The Intelligencer out of Wheeling, West Virginia, put a list of all the leases that had been taken in Wetzel County, WV in January 2015. While this list may have been longer in September 2014, it’s still pretty lengthy. Even with the drop in prices for oil and gas, there’s a lot of development going on.
On a side note, I’d like to thank Marcellus Drilling News. I get a lot of the information that I use from them. They do excellent work for the whole Marcellus/Utica region.
There’s a very interesting article in the Pittsburgh Post-Gazette about the cracker plants that are planned for the Marcellus/Utica region, and why oil prices affect whether to build one or not. What it boils down to is that you can use either oil or ethane to make the same product. When oil prices are high, the ethane has a big price advantage over oil, so an ethane cracker plant is very attractive. When oil prices are low, the advantage isn’t so great. At $50/bbl, the cracker plants in this area would still be making money, but not enough to strongly attract the investment capital that is necessary to build. Hence the current wait-and-see attitude of Shell and Odebrecht.
As the saying goes, “cats have nine lives”. It seems that oil and gas leases can compete with cats in that department. The Northern District of West Virginia ruled on a Tyler County case (.pdf) a few days ago, saying that a lease needs a forfeiture clause or it will continue to exist, even if the Lessee doesn’t keep up it’s end of the bargain. Anyone trying to negotiate a West Virginia oil and gas lease for yourself should make sure the lease includes a forfeiture clause.
The case, Cunningham Energy v. Ridgetop Capital, involved two corporations, about 190 acres of land, and a lease that required development within a specific time frame. The Lessee was supposed to drill two wells within two years and more wells if those were successful. The Lessee filed permits and did some preliminary site work, but didn’t drill any wells within the two year limit.
The companies went to court over it, arguing a number of points. The one that people should be most interested in is regarding breach of contract and forfeiture. The Court held that the Lessee had breached the contract or, in other words, that the Lessee had not met the requirements of one or more terms of the lease.
Since the Lessee had breached the contract, the Lessor argued that the Lease should no longer be valid, and the Lessor should be free to enter in to a new lease with another company.
The Court disagreed. It stated that a breach of contract in an oil and gas lease did not automatically forfeit the lease. It stated that the usual remedy for a breach of any contract is money damages. It stated that in order for the lease to be automatically forfeit, there would have to be a clause in the lease stating that forfeiture was the correct remedy, and doing so in some detail.
The Court went on to award damages in the amount of several million dollars, which represented the back royalty amounts that would have been paid, and which would have to be paid back if wells were drilled and royalties paid in the future.
This means when you, West Virginia mineral rights owners, are negotiating a lease, make sure there’s a forfeiture clause in your favor. If not, understand that you will only be able to get money damages in a breach of contract situation. I suspect either one will make most people happy. It’s just a bit jarring to expect that you will be able to get rid of a bad Lessee when they mess up, and then have the Court tell you otherwise.
Back in December of 2014, it became obvious to everybody that the most recent oil boom was over. Oil prices dropped below $50 a barrel. OPEC had stated that it wasn’t going to cut back production to drive up prices. Our office started getting calls from landmen trying to finalize leases before the end of the year. All of them said that the new year was going to bring lower bonus prices and reduced drilling activity, and they were right.
In January 2015, Antero Resources laid off 301 landmen and rescinded all their offers in Wetzel County. Cimarex pulled out of Wayne County. Stone Energy stated it was going to quit drilling for the rest of the year. Pretty much every published 2015 budget stated that drilling and leasing was going to decrease by 33%. Even Odebrecht said it was “rethinking” the cracker plant that’s being planned for Wood County, though they say they’re optimistic it will still be completed. It was all doom and gloom for the Marcellus Shale region.
However, since the first half of January, things haven’t been quite so bad as expected. Oil prices are hovering at $50 a barrel for WTI crude and $60 a barrel for Brent crude. Our office continues to get calls from people saying they’ve been offered a lease on property they didn’t know they owned. The offers aren’t quite as high as they were before, but it’s still normal to get over $4,000/acre in Tyler County. In fact, we just completed a lease in Wetzel County for $5,000/acre and 17% gross proceeds royalties. It wasn’t even a large tract. Big pipelines are still being worked on and demand for natural gas as a source of generating electricity is still growing. There are even a couple of companies that are increasing their investment in the Marcellus Shale, Southwestern Energy being the biggest.
Today over at “Marcellus Drilling News”, there was an article about three new natural gas powered electrical generating plants being proposed for West Virginia. They’ve been proposed by the same people who are behind the power plant going in at Mounsdville, WV. Two of them are up in Brooke County and the other is in Harrison County.
Other parts of the country are feeling the effects more than the Marcellus/Utica region. Things are slowing down more in the Bakken, Eagle Ford, Haynseville, and Niobrara plays. That’s because the Marcellus is the most economic play due to low leasing costs (still), high production rates, and vicinity to large markets. A lack of infrastructure has slowed things down some, but the infrastructure is being built.
Some analysts think that oil will drop down to $20 a barrel before prices start to recover. It seems that most analysts think that $40 a barrel is the lowest it will go, and that prices will recover to around $70-$80 per barrel around the end of 2015.
Luckily for our clients, this means business as well. We just expect reduced profits.
The meeting I attended back in December was run by some attorneys who were trying to organize opposition to the pipeline. It was reasonably well attended with the usual citizens, activists, and curious people. Even a pair of pipeline workers. The odd thing was that there was only one landowner. Out of about 60 or so people. How odd was that? The attorneys said that the usual crowd at their meetings was made up of about one-third landowners. Weird. I guess Randolph County landowners aren’t terribly concerned about the pipeline. Unfortunately, they should be paying attention.
