Lynne and Bill Seligman leased to Chesapeake Energy in 2008

From an Article by Andrew Maykuth, Philadelphia Inquirer, December 21, 2017

Lynne and Bill Seligman thought they were protecting themselves in 2008 when they agreed to allow an Oklahoma company to explore for natural gas under their 91-acre Sullivan County, Pa., farm. They even paid a lawyer to help negotiate the lease.

But since Chesapeake Energy Co. drilled a well to capture gas from the rich Marcellus Shale formation deep under that property, the Seligmans, who live in Chester County, have seen their gas income shrink dramatically — and not just because production declined or gas prices fell.

“I just feel they cheated us,” said Lynne Seligman, 64, a retired nursing-home consultant. “They made us promises they didn’t fulfill, and I guess that’s what really irritates me.”

Chesapeake has slashed royalty payments to many like the Seligmans, subtracting “post-production costs” from income the landowners said they were promised under the state’s Guaranteed Minimum Royalty Act of 1979. The law provides that owners of mineral rights receive a minimum one-eighth share, or 12.5 percent, of the sale price of their oil and gas.

Many Marcellus producers began to deduct post-production costs after the Pennsylvania Supreme Court sanctioned the practice in 2010. But Chesapeake, the state’s largest producer, has been the most aggressive about billing landowners for the costs.

Last year, Chesapeake reduced the Seligmans’ $317.57 royalty share for April and May by 90 percent, mailing the Kennett Square family a paltry check for $30.96 for the two months. The deductions were attributed to the costs of gathering, compressing, and transporting the gas.

Other disillusioned landowners say Chesapeake has reduced royalty payments below zero, essentially docking them for the gas produced on their properties.

Russ Forba, whose siblings share ownership of a large family property in Wyoming County, said Chesapeake assessed them “negative revenue” for 10 months during the last two years, and estimated that the company has deducted $1.5 million from their royalty payments since its wells began producing in 2014.

The most recent check, for production in August and September, amounted to $2,400, a 96 percent reduction from the gross royalty of $55,000, Forba said.

Chesapeake is now defending itself from an onslaught of lawsuits in federal and state courts. On Dec. 15, a Bradford County judge allowed to proceed a state attorney general’s suit accusing Chesapeake and Anadarko Petroleum Corp. of cheating landowners, and the federal issues appear to be moving toward a settlement, according to court filings.

The landowners are also pressing the state legislature to rewrite the royalty law to limit deductions, affecting all gas producers. But they say they have been frustrated by the powerful gas industry, which argues that the government cannot constitutionally alter existing gas leases, and that the proposed revisions would make Pennsylvania less attractive for energy investment.

“I have no desire at all to do anything to stop the industry from investing in Pennsylvania, but I think it’s very, very unfair that they’re not paying the landowners the royalties they deserve,” said State Rep. Garth Everett (R., Lycoming), who has sponsored legislation for five years to require minimum payments to landowners of 12.5 percent.

In recent years, members of the Pennsylvania chapter of the National Association of Royalty Owners have staked out spots in the state Capitol’s corridors to buttonhole legislators. Their lobbying efforts have been unsuccessful, though the political neophytes say they’ve learned a lot about lawmaking.

“It’s good to know how state government works, or why it’s not working,” said Jacqueline Root, a Tioga County landowner who is president of the NARO chapter. She said she hopes the legislature will take up the measure in January, when it reconvenes.

Currently, the royalty legislation is attached to a House proposal to enact a severance tax on natural gas, which has also been stalled for years. The prospects of getting approval for either in the Republican legislature seem remote.

Gas-industry defenders say that not all landowners feel cheated. They portray Chesapeake Energy as the principal villain. It is accused in the lawsuits of shortchanging landowners by overpaying for post-production costs to an affiliated “midstream” company that processes and moves its gas to market.

Chesapeake denies wrongdoing. In federal court filings, the company says the Pennsylvania Attorney General’s Office, as well as landowners, “simply got its facts wrong” about its business arrangements.

The gas industry and its supporters maintain that a resolution is best left to the courts.

“The fix that people are looking for is not a legislative issue,” said State Sen. Gene Yaw (R., Lycoming). “It’s a contract issue. It’s going to be resolved through litigation. There are probably a thousand different contracts out there, and everyone of them is a little different, and to try to fix that issue legislatively is an impossibility.”

