Notes from Penn State Extension Feb 4th Lehman Campus Penns State U.

The experts are not sure how thick the Marcellus Shale. Maps of the shale extent can be found at http://iogawv.com/RamsayBarrett-Shale.pdf The TOC (Total Organic Carbon) is of the Marcellus Shale is high. The Marcellus Shale is thick and of high quality.
Spacing – not exactly the 640 acres we had heard. The size of the spacing unit for a particular reservoir is set according to its depth and production characteristics. The larger the frac needed the larger the unit of land needed.
There is excitement in the gas industry over the ability to drill horizontally. A drilling rig can go vertically and then extend that drill to the side.
If people have not been approached there is time for them. The play keeps expanding.
Cosmic Seismic Services of Canada does the majority of the seismic testing in this area.

Atty. Dale Tice of Greevy Assoc. Williamsport
A well should be 500’ from any structure on a person’s property that contains living area.
Marcellus Shale is above the Onondaga , a layer of dense limestone that outcrops in NY and PA. Forced pooling is allowed above the Onondaga. A group of landowners may group themselves together voluntarily to negotiate a lease.
These landowners do not have to be adjoined. Each property owner in a group will have their own lease. One size may not fit all. Those same landowners may not be pooled together for the purpose of drilling for gas. To be pooled, the company gathers the land that has the potential to be above gas reservoirs. It can be the whole of one property or a portion. They will gather as much land is as necessary and form it into a unit. There may be several wells drilled in that unit. A unit is guided by production.
The horizontal drilling can be used with pooled properties.
Timber – it is best to get an independent appraisal for any timber for which you request payment.
Water – Make certain you have an independent entity take a water sample three months before drilling. Water can be drawn from any pond, lake, stream on a leased property. Check your addendum on this.
Roadways – make sure you address this in any addendums. Whose concern are they before and after the drilling.
Fences – Who is liable to replace. Make sure they fence off their well area so no one can enter.
Make certain that any seismic work has your pre-consent.
Pugh Clause – a bit murky to this writer. Make certain your attorney explains as it is important if you are in a pooled unit. In lay terms (I think) at the end of your lease, only the portions of your land in that pooled unit shall continue to be held by the lease. At any rate, check this one out with an atty.
Record and Audits - make certain you can review this information.
Should you sign a lease? It depends on: your goals for the property, your financial strength, your estate plans, the terms of the lease.
Should you not sign a lease? It depends on: do not sign because the neighbors did, because you are afraid they will drill across property lines, if you do not understand the effect on you, your family and your property, for the bonus dollars alone.
How to make a decision – Understand all terms of the lease, seek an attorney that works for you and makes you feel comfortable with asking questions.
The lease covers two different terms : Primary in which the do their exploration and seismic studies. There is little impact on property. Risk in this term – abandonment of lease – no gas under your ground. Poor lease terms, poor work relationship, assignment of lease to others with whom you are not comfortable. Think about the impact and negotiate terms that work for you.
Secondary in which there is well drilling and production. There is more impact. How much impact? As much as they need: well site – could be viable for years, access roads, pipelines, metering stations, compressor buildings (all mobile and not subject to Planning Commission), traffic for routine maintenance. If no well is drilled at the end of the term, make certain the addendum states that the lease is ended.
Financial Gain is a balancing act. Consider your property risk, resale and taxes.
Make certain you understand how much Royalty you might receive. There are many factors, the least of which is the percentage.
Have a clear understanding with your accountant before you sign any lease. After is not the time to make changes. You will pay tax. Just as you need a gas attorney you need someone that understands gas taxes. Do-it-yourself tax programs might not give you all the information you need.
Pipelines – Eminent Domain cannot be used for wells. Probably not for small pipelines but maybe for the large ones.
15% is the new plateau. Work toward that number.

Books of Interest

Let's Talk an Oil Deal (Your Key to Oil Patch Lingo) John Orban III
Money In the Ground John Orban III
Oil and Gas Production in Non Technical Language, Martin Raymond and William Leffler

example in Let's Talk an Oil Deal Association for Tax Purposes - basically when two or more taxpayers are associated in a common undertaking if it looks like a corporation it can be taxed as such.
My questions? Does this include pooled properties or those in a unit? Should we add an accountant to the mix of experts?

Penn State Extension gas lease web address

http://naturalgaslease.pbwiki.com/Penn+State+Programs If you cannot find an answer needed at that site, register and ask a question in their public forum section.
Members of the core group attended the second workshop at Penn State Lehman Campus on February 4th.

