyone, no commitments or proposals of any kind; just talking in concept to see how things lie.
I let both of them know right up front that we are simply not going to lease the land if it means surface disturbance of any kind anywhere on the property, but would they be interested in leasing the land under the non-disturbance stipulation that I described.
Both companies expressed interest though they would far prefer to drill on the land, and three days ago the main driller here (Chesapeake Energy) suggested that they'd be interested in offering us a lease with our stipulation of non-surface-disturbance conditions.
What they said:
The suggestion from the landsman that handles leasing in this area was that the company he represents (Chesapeake Energy) would accept a 5-year, primary term lease, a bonus payment of $3,500 per acre upon signing, with 20% royalties on any gas produced from under our portion of the Pool for the duration of the production of the wells. (Note: when Larry touched base with Chesapeake Energy last week, the spokesman quoted $5,750 per acre.)
It means that we would negotiate a lease that stipulates (among many things) that there would be no surface disturbance of our land of any kind, with the exception of a seismic survey (I will explain this later). They would pay us a lump sum of $308,000 (based on $3,500 per acre), on which we would pay taxes at our rate of 39%, leaving $188,000 in the bank account.
They would be able to put a drill rig on the neighbor's land and include our acreage in the pool from which they draw gas, paying us 20% of the market rate of gas extracted at the wellhead.
We've been petitioned about every 10 years to either sell our mineral rights or lease our mineral rights, usually for a few dollars an acre.
In my opinion we should never release control of our mineral rights.
Leasing is different. Leasing stipulates a term for which they can use the land, and the conditions under which they can use it. The current Gas leases are for a 5-year primary term, with an option for a secondary term.
The condition of the first 5-year term state that they must "develop" the well (Drill for gas), and if they do so, the lease stays in force beyond the primary term into the secondary term for as long as the well produces gas (could be 30 years or more). If they don't "develop" the land, the lease terminates and you re-negotiate a new lease.
How do I put this..............You're working with the Devil.
There are myriad ways that the Gas companies will maximize their profits. The only way we and they will get along is if our interests and their interests are aligned. So, negotiating the lease is a very long process and should be considered deeply, negotiated carefully, and checked and double checked with lawyers.
However, everything is negotiable, and nothing is a commitment until you sign.
Leasing has taken place here in earnest for a couple of years now. To my knowledge all of our neighbors have leased with the exception of Dean Starner. I have been in discussion with him. I am currently verifying who has leased, and with what kind of lease.
Many people around here settled at $100 an acre two-and-a-half years ago (we were offered $50/acre then), many others at $1,000 an acre a year or so after that, some at $2,800 an acre even later.
This past summer the bonus price went to $3500 an acre, and in the last month it settled at a benchmark of $5,750, due to the creation of two landowner's groups that negotiated as single units of land (upwards of 15,000 acres total in each group) on behalf of the individual owners.
This last lease is, for the first time, a pretty good lease (most of the rip-off clauses are gone and there are a lot of owner-interested clauses included).
Currently the going royalty rate is 20%
Their initial "offer" to us is lower than market rate of $5,750 per acre bonus at 20% royalties, proposed by the landsman under the idea that a non-disturbance lease makes the land less desirable for his client. That is clearly a ploy and I think we can do better. However, it gives us a benchmark from which to discuss the issue.
(In a subsequent discussion, the Chesapeake Energy spokesman quoted Larry the $5,750 per acre for a non-surface-disturbance lease. SMR)