Thursday, September 26, 2013

FRACKING FINANCES by Mike Bernhard

Both pro-drilling and pro-environment camps should appreciate the statistical analysis, done by systems manager Jerry Acton and geologist Brian Brock, which projects potential production of Marcellus Shale horizontal wells in New York.  By correlating recent production of Pennsylvania shale wells with the thickness and depth of the Marcellus Shale in both states, they have supplied credible production projections that can replace the industry’s hype  that every town in the Marcellus fairway can frack its way past its financial problems, personal and communal.  An easy-to-understand map is at
http://bit.ly/15IXnTK
OR
http://maps.fractracker.org/latest/?appid=a134a591b16141b387552dacbef52d5f.

Essentially, where the shale is thickest, the wells produce the best:  the volume of rock fracked around horizontal wellbore varies with the square of the diameter of the frack, which is limited by the thickness of the shale.  Thus, a 300’-thick layer of Marcellus shale can produce nine times as much gas as a 100’- thick layer.  In addition, pressure increases directly with depth: a shale layer 7,000’ deep can produce twice as much as a 3,500’-deep layer.   The combined effect is that towns in Chenango would see, on average, about 5% of the production of towns in the “sweetspot” of Pennsylvania (Susquehanna and Bradford counties).
***
Drilling advocates claim that any level of gas production is “free money” to leased landowners who receive royalties and to the community-at-large, whose local governments, schools and fire departments receive wellhead tax revenues.
In fact, leased property-owners do face costs that reduce their bottom line.  Leases constrain the surface use of the leased property. Homeowner’s Insurance doesn’t cover industrial operations. Banks won’t extend mortgages to buyers of leased properties.  These costs, reducing the market value of leased – and adjacent -properties are fixed.  They are independent of the level of royalty income, and they are borne before compensatory royalty income becomes available. 

This reduces market value assessments on some parcels – notably residences on small properties with water wells -   shifts the tax burden to others parcels, if town, school and fire department are to make their budgets.  Like royalties, wellhead tax revenues depend on production levels and gas prices, while costs faced by communities (road damage, emergency services, displacement of renters, a rise in the cost of labor, etc.) are independent of production/revenue levels, depending generally on the number of wells. Wellhead tax revenues will also lag behind these community costs. And these revenues, being based on a three-year sliding scale on historically-low wellhead profits, will under-reflect gas prices at the time of “sale”.
In Pennsylvania, royalties, based on wellhead prices, are being reduced by drillers subtracting unspecified “post-production” costs from the sale price. And, unlike any other state, New York State accepts production reports from companies without any attempt to verify production figures.
To evaluate these costs to individuals and to the whole community, it is important to determine whether actual gas production, as a determinant of the levels of royalties and of ad valorum tax revenues, will be high enough to compensate for those costs. 
***
Petroleum geologists use the concept of Initial Production (IP), the production rate six months after fracking,  to evaluate gas well productivity.  Since all Marcellus wells share a common production “decline curve”, the lifetime productivity of the well (of which 80% occurs in the first two years) can be predicted by its IP.  In Pennsylvania,
·         Very High Producing wells, with IPs between 7 and 24 million cubic feet per day (MmCF/D) are clustered where the Marcellus Shale is between 250’ and 300’ thick.
·         High Producing wells, with IPs between 4 and 7 million cubic feet per day (MmCF/D) are generally found in areas between 200’ and 300’ thick
·         Low-producing wells (IPs between 2 and 4 MmCF/day) are clustered in areas where the shale is 150’ -250’ thick.  
·         Very Low-Producing wells (IPs between 0 and 2 MmCF/day) are clustered where the shale is 150’ to 200’

