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Uncertainty remains as landowners band together

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By Tim Puko
Wednesday, Sept. 1, 2010
 

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.

 

 
 


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