The pipeline is a big deal. It’s going to transport huge amounts of gas from the heart of the Marcellus Shale play to end users in Virginia and North Carolina. The price of natural gas could actually go up because of it. Right now there isn’t enough capacity to handle all the gas that comes out of the ground here in West Virginia. Pipeline owners can set their price, and producers have to pay. With additional capacity, pipeline owners will have a little more competition and should have to pay more for the gas.
This pipeline will have eminent domain. Once FERC approval is done, the company will be able to set their price and terms. Federal regulations will be the only limit. Landowners will not be able to negotiate well, because the company will be able to walk away from the negotiating table whenever they want to and apply eminent domain.
Besides the usual ripping up of surface tracts and the temporary easement or right of way that will be there as long as the pipeline company wants it, landowners need to be concerned about pipeline failure. You might not want a pipeline on your property at all because of the risk, however slight, that it might break. A smaller pipeline can do serious damage and force you to leave your property for days, even weeks. A larger pipeline can be deadly.
The ATEX Pipeline explosion in Brooke County in January 2015 burned about 5 acres of woodlands, according to an article on the West Virginia Press website. The ATEX Pipeline is a 20 inch pipeline that runs to the Gulf Coast.
The Sissonville pipeline explosion in December of 2012 was the result of age-related corrosion, according to a report by the NTSB (.pdf) that was finished up in March of 2014. If you don’t want to read the whole thing or don’t like .pdf links, the West Virginia Gazette wrote a pretty decent summary of it. MetroNews had a great picture in their article that gives some excellent perspective of the size of the fire. Keep in mind that this was a 20 inch pipe.
Again in January 2015 (it was a bad month for pipeline accidents), a pipeline exploded near Jackson, Mississippi. The Weather Channel, of all places, has a story with photos that put the damage in perspective. That pipeline was 30 inches in diameter.
It’s eye opening to say the least. Having a pipeline this big close to your house might be a cause for concern. If you are concerned, now is the time to get involved and to get educated.
I just read an article from Marcellus Drilling News. It points out that the best producing gas wells in Ohio are in Belmont and Monroe Counties — right across the Ohio River from Tyler, Wetzel, and Marshall Counties here in West Virginia.
Make sure you do some research on the value of your minerals before you lease them. There’s no reason (unless there’s some geology that I don’t know about) for Tyler, Wetzel, and Marshall to be less valuable than Belmont and Monroe. Belmont and Monroe have been commanding $5,000 to $8,000 per net mineral acre for a bonus.
Granted, bonus amounts may change in the coming months due to oil prices dropping like rocks, but for now they’re stable. Don’t forget, however, that the Marcellus play in WV is the most economic play in the country, so drillers here can weather a drop in energy prices better than most.
To pile on, Stone Energy just brought in the Pribble 6H well in the Utica/Point Pleasant in Wetzel County. It’s producing huge numbers, 30 MMcf per day. And Magnum Hunter is getting 45.6 MMcf per day from it’s Stewart Winland well in Tyler County.
West Virginia minerals are valuable. Don’t sell yourself short.
I apologize to all those I haven’t been in contact with recently. I’m working hard to get to everyone.
I ran across an article that shows that the Marcellus formation isn’t the only play in this neck of the woods. Gastar has gone down to the Utica and Point Pleasant in Marshall County, and are getting excellent results.
These ares not the only producible formations down there. Keep that in mind when you’re negotiating a lease. Ask for a formation reservation, a Pugh clause, and keep in mind that this document could easily exist beyond your grandkids’ lifetimes.
I’ve wondered at times whether or not these horizontal wells would be re-fracked at some point in the future. Looks like they will be. At least, the companies are thinking up ways to do it. This one involves pumping “diverting agents” into the old cracks at high speeds. Subsequent fracking would open up new cracks. Pretty doggone cool.
I bet there are other ways to re-frack, too. Shoot, it seems to me that you should be able to pump some kind of cement that would dry to be as hard or harder than the rock formation into the horizontal part of the drill bore, let it harden, and drill a completely new horizontal in a slightly different place. You could use the old vertical part of the well, so you don’t have the expense of a new pad and vertical portion of the well. That’s just one thought off the top of my head. It’s a freebie for any gas company that wants to use it. You’re welcome, guys.
There’s a guy up in Canada who came up with a novel way of creating negotiating leverage with the oil and gas companies. Back in the early 2000’s he was having difficult with landmen and company reps coming to his door and taking up his time. He wanted to protect his property from pipeline development. So he turned his property into a work of art, and got it copyrighted. Now he charges the companies $500/hr to discuss use of his property, and only talks to company presidents. I’m not sure that would work here in the US, but I don’t know the first thing about copyright law, so maybe somebody else could weigh in and let me know if it might work. You can read more about it here.
The takeaway from this story, I think, is that knowledge really is power.
Here’s a link to an article from the Wall Street Journal (link goes to a Google search page, as that’s a simple way to get around WSJs paywall) about the infrastructure that is being put in place to handle some of the gas that the United States is producing. This piece deals with what’s going on in Louisiana. But large projects are needed in other locations as well. Putting something as large as a 7000 acre plant in West Virginia would be a challenge due to the hilly nature of our state, but smaller projects could be and are being undertaken. This is the kind of thing West Virginia could really benefit from. A large percentage of the minerals under West Virginia topsoil are held by out-of-state owners, meaning that royalty payments won’t be paid to West Virginians in a lot of cases. We need to make up for that missing royalty money from surface rights, oilfield and service industry jobs, taxes, and industrial development.