Uncertainty Remains as Landowners Band Together
Pittsburgh Tribune-Review
1 September 2010
By Tim Puko
Aaron Davis has been trying for months to get in on the state's natural
gas boom and turn a profit from his 19 acres of hunting land in Clarion
County.
But with such a small plot in a county relatively ignored by scores of
drillers descending on Pennsylvania, Davis hasn't been able to draw the
kind of get-rich-quick deals that some others have. He's hoping that in
about a year he'll at least have a piece of a deal.
Davis, 20, a sheet metal worker from Donegal in Butler County, is
planning to sign what its backers call the biggest gas-land deal in
Western Pennsylvania.
Officials at MDS Energy Inc. in Kittanning are spearheading a group
with about a dozen drilling companies and maybe hundreds of land
owners, trying to leverage a package of 500,000 acres into big payouts
from a multibillion-dollar auction.
"It's still a little uncertain, but I'm willing to at least give it a
try," Davis said of the deal scheduled to go to bid next year. "It fits
really well (for me) because even though I would only have 20 acres,
I'd still be able to join this great big group and get the high rate
because I'm in this big group."
Whether MDS's agents can get the price they're suggesting -- $8,000 to
$12,000 an acre -- is far from certain.
There are other red flags, said gas industry experts who are following
or have been briefed on the deal. The company is offering a 10-year
lease and will take a 15 percent cut from a sale, and both are about
twice the industry standard, the experts said.
"This is creating a service you don't need (to lease your land)," said
Kent Moors, director of Duquesne University's Energy Policy Research
Group. "And you've got no guarantee they're going to develop your land.
You're preventing yourself from negotiating with everybody for an
18-month period. If their deal goes through, but then they never
develop your land, you're out cold."
Landowners have been banding together in groups called "compacts"
across the gas-rich Marcellus shale region. It is a mile-deep layer of
shale rock, stretching underground from New York to Tennessee. Usually
they're farm owners or neighbors trying to strike a leasing deal by
banding together with 25,000 or 35,000 acres. They want to profit from
leases and production royalties that can come from offering larger
packages of land, while protecting themselves in negotiations with big
drilling companies.
The MDS group was started by about a dozen small oil-and-gas companies
working with Knapp Acquisitions & Production LLC for a way to cash
in on their landholdings. Multinational energy companies have paid for
three multibillion-dollar deals in the state since December.
MDS controls about 50,000 acres, President Michael Snyder said. With
its partners it has about 300,000 combined, mostly in Armstrong,
Indiana, Clarion and Jefferson counties. More landowners will lead to a
higher premium for every seller, said executives at MDS and Knapp.
"We feel pretty confident and so does our marketing company that we'll
get $8,000 per year if not more," Snyder said. "We are an ambitious
young group, and we are trying to grow the project. Our entire
entourage involved in this sale feels the more acreage the better to
get a better payout for everybody."
The deal will be cancelled and landowners will be freed from the
agreement within a year if the highest bid is lower than $4,000 per
acre, MDS and Knapp said. Royal Bank of Canada is brokering the deal
and has agreed to take no commission if the sale goes through at less
than $6,000 per acre, they added.
MDS and Knapp have used that claim to advertise the deal. Their agents
told a crowd of about 50 at the MDS garage in Kittanning last month
that with RBC's support, the large quantity of land being offered and
the recent deals statewide, the sale price could rise to $12,000 or
$14,000 an acre.
That high of a price is unlikely, said Anthony Scott, senior energy
analyst at Bentek Energy LLC. The land they're offering is on the
fringe of Marcellus development, and drillers may not want to risk the
chance it will turn out to be outside the sweet spot.
"You would need a huge amount of information before I would join that
group." said James McCune, a Washington County lawyer who specializes
in gas leases. "It might be a good thing, but just saying, 'We're big,'
in and of itself, doesn't carry the day."
A Royal Bank of Canada spokesman could not be reached. Snyder declined
to name his agent at the Toronto-based bank, saying bank officials
can't comment on the deal until they finalize another they're working
on.
Without the bank confirming the details, it's hard to analyze how good
the deal will be for small parcel owners, Moors said. People interested
in the deal should be skeptical until they hear from the broker, he
added.
Landowners should always consult lawyers with gas industry expertise
before signing any lease, Moors and several other industry experts said.
Tim Puko can be reached at tpuko@tribweb.com or 412-320-7991.