Marcellus Shale natural gas fever is here, but are you ready?

NEW CASTLE, Pa. — The time is not to wonder if it will happen, the time is to get prepared for when the Marcellus shale gas drilling will begin.

In western Pa., drilling has already commenced in just about every county from the southern border to the New York state line, and permits have been issued in Beaver and Butler counties. There are no permits issued in Lawrence or Mercer counties yet, but many expect it won’t be long until that happens.

Ask questions first

The public crowded into the Lawrence County Community Action Partnership Building May 20 to learn more about Marcellus shale drilling at an event coordinated by Penn State Cooperative Extension.

Everyone who made a presentation at the workshop had one common statement: Hire an attorney before signing any type of agreement or lease with a gas company.

Drilling increase

The Pa. Department of Environmental Protection, Bureau of Oil and Gas Management, is reporting a tremendous growth in Marcellus wells across the state.

In 2008, 196 wells were drilled, and 519 wells were permitted.

In 2009, 763 wells were drilled; 1,985 were permitted.

So far in 2010, 280 wells have been drilled and 584 have been permitted.

The state of New York quit issuing permits for drilling there and that has contributed to the boom of drilling in Pennsylvania.

Marcellus shale

Jon Laughner, an educator with Penn State Extension, said the Marcellus shale is a very thin layer of earth and in most cases if the Marcellus shale is present then so is gas trapped in it.

There are now more than 60 gas companies in Pennsylvania, and some wells have began production in Washington County, the site of the first producing Marcellus well.

One thing to consider is a no surface drilling lease, the presenters said. This is especially important to keep in mind if the property is less than five acres.

A recommendation given was to have the lease stated that there will be no surface drilling and only horizontal drilling, although if the property is greater than 50 acres, it is almost impossible to get a gas company to agree to this stipulation.

Marcellus shale may not be the only thing gas companies are interested in on a property. Studies are finding that if a property has a layer of Utica, which is several thousand feet lower than the Marcellus shale, the gas companies are probably interested in that as well. Under the Utica layer is also natural gas.

Water resources

Bryan Swistock, Penn State water resources specialist, is studying connections between brine water, water used for the drilling process and drinking water supplies.

One thing he recommends is that property owners get it stated in their lease that the drill site has to be at least 500 feet from a water supply. He added Pennsylvania law states it only has to be 200 feet, but that may not be enough.

After the permit is issued, the only notice given about the commencement of drilling will be to anyone with their drinking water supply within 1,000 feet of the drilling location. They will be notified within 24 hours of the drilling to begin.

Another tip he gives homeowners is to get their water tested by a state certified water testing lab prior to drilling, even if the site is not on their property and even if they are outside of the 500-feet zone. He said that will be the only way to prove something happened to the supply during the drilling.

After the drilling is complete, get another sample taken and tested.

Brine water disposal. Swistock also talked about the use of brine water at the drilling site and storage of the liquid on the property. He said it is very important to keep it away from drinking water areas.

He said millions of gallons of water will be needed for the drilling process and it is important to plan ahead and find out where the company plans to store the fluids.

Swistock added only 30 percent of what the company uses to drill will resurface within a couple of months and not enough studies have been completed to find out when and where the remaining water will resurface in the future.

Legal issues

Kris Vanderman, farmer and an attorney in Washington County specializing in working with property owners and natural gas issues, emphasized how important it is to contact an attorney before signing anything, rather than contacting one after a problem emerges with the gas company.

His legal tips included:

• Ensure the lease states arbitration will be used to determine issues between the land owner and the gas company.

• The lease should state how the property tax dealing with agricultural use will be handled. For example, who will pay the difference if gas is found on the property, when the farm loses its CAUV, or similar ag use valuation.

• Get the lease to state what will happen to the crops that are planted on the property and how much will be given for them if they are destroyed.

• The lease should also state that the property owner gets the right to have final say on where drilling sites will be and where brine tanks will be situated on the property.

He also told the group to make sure the lease does not state “owner has reasonable” anything. He recommends removing the phrase from any clause because in a court the gas company will hire professionals to state why you are unreasonable in not wanting the drilling site to be in a particular position on the property.

He said, simply, no matter what it comes down to, the gas company will say you are unreasonable and will have a good chance at winning the argument.

Financial planning

An average property with gas lease is getting between $200 and $300 an acre. If drilling begins, the price could increase to $2,000 an acre and if gas is found then the property owner could receive as much as an 18 percent royalty and storage fees.

Ted Feitt, of Washington Financial, said he couldn’t stress enough that property owners must plan ahead. He added it is not enough to wait until the gas is found to plan.

Feitt said he has seen some property owners already go broke because they didn’t plan ahead. He compared the financial windfall for some property owners to lottery winners who have gone broke five years after the good fortune.

He said the best thing to do is to establish a plan of action and an estate plan. One thing to consider is the taxes that will need to be paid when the checks begin to roll in once gas is found.

Feitt’s advice is simple: Pay taxes and then invest, otherwise it won’t be long before the farm will be foreclosed on and the property will be sold.

Another important item to remember is for your estate. He said if money is not set aside for the estate taxes, heirs could be forced to sell the property unless a cash reserve is available or another plan is established.

One thing was made clear by the workshop: There is a host of items to consider when thinking about leasing your property to any company. But if you remember only one thing, it should be this: Consult an attorney before signing anything.

Map: Courtesy of Penn State University Extension