Many landowners say that their royalty payments are so small, it’s not worth hiring a lawyer, and that their leases contain arbitration clauses prohibiting them from suing the gas company or pursuing a class action.

“Litigation is an easy answer you often hear from legislators aligned with the gas-company interests, but realistically, it’s not a possibility for most landowners,” said Robert Sher, a Philadelphia businessman with real estate and gas interests in Tioga County.

Though industry officials shy away from criticizing Chesapeake publicly, they point out that other producers have paid billions in royalties to landowners since shale-gas development began more than a decade ago, catapulting Pennsylvania into the role of second-largest gas-producing state.

Range Resources has paid more than $1.6 billion in lease bonuses and royalty payments in Pennsylvania, mostly in its core area of Washington County. EQT, based in Pittsburgh, paid $77.4 million in Pennsylvania royalties last year.

Cabot Oil & Gas, the state’s second-largest producer, has paid out more than $1 billion in royalties on natural-gas production in Susquehanna County. Cabot subtracts some post-production costs, said company spokesman George Stark, but the reductions do not wipe out the royalties.

“We’ve all heard the stories about negative checks going out,” said Stark. “We don’t have that scenario.”

Some landowners get no post-production reductions because they are specifically forbidden in the leases or because of longstanding practice.

The biggest landowner, the state Department of Conservation and Natural Resources, saw less than 1 percent of the $80 million in royalties it collected last year deducted for post-production costs, and that was mostly by Chesapeake.

“Our major operators and lessees are not taking deductions,” said Arianne Proctor, a DCNR program manager who administers the state leases. “We do have some issues with Chesapeake that we are working on with them to settle out.”

DCNR’s elaborate leases governing gas extraction on 386,000 acres in state forests require producers to pay royalties based on market price but do not specifically prohibit deductions. “But that’s how our leases have always been applied, and we have a long history of operators paying us accordingly,” said Proctor.

The Marcellus Shale Coalition, the industry trade group, attributes landowners’ discontent to the depressed price of natural gas, which is lower in Pennsylvania because of the lack of pipelines to get the gas to market.

“Given these shared commodity-market pressures, it’s critical that we remain focused on working together to encourage infrastructure development and other ways to leverage our region’s abundant resources to benefit all Pennsylvanians,” coalition spokeswoman Erica Clayton Wright said in a written statement.

For many landowners, the distrust is also founded on the murky way some gas companies calculate and report royalties and deductions, as well as the multilayered ownership arrangements among companies producing the gas.

After the Seligmans signed their lease in 2008 with Chesapeake, the company later partnered with Anadarko to consolidate their Marcellus properties. Chesapeake and Anadarko then sold portions of their interests to other producers. So each month, the Seligmans get royalty payments from four different companies that control the gas produced from their land. Each company reports different market prices, and different deductions.

“It’s an incredibly complicated thing to sort out,” Lynne Seligman said. She now regrets having signed the lease.

Root, the head of the royalty owners’ group, estimated that nearly 200,000 landowners receive royalties from Pennsylvania gas properties. Some are struggling dairy farmers who had counted on the gas royalties to salvage their small holdings. But others, like the Seligmans, are comfortably well off, and the gas income was an unexpected bounty.

“The image is one of our problems,” said Root. “We’re not starving children here. Sometimes, our case gets portrayed as the greedy royalty owners. But c’mon, this is a lot of people getting ripped off by a big industry. It’s a matter of getting something you should be due.”

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See also: WV Supreme Court Favors the Gas Industry on Post-Production Costs

See also: www.Marcellus-Shale.us

Shale production retreats as oil & gas prices do not support the high cost of production

Commentary by S. Tom Bond, Retired Chemistry Professor & Resident Farmer, Lewis County, WV

There were two impressive article in Bloomberg recently. One titled “Speculators Retreat From Oil as OPEC Oversupply Crowds Out Shale” and a second called “The Shale Industry Could Be Swallowed By Its Own Debt.” Deborah Rogers Lawrence has been predicting something of this sort for years, and now it seems to be coming to pass.