The geological fact is that 85% of Chenango County overlays a Marcellus formation that is less than 150’ thick and less than 4,000’ deep.  Drilling into similar geological conditions in Potter and McKean counties in Pennsylvania has yielded only one well – out of 33 – that is High-Producing. This production data, overlaid on the depth maps of the Marcellus formation, suggests that wells drilled in Chenango County are likely to be low/very low producers.  
If the production of gas wells in the town is low, and the price of gas is low, then the returns (royalties to landowners and the gas-tax revenues to the town government, school and fire department) will also be low.  However, the costs to leased landowners and to those community institutions will be much the same whether the wells are high producers, or deep, dry holes.  
*****
Since profitability, rather than production levels, is gascorp’s bottom-line concern, they will only be drilling here if they can off-load production costs onto the public: reducing landowner royalties and ad valorum taxes by deducting undocumented “downstream” expenses, spreading gaswell wastes on local roads, paving over dirt roads that towns will be stuck maintaining, making liberal use of taxpayer-funded first-responder services, and doing unmonitored wee-hours waste disposal.
But every well drilled, gusher or dud, is guaranteed income for local providers of the large quantities of gravel that are used building pads and access roads.  Each new well, requiring as it does about 500 water-truck trips, and roughly 250 toxic-waste disposal trips, guarantees income to trucking companies. As does the hauling of drill cuttings to the Pharsalia landfill and the transloading of silica fracking sand at nearby railway depots.  The largely-imported workforce will drive up rents levels, benefiting some landlords even as displaced low-income renters become a burden on the public purse.
While landowners and taxpayers will, in general, suffer financially from low-production wells, such businesses will profit from gas drilling regardless of whether well productivity is high or low. These businesses have a financial interest in “holding the door open” for the drillers, even though low well productivity, at low prices, will be to the detriment of most lessors, property-owners and our community institutions.
***
“In planning the recovery of our local economy, we should rely not on subterranean fracking fantasies, but on making the most of sustainable economies on the surface.”  B.Brock





HOW GAS DRILLING AND HYDROFRACKING AFFECT PROPERTY VALUES
Homeowner’s insurance policies do not cover liabilities from industrial operations, no matter how willingly insurers accept your premium payments.  Similarly, banks will continue to collect mortgage payments despite the fact that every leased property-owner who did not get approval from their mortgage-holder prior to signing is in technical default and has in fact committed a fraud: one simply can’t assign one’s subsoil interests to both the bank and one or more gas companies and one certainly can’t undertake uninsured activities on a property on which someone else holds the mortgage. If a residential property is converted to commercial use, the mortgage holder can call the loan. Similarly, the oil and gas company may pledge the mineral interest in the property as collateral on their borrowings - in effect hypothecating* an asset that is already encumbered by a mortgage.

Nine-tenths of local bank mortgages are re-sold into secondary markets (eg. FannyMae, FHA, VA, SONYMA), which makes more investment capital available for home-mortgage lending.  Those agencies have recently decided to enforce long-standing regulations prohibiting activities commonly associated with gas drilling. That means that leased properties (and those unleased properties subject to inclusion into drilling units through Compulsory Integration) will be more difficult to sell, reducing their market value.
Leased property-owners have also encumbered the use-value of their properties.  Any improvements (buildings, additions, plantings) made to leased property can be removed by the driller, even after it is sub-divided, sold outright, or passed on to heirs.  Any infrastructure needed by gas extraction (access roads, metering stations, gas storage, pipelines, compression stations, multiple well sites) can be located anywhere on the leased property surface unless specifically limited by the lease. There are no setbacks in New York state for shale gas infrastructure, such as compressors, gathering lines or tank batteries -  from any buildings, including  residences.

The best review of insurance/mortgage problems from a legal standpoint can be read in the New York State Bar Association Journal (Nov-Dec 2011)
*Definition:
Hypothecate
To pledge property as security or collateral for a debt. Generally, there is no physical transfer of the pledged property to the lender, nor is the lender given title to the property, though he or she has the right to sell the pledged property in the case of default.

The Fall 2013 issue has been mailed and is full of interesting articles.
If you would like a PDF version please e-mail your request to:
AftonVision@gmail.com...

and let us know what you think.

