For Pennsylvanians who live below Interstate 80 and east of the Allegheny Mountains, the Marcellus shale boom is vaguely known to us. But it is told mostly in the context of cocktail party stories about hunting camps being transformed into huge payments for gas rights. Unless you own a hunting camp these stories are heard with a level of disinterest; much like hearing about the friend of the friend who won it big at the lottery.
Truth be told, oil and gas deposits are consuming the northern and western regions of this state unlike anytime since the discovery of Spindletop moved hydrocarbon exploration in Texas to the forefront and away from Pennsylvania. That was a century ago and it is ironic that for many Pennsylvania counties, the glamor lost in that era appears to be destined to rise again.
That being said, the purpose of this is to provide divorce lawyers with a very thin view on a very deep and lucrative subject. Until 10 years ago, when a spouse offered up that her husband had a longtime interest in a hunting camp deep in the woodland, most attorneys would glaze over. The land sold for $50 an acre after the end of World War II and might otherwise command $500 today. The camp was 300 acres and 30 families owned “interests”. That was $5,000 before we considered minority and marketability discounts.
Then came Marcellus shale. More accurately shale has been around for millions of years. It was recognized to have some trapped mineral or gas deposits just about the same time as coal was discovered to be useful (circa 1830). But until hydraulic fracking (or more accurately “fracturing”) and horizontal drilling came along, this energy was trapped deep in the ground with no commercial means to extract it.
The world has now changed and with it the value of the land on which Marcellus and now Utica shale is found. Beginning roughly seven years ago established exploration companies began to appear throughout the north and western regions of the commonwealth with helicopter operated surveying equipment and miles of orange extension cord as these companies identified where they thought shale gas could be positively identified through seismic testing. They approached families and hunting clubs through “landmen” with offers of sometimes eye-popping payments merely for the right to explore for hydrocarbons. If they ultimately began to extract gas they would do so for additional royalty payments that are a minimum of 12.5% of the value of the stuff extracted. Typically these leases provide that unless the drillers began to make the land productive by actually drilling and extracting product within a specified time, the landowner can keep the payment and re-let the land to others.
History took a strange turn in this; a kind of deceptive turn, as well. Until 2000 the wellhead price of a thousand cubic feet of natural gas had been less than $2.00. But beginning in 2000 the price rose precipitously peaking at more than $10.00 per 1000 cubic feet in October, 2005. It dropped off but then returned to $10.00 in June, 2008. Throughout this entire time leases were being formed and many wells were being drilled. But after reaching a peak of $10.79 in Summer, 2008 prices fell as quickly as they rose. Gas price at the well dropped 70% in the following year and the price was less than $2.00 in May, 2012. Currently the shift in production is headed toward Southwestern Pennsylvania where the shale deposits contain “wet” gas; methane coupled with propane, butane and ethane. Theses gasses have not suffered the same decline in price as dry (methane) alone and are therefore, more profitable to extract.
There is no certainty in any market and commodity markets are among the world’s most volatile as this history shows. But folks who invest in these commodities have learned to embrace this risk knowing that Americans are addicted to hydrocarbon energy. Between Labor Day 2008 and President’s Day 2009 the average retail price of gasoline fell by 50%, creeping back to almost $5.00 in Spring, 2012. The betting is that prices will rise for all of these commodities.
Marcellus and Utica shale reserves are near the Northeast corridor where most energy is consumed. The Utica shale formations are found even deeper in the ground than their Marcellus cousins. There is plenty of water in the region to use for the fracturing process. As this is written drilling has tailed off in many areas because it is expensive and gas prices are low. But anticipating an eventual rise in price, the energy companies have turned to building pipelines and compression stations to regulate gas flow once in the pipes. Bear in mind that when we say drilling has tailed off, 3,400 wells have been drilled since 2008. Some of these wells are paying royalties to landowners of tens of thousands of dollars each month despite depressed prices.
"Hunting camps" are no longer an unimportant asset; appraisals of the land and mineral rights thereon are a critical element whenever this type of asset is in the marital estate. The system of leasing and royalties can make for a complicated analysis and requires the diligence of a family law attorney to ensure the value of the land is properly evaluated and considered at equitable distribution.
(attached is a power point presentation, please view in full screen)