The Times West Virginian

West Virginia

June 20, 2010

Natural gas leases becoming popular

Profits, royalties and production rates vary for those signing on

WHEELING — Upper Ohio Valley property owners signing natural gas leases with royalty payments ranging from 12 to 19 percent may be wondering how much money they will actually gain.

With so many owners signing contracts with companies like Chesapeake Appalachia, AB Resources, CNX Gas Corp., Range Resources and others, the individual landowners may also wonder how they are supposed to track the production levels for wells on their property.

James Martin, chief of the West Virginia Office of Oil and Gas, said the drilling companies are required to report their production levels to his agency. The organization, a division of the Department of Environmental Protection, is accessible on the Internet at www.dep.wv.gov/oil-and-gas.

“The figures we have on the website for each well are based on units of MCF,” he said, noting this abbreviation represents 1,000 cubic feet of gas.

The levels of production for each well vary greatly, Martin noted. For example, the website shows that one active Chesapeake gas well in Marshall County produced 40,160 units of gas, or MCF, in November. Given the theoretical $5 per unit price and the 15 percent royalty rate, the person holding the royalties to this well would take home $30,120 for the month.

Another Chesapeake well in Marshall County, however, produced only 357 units of gas in November. Given the same terms of $5 per unit and 15 percent royalties, this well would yield the royalty owner $267.75 for the month.

Royalty payments can also fluctuate based on the going rate for natural gas purchases. Natural gas for June delivery on the New York Mercantile Exchange, or NYMEX, have fluctuated from about $4 to $4.30 lately. A Chesapeake report shows that the company expects the price to reach $5.21 per unit by the end of the year.

Though the companies must report their results to the Office of Oil and Gas, Martin admits those drillers do not need to alert his organization of their activities until the end of a given year.

“If someone got a check from a company in June 2009, we are not going to know what the production actually was until 2010,” he said.

Wheeling attorney Robert Samol said most landowners receive reports from the companies outlining the production with their royalty checks. He said these items are typically detailed in the gas contracts.

“Every term in the contract can be negotiated. ... There is no such thing as a standard gas lease,” he said. “Even if you have a contract with the same company as your neighbor, your contracts may be completely different.”

The Wheeling Park Commission is set to gain 14 percent royalties on natural gas drilling at Oglebay and Wheeling parks, with the Ohio County Commission ready to gather 18 percent for action on its land.

In addition to the projected royalty payments, the Ohio County Commission got $3,600 per acre in lease revenue.

The city of Wheeling and the Wheeling Park Commission got $750 per acre for leases with its 14 percent royalties. All the Ohio County government entities signed on with Chesapeake.

The Marshall County Board of Education signed 177 acres over to Chesapeake for $2,800 per acre and 18.75 percent production royalties. Also, the Marshall County Parks and Recreation Board signed on with Chesapeake for drilling in Grand Vue Park at $2,900 per acre, with royalties of 18.75 percent.

Though no drilling has yet taken place in Ohio County, County Administrator Greg Stewart said Chesapeake officials have checked out some sites at both the Wheeling-Ohio County Airport and the former Ohio County Poor Farm.

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