Bob Rea, a farmer in Salem Township in Columbiana County, has helped form a group of landowners who are negotiating with drilling companies for rights to natural gas on their properties.
By GRACE WYLER
The natural-gas boom sweeping the Appalachian Basin has hit Columbiana County in full force, with gas producers moving to snap up mineral-rights leases in the area’s lucrative shale formations.
But the land rush has left many property owners overwhelmed by the leasing process and concerned they might not be getting a fair deal for their hydrocarbons.
Bob Rea, a farmer who owns 40 acres south of Salem, has taken matters into his own hands. Rea and several of his neighbors have formed a land group to educate themselves on an industry that has the potential to make them overnight millionaires.
“We are trying to address the issues from the standpoint of how we can best protect ourselves,” Rea said. “These are capitalists, and they want to make money. The way you make money is you buy low and you sell high — there is nothing wrong with what they’re doing; it just feels wrong when you are on the low side.”
The group, which began as an informal collective of about 65 families from the Salem area, has exploded in both size and scope.
The Associated Landowners of the Ohio Valley, as the group is now known, represents more than 200 landowners in Columbiana County, who together own about 20,000 acres of unleased land.
“All we want to do is try to level the playing the field a little bit,” Rea said. “We want to make it so that those of us who aren’t educated in this new technology at least have a chance to defend ourselves in the negotiations to get the best that we can.”
Across Columbiana County, leasing agents have been working aggressively to persuade landowners to sign over their subsurface mineral rights.
The county recorded 556 leases in the first 10 months of 2010, compared with 196 leases signed in the same period last year, according to the Columbiana County recorder’s office.
Every day more than 20 leasing agents duke it out over the office’s two microfilm machines, said deputy recorder Diana Reiter.
“You usually can’t move back there,” Reiter said. “The companies call every day to see how many more people we can handle.”
As competition for land has escalated, so has the price companies are willing to pay.
Mineral-rights leases are now worth upwards of $2,000 per acre, up from about $750 per acre earlier this year.
“I have been in this business 37 years, and I have never quite seen the feeding frenzy that I have seen here in the past few months,” said Ben Funderberg, vice president at Ohio Valley Energy, an oil- and gas-leasing company based in Austintown. “It really is a land grab.”
Drillers were initially drawn to the region by the Marcellus Shale, a massive natural-gas formation that stretches across New York, Pennsylvania, West Virginia and parts of Ohio. Marcellus wells are thought to be more productive in the northeastern part of the formation, where the shale is thickest.
But leasing and drilling activity has been moving west across the Appalachian Basin, Funderberg said. While a moratorium on shale drilling in New York could play a minor role in the westward shift, geology is usually the primary decision-making factor in the oil and gas industry, he said.
Producers are likely looking at the Utica Shale, an Ordivinian formation below the Marcellus, Funderberg said. The Utica is thought to contain oil as well as natural gas.
Small, independent gas producers such as Ohio Valley Energy have been drilling conventional natural-gas wells in the Clinton sandstone for several decades, Funderberg said.
But the recent activity is driven by the biggest players in the energy industry, which have the resources to drill the more expensive and technologically advanced shale wells.
Chesapeake Energy, an Oklahoma-based gas producer, is responsible for most of the leasing in Columbiana County, Funderberg said.
The company, one of the largest operators in the Marcellus Shale, recently spent about $850 million to buy leasehold and option rights to 500,000 acres in the Appalachian Basin from Anschutz Corp.
Other major companies, including Royal Dutch Shell and ExxonMobil, have bought up gas assets in the region. Chevron acquired Atlas Energy, a Pittsburgh-based independent producer with nearly 1 million acres in the Marcellus and Utica shales.
“Everything is totally dependent on geology,” Funderberg said. “I don’t think that [gas producers] would come in here and spend this much money without drilling.”
So far, there have been relatively few shale wells drilled in Ohio. Of more than 64,000 oil and gas wells in the state, only about 30 are tapping into shale formations.
Shale drilling is not likely to have an impact on Ohio’s energy landscape in the immediate future, said Tom Tugend, deputy chief of the Ohio Department of Natural Resources’ Division of Minerals Management, which oversees oil and gas drilling. Horizontal wells have a much larger “footprint,” Tugend said, and it can take gas producers several months, if not years, to obtain all the leases required to get a permit.
“At this point, companies are in the exploratory phase,” Tugend said. “They are signing a lot of land, so we know there will be more [drilling], but how much more is hard to say.”
ODNR is responsible for regulating permitting and well production, Tugend said, but has “absolutely no involvement” in the leasing process.
In the absence of state oversight, landowners are left to try to defend their interests from major gas producers adept at getting what they want from a lease.
The Associated Landowners of the Ohio Valley is relying on strength in numbers. The land group voted to hire Youngstown law firm Harrington, Hoppe & Mitchell to draft an original lease that provides protection from possible environmental contamination and property damage.
Typically, landowners will make addendums to a standard company lease. But Rea is confident that the size of the land group will bring gas producers to the table and give landowners a stronger position in negotiations.
“I think that we can approach them as partners in this thing,” Rea said. “We aren’t here to be adversaries, but we have to protect people.”
More than 400 property owners gathered at Armstrong Saddlery & Trailer last Monday to view a copy of the lease. The association is asking the landowners to sign a letter of intent, committing their acres to the group.
A major provision in the lease would limit the size of horizontal drilling units to 640 acres. Drilling units are designated by the company in their permit application to denote where gas will be drawn.
Ohio, unlike other oil- and gas-drilling states such as Texas and Pennsylvania, does not put a maximum limit on unit size.
Unlimited unit sizes can dramatically curtail royalties for individual landowners, as these payments are prorated based on the amount of acreage one owns in a unit.
But the royalty checks are only part of the equation.
If a company does not own a well within the initial term of the lease, usually five years, a landowner will have the option to renew the lease for a second signing bonus. But once a well is drilled on a unit, all of the land in that unit is “held by production” — the lease is automatically renewed for as long as the well is producing gas or oil.
“They could literally control the whole region with only a few wells,” Rea said. “This has little to do with the size of the royalty checks — this is how they can control huge amounts of land.”