Issues in the Twin Tiers: Gas drilling market reaches a new age

Natural gas drilling in the Southern Tier, once heavily weighted in favor of the drilling companies, is now shifting toward the landowners’ interests.

Two factors are pushing the pendulum. One is a new policy, implemented in August 2005, which allows parties with land in a well unit to buy their way into the drilling of that particular well. The second is the decision by Chemung County to jump on the gas leasing bandwagon by opening about 4,000 acres of county-owned land to natural gas exploration.

The direct result of both events has been the same — gas companies other than Fortuna Energy, the area’s dominant driller, have set up shop in the Southern Tier.

Natural gas has become big business in New York. According to the state’s Department of Environmental Conservation, 55 billion cubic feet of natural gas was produced in 2005, up significantly from 1998′s total of 16.5 billion cubic feet. Totals for 2006 won’t be available until July, a department spokesman said.

That production figure, observers say, is on track to become even bigger, and most of the activity is taking place in the Southern Tier.

Drilling explodes
Fortuna Energy Co. in Big Flats, a subsidiary of Canada’s Talisman Energy, operates 63 wells in Chemung, Schuyler and Steuben counties. Active in the Southern Tier since 2002, Fortuna last year spent $80 million to drill 14 wells and participate in seven more with other operators, company spokeswoman Teresa Degarmo says. This year, Fortuna plans to drill or participate in 25 wells and hopes to bring a new well in the town of Corning on line.

About $120 million has been budgeted to support the drilling operations this year.

But Fortuna is no longer the only energy company working in the Southern Tier. It has partnered with East Resources and Western Land Services for some of its wells. Chemung County’s leasing program has brought in other companies — the Long Consulting Group, Chesapeake Energy Company, Whitmar Exploration — interested in exploring the Trenton-Black River formation.

Attracting attention
In August 2005, the state Legislature ruled that landowners with holdings in a well unit had the right to buy into the drilling of the well and share in any profits. Before the law went into effect, landowners’ payouts were limited to production royalties, usually 12.5 percent, written into their leases. Well operators did not have to partner with landowners within the unit who wished to share the costs and profits of drilling a gas well.

Western Land Services was the first company to take advantage of the new law in July when it paid $1.3 million to Fortuna for participating operator’s rights for the Hulett well in Veteran. The Michigan company has partnered with Southwestern Oil for its New York operations. Since the new law was passed, Western has spent about $4 million for participating operator’s rights in 10 Southern Tier gas wells.

“We had been in the play since 2001 and over the first four or five years, were offered participation in only one well. With the new law, we are now in 10 wells over the last year,” said Jeffrey Cook, Southwestern Oil’s president.

“The same activity is planned for 2007 and we are talking to landowners every day.”

As Western Land Services can attest, the new law has changed the way developing and drilling gas wells takes place, said Michael Joy, an attorney with the Williamsville-law firm of Lipman & Biltekoff that specializes in the issues surrounding natural gas drilling.

“It’s created vast new opportunities for companies in southern central New York and created new opportunities for competition for oil and gas leases,” Joy said.

The policy revision, Joy added, was partially responsible for the surprisingly high royalty and signing bonus bids Chemung County received on its parcels from six energy companies. Production royalties, payments based on the amount of gas produced by a well, ranged from 12.5 percent to 18.75 percent. Signing bonuses ranged from about $20 per acre in Horseheads to $730 per acre in Southport.

Both amounts are over and above what was previously offered to private landowners. If Chemung County had bid out its parcels before August 2005, Joy said, it would not have gotten the attractive lease offers.

County officials agreed.

“We did not expect the numbers to be where they came in,” the county Legislature’s attorney Richard Keyser said. “What we saw was that in two cases, we received a significantly higher royalty than had been offered to private landowners and with that information out there, private landowners now know the companies are willing to pay a higher royalty.”

(The local standard is now 18.75 percent, landowners say, and that figure isn’t carved in stone.)

Even Steuben County has gotten involved by entering into several leases for county-owned property over the last couple of years, said county Administrator Mark Alger.

“We’ve had a number of natural gas companies looking at Steuben County for some time. When they are in the process of getting ready to drill and explore for gas, if we have property in that area, they approach us,” Alger said. “(Our attorneys) have negotiated favorable leases for us. We don’t sign the standard lease they give us.”

New players and choices
Western Land Services isn’t the only newcomer settling into the Southern Tier. In November 2005, Chesapeake Energy Corp. purchased the leasing rights held by Columbia Natural Resources for land in the Southern Tier. The Oklahoma-based company, also a successful bidder on some Chemung County-owned parcels, expects to have more than 1 million acres in New York under lease by early 2007, Eastern Division Operations Vice President Michael John said.

“We’re taking the time to evaluate what work has been done by CNR and taking the time to do 3-D seismic surveys,” said John. “As soon as we get the results back and plan additional surveys, those will lead us to our drilling.”

For the landowners, the new companies mean more competition for the leases.

Maria Turner of Horseheads formerly leased about 500 acres along Ridge Road to Fortuna. But the company failed to contact her when the lease was about to expire. After entertaining offers from Western Land Services and Whitmar Exploration, Turner decided to sign with Whitmar.

“Whitmar drills wells and Western doesn’t,” said Turner. “My son and grandson sat in on a meeting and we were impressed. I also had a niece who researched them very well. We would have talked to the other companies even if Fortuna (had shown) an interest in re-signing us. The new lease gives a higher royalty and more bonus money, but we had to negotiate for that.”

Being able to negotiate is the key, said Joy.

“Where there is competition for leases, the market will control signing bonuses and royalties, and the landowners are now freer to negotiate,” he said.

Source: www.stargazettenews.com