By SUSAN EVANS
The bubble has burst – at least temporarily – for those hoping to prosper from gas wells expected to be drilled in the Marcellus Shale formation deep underground.
A struggling national economy is dampening drillers’ zeal and in some cases their ability to pay for leases. In turn, most drillers have pulled their agents out of Cambria and Somerset counties, some even out of Pennsylvania entirely.
Others say that when gas prices decline, so does the enthusiasm for drilling as deeply as required by the Marcellus Shale.
Still others warn that even if the economy improves, state regulations are too restrictive for them to make a profit, especially if oil and gas prices continue to drop.
It’s a starkly different picture than the one painted by gas seekers when they flooded the region several months ago, looking for land to lease and extolling the potential of the Marcellus Shale formation that new technology now allows to be mined.
“It was a madhouse in here just weeks ago,” said Andrea Sims, Cambria County’s recorder of deeds. “Now, we hardly have anyone coming in for that reason.”
A Warrendale, Allegheny County, company recently dashed the hopes of 1,000 residents with whom it has lease agreements, sending out letters affecting 40,000 acres.
“Because recent economic conditions in the nation’s financial markets have reduced our ability to obtain extensions of credit, we are at this time not in a position to make payment to you,” the letter said.
Leaseholders are given the option of voiding their leases with the company or extending the payment terms.
In other cases, companies are putting acreage out to bid, with no offers coming in.
“It got into a crazy frenzy,” gas-leasing consultant Jackie Root said. “The land agents have been saying the bubble would break. Drilling companies backed off the crazy prices they were paying for leases.
“Now, if it comes back, maybe the leases will be more targeted.
“We have to be more concentrated. As drilling companies get more data, some land will be more valuable.
“It just got out of hand,” Root said. “In some areas, companies were coming back to landowners and offering $500 to $1,000 an acre. I tell landowners to get a good lease, at an amount you can live with, and don’t look back.”
Underground opportunity
Marcellus Shale wasn’t even heard of until recently, experts said.
While the oil and gas drilling industry always has been substantial in Pennsylvania, up until 2005 there was very little interest in leasing properties for Marcellus Shale gas production.
The shale formation was so deep, and so difficult to access, that it was not considered to be an important gas resource. But when horizontal drilling was determined to be a technology for tapping it, drillers’ interest was spurred.
Then, when the potential gas productivity of the Marcellus was first suspected in 2006, a small number of speculators began leasing land. They often paid risky signing bonuses that were sometimes as high as $100 per acre.
In late 2007, signing bonuses of a few hundred dollars per acre were common.
As the technology was demonstrated, lease prices began to rise rapidly.
By early this year, several wells with strong production rates were drilled and numerous investors began leasing. The signing bonuses rose from a few hundred dollars per acre up to more than $2,000 per acre for the most desirable properties.
But as the national economy soured, gas prices dropped and credit crunched, the Marcellus became questionable again, said Helen Humphries Short, a spokeswoman for the state Department of Environmental Protection.
“All you have to do is look at the price for natural gas compared to last year,” she said.
“When prices were high, a lot of wells were drilled, and those are productive wells. And we’re still receiving a high number of permit applications for more wells.
“But we do keep hearing that there are a number of financial pressures that could change that.
“When the economy is strengthened, it could all change.”
Regulations at issue?
Local governments, especially those awaiting payments for leases already negotiated, are closely watching the outlook.
“I’m hearing two varying opinions on the Marcellus Shale drilling,” Ebensburg Manager Dan Penatzer said.
“One side is saying that because of the national credit crunch, it’s all come to a screeching halt. The other side says that there are so few good investments out there, that energy will continue to attract investors.”
Penatzer has a special reason to hope the bubble doesn’t burst.
In August, Borough Council entered into a lease agreement with GFI Oil & Gas of Lycoming County, committing 1,300 acres to a five-year lease and 15 percent royalty.
The total price is $2.6 million, but that’s not due until the last week in December.
David Scopta, the GFI representative in Ebensburg, minimized the potential downturn in Marcellus Shale drilling, saying the Ebensburg land would go on the auction block and be sold to the highest bidder.
“We haven’t held back on any payments, and Ebensburg has been paid,” he said.
Penatzer laughed at that.
“The contract calls for just one payment, and I’m pretty sure I’d remember if that size check came in,” he said.
Scopta provided a phone number to his home office to substantiate that payment had been made, but calls to the number reached a fax machine.
The looming non-economic issue involves state regulations of drilling companies.
“The big issue in New York state is that regulations, not the economy, have virtually shut things down,” Root said.
An Akron, Ohio-based company, Exco-North Coast Energy Inc., has moved its drilling equipment to West Virginia and delayed plans to transfer its workers to Pennsylvania.
One of the issues is approval needed for water use, such as the recent request from a drilling company to use 20 million gallons of water per day from the Susquehanna River Basin.
Drillers are fighting the need to obtain water-usage approval.
