Monday, April 4, 2011

Triple Play for Many Pennsylvania Marcellus Landowners

In his energy speech last month President Barack Obama finally gave a nod to natural gas. He said, "Recent innovations have given us the opportunity to tap large reserves—perhaps a century's worth—in the shale under our feet. The potential here is enormous." 

It’s been less than four years since the first successful Pennsylvania shale well using the new technologies (Range Resources Gulla No. 9 well) went online. But the innovations (optimizing fracking and horizontal drilling) have already made Pennsylvania, with its massive Marcellus shale play, a leader in the shale gas revolution that is changing the energy equation worldwide. We are riding a fast train – no one seems entirely sure where we will end up – but our trip is certainly an energy game changer. (See, Could Shale Gas Power the World, Time Magazine, March 31, 2011).
  
The Marcellus has also been a game changer for landowners in Northern and Western Pennsylvania. While we are only in the early innings of the “shale gale,” tremendous wealth has already been produced, and our lives and the environment in which we live have been permanently altered. 

I spent an interesting two days last week with Pennsylvania royalty owners at the convention of the Pennsylvania chapter of the National Association of Royalty Owners. PA NARO provides information and advocacy for landowners with gas royalty interests in Pennsylvania. 

Of particular note were presentations by Dr. Terry Engelder, the Penn State University geologist whose 2008 calculation of the extraordinary amount of natural gas that could be extracted from the Marcellus shale stimulated exploration and production (E&P) company and Wall Street interest; Scott Perry, Director of Oil and Gas Management for the PA Department of Environmental Protection, who reassured the audience of the Departments attention to environmental concerns; attorney Dale Tice and Earle Robbins, both of whom are certified mineral managers, who laid out the basics of mineral management for landowners; and State Senator Gene Yaw, who provided a legislative update.  

I came away with an increased realization that our Pennsylvania shale gas play is long term and involves much more than the current development of the Marcellus.  The Marcellus is just one of a number of layers of shale that are stacked on top of each other.  Other layers could prove to be incredible sources of natural gas. 

Exploration of the Utica, which lies beneath the Marcellus, has already begun. As noted in a recent article on geology.com, “what we are seeing today from the Marcellus is only the first step in a sequence of natural gas plays. The second step is starting in the Utica Shale.”

“[The Utica] also has the potential to become an enormous natural gas resource. The Utica Shale is thicker than the Marcellus, it is more geographically extensive and it has already proven its ability to support commercial production.

It is impossible to say at this time how large the Utica Shale resource might be because it has not been thoroughly evaluated and little public information is available about its organic content, the thickness of organic-rich intervals and how it will respond to horizontal drilling and hydraulic fracturing. However, the results of early testing indicate that the Utica Shale will be a very significant resource.”

Once the well pads, pipelines, and other infrastructure are in place, companies will be able to take advantage of what Range Resources CEO John Pinkerton calls a “triple play' from their drilling in the Marcellus region. This refers to the potential for Range and other E&P companies to be able to produce natural gas and natural gas liquids not only from the Marcellus Shale but also from the Upper Devonian Shale above the Marcellus and the Utica Shale about 1,000 to 2,000 feet below the Marcellus.

Once companies like Range have incurred the cost for acreage, roads, surface location, water management, gas lines and compression in relation to the Marcellus, the incremental cost to develop the Upper Devonian and Utica will be reduced by approximately one-third according to Mr. Pinkerton.  Range believes that about 60 percent of 700,000 net acres that it plans to develop for the Marcellus has potential for the Upper Devonian and Utica shales.

My take away is that we should expect the extraction of our shale gas resources in Pennsylvania to continue for decades.  Focusing solely on the Marcellus might be short-sighted. In analyzing the value of your subsurface gas and mineral rights, whether for purposes of sale or estate planning, landowners should recognize the potential that exists for development of rock layers other than the Marcellus. Your royalty interests may eventually be worth a lot more than what the Marcellus wells on your property will produce.  

Landowners need to plan for the long term and the royalties your family may receive over many decades from all the layers of gas and oil beneath your land.  

Here are a few links to more information:

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