Wednesday, June 26, 2013

Summer Greetings!

The Summer issue of the  Afton Vision has been mailed to over 1400 households (all within the 13730 zip code). The newsletter has grown to 16 pages -- full of local news and ads. To get a pdf version, please send an email to:

aftonvision@gmail.com

and request that you be put on the email list.
We will no longer be posting separate articles here.

We have already started working on the Fall 2013 issue -- with an October publication date.
Your comments and suggestions are welcome.

Thursday, April 11, 2013

Next Issue Coming Soon-- The Editorial Board is working and playing and creating the next issue of The Afton Vision. 

The Afton Vision is published three times a year. All those in the 13730 zip code should be receiving a copy at the beginning of June 2013. Look for our usual town and village news and updates, highlights about local businesses, about new projects like the Afton Community Gardens, advice about lessening the damage of tomato blight from The Resilient Gardener, some important tips on how to keep your computer information safe and secure, where to exercise in town, the Arts column featuring a couple of local potters, concerns about the increase in traffic if hydro-fracking is permitted in our area, and So Much More!!

Read us in print, here in the blog, or get a complete online pdf by request (email to aftonvision@gmail.com)

Keep reading and we will keep writing.

Tuesday, February 26, 2013

Welcome.

The Afton Vision Group is a circle of concerned citizens whose mission is:
To remember Afton's past as we help build a livable future.
We meet monthly to discuss topics of interest and to organize local events. The Afton Vision newsletter is one of our current projects. 
The Afton Vision is sent free to all households, approximately 1400, in the 13730 zip code.
Pdf copies are sent to those who request it via email (aftonvision@gmail.com). Our growing subscriber list includes a number of people in the region who are interested but do not live within our designated mailing group as well as people who no longer live in the Afton area.
Each article of an issue will be posted separately on this blog to make it easier for readers to respond or to post questions.
The Afton Vision Group also plans to use this blog to update stories and publish information about our other projects and other community events.
Please send notices to aftonvision@gmail.com.

Forum on Gas Lease Issues



Informational Forum on Gas Lease Issues
to Take Place on March 14th in Norwich

Oxford, NY—Concerned Residents of Oxford is holding FLEASED FORUM/Chenango County, an informational forum for Chenango County landowners regarding gas lease issues. Landowners in neighboring counties are also invited to attend. The forum will take place on Thursday, March 14th, 6:30 pm, at United Church of Christ, 11 West Main Street, in Norwich. The event is free and open to the public. Note on parking: Please park on street, in public parking lots, or in County Office Building lots, not in Church parking lot.

Geologist Ellen Harrison and Attorney Joseph Heath, of Fleased.org, will present information on landowner’s rights concerning a range of topics including: the implications of gas leases on insurance coverage, property uses, and mortgages; whether it is possible to sign a “good lease”; how Norse’s Chapter 11 bankruptcy filing affects the leases that they currently hold; lease assignments such as overriding royalty interests and reciprocal capacity agreements and how they impact current leases; and what the recent force majeure decision in Binghamton means for expired or soon-to-expire leases in Chenango County.

Landowners wishing to terminate their gas leases will hear what they need to do to officially cancel a lease at the end of the primary term. Clearing the land records usually falls to the landowner. Landowners who are not in active gas leases are cautioned to check their deed papers to verify if there was ever a gas lease on their property. Even a decades-old lease remains a liability for the current landowner if not properly released by the gas company and filed as such with the County Clerk’s office. Forum attendees will hear what steps can be taken by a landowner in this situation.

Following their presentations, Harrison and Heath will take questions from the audience.

FLEASED FORUM/Chenango County is organized by Concerned Residents of Oxford, and co-sponsored with CDOG and C-CARE.

Contact: Concerned Residents of Oxford, PO Box 631, Oxford, NY 13830
tel: 607.226.6483 (Mina T