Owners also may receive bonuses for signing gas
leases. Unlike a royalty payment, which depends upon
production, the lease bonus occurs whether or not any
gas is produced. It is generally based on a per-acre
price.
Shale “plays” (geographic areas targeted for
exploration) have traditionally not been developed
because they failed to produce natural gas in volumes
sufficient to make the wells economically viable. This
was primarily because of the low permeability found
in most shale. Because of the low permeability, shale
– including the Marcellus Shale – has been classified
as an “unconventional” natural gas reserve. However,
recent improvements in drilling and hydraulic
fracturing (fracing) techniques have allowed producers
to begin developing natural gas from unconventional
reserves. As a result of the improved techniques and
recent shale discoveries, scientists now predict that over
half of our nation’s natural gas supply will be produced
from unconventional reserves by 2018.
Hydraulic fracturing is the process used to free the
natural gas trapped in the shale. During this process,
fluids (primarily water) are injected into the shale
formation at high pressure to break up (fracture) the
shale, and sand is pumped into the voids to keep the
fractures open. This process facilitates the flow of
natural gas out of the formation, and improves the
production from the wells.
Directional drilling is another new technique that
has allowed producers to free the natural gas trapped
in the shale. Directional drilling is a process where
the well is drilled vertically, to a depth just above the
target formation, and then the well is turned and drilled
horizontally for some distance. This process exposes
a much larger portion of the target formation, which
allows the producer, through fracing, to increase the
production of the well.
As you might imagine, these improvements in
technology do not come cheap. The costs of horizontal
drilling and hydraulic fracturing have dramatically
increased the cost of drilling wells in West Virginia. A
conventional shallow well, drilled and completed to a
depth of 5,000 feet in West Virginia today, would cost
approximately $300,000. A typical vertical Marcellus
well, drilled and completed to a depth of 6,500 to 7,500
feet, will cost between $800,000 and $1.5 million.
A typical horizontal Marcellus well is drilled
vertically to a depth of approximately 5,800 feet and
then turned and drilled directionally for another 3,000
to 4,000 feet, making the total length of the well almost
10,000 feet. Depending upon the length of the well
and the cost to obtain the water, a typical horizontal
Marcellus well will cost between $3.5 million and $5
million.
Recent shale plays in the United States have had
a huge economic impact on the regional economies
where each is located. The Haynesville Shale is
credited with adding $10.6 billion to Louisiana’s gross
sales in 2009. The Barnett Shale is credited with
generating 111,000 new jobs in Texas. The Fayetteville
Sale has created $18 billion of new development
activities in Arkansas. In 2009, the Marcellus Shale
development added 7,600 jobs, paid $298 million in
wages and increased gross revenue by $1.2 billion
for West Virginia. Experts predict that by 2015, the
Marcellus Shale development will create over 19,000
new jobs, pay over $800 million in new wages, and
generate hundreds of millions of dollars in tax revenue
for West Virginia.
Those who own large Marcellus Shale gas interests
have the potential to become extremely wealthy, almost
overnight. As exciting as that is, those owners will
have new challenges to face, like dealing with big
income tax liabilities. Wills, trusts, and other financial
planning techniques can significantly help protect a
family’s increased income. Please stay tuned for our
next article, in the May edition of Farm Bureau News,
where we will discuss these options for the gas owners.
Robert S. Kiss is a partner in the Charleston office
of Bowles Rice LLP, a regional law firm with offices in
West Virginia, Pennsylvania, -