Companies bidding for gas rights made $3.9B. Heavy hitters pin hopes on massive ‘Marcellus’

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By Tom Wilber
Press & Sun-Bulletin

More than $100 million — and counting — is changing hands for drilling rights to the Marcellus Shale under the Southern Tier. Landowners on the receiving end might see it as a lifetime windfall, but it’s another day at work for the multibillion-dollar energy companies looking for access to a massive natural gas reserve.

Just how much money are Southern Tier property owners sitting on?

Hard to know until wells are actually drilled in the next year or two, but consider this clue: Two companies competing for rights to drill in Broome County collectively earned $3.9 billion in profits last year.

The Marcellus, stretching under Pennsylvania, Ohio, West Virginia and upstate New York, has long been known as a major natural gas resource. However, regional companies tapping smaller reserves in the area have lacked the technology and equipment to drill horizontally through bedrock to extract gas from the Marcellus.

Years of developing and refining the process to tap a similar shale formation in Texas have yielded industry know-how to pursue the Marcellus.

Success depends on an outlay of capital, equipment and manpower that far exceeds the type of wells drilled in upstate New York in the past.

“It’s a high-tech, cutting-edge resource play,” said Brad Gill, a spokesman for the Independent Oil & Gas Association of New York. “The smaller operations that have been here for years can’t undertake it. It’s separating the smaller players from the bigger ones.”

The bigger ones include XTO Energy, of Fort Worth, Texas, and Chesapeake Energy, of Oklahoma City, Okla., competing for mineral rights in acreage between Binghamton and Hancock, north to Afton and south through the Pennsylvania border.

XTO is offering $2,411 per acre for mineral rights for a five-year lease, with 15 percent royalties on the production of the well.

Chesapeake is offering $2,500 an acre for an seven-year lease with 15 percent royalties.

The going price per acre has risen from $250 several months ago, and some landowners expect it to go higher.

The companies now courting landowners can afford it, if it’s worth it to them. Based on recent financial reports, they are savvy decision-makers.

XTO is ranked 81st on Platts Top 250 Global Energy Company Rankings, with $12.9 billion in assets, $1.9 billion in profits and a 20 percent return on invested capital. It was also listed as the seventh-largest- growing American energy company by Platts, a firm that tracks the energy industry.

Chesapeake Energy is ranked 70th of the 250 largest energy companies, with $24.4 billion in assets, $2 billion in profits and a 10.3 percent return on invested capital.

Representatives from Chesapeake did not return calls last week.

XTO representatives said they expected more deals in the near future, but could not comment on negotiations. They made no secret of their expectations in Broome County.

Vaughn O. Vennerberg, chief of staff for XTO, said engineering and geologic surveys showed promising results, and more aggressive leasing efforts were possible, depending on results from initial wells.

“From the industry as a whole, a great number of rigs could enter the region over the next five years,” he said.

Much of the pioneering work in New York is likely to happen in eastern Broome and western Delaware counties, where about 300 property owners accepted the XTO deal at a group signing last week.

Upcoming is another signing with more property owners, said Jackie Root, who is negotiating the deal on behalf of landowners. The group signings will give XTO access to about 47,000 acres.

Additionally, Root said, she expected some property owners to negotiate deals on their own.

Because the Marcellus is so vast, there is room for many companies to work it, compared to the lucrative but geographically much smaller Barnett Shale in Texas. The Barnett, extending over 20 northern Texas counties, has produced leases of $24,000 per acre.

“The Marcellus is so large, there is a lot of room for a lot of companies,” Gill said.

Lots of companies, and lots of landowners.

Five other landowner groups are organizing in eastern Broome County to negotiate deals collectively.

Competition among major energy firms will no doubt serve them well, but there are several factors yet to play out as the market develops.

How much companies are willing to invest depends largely on how well the Marcellus produces. And that remains to be seen.

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