Issues and opportunities for shale gas production complex

From the left, Doug Southgate, Allen Klaiber, Mike Lloyd and Matt Roberts discuss Ohio's shale opportunities at the Farm Science Review.

Farmers and landowners face several complex issues and opportunities relative to mineral rights as Ohio develops natural gas production from Marcellus and Utica shale, advised experts from the Ohio State University speaking at Farm Science Review 2011.

“The best advice is ‘caveat emptor,’ buyer beware,” said Mike Lloyd, OSU Extension educator, and a panelist discussing the impact of natural gas production from shale on Ohio’s rural communities and economies. He joined professors Doug Southgate and Allen Klaiber of the Department of Agricultural, Environmental and Development Economics on the Review’s opening day panel.

Lloyd said some of the biggest concerns for potential leaseholders include the complexity of the lease agreements themselves, such as are they OK with a well being drilled on their property, or would they rather sign a non-drilling lease that would require the actual drilling to take place on neighboring land. While most landowners are interested in what their upfront payments and royalties will be, they also need to consider these details before signing a lease.

“The oil and gas business in Ohio is exploding,” Lloyd said, acknowledging the pun. “About two years ago, people started coming around asking about buying or leasing mineral rights. The offers were $10, $20 or $50 an acre, and some people jumped at that. But we asked people to step back and rethink things. We have done 30 programs with about 3,000 attending to educate them on all the things to consider.”

Those who did not jump quickly likely made a good choice. In fact, some landowners have started forming groups, combining their land into larger chunks, to make them more attractive to those purchasing mineral rights. This gives them more bargaining potential, Lloyd said. Once such group recently signed to lease their mineral rights for $4,950 per acre with a 19% net royalty.

Beyond the initial signing payments, the long-term impacts of natural gas production on local communities was discussed. A study by Kleinhenz and Associates, a Cleveland-based research firm, has suggested Ohio’s oil and natural-gas production could lead to more than 200,000 new jobs and $14 billion worth of investments in the next four years.

Klaiber, who recently joined the faculty, observed the natural gas industry at length during his tenure at Penn State University prior to his arrival at Ohio State. The industry leads to a variety of jobs, he said.

“Gas production definitely creates jobs,” he said during the panel discussion, “but not necessarily in production itself.” He said service industries, including food service and hospitality, typically see increased demand, at least temporarily, as out-of-state workers arrive to service new wells.

Because gas production is a very intense occupation with long hours, Klaiber said local workers are not always interested in production jobs if they are not already familiar with the working conditions and lifestyle.

There is also the potential for new jobs in the chemical industry, because water used in the shale fracking process that releases natural gas and oil often resurfaces and must be collected and treated, Klaiber said. Local municipalities often cannot do the water treatment, so alternative options are needed.

A typical shale gas well impacts about 8 acres of land, with that industrial activity lasting about eight to 12 months before the land is mostly restored to its original use, Klaiber said. The question, he acknowledged, is what happens to the communities after the gas wells are established, and the production crews move on to newer wells in other communities.

“We want to avoid the ‘boom and bust’ cycle, if possible,” he said.

Southgate said while the initial “play” in Ohio’s shale gas resources was exploitation of the Marcellus shale, the Utica shale is potentially much bigger, involving a larger portion of Ohio’s counties, partly because of developments in gas exploration.

He said the most “jaw-dropping” developments in technology in the industry have come on the exploration front, with equipment that can detect vibrations roughly equivalent to “dropping a can of soda 10,000 feet below the ground.”

The panelists agreed that local communities have significant questions to consider regarding the effects of natural gas production on infrastructure and environmental issues.

“One of the biggest concerns is over water quality,” Klaiber said. “Companies are now testing water quality before production to establish a baseline for water quality before production begins.”

He noted that local groundwater supplies are typically drawn from 200-300 feet below ground, while shale gas wells are often a mile or more deep. Casings designed to protect the water supply run between 500 and 1,000 feet down the well.

Lloyd said the bottom line for potential leaseholders is to learn all they can, ask questions, and consider all the options.

“Picking the right time to lease ground is like trying to pick the top of the corn market,” he said. He noted that Extension professionals are available to answer questions and provide resources, but they will not make specific recommendations about lease rates or royalties.

Farm Science Review is sponsored by the College of Food, Agricultural, and Environmental Sciences, OSU Extension and the Ohio Agricultural Research and Development Center. For more information, visit fsr.osu.edu.

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