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Sunday, November 27,2011

In some areas, oil-gas lease offers have doubled in 5 months

Lease offers in Athens County also see steep rise

By Terry Smith

The bidding war for oil and gas leases in northeast Ohio has substantially increased the potential windfall for rural landowners, if a lease offer letter obtained last week by The Athens NEWS is any indication.

The letter, from an independent landman representing Hilcorp Energy I, L.P. in Houston, offers $5,000 per acre for a five-year lease for a rural property in Carroll County. The offer includes an option to extend the lease an additional five years for another $5,000 an acre. It also includes an 18 percent royalty on the sale of oil and gas extracted from the land.

Carroll County, southeast of Canton, is among several northeast and eastern Ohio counties where oil and gas development is booming. Relatively new technology – horizontal hydraulic fracturing (or fracking for short) – has allowed the development of deep underground shale layers. The boom, which started in Pennsylvania, has spread west into Ohio, where the Utica shale layer is being targeted along with the western fringes of the Marcellus shale beds.

The fracking boom has generated a storm of controversy at local, state and national levels. It's essentially the mother of all "jobs vs. environment" debates, generating controversy anywhere where it's happening, in both the East and out West. That conflict has been raging in Athens County, despite the fact that no horizontal fracking wells have been permitted or drilled here. In addition, geologists have expressed doubts about whether the shale underlying our county has the sort of promise for oil and gas development seen in areas such as Carroll, Jefferson, Belmont, Tuscarawas, Columbiana and other counties to the north and east of southeast Ohio.

That opinion has been evolving in recent weeks, however, as lease bonus offers have begun to increase in this area, and one drilling company in particular, Cunningham Energy of West Virginia, has made no secret it intends to use horizontal hydraulic fracturing to access oil reserves underlying Athens County.

The local debate has been fueled to some degree by an influx of Cunningham and other energy companies trying (and succeeding in many cases) to sign oil and gas leases with Athens County property owners. Until recently, it seemed that lease offers hereabouts were significantly lagging behind those farther to the north and east.

However, a local property owner informed The Athens NEWS Sunday evening that she had been offered a lease with a $2,500 an acre signing bonus for mineral rights to her western Athens County land, plus 16 percent royalties. (This is related to an effort organized by local attorney John Lavelle to offer property owners in Waterloo and Lee townships, near his farm, a special "landowner-friendly" lease, with those terms, in exchange for a $50-an-acre fee. Cunningham is the company they're dealing with.) That lease also offers $1,250 an acre for a "no-drill" option, which apparently means the oil and gas company would get the rights to their gas or oil, but then would have to retrieve it from a drilling site on a nearby property.

The property owner said that she had been offered just $100 an acre for those drilling rights less than a year ago.

The same sort of inflation in lease offers is happening farther north and east, though on a larger scale. The Carroll County property owner who received the offer of $5,000 an acre in mid-November just five months ago received a lease offer from a different energy company for less than half of what Hilcorp Energy is now offering.

In early July, Kenyon Energy of North Canton offered the Carroll County property owner $2,000 per acre for five years, with an option to extent another five years at the same price. That letter offered 15 percent royalties, as opposed to the 18 percent royalty offer now on the table from Hilcorp. At the time, the property owner, whose permanent residence is in the Athens area, declined the offer.

Royalties are a percentage of the proceeds from gas and oil sales from a property. Traditionally, oil and gas royalties have been 1/8th (12.8 percent) of production, according to the Oil Gas website (described as "a comprehensive objective resource for landowners and other parties involved in oil and gas lease agreements").

The rapid inflation in both lease payments and royalties, coupled with the increasing debate over the negative environmental impacts of fracking, present an excruciating dilemma for rural property owners.

Do they sign a generous oil and gas lease offer for their property, and risk losing out on a much greater windfall in a few months? Or do they delay, anticipating a much bigger payoff, only to see the boom turn to bust? Finally, do they sign over the rights to drill on their property, triggering negative environmental and quality-of-life consequences that ruin the property's value for any other use?

Whether that sort of painful dilemma becomes routine in this area will have to wait till someone actually drills a horizontal fracking well and finally learns what sort of recoverable oil or gas underlies our fields and forests.


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