By Brian Bowling
TRIBUNE-REVIEW
Wednesday, January 21, 2009


Ebensburg's first foray into leasing its Marcellus Shale natural gas rights apparently ended in a broken promise, but manager Dan Penatzer said that hasn't soured the Cambria County borough on the idea.

"We don't see it as anything lost," he said.

GFI Oil & Gas of Williamsport missed its 90-day deadline for paying the $2.6 million it bid to develop Ebensburg's 1,300 acres. Given the economy, no one is offering to pick up the lease, but that doesn't worry Penatzer.

"(The market) is going to return, and the gas isn't going anywhere," he said.

A GFI spokesman couldn't be reached for comment.

The Marcellus Shale could offer Pennsylvania taxpayers a boon not seen from other oil, gas and coal operations because much of the developable property is public land.

Although many local governments and school districts have conventional gas wells on their properties, they typically generate only a few thousand dollars a year in royalties. The higher-volume Marcellus Shale wells are expected to produce hundred of thousands of dollars a year in addition to millions in up-front lease payments. That could pay for capital improvements or shore up pension funds that otherwise would soak up tax dollars.

Geologists knew about the Marcellus Shale for 75 years, but exploration companies didn't think extracting mile-deep gas was worthwhile until drilling technologies and a run-up in natural gas prices changed calculations about two years ago. The result was a boom in leases that started at $150 to $200 per acre and peaked at more than $2,000 an acre last year.

Most of the activity has been with private landowners, but companies such as GFI and Zoom Resources of North Versailles see potential in leasing public land.

Zoom Resources wants Monroeville and several other communities to hire it as a Marcellus Shale broker/consultant.

David Ball said his 2-month-old company doesn't have oil and gas experience, but its principals put together several real estate deals.

"We see an opportunity, particularly for municipalities, to package their interests," he said. "There's going to be a competition, if you look at it that way, for drilling."

Penatzer said GFI was a relatively new company when Ebensburg negotiated its deal, but that didn't worry officials. "There's all kind of people entering that market. Somebody is going to be their first customer," he said.

Jim Brown, one of three Monroeville council members looking into Zoom Resources' proposal, said the municipality will approach it with an open mind but won't rush into a decision.

"This is obviously something that needs to be researched and thoroughly discussed," he said.

In addition to $2.6 million upfront, GFI offered Ebensburg a 15 percent royalty on gas produced. The other bidder, Running Foxes Petroleum of Centennial, Colo., offered $1.9 million and a 17 percent royalty.
Running Foxes spokesman Dennis Mann said the borough already would have $1.9 million and some royalty checks if it had accepted his company's proposal. From the start, the Pennsylvania market has been different from other states, Mann said.

"This has been like the Wild West up here," he said.

Except for Texas and Oklahoma, oil and gas leases typically run $10 to $15 an acre. They started at $150 to $200 an acre in Pennsylvania and quickly soared past $1,000 an acre. At the same time, landowners attached special conditions to leases, such as no drilling during hunting season.

"The companies soon got weary of the whole thing," Mann said. "There were too many demands on the landowners' side. It ended up where a lot of these people didn't get paid."

Matt Pitzarella, spokesman for Fort Worth-based Range Resources, sees things differently. The recession and drop in natural gas prices from about $13 per thousand cubic feet this summer to $6 per thousand cubic feet has slowed leasing.

The Marcellus Shale activity has shifted from leasing to drilling, he said. After the initial rush to secure drilling sites, Range Resources and its competitors need to produce gas so they'd have cash to buy more leases.

"The investors want to see you get a return on those investments after a while," Pitzarella said.

Although much of the buzz has been about the upfront lease payments, Pitzarella said municipalities and other landowners should pay more attention to royalties. Depending on production and natural gas prices, each well could generate $2 million in royalties over an average 50-year life, he said.

Because a well's production peaks at the start and then tapers off, "the heavy percentage of those royalties are in the first few years," Pitzarella said.

The boom in Marcellus Shale leases has Gov. Ed Rendell and some legislators considering a natural gas severance tax. Pitzarella said such a tax would slow the Marcellus Shale industry. State and local governments stand to gain more in lease payments and royalties than they would make from a tax, he said.

House Environmental Resources and Energy Chairman Bud George, D-Clearfield County, is a proponent of a severance tax. He authored a column arguing that enacting a tax is unlikely to drive exploration companies to other states because those states have such taxes.