Landlord Concerns

Small comment from the blog person: My concern over gas leasing has its genesis in our experience with being landlords. Recent history – My mother left us a little rancher in Endicott NY. It is tiny by any standard. The last three tenants have cost us money. Sept thru December of 07 a young woman and her three children moved in with a reference and pay stub. Her parents lived up the street and she was moving in because her parents could help put the kids on the school bus while she was at work. Within two weeks of her moving in she lost her job and there were never any rent checks. She had signed a month to month lease. Our attorney told us it was the best way to remove an undesirable tenant. It still took us $1,000 to the attorney for eviction and two months of cleaning to restore the house for sale. Thank heaven at the last minute she moved out herself saving us the heartache of seeing the sheriff throw her and her three darling children out on the street. Needless to say, Christmas was emotionally ruined. Now, like the tenant, the landsmen have great stories. I assume any lawyer will give as good advise as he or she is able. The whole lease affair still cost us $2K and a ton of heartache and stress. I extrapolate this to any gas lease signed on our property. A lease is a lease. When you become a landlord, the property you rent is no longer yours to do with what you would like. You cannot enter the property unless you call and ask permission. You must give notice. You cannot demand the tenant leave and expect that they will do so. In short, the laws of the land are heavily weighted to the tenant no matter what or who they may be. Once you lease your land, even with what you think are adequate safeguards, you are in a weakened position. Our tenant signed a month to month lease packed with what we thought were protections i.e. no live- ins, no dog. We had given her the key and probably had not arrived home when her boyfriend and his dog had moved in. I am involved in this group and this process because I know too well how helpless we are in the face of this juggernaut. The money may be great and who doesn’t need it? Just beware of “Whomever, bearing gifts.” There could be a Trojan horse waiting at your gate.

Unit Size- how units are decided or declared?

Answer: That is a very good question and one we are still waiting from the state to legally define according to PA law.

It depends on how deep the well actually goes. Shallower wells are controlled by one set of state laws and deeper wells by a different set (Conservation Law). Since we don’t actually know how deep the wells will be it is kind of an educated guess as to which set will apply. You can go on the PA web site and read the regulations. I questioned Joe Umholtz, Chief, Bureau of Oil and Gas Management Pa DEP and he was unclear too. Ed called different people in the department and was also unable to get an answer. They just forwarded us the actual law, which we had already read.

In theory the unit is supposed to be the area that the Company will be pulling the gas from. So in "shale" it should be fairly small. Historically shale would be from 30-80 acres. Deeper wells could drain larger areas. They report from 180-600 acres. The state does not determine this, the company does on its permit. There are hearings on each permit at which we could probably testify but I am not sure how much clout you or I would actually be able to carry.

The other thing that is disconcerting to me is the clause in PA law that allows spacing orders to be no larger than 10 square miles. WOW! That’s 6400 acres

But just because we don't have an exact answer in PA law that is clear to us doesn't mean we should take a wait and see out look. We feel that we should limit that size in our leases. We already have limits on size to no more than 640 acres from Whitmar, New Penn, and Apex Oil. Their language is good. Chesapeake has not yet "volunteered" that language restricting the pool or unit size. Unless someone in the loop has gotten that Addenda from Chesapeake. If you have it forward the language to me Please!

So it all boils down to the same thing; if the Township, County can't regulate it which they can't and we are unsure what protections the State offers we better protect our selves in our lease agreement.

Gas well spacing is ideally an economic question. It is a trade off of the increased cost of tighter spacing, more wells per area, and cost of money in the future due to a longer time to drain the gas. In these very tight shales needing huge frack jobs, the extend of the fractures may be even more important to spacing. The rate of flow declines, obviously, over time as the pressure declines. It is an exponential declining value. After a gas well is completed, flow and pressure build-up tests are completed. With very complicated equations and some known factors from past wells in the same formation, the rate of flow and gas volume can be estimated. Even the extent of reasonable drainage area may be calculated. In Texas, all the production rates are public providing significant data to estimate gas production rates for a gas well decline curve. PA's gas well production rates are confidential for 5 years which hinders the ability of the some gas production companies to design for economic and possibly Green well spacing. I have read for a single well the spacing may be 160 acres and for 4 horizontal wells on one location about 400 acres. There is also a reasonable limit to the size of a frack job and thus the drainage area. A certain velocity must be maintained to carry the prop material, sand, ceramic beads, etc. Another factor is that the is a relatively high amount of clay in shales, therefore, the time the formation is exposed to water needs to be minimized.

Marcellus Shale Information

As with much of this blog, information has come through the Wayne County based NWPOA (Northern Wayne Property Owners Alliance)

Also Ross Smith Energy Group RSEG, Instinct ,LLC

Players – Range Resources, Atlas Energy Resources, Southwestern Energy, EDG Resources, Equitable Resources, Chesapeake, Talisman Energy

CNX Gas, Penn Virginia, Ultra Petroleum, (possibly) Phillips Petroleum and PetroEdge have drilled horizontals in NE PA, Rex Energy, Chief Oil and Gas LLC, and Newfield. Not a complete list by any means.

