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Slowdowns in oil, gas industries mean smaller checks for landowners

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Evan Sanders | Tribune-Review
Ethan Ward (left) and his friend Ryan Sperling stand along one of many fences on Ward's Donegal Township, Washington County farm on Thursday, Feb. 4, 2016. Ward is a landowner with several leases but he says his contract was fair because he negotiated as part of a group of neighboring landowners. With the royalties he received, he was able to pay of debt on his farm and make upgrades. He paid off the mortgage on the property and paid for a new fence, tractor and storage building for crops; refurbished a barn where cows give birth; put lime on the fields for better crop production; paved a road, etc.

Ethan Ward is no stranger to physical labor.

He grew up on a farm and manages his own beef farm in Washington County. The work got easier when royalties from wells tapping the shale gas beneath his land in Donegal gave him enough money to make some much-needed upgrades during the past two years.

He replaced a nearly 50-year-old tractor with a 2003 John Deere for $35,000, built a crop-storage house at a cost of $60,000, and invested $40,000 to refurbish a barn. Perhaps more importantly, he paid off the mortgage on the property for $130,000.

“I kind of looked at it as, it came from the farm and I wanted to put it back in,” Ward, 45, a district judge, said of the money he made from energy company leases on two pieces of land.

But the gas price drop that has prompted layoffs and less drilling across the Marcellus and Utica shales has led to smaller royalty checks for landowners, whose lease payments are based on the value and amount of oil or gas produced. In some parts of the state, companies have choked or shut wells to reduce production.

Drilling in Pennsylvania’s gas-rich shale fields enabled many landowners who leased property or royalty rights to energy companies to significantly improve their way of life. Now, they find themselves cutting back and taking a second look at their lease agreements and check statements to see whether they are reaping what they should.

Prone to fluctuations

The benchmark price of natural gas fell below $2 per million British thermal units last week, down from $3 in May and the $4 it fetched for most of 2014. Prices in the Marcellus usually trail that price by a dollar or more.

Prices touching 16-year lows have affected all landowners with leases, said Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners.

“When you build expectations that don’t come to fruition, then you may find yourself in some difficult positions. We’ve encouraged people to understand how things work in the industry — that prices fluctuate and production fluctuates, and you don’t have control over either one,” said Root, who leases about 400 acres of farmland in Tioga County to Royal Dutch Shell and Repsol S.A.

Some landowners expected to get rich quickly. Some with leases are waiting longer than they anticipated for drilling to begin, especially since companies dialed back activities to save money and sunk 40 percent fewer shale wells in Pennsylvania last year.

Others have land being “held by production,” meaning as long as any company activity takes place on the property, the lease remains in effect regardless of whether oil or gas is produced, Root said.

On Ward’s two farms, he has leased 156 acres to Huntley and Huntley Inc. since 2013, and 105 acres to Columbia Gas of Pennsylvania Inc. since 1985 and Range Resources Corp. since 2012.

He negotiated favorable terms for the Huntley lease as part of a group of neighbors who own a total of 15,000 acres, he said. The Monroeville-based company paid him $4,400 an acre up front and 18 percent on production. Independent of his neighbors, Ward secured a lease with Range for $4,400 an acre and 17 percent on production.

His royalty checks dropped 60 percent since production started on his property in 2014, but he appreciates the bigger picture, he said.

“As a person, I don’t like the loss of royalties. But as an American, I love it,” he said, noting the concurrent price drops in natural gas liquids and oil. “I love that I can get gas for $2 a gallon. I love that my mother can buy propane for 80 cents a gallon. It would be selfish of me to say that I was worried about my royalties all the time.”

Unmet expectations

Some landowners have sued gas companies, claiming underpayment of promised royalties. Yet experts say many signed agreements without reading the fine print and had unrealistic expectations of production.

The Pennsylvania Oil and Gas Law of 1979 guarantees that mineral owners receive at least 12.5 percent of the value of oil or gas sold, but the law doesn’t specify at what point in the production process to apply that value. Companies might deduct fees before calculating the percentage. A lease can spell it out.

Pennsylvania’s biggest shale gas producer, Oklahoma City-based Chesapeake Energy, is the target of several class action lawsuits from people saying it and related companies shortchange their royalty checks.

In December, the state Attorney General’s office sued Chesapeake and its affiliates, claiming the companies used deceptive practices to deduct post-production expenses from royalty checks, sometimes retroactively, despite landowners’ claims that their leases prohibited such subtractions.

Chesapeake has sought to settle some lawsuits but denied the Attorney General’s claims and called them “baseless.”

“Chesapeake has led the way but there are certainly other companies,” said Root, whose group has pushed for legislative changes to more clearly set minimum payments from leases.

Highs and lows

Dennis and Sherre Boyanowski of Wyoming County once collected $100,000 a month from leasing rights below their 565-acre farm to Chesapeake, Statoil, Anadarko and Mitsui. The royalties, from five wells, allowed the couple to sell their cows and get out of the milking business.

“I’m 60 years old and I have bad knees and a herniated disc in my back. My wife and daughters were having to milk and do the farm work,” Dennis Boyanowski said.

The Boyanowskis repaired their barns, machine shop and farmhouse, which had termite damage, he said. They were able to put their fourth child through college, said Sherre Boyanowski, 61.

Since the energy industry slowdown, they receive about $50,000 a month in royalties. The couple are attentive to the terms of their lease agreements and the calculation of the payments they receive.

Chesapeake last year paid them 6.25 percent in royalties last year, or about $250,000, after taking deductions to cover costs of moving the gas on pipelines. The Boyanowskis might join one of the lawsuits against Chesapeake over what they consider excessive deductions under their lease’s market enhancement clause.

“They have some creative accounting,” Sherre Boyanowski said.

Lean times

Ryan Rupert, a certified public accountant in Washington County who serves on the board of Root’s royalty owners group, works with landowners to structure lease agreements to their benefit.

These days, he advises clients not to enter into leases with energy companies because the terms won’t likely be as favorable during a business downturn. Rupert shares with family members the mineral rights to 82 acres in Finleyville leased to Range Resources.

Fort Worth-based Range, with offices in Cecil, remains the most prolific driller in Washington County but has cut back because of the low prices. Range announced Tuesday it would lay off 55 workers, including 31 locally.

“So if they’re starting to lay off people, then you know it’s pretty tough and lean in the industry right now,” Rupert said.

Tory N. Parrish is a Tribune-Review staff writer. Reach her at 412-380-5662 or [email protected].

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