The first article says “Trading in futures is falling as WTI swings in a $5 range, the narrowest in 19 months. The Organization of Petroleum Exporting Countries pumped the most oil last month since October 2012, while the U.S. government says output will start falling from this month. Investors are watching a June 30 deadline for Iran and six other nations to reach a nuclear deal that could lift oil sanctions and further swell a global supply glut.’ The higher cost of extracting oil in the U. S. seems to be catching up with the market.

It continues ” Saudi Arabia, OPEC’s biggest member, is ready to produce more oil if demand rises, Oil Minister Ali-Al Naimi said June 18. It has 1.5 million to 2 million barrels a day of spare capacity, he said.” and further, Libya may double output to 800,000 barrels a day by next month, according to Mohamed Elharari, a Tripoli-based spokesman for the state-run National Oil Corp.” Moreover, Iran wants to pump 4 million barrels a day, up from 2.8 million.

And according to a financial news letter I get, both Royal Dutch Shell and Total (France) want to return to Iran as soon as matters can be cleared up. Elsewhere the same source (out of Israel) says Total is seeking the equivalent of up to $15B in Chinese financing to fund its expansion in Russia, despite U.S. and European sanctions imposed on the country. The company expects Russia to be the most important region for its oil and gas output by 2020, when it hopes for production of around 400K bbl/day. Last year Total produced 2.2 Mbbl/day out of world production 94 Mbbl/day.

OPEC’s principal interest is to continue with its market share, while U. S. producers want to maintain oil’s current price, or put it back to where it was when they borrowed so much money. Futures traders are withdrawing, because they are not sure what the signals mean. Drillers are loosing their nerve. The number of rigs searching for oil dropped by 4 to 631 in the week ended June 19, the lowest level since August 2010, Baker Hughes Inc. data show.

The second article reports “The debt that fueled the U.S. shale boom now threatens to be its undoing. Drillers are devoting more revenue than ever to interest payments.” It gives as an example one company that is spending almost as much in interest as a company twenty times its size.

The reason this is dangerous is that oil has fallen 43% in the last year. Bloomberg says, ” Interest payments are eating up more than 10 percent of revenue for 27 of the 62 drillers in the Bloomberg Intelligence North America Independent Exploration and Production Index, up from a dozen a year ago. Drillers’ debt ballooned to $235 billion at the end of the first quarter, a 16 percent increase in the past year, even as revenue shrank.”

More from this Bloomberg article: “The question is, how long do they have that they can get away with this,” said Thomas Watters, an oil and gas credit analyst at Standard & Poor’s in New York. The companies with the lowest credit ratings “are in survival mode,” he said.

The problem for shale drillers is that they’ve consistently spent money faster than they’ve made it, even when oil was $100 a barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years. (End of quote.)

Some 45 of the 62 companies are rated “junk bond” by Standard and Poor. The $20 billion in bonds of the 62 are trading as distressed bond yielding more tha 10% above U. S. Treasury bonds. the most conservative bonds available. S&P has lowered the investment ratings of 105 exploration companies. World-wide oil and gas companies comprised one-third of the 36 corporate- debt defaults.

One bad example given in this article: Oklahoma City-based SandRidge issued $1.25 billion of second-lien debt this month at 8.75 percent interest, more than all but one of their existing bonds, records show. The company paid $24 million in fees and will add $109 million a year to interest payments, which are already eating up 29 percent of its revenue.

So far this is all about oil. What about gas? The net-short position on U.S. natural gas (that is the promises to deliver by speculators) decreased 23 percent. Nymex gas rose to $2.894 per million British thermal units. Baker Hughes gas drilling rig count in the Marcellus has fallen from 141 in 10/28/11 to 64 in 6/19/15.

Gas and oil are somewhat linked since the principal use for both at the present is to burn them for energy. Oil can be moved as liquid cheaply, and gas can not. Gas lines are the big boom at present. The Energy Information Administration says that about 4,600 miles of new interstate pipelines could be completed by 2018. That’s on top of the 6,800 miles of existing pipelines as of April, 2014. Compare the two numbers. Quite a bonanza for the executives in the agencies that move the money and the companies that build them. It is reflective of very high optimism – or is it simply “get mine now, to hell with what follows.”

Is optimism about substituting gas for coal justified? The U. S Energy Information Administration says 205.7 pounds of carbon dioxide is given off per million BTU’s produced. With natural gas it is 117.0 pounds of carbon dioxide per Million BTU’s. 57% as much.

