NEW YORK—Leasing consultant James Leonard tells a tragic story, but it’s also a cautionary tale. Leonard warned a room full of upstate farmers considering leasing their land to gas companies for fracking: “You’re signing not only on behalf of you, but also on behalf of your kids, your grandkids.”
“Three years ago or so, a young fellow came to me, in his 30s or so,” began Leonard. “He signed his lease, got his bonus money—about $2,500 an acre—which gave him a little over $500,000. This guy had never had money in his life. With $500,000 he did what any red-blooded American would do: He went out and spent a hundred grand on all the toys—the pickup truck, the ATVs [all-terrain vehicles], the snowmobiles, and all that good stuff.”
“So, he had $400,000 left and he invested all of it in late summer of 2008. And what happened after that? He lost half; he came in, had to do his tax returns, and I had to sit there and look him in the eye and tell him the taxes on $500,000 were $200,000.”
“He’s got nothing left,” concluded Leonard.
The laws on fracking aren’t finalized yet, but gas companies are leasing up large tracts of farmer’s fields along the Marcellus and Utica shales upstate.
It is still uncertain how much the land will be worth, since no one really knows how productive the wells will be, and the value of natural gas fluctuates in relation to the price of oil.
“It’s sort of a good time for them [gas companies], because we don’t know what the heck is going to happen. They can get some pretty cheap leases,” said Kenneth A. Smith, executive director of the Cornell Cooperative Extension for Chenango County, which uses Cornell University research to benefit the community.
At the annual Farm Show in Syracuse on Feb. 24, hundreds of upstate farmers gathered to check out the new tractors, seeds, and tools of their trade.
About 30 of the farmers gathered to discuss fracking leases with experts from Cornell University and leasing consultant, James Leonard. The farmers and many of their neighbors living along the Marcellus and Utica shales had already been approached by gas companies; many have already signed contracts.
Data is not readily available in all counties, but approximately 60 percent of the land in Cortland County has already been leased. Citizens Campaign for the Environment spent 16 months sifting through county clerk office documents to find out how much land could be fracked in eight counties along the Finger Lakes. They found more than 602,000 acres, or 30 percent, of the eight counties are under gas leases filed between 2005 and 2010.
Millionaire Farmers
In a best case scenario, a farmer could cash in on a couple million dollars in the first couple years of drilling on his land.
A handful of farmers in Chenango County with more than 500 acres could become instant millionaires with the per-acre bonus payout, said Smith. Over a longer period of time, another 200-300 farmers could become millionaires depending on the pace of development. Regionally, a few thousand landowners medium to large tracts of land could become millionaires over time with bonuses and royalties, said Smith.
Smith thinks the huge number of landowners across the region who could see a more modest, yet significant income of $50,000 or more, will shape the debate.
“They won’t become ever become millionaires, but they will also not forgo their significant possible income without a strong fight, and we are seeing that fight now,” wrote Smith in an email.
But, the long-term profitability and even the certainty of short-term profits are questionable.
The coffee shop talk in farming communities upstate is all about the signing bonus, said Leonard. The gas companies offer farmers a few thousand dollars per acre, a one-time lump sum of cash upon signing the contact. The real money is in the royalties, said Leonard, which is the landowner’s cut of the gas profits.
Royalty rates around wells in Texas and Louisiana are around 25 percent. In New York, people are getting about 15 percent.
“We’re signing up cheap,” said Leonard. “Way too cheap.”
“People are in debt,” responded a man in the audience.
After the seminar, farmer Dave Johnson from Broome County told The Epoch Times, “We have neighbors that have leased for probably not what they should have. They got caught early.”
A lot of people in his area were approached about five years ago and leased for even less. “Nobody knew, nobody was educated at that time,” chimed in his friend, Dale Hamilton, whose parents own farmland in the region.
Johnson is planning to lease, but he’s waiting to see what the state lawmakers decide. He says he'll build a log cabin with the money to pass down through the generations in his family.
As for potential damage to farmland, Smith warns, “They'll set up right in your best cornfield.” He suggests farmers work requirements into the lease agreement to make sure companies return the land to its original state for production.
Compulsory Integration
A farmer who chooses not to lease his land may find himself roped into the deal anyway. If his neighbors lease, and his land falls within the spacing needed for the well, he will receive a notice, which he has 21 days to respond to.
He has four choices. He could become an active partner, paying his share of drilling costs, reaping his full share of the profits, and bearing the loss if the well is dry. Or, he could become a nonparticipating owner, getting a sort of loan from the gas company to pay his share of the drilling costs, thereby bearing risk if the well does not produce, but he will reap his full share of profits once the well has paid for itself three times over. Or, he could become a royalty owner, in which case he does nothing, maintains surface rights to his land, and gets the minimum amount of royalty for his share of the land, 12.5 percent.
The fourth and final option is legally complex and requires legal assistance: the farmer forms an LLC in which he acts as a nonparticipating owner, but receives some low royalty rates before other nonparticipating owners without the LLC status.
In Pennsylvania, the typical landowner share per well has been $2 million.
Well production is expected to be high in the first few years of drilling, then taper off and eventually level out at a low rate, a rate that is difficult to predict.
Proponents of fracking say wells have 30 years of productivity; opponents say 10 years.
At the high end of the Department of Environmental Conservation’s economic impact estimates, fracking could create just under 30,000 jobs in the state (0.7 percent of the state’s labor force). At the low end, it could create about 7,500. Kay warns that not all jobs are full-time, permanent jobs.
In 2009, fracking in the Marcellus Shale in Pennsylvania created between 23,385 and 23,884 jobs, and generated $3.1 billion and $3.2 billion. While the economic impact was considerable, it was only half of what was estimated.
In Pennsylvania, landowners put 55 percent of their profits into savings and investment, not back into the community.
Kay’s colleague, Kenneth A. Smith, noted that Cornell geologists estimate each acre of the Marcellus Shale contains about $30,000 dollars worth of producible gas.
Hydraulic fracturing, also known as fracking, is a method of extracting natural gas from underground shale using a solution of water, sand, and chemicals. Fracking has already been taking place in New York state since the 1950s using low volumes of fracturing fluid, about 80,000 gallons per well.
High-volume horizontal fracking uses considerably more fracturing fluid, millions of gallons per well. It is a new method, the effects and risks of which are not yet fully understood. It is currently used in Pennsylvania, but there is a moratorium in New York.
The state Department of Environmental Conservation (DEC) issued a Supplemental Generic Environmental Impact Statement (SGEIS) in July 2011. The public had about five months to comment on it, and the DEC is currently reviewing about 79,700 comments from experts and the general public.
The DEC expects to issue its final recommendations by the end of 2012. Permits for drilling will not be issued until these recommendations are considered by state lawmakers. Several permits may be issued by the end of the year.
The town of Dryden, N.Y., has banned fracking through local zoning laws. This ban is likely to be appealed, and litigation may hold up the fracking process in other areas as well.
