The bottom has dropped out of sale and leasing offers to property owners sitting above huge deposits of natural gas in Western Pennsylvania, industry officials and experts say.
The lucrative offers have become more scarce as the credit crunch, weak economy, falling energy prices and concerns over environmental regulations have teamed to deflate some of the interest by companies that have flocked here to drill.
"Lease 'bonus' rates -- what a property owner is paid up front for an oil or gas drilling lease -- have clearly softened over the last three or four months," said Robert Belesky, vice president of business development at CNX Gas Corp., a Robinson-based gas exploration, development and production company.
"Last summer, we saw bonuses of $3,000 per acre and higher in Southwest Pennsylvania. Today, the market is less than $1,000 per acre," he said.
Through September, CNX had acquired leases for about 24,000 acres in the Pittsburgh area, mostly in Washington and Greene counties. That brought its total holdings in the booming Marcellus Shale region -- an underground natural gas formation that underlays two-thirds of the state -- to about 185,000 acres.
Some estimates have placed recoverable natural gas from the entire Marcellus region in portions of four states at 400 trillion cubic feet, enough gas to handle all of America's natural gas needs for more than 14 years.
Deals to buy or lease mineral rights haven't disappeared altogether. CNX and other natural gas developers and drillers are still looking for more leasing rights, even if offers aren't as high as they once were, Belskey said.
"Upfront leasing rates have declined from the thousands of dollars to the hundreds, mostly because of the credit crisis and the decline in energy prices," agreed Matt Pitzarella, a spokesman for Range Resources Corp. of Fort Worth, Texas.
Natural gas prices have fallen by half since reaching a high in the spring of more than $12 per 1,000 cubic feet, with natural gas for January delivery now priced at $6.45 per mcf.
Range Resources has been one of the most active players in Marcellus region in Western Pennsylvania, with more than 900,000 acres leased, primarily in Washington County, since it first entered the market in 2004. It opened a regional office in Canonsburg early this year.
With cash from existing wells down considerably, some companies are having difficulty finding revenues to secure new leases and even pay promised payments on existing leases, Pitzarella said.
"Natural gas prices are down around 50 percent in the last several months, so your amount of cash flow is even less. So you have to be more selective, and that is what we are doing," he said.
Scott York, broker and owner of York Realty in South Strabane, Washington County, said "Because of the current credit crunch, some companies have reigned back or curtailed their activities ... exploring is not paying off as much."
Until the recent pullbacks, York had seen several instances of energy companies purchasing land for premium prices in Washington County.
"In Prosperity, a 74-acre farm, listed for sale at $235,000, was purchased by CNX Gas for $300,000," York said. That was $4,054 an acre and 27.6 percent over the listing price.
In Amwell, a 31-acre site, listed for $135,000, was purchased by T&F Exploration Co. for about $170,000, or $5,500 an acre, he said. That was 25.9 percent above the listing price.
The recent lull in offers doesn't mean activity has ceased altogether, York said.
Recently, he listed a 64-acre farm in south Greene County for sale, and it has attracted 40 interested buyers. He expects the minimum sales price to be $95,000, with free gas to the owner.
Officials in Washington, Greene, Fayette and Westmoreland counties said they can't yet estimate how much overall property values have increased, or may increase, because of gas drilling activities within their borders.
A countywide reassessment of properties would be needed for an accurate reading, said John Frazier, Greene County chief assessor. "However, after talking with people, I believe that land values have increased because of the drilling."
If conditions were the same today, Exco-North Coast Energy Inc., based in Akron, Ohio, would not have spent $2 million to purchase 480 acres ($4,166 an acre) in Fairfield, Westmoreland County, said Wendy Straatman, the company's president.
According to county recorder of deeds, the assessed value of the property today is only $202,960.
"We would not pay that much today for the same property," Straatman said.
The company hasn't started any wells on the site, but there are no plans at this time to re-sell the property, Straatman said.
Farm land often has been a target for gas exploration companies. The general trend by oil and gas exploration companies is to lease the land, not buy, said Mark O'Neill, spokesman for the Pennsylvania Farm Bureau.
Among those benefiting are Bill Doney and his wife, Donna, two retired school teachers who own two farms in South Huntingdon, Westmoreland County.
About four years ago, he signed a drilling lease, but since then, the amount he recieves for drilling rights has more than doubled, Doney said.
"Recently, I signed with Atlas Energy Resources," he said. He now receives royalties on production of "12.5 percent per cubic foot of gas from the wells." There are nine shallow wells and three deeper wells drilled on his property.
Bill Jackson of Redstone, Fayette County, said he agreed several years ago to an 8 percent royalty deal for drilling on 800 acres of his Jackson Farm property. Since then, he signed a new drilling agreement with Atlas Energy that will pay 12.5 percent royalties from gas produced on his land. Several shallow wells are producing on his land and this spring, he expects three deeper wells to be started.
Some municipalities and governmental bodies have sought to cash in on the state's gas drilling boom, but with mixed results.
In October, the Allegheny County Airport Authority was surprised when it received no bids from companies vying to drill for natural gas on airport property, even though 10 companies had expressed interest.
The authority's Sept. 9 request for proposals sought $4.5 million in minimum royalties during the first 18 months of the lease and ongoing royalties of 25 percent on gas produced on the 9,300 acres under the airport in Findlay.
CNX Gas gave the county a letter citing changing market conditions as a reason for not making a bid.
Ebensburg, in Cambria County, had better luck and could be the recipient of $2.6 million from GFI Oil & Gas, a Williamsport company that has obtained the rights to drill on 1,300 acres of borough property for gas, said Daniel Penatzer, borough manager.
GFI has until Dec. 29, 2008, to provide the up-front payment of $2.62 million before drilling can begin, he said.
The five-year lease calls for 15 percent royalty payments on gas extracted from the wells, Penatzer said.
O'Neill agrees with York that the national economy has either slowed down or stopped companies from initiating new leases. Expectations are that once the economy picks up, so will the leasing activity.
According to the latest figures from the state Department of Environmental Protection, it has issued 518 drilling permits for gas wells in the state in 2008, and there have been 277 wells actually drilled.
That includes 317 permits issued and 194 wells drilled in the Pittsburgh region.
Washington County has the most activity, with 137 permits and 98 wells drilled, followed by Fayette County with 68 permits and 34 wells drilled; Green County, with 47 permits and 22 wells, and Westmoreland County with 41 permits and 17 wells.