What’s more, the conservative Deutsche Bank has just concluded that in 14 states of the US, solar power is now as inexpensive as that from coal and natural gas. And get this: by 2016– next year! — Deutsche Bank concludes that solar will be competitive with coal and natural gas in all but three or four states.

Must be a lot of clenched toes and queasy stomachs among the oil and gas gamblers.

Crude Oil Supply: Saudi Arabia & US

Oil Production is in Flux.  Gas Supply is Uncertain.  Where Are The Safe Investments?

Commentary by S. Tom Bond, Retired Chemistry Professor and Resident Farmer, Lewis County, WV

This graph is supposed to show the American ascendancy in oil production. The result is claimed over and over. Concealed are three important facts:

(1) The gap between the extraction cost in Saudi Arabia’s conventional oil and the US fracked oil is approximately $60/bbl. Extracting oil from shale costs $60 to $100 a barrel, compared with $25 a barrel on average for conventional supplies from the Middle East, according to the International Energy Agency [IEA]. Extreme energy extraction is just that – extremely expensive.

(2) U. S. shale drillers have to deal with high decline of production where redrilling the shales requires constant vast input of capital to keep up high production. They are on the “drilling teadmill.” Quarter by quarter they have to struggle to keep up appearances of profitability to attract capital.

(3) They are already beginning to have to deal with the fact there are “sweet spots” where production is good, but much of the drilling range is not so rewarding. They find the sweet spots in early drilling by spacing wells widely and drilling the second round adjacent to the best of the first round. Get out of the sweet spots and some wells are not even breakeven, although in the targeted shale.

You are sure to know the price of oil is down. As of this writing, $67.39 a barrel.  According to the Washington Post, down 40% since mid mid-June (then $115). Oil is a commodity, so it responds to supply and demand. It is notoriously unstable, a gambler’s dream. Storage capacity is small compared to the volume being used, so production has to go somewhere, and the price is reduced to get rid of it.

The fracking industry tells us price is down because of the increasing production of American oil. Too quick and self-serving, it is best to look for more substantial reasons, because we have not reached self sufficiency, and can’t for more than a short burst. Reserve calculations don’t factor in decline in return due to come, because of moving out of the sweet spots.

The decline in the economy world-wide is part of it – less demand. You’ve heard of the disappointment of Black Friday sales – they didn’t get as much as expected. Russia is nearing a recession. Much of Europe has trouble. Japan doesn’t seem able to pull out of recession, and China is slowing. It’s bound to have an effect, along with recent increased production by Libya, Nigeria, South Sudan, Iraq and Russia. Some think the previous high price has induced an increased efficiency of oil use, too.

All cite the decision by Saudi Arabia not to decrease production as a major part of falling prices. World consumption of oil is 85.5 million barrels per day, with Saudi Arabia contributing to it 10. 2 million a day. That’s about one-eighth world consumption. (It could pump 12.5 million, so it is already holding in, while most oil producing countries need money and pump all they can.) As a member of the Organization of Petroleum Exporting Countries (OPEC), the Saudi’s have a controlling interest. U. S. – Saudi relations is much too complicated to get into here, but basically the U. S. is pledged to protect the Saudi family’s hold on Arabia, in return for her control of the oil price for U. S. interests (Saudi Arabia also provides 40% of the U. S. arms production industry income. The U. S. is the largest arms producer in the world, $28B worth.)

The Saudi’s want the U. S. to wipe out Iran, their worst enemy, but Iran produces too much oil, 4.14% of the world supply. Since the U. S. is not complying, the shoe is now on the other foot. It may be that the real reason Saudi Arabia won’t turn down the production is because it is in their national interest. Here’s why.

Two things can be expected to happen if oil stays low:

(1) The other oil producing states will feel the hurt, because they need the money. If this continues for a year or more, they will be compelled to join OPEC, giving the Saudi’s much more power to raise of lower oil prices (which also effects natural gas, too).

(2) Low prices puts the fracking producers in the U. S. and elsewhere in trouble. Many of fracking companies are marginal now, because of the “fracking treadmill,” the necessity having to drill many new wells constantly to maintain production, and because of the high cost of inputs.. They have to seek new capital quarterly. If profits won’t allow repayment, the big banks will surely cut off funds and leave them swinging in the breeze.

These topics will be interesting for a long time to come. Anybody want to invest in shale?