Favorable Properties – High TOC – Total Organic Carbon, Adequate thermal maturity, Significant gas in place, Thickness, Favorable mineralogy, Overpressured, Successful high-rate gas wells.

Immediate post-fracture clean-up is a contributing factor to success. Frac fluid must be cleaned up immediately. Disposal of frac fluids will become an operational issue. There are only three disposal wells in the Commonwealth.

The Marcellus may be stronger in the NE than in the SW due to thicker, deeper shale, more brittle with a higher TOC. Companies are still negotiating 1/8^th royalties. NE PA proximity to Millennium Pipeline and major markets make NW Susquehanna County attractive to gas companies. The land owners in the Friendsville Group do not expect anything more than fair economic treatment from any company bidding for a lease.

Water Issues

The paragraphs in blue were written by people in Wayne County. The black at the bottom contains local information and is current. Needless to say, water must be considered in our addenda.

I have an added comment about this well water issue and the drilling. Stop to think a moment. They will not be using ground water as a source it is just not practical. If the drilling of a gas well requires a minimum of 1 million gallons it would take way to long to get that from a water well. A very good well could put out 50 gallons per min. even at that rate it would take 2 weeks to get the water tankers filled to drill just one well. Its not efficient to get the water this slowly.

They will not be pumping out of a ground well. They will be taking it from a surface source of water some where. Time is money for these drilling teams and they wont be sitting around for 2 weeks to fill their tanks.

Ask around in other areas. Its not coming out of a well. They will pump it from a surface source or pay someone to pump it out of their pond or lake, stream or river.

Does the water quality group know that the energy companies are going to try to use lakes, ponds and streams to pull water for the fracing? Long Consulting/Chesapeake basically told us that at the Jan 9 meeting. They do not play to drill water wells for fracing. They still may drill wells for other purposes and in any event the current domestic wells must be tested and the aquifer protected from infiltration of hydrocarbons and toxics. Also the use of surface water, I would presume, would be controlled by the addenda.

It has been said time and time again, by the DEP, that the permitted party would be responsible to correct any problems associated with the drilling of the well. The DEP has specific procedures it follows when notified of any infractions. Though it has been said the gas companies have vested interest to do the best job possible, environmentally speaking, there have been instances where something has gone wrong.
On a brighter note it seems the cement casing is responsible for less destruction and contamination of the aquifers.
Water testing should be done (seasonally) before the well is drilled. It's standard operating procedure for the gas companies to test the water before they start drilling.

Anyway, at some point in the process the wells are fractured with water.

The O&G people say they use about 1 million gallons (about 40 tractor trailer tankers) to accomplish this. As far as I know, this process is complete on the county's 3 existing wells. The good news is that they can, and do, recycle the water from one well to the next. They simply truck it. At XXX they pulled the water from the creek, by the dairy barn. It's taken out over a period of several days; a small percentage of the total flow. At some point the water needs to be disposed of and they need to truck it to a willing sewer plant. They pay the plant operator a fee based on gallons. the last I heard from O&G they were still looking for an interested local sewer plant.

Random thoughts from the Penn State Meeting Penn State Lehman 1/28/08

*Approximation- 35 million can be gained from working in joint ventures, more than when the same number of property owners deal with landsmen individually.

*Drilling and leasing speculative – a hit only 50% of the time.

*Any consultant will only strike a deal as good as we give them. One got the summer of ’07 people, a whopping $165.00 an acre. It does not seem to me that there was given particularly good advice in terms of what they might get. The consultant took what they were willing to accept and ran with it. All the consultant did was shepherd. The sheep followed the lead and it took them to less than they might have received. The same might be said of working with an attorney which, is I believe what one of our members said in the first place.

*Properties in a unit will get the percentage of royalties that their acreage allows. Up front money simply gives the drilling companies the right to come on your property. On your property they can do what they darn well please under the parameters of the lease. If we have one hundred acres and our neighbor has four hundred and they find gas on our property, we still only get 1/5 of the royalty.

*Who pays for the added damage to Township or Boro Roads? We have had that problem with quarry trucks and are able to work that out as the quarry owners in general, live here. The gas company does not. Do the municipalities have a legal voice here? If the municipal roads are damaged, we may have to pay more municipal tax.

*Insurance: Be certain that the property owner understands the insurance of the company. It might be a wise plan to up your homeowners in case someone wanders in to look at the drilling process and breaks a leg in a woodchuck hole. Not sure what the gas company’s insurance covers.

*Make payment schedules very clear.

*Take the lease to a copier and raise the magnification so you can read every bit of the fine print.

*The chances of the lease being sold or transferred is high so make certain you know the terms of these actions.

*Have a third party take a sample of your water at least three months before action on your property.

