Robert N. Hart is the CEO of HartPetro Global LLC and the president of the National Association of Royalty Owners, Appalachian Chapter.
Up until the advent of horizontal drilling and completions in Texas' Barnett Shale about 10 years ago, only those geologists and petroleum engineers working in the oil and gas industry in the Appalachian region of the U.S. had heard of the Marcellus and Utica shales. However, these two, now prolific, natural gas-producing geological zones have actually existed about a mile or so beneath the surface for hundreds of millions of years.
So, what is the big deal? Well, oil and gas explorers have always known that the Marcellus shale, shallower by several thousand feet than the Utica Shale, contained vast quantities of natural gas. Many, if not most, college and university geology professors taught their students that Marcellus and Utica were depositories for decaying organic matter on the bottom of a large ancient seabed in eastern North America, over time were converted into methane and other hydrocarbons as they were exposed to very high pressures and temperatures.
The problem was not whether natural gas (mostly methane) existed in those geological formations in large quantities, it was developing technical methods of extracting it in profitable amounts. You see, these formations are known to be extremely difficult to release large hydrocarbon volumes under conventional vertical well drilling and completion techniques. The methane gas was always there (relatively speaking in vast geological time spans of tens and hundreds of millions of years).
So, what changed? Just as the world has seen tremendous technological advances in medicine, space travel, computers and other sciences, the oil and gas industry, with the help of the United States Department of Energy and non-profit groups such as the Gas Research Institute, began experimenting with something called “horizontal drilling” about 30 or so years ago. A Texan by the name of George Mitchell, and other oil and gas visionaries, were convinced that deep shale reservoirs (not pools but pore spaces and natural fractures in the rock itself) would release their rich deposits of natural gas if wells could be drilled horizontally within those formations.
Although the new drilling method is much improved over Mitchell's original plans, his novel idea of drilling vertically and then turning the well horizontally, is in use today throughout the United States; and in a less intense manner, in other parts of the world. The technique was first used in the Barnett shale of Fort Worth, Texas (where over 10,000 wells have been drilled in the last decade or so) and rapidly spread to Pennsylvania, West Virginia and Ohio of the Appalachian Basin.
America's leadership in developing horizontal drilling, along with its highly skilled workforce and in-place infrastructure has been a true “game changer” in the world of energy development. Not limited to just our eastern states and the well-known Bakken Shale of North Dakota and Montana, this drilling method, combined with new completion technologies, has literally catapulted the United States into a leading gas producing nation throughout the world. Indeed, only 10 years ago the United States appeared to be running out of natural gas and was planning to build new LNG (liquefied natural gas) importing plants at a cost of hundreds of millions of dollars each to assure our energy needs would be met. In a complete reversal of fortune, those plans have been cancelled and U.S. gas transporters are now planning to retrofit existing operational LNG plants to export LNG to Asian and European markets. On the oil side, North Dakota alone is now producing almost one million barrels of crude oil daily.
Not just more wells and greater oil and gas volumes, though, are the winners. So are the nation's mineral owners and hundreds of thousands of well-paid employees of the nation's oil and gas companies and associated collateral services providers. Entire communities are now buzzing with activity that just a few years ago were struggling with high unemployment and closed businesses. Literally hundreds of millions of dollars are being invested in drilling numerous horizontal wells, installing thousands of miles of new pipelines to carry the gas, and the building of many new high-tech processing facilities needed to extract valuable hydrocarbon components needed by the petrochemical industry.
One possible development of utmost importance and interest in West Virginia is the future building of “cracker” plants to extract ethane, a raw component of the plastics industry. Estimated investment needed for each of these can exceed several billions of dollars. Other valuable components of the extraction process are propane, butane and other more complex hydrocarbons used as certain heating and transportation fuels.
A visit to West Virginia's northern panhandle counties reveals myriad activity in the rush to acquire leases, drill and complete wells, lay pipelines, build compressor stations and extract marketable liquids. Some of the active drilling regions' hotels and motels have been solidly booked for months and years with oil and gas employees and persons providing associated services. While working in these regions, I have personally met many workers in motels having an early morning breakfast before leaving for construction sites well before dawn to begin work in the oil and gas fields. Some hotel operators have reported that some out-of-state companies have literally booked large blocks of rooms and even the entire hotel for at least one year in advance for their employees.
Needless to say, these investments also require workers to build and operate these facilities. Some jobs are very high-tech, such as geology and engineering, but a wide spectrum of talents are required including almost every conceivable skill and capability. A surprising added upside has been the need for housing, food and related goods and services to provide oil field workers with needs while building all of these facilities. In our appraisal and leasing consulting business we have worked with and interfaced with numerous other companies including professionals in banking, wealth management, accounting and law whose services are needed by all facets of the emerging Marcellus and Shales development. Included are the important tasks of various surveying and engineering consulting services in designing well sites, pipelines, roads and related above ground facilities.
Another unexpected benefit has been substantially increased state severance and county property taxes in West Virginia and other states having such taxes. Severance taxes are calculated as a percentage of gross revenues while property taxes are based on the value of the oil and gas in the ground.
