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Barnett Shale gas lease deals get more lucrative
11:14 AM CDT on Monday, May 5, 2008
Residents in Fort Worth's historic Oakhurst neighborhood did their homework two years ago before allowing gas drilling so close to their homes.
The neighborhood association brought in an attorney to answer questions and give advice. Most residents eventually agreed to a signing bonus of about $200 per home, 20 percent royalty payments and a $25,000 grant to pay for neighborhood improvements.
Now they look back woefully, watching as other neighborhoods in Tarrant County get bonuses of $25,000 or more per acre and wishing their time hadn't come so early. Royalties are now regularly at 25 percent.
"Hindsight is always 20/20," said Libby Willis, Oakhurst Neighborhood Association president. "Unfortunately, it is what it is for us."
Gas drilling negotiations have evolved into a frenzied system of jockeying as savvy residents organize into ever-larger groups and pit energy companies against one another to drive offers to unprecedented levels.
The number of gas wells has quadrupled in Tarrant County in the last four years, reaching 1,176 as of February. Denton County had 2,339.
And drilling is expected to escalate as activity in the massive underground Barnett Shale gas field moves farther south and east, particularly into southwest Dallas County. On Thursday, the Irving City Council approved the first drilling permit in the city.
S.P. "Chip" Johnson, president and CEO of Carrizo Oil & Gas, said areas in western Dallas County and around Joe Pool Lake look promising. Everything west of an underground fault line underneath Dallas County should be ripe for gas drilling, he said.
"We're all trying to figure out exactly whether it's 2 miles in or 3 miles or 4 miles in, but it's probably somewhere right in there," Mr. Johnson said.
Meanwhile, Tarrant County has proved a sweet spot in the Barnett Shale.
"A year ago a signing bonus of $3,000 to $5,000 an acre looked like a good deal," said Fort Worth attorney Bob West, who represents many neighborhood groups in negotiations with drilling companies. "But a few months later, the standard rose to about $8,000 to $10,000 an acre."
Keith Milberger, president of Proven Concepts Inc., which represents mostly rural mineral rights owners, said that bonuses and royalties have never been this high in Texas.
"I'll guarantee you I have never seen a 25 percent royalty paid in West Texas, ever," Mr. Milberger said. "That just doesn't happen. It is now beginning to. But the Barnett Shale has helped rewrite a lot of the expectations from land and mineral owners' standpoints."
Neighborhood groups, which closely track fellow groups, have found strength in numbers. At first, neighborhood associations negotiated for dozens or a few hundred houses. Now, corridor alliances, representing thousands of acres, are the hottest trend.
One East Fort Worth neighborhood even requested what would have been a record $30,000 per acre and 30 percent royalty, although it found no takers at that price.
Beyond payouts, neighborhood coalitions are demanding other concessions, such as limits on truck traffic and charitable donations for schools, libraries and museums.
"It is not just about dollars and cents for us," said Grady Walker, president of the Colleyville Area Mineral Rights Association. "We want to partner with a company that can take us from drill site to production in a timely matter and are willing to address our other issues and concerns."
While the feverish activity is typical for any boom, experts say prices might be approaching a ceiling.
John Baen, professor of finance, real estate and law at the University of North Texas, said if the prices rise too high, "someone is going to go broke."
"I can't believe the prices the gas companies are paying now on signing bonuses," he said. "It's profitable now because the price of gas is so high, but those prices are volatile, and there's only so much the companies are willing to pay."
Despite widespread publicity about record signing bonuses, not every community can expect offers like that, said Julie Wilson, vice president of corporate development for Chesapeake Energy.
"Different areas get different leases," she said. "Why some are getting offers of $3,000 to $5,000 per acre as opposed to $20,000 to $25,000 an acre depends on various factors."
Those factors include the quality of the minerals, based on seismic studies, and competition among gas companies.
Mr. Johnson from Carrizo said his company has stopped buying in certain areas of Arlington because of the high signing bonuses. At $10,000 per acre, he said, he was willing to make deals even if he didn't have a guaranteed drill site – but not at double that price.
"Unless we're sure we have a drill site, we're just pulling out of those areas and leaving them to the other two guys [XTO and Chesapeake]," Mr. Johnson said. "We're just kind of at the limit of our economics."
In Southlake, landowners may see offers reduced or withdrawn if a proposed ordinance passes, Ms. Wilson said. It would require a distance of 1,000 feet between buildings and drill sites and high fees for permits and repairs.
"It's too restrictive, and the fees are ludicrous," Ms. Wilson said. "There's no point in paying for leases if the restrictions make it too difficult to drill."
The City Council is expected to consider final approval of the ordinance on Tuesday.
But for savvy homeowners in cities with fewer restrictions, the payoff can be sweet.
Bill Tinsley, who helped negotiate a gas drilling contract with the Villages of Fairfield Neighborhood Association in Arlington, said patience and bargaining strength benefited his neighborhood. The initial offer in November was for a $5,000-per-acre signing bonus. Residents held off and later joined with two other neighborhood groups, a move that helped them land a $22,500-per-acre signing bonus.
But that's no consolation to those on the front end of the Barnett Shale boom.
Eartha Parker of Fort Worth, who leased her minerals in April 2005, received a $250 signing bonus and a 20 percent royalty agreement.
She regrets not organizing her neighborhood to negotiate a better deal. At the time, she said, urban drilling was new, and she and her neighbors knew little about the industry.
"They made it seem like it was a rush to get stuff done," Mrs. Parker said. "If we didn't sign, we wouldn't be included.
"Seeing it now, it's a whole lot larger than what we would imagine it would be."
•Band together with your neighbors or neighborhood association to gain strength in numbers.
•Learn what other neighborhoods have done – not only in terms of signing bonuses and royalties, but also provisions such as safety, noise, truck traffic and liability issues. Look at contracts that cities have signed.
•Educate yourself on the drilling company and its plan for your neighborhood, including the drill site and plans to transport the gas to market.
•Make sure you understand all the terms of a contract before signing. Consider consulting an attorney.
•Learn what ordinances your city has in place and how that might affect your lease offer.
•Make sure any offers you receive are in writing.
To learn more, visit www.bseec.org or www.fwlna.org
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