*It takes 5-6 million to drill one well. Gas companies will get 87% of any gas.

*Protect your intended land use. Make sure your lease excludes surface use.

*DEP has only three offices in the whole state for Gas and Oil oversight. (Likewise, our County’s E&S staff is not large) If there was concern that the quarry operators had little oversight the same is true here. DEP only oversees production. Anything beyond that is a civil matter. Your problem. They could care less about your lease. Storm water Management plans must be drawn up for over 5 acres of disturbed ground. We must check on the Clean and Green provisions of the County. Now, new Commissioners so check on their views.

If any structures or outbuildings application must be made to County Planning. Company responsibility? Landowner? Make certain.

*This has the same potential to scour the land as a quarry. Again, watch the lease and make strong provisions to reclaim the land on and beyond what the Commonwealth might find acceptable.

*No gas storage on a property. It has the potential to injure the land permanently.

*A local person to have oversight of the process once the land has been disturbed; that the company is sticking to the lease. (Perhaps Farm Bureau can clarify that. I heard the term Ag. Inspector? On the 22^nd.)

*We need a list of Industry Definitions

*The companies have the technology to place pipelines under a stream bed.

*You can designate the strata you want to lease. Near the surface is best.

*It would be better for the property owner to do a quiet title search. If someone else has signed a lease before you owned the property the company will deal directly with them and leave you out. (For new owners) Again, your attorney can answer any questions about Warranty of Title

*Clarify – The best lease is for 5 years. Ten is too long. They will know shortly after they come to the property if it is valuable to them. If they strike gas then they will be there until the gas runs out. Pipelines are forever so be careful how they are built and put a lot of protection into the lease. Make certain that if there is an extension clause in the lease that you are paid accordingly, not a simple $1.00 a year. That has happened. Sign a five year lease with the provision that if they do not drill in five years the lease is void and must be renegotiated.

This is a wildcat area. The companies are taking a chance: educated guess.

Favored Nations - from Wayne County e-mail

It would be great if a large group of landowner would combine their
>> resources and share in the legal expenses. However, this does not seem
>> to work because each land and mineral owner has different goals and they
>> often want to make better deals than their neighbors. One way to get
>> around this is to have a "favored nations" clause. The requires the
>> lessee to give the lessor terms equal to the best terms for some distance
>> around the land in question. So, no matter what Farmer A has in his
>> lease, if Farmer B is within the area of interest, an he gets better
>> terms, Farmer A's terms will improve. Again, this requires that the
>> landowners/mineral owners truthfully share information. This is
>> something that they often won't do. Nobody wants to let his neighbor
>> what his financial business is. Again, the lessees prey on this
>> mentality to break down the individual lessor.The favored Nations Clause is wonderful security for moving negotiation
> forward. With that clause you can be sure that there wont be a better deal
> to the next group over yonder. There are usually distance limits on them.
> I have seen 2 mile circumferances here. The negative side is you have to
> be a detective to find leases in your area that were agreed on that
> exceeded what you got. But then this is a small tight community and
> eventually everone tells. Especially if they have bragging rights.
Thats
> why the NWPOA has the clause inFAVORED NATIONS CLAUSE (BONUS ONLY): In the event Lessee pays a bonus
> amount greater than the amount paid to Lessor, for an oil and gas lease,
> and/or pooling action, in this section within one (1) year from the date
> hereof, Lessee agrees to pay to Lessor the difference between the bonus
> amount already paid per acre, and the amount per acre of the greater bonus
> paid.
At the end of six months from the date of this Lease, at the written
> request of Lessor, Lessee agrees to determine the average cash
> consideration paid per leasehold acre ("bonus") for all oil and gas leases
> taken by Lessee for the six month period starting from the date of this
> Lease over lands in a five (5) mile radius of the Leasehold Premises, and
> if the average bonus amount paid by Lessee for such leases is greater than
> the bonus paid to Lessor at the signing of this Lease, Lessee will pay
> Lessor the difference as additional bonus. WmBa +/- Ck
FAVORED NATIONS: If at any time or times prior to a well being completed
> on the leased premises, or prior to a well being completed in any pooled
> or unitized units in which the leased premises are included, Lessee or its
> assigns shall obtain a lease from or make a contract with a mineral owner
> under the Leased Premises other than Lessor, then Lessor shall be entitled
> to any benefits paid for, granted or reserved in such lease or contract
> which are greater or more favorable than those paid for, granted or
> reserved in this lease. Lessee shall pay Lessor immediately Lessor's
> prorate share of such benefit, including without limitation, bonus,
> royalty, rental or shut-in payment or any other benefit more favorable to
> such mineral owner than the payment for or the benefits of this lease. If
> necessary in the opinion of Lessor, then Lessee shall amend this lease to
> confer such benefits upon Lessor.
>


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