And what about the state's mineral owners? Well, it has been a dream come true for many whose properties are situated in the more active and productive Marcellus and Utica Shale areas. As early as 2008 or so many mineral owners were asked to sign leases for up front “paid-up” lease bonuses of thousands of dollars per acre, whereas just a year or two earlier the amount was in the tens or hundreds of dollars per acre.
Not only that, the per well yield for at first Marcellus wells and now for Utica wells is 10 or even 20 times or more of a conventional vertical shallow well as drilled in the region for many decades. In addition, royalties — the percentage of the total revenue generated from oil and gas sales due to the mineral owner — has been much higher, in the general range of 15 percent to even 20 percent or more, up from the standard 12.5 percent. Needless to say, West Virginia's royalty owners having property in the highly lucrative Marcellus and Utica shales regions of the northern panhandle and north central West Virginia, have benefitted substantially.
Even more recently, the new horizontal drilling and completion technology is being applied to shallower oil plays in some of the same parts of the state as the Marcellus and Utica shales. Wells drilled there cost substantially less due to lower drilling and completion costs and corresponding lower needs for steel casing, water, sand, and chemicals. Lower also are the costs of services such as logging, cementing, etc. These geologic zones are becoming similarly attractive to developers and investors and are an added bonus to West Virginia's royalty owners. These, in conjunction with the Marcellus and Utica, are called “stacked plays,” meaning up to three or more oil and gas bearing geologic zones can be drilled and developed on the same leases and drilling units.
All of this has not been without various concerns though as the influx of large drilling equipment, trucks carrying pipe, cement, sand and water have traveled some rural roads 24 hours each day during the weeks or months needed to complete the development. It literally has looked and felt like a major industrial operation in some counties. West Virginia is not alone, as our neighboring states of Pennsylvania and Ohio have experienced similar upswings in heavy truck traffic. In addition, certain watch-dog groups have also presented strong resistance to certain aspects of oil and gas development.
Marcellus and Utica royalty owners themselves have been experiencing new dilemmas and matters requiring their focused attention including decisions about lease signing details affecting bonus payments (often as much as thousands of dollars per acre), royalty percentages that they will receive upon successful drilling operations, pooling of their lease with others to allow for long horizontal drilling across multiple properties of individually owned oil and gas rights, permitting the use of their surface for building of access roads and drill pads and the placement of related meters, compressors, storage tanks, etc. Upon completion of drilling and well completion operations, those who also own the surface may soon be faced with aggressive requests to grant pipeline right-of-ways across their properties, often for the construction and installation of large diameter pipelines which may transport large volumes of shale gas under high operating pressures.
Property owners' decisions to grant any or all of the above may carry with them additional income in the manner of one time or annual fees to be paid by the various companies. Many in the active horizontal shale regions have also been approached by different companies interested in purchasing their mineral rights outright, whether they are already leased and producing royalty payments or unleased and undrilled. These offers represent a new dilemma and decision on their part: Should I sell outright and at what price? Is the offering price a reasonable fair market value or should I hold out for more? Do I need professional services such as independent minerals appraisers, attorneys, or accountants to assist me with this decision? The potential sales price for their minerals could be very substantial, depending on the magnitude of production or the potential of future production.
Regardless of the concerns (my personal experience is that the industry is working hard to prevent inconveniences and negative collateral issues), my opinion as well as many others is that the overall impact to the affected states and the United States in general is very positive. It may be our only chance to wean ourselves from the dependence on foreign oil and the sending of up to one billion dollars each day to other parts of the world to supply our transportation, heating, industrial and related energy needs.
The tremendous increase in natural gas production since around 2008 has also sent the price of natural gas falling from a high of around $14 to approximately $4 per MMBTU (approximately equivalent to 1,000 cubic feet). This price drop, along with a substantial many fold increase in daily production and long-term energy supply has allowed large industrial users to finally make plans to project new processes, facilities and employment. Another positive effect is the slowly developing use of compressed natural gas in industrial, commercial and passenger vehicles.
Having been employed in the oil and gas industry for nearly half a century, both domestically and globally, I can without doubt say that this is by far the most excitement I have witnessed and also the brightest opportunity to provide America's energy needs for decades to come.
Persons interested in learning more about Marcellus and Utica shale development and the impact on royalty owners may want to attend the upcoming annual members' meeting of the Appalachian Chapter of the National Association of Royalty Owners (NARO) to be held at The Greenbrier in White Sulphur Springs Sept. 7-9. This conference will be a great place to network and learn about many aspects of the oil and gas industry including fracking, estate planning, geology, pooling legislation and pipeline activities.
In addition, the conference banquet on Sept. 8 will feature a special portrayal by George Daugherty (the “Earl of Elkview”) of the late Mike Benedum, aka “the Great Wildcatter” of Bridgeport, West Virginia, believed to be the world's greatest explorer for oil and gas during the early 1900s. Call NARO's Tulsa, Oklahoma, office at 800-558-0557 or my office at 877-341-3244 for details and registration information.