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Natural gas royalties open farm opportunities

| Saturday, Nov. 1, 2014, 9:00 p.m.
Keith Hodan | Trib Total Media
At the Folly Hollow Farm in South Franklin, John Grice walks past one of the five wells on his property, Thursday, Oct. 23, 2014. There are five wells on the site, which is 3 1/2 to 4 acres in size.
Keith Hodan | Trib Total Media
At the Folly Hollow Farm in South Franklin, dairy farmer John Grice looks at the condensing units on the well pad on his property, Thursday, Oct. 23, 2014. There are five wells on the site, which is 3 1/2 to 4 acres in size.
Keith Hodan | Trib Total Media
At the Folly Hollow Farm in South Franklin, dairy farmer John Grice looks out over the gas well pad on his property, Thursday, Oct. 23, 2014. There are five wells on the site, which is 3 1/2 to 4 acres in size.
Keith Hodan | Trib Total Media
At the Folly Hollow Farm in South Franklin, dairy farmer John Grice walks among the five wells on the pad on his property, Thursday, Oct. 23, 2014.

The tractors at Weatherbury Farm are a little fancier than the old ones, and a $65,000 compost and manure spreader purchased last year puts down fertilizer evenly.

The organic farm in Avella is doing pretty well these days. A big reason is thousands of dollars in monthly royalties from Range Resources Corp. to pull natural gas from beneath Weatherbury's 100 acres.

“It has allowed us to keep farming,” said Marcy Tudor, whose family has owned the Washington County farm since 1986.

The shale boom has injected cash into agriculture, which leaders consider one of Pennsylvania's key industries. Farmers who in recent years have struggled to turn a profit on produce, milk and beef discovered a source of income from leasing mineral rights or land to natural gas companies.

It's difficult to know how many farmers hold natural gas leases in the state, or what financial compensation those leases provide, because each was negotiated privately. But as the largest single landowners in most counties, farmers stand to disproportionately benefit, and there is evidence that Marcellus shale activity has boosted incomes where drilling is most prevalent, said Timothy Kelsey, a professor of agricultural economics at Penn State University.

In 2004, before the boom, rents and royalties accounted for 1.3 percent of total income in counties that had at least 90 wells, on par with counties that had no drilling, according to a study of state tax data that Kelsey co-authored last year. By 2010, royalties were 8 percent of income in counties with the most activity, compared with 1.4 percent in counties with no wells.

Fences, blacktopped driveways, barns and outbuildings have appeared on farms perched atop the resource-rich shale play. Suddenly, dairy farmers struggling to get by on unreliable income from milk production could pay off a $200,000 mortgage in cash, bankers say. And though some farmers chose to take the money and retire, many are doubling down and expanding operations.

“It's fairly widespread that the dollars are allowing farmers to invest in new buildings, new equipment. They're shifting production from what they were doing previously to something else,” Kelsey said. “Largely, what I've heard is that the dollars are allowing farmers to make more choices than they were before.”

The money John Grice receives in royalty payments each month will enable him and his brother, Bruce, to buy out their other four siblings' share of their dairy farm.

John and Bruce Grice together own two-thirds of the 400-acre Folly Hollow Farm in South Franklin in Washington County, and have made payments to their siblings for the remaining third, which they inherited when their mother died two years ago.

Washington and Greene counties account for the most shale gas in Western Pennsylvania. Susquehanna and Bradford counties lead the state.

Range has five wells on the Grices' property. When the wells began producing last year, the farm's first monthly royalty payment was $70,000.

Grice didn't pocket all the cash, though. Taxes took a third of it, Grice said, and the siblings divided what was left. His share was about $15,000.

The checks won't always be that big. Payments are tied to the royalty percentage in the contract — which can be as high as 18 percent — but fluctuate with production volume and the price of gas. Folly Hollow Farm's royalties have gone as low as $6,000 a month.

“Just like the dairy business, you don't know how much money you're going to get from the gas. It fluctuates tremendously,” Grice said. “And it's really hard to plan because you don't know how much you're going to get.”

However welcome the royalties may be, farmers cannot afford to treat the payments like found money and must budget wisely, Kelsey said.

“This is a little bit different than lottery winnings,” he said. “If you make mistakes early on in how you manage the resource, it's a big problem.”

That is, farmers should not squander money on luxury items that do nothing to improve the long-term value of their farms. Capital investments such as building barns, upgrading equipment, or expanding into other agricultural products can sustain a farm for decades when the royalty payments run thin, Kelsey said.

Besides tractors and the compost spreader, Weatherbury purchased a stone mill to grind organic grain into flour and sell it.

“The flour mill allows us to take our grain and add value to our grain ourselves,” said Nigel Tudor, Marcy's son.

That $12,000 investment has doubled the value of the grain because the organic flour sells at a premium, he said, providing a sustained income boost even when payments from the natural gas activity decline.

The farm has been fortunate to avoid environmental damage that would ruin its organic crops, Marcy Tudor said. She has had the groundwater tested several times and found no change. Regulators have documented about 240 instances in the past decade in which gas drilling has negatively affected well water supplies statewide.

As long as Range pulls gas out of the ground and pays the Tudors for the right to do so, the Tudors are pleased to put the money back into their farm.

“The gas was from the land,” she said. “So we're putting the money back into the land.”

Chris Fleisher is a Trib Total Media staff writer. Reach him at 412-320-7854 or cfleisher@tribweb.com.

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