Leasehold acquisition: The first step of natural gas extraction
Editor's Note: This is the first part in a six-part series giving a step-by-step look at the process that a natural gas company conducts to extract natural gas from the Marcellus Shale. The series is a collaboration with Chesapeake Energy. The company's methods of operations are not meant to reflect the operations of other natural gas companies.
There are many aspects of the natural gas industry that makes it extremely interesting. The technology to know where and how to drill for natural gas and the sophisticated equipment used makes the industry a fascinating one to witness. However, none of that would have been possible in the Marcellus Shale region without first acquiring the right to do so from individual landowners via leasing.
"The leasing process secures us access for the right to produce the minerals under a landowner's land," Rory Sweeney of Chesapeake Energy said.
First, however, Chesapeake needed to find out if there was an economically feasible amount of natural gas in northeastern Pennsylvania to warrant putting forth the investment to drill for it.
"We combined the process of reviewing old geological studies with our seismic testing and the insight of other new technologies to pinpoint where to invest our capital," Sweeney said. "We want to take the most high-percentage opportunity as we can. Using historical data along with new information allows us to see the perspective of the shale formation.
"One of the technologies we use is our state-of-the-art Reservoir Technology Center," he continued. "This allows us to better understand and solve the challenges of the unconventional reservoirs from which we believe vast new reserves of natural gas can be developed. At our campus in Oklahoma City, we have our 3-D seismic visualization center, which features wall-sized, rear-projected screens that display vivid images of the earth's subsurface, allowing our geologists to find hidden natural gas prospects miles below the earth's surface.
"It's been known that there was gas in the Marcellus Shale for some time," Sweeney added, "but producing the shale play wouldn't be economically feasible without the technologies of horizontal drilling and hydraulic fracturing."
After it was decided that investing operations in the Marcellus Shale was an opportunity, Chesapeake began to research the status of any existing leases.
"We needed to find out which leases are here, which leases are expiring and other aspects," Sweeney said. "We also looked up maps in the courthouse to check on surface situations and look for wherever opportunity may arise.
"Once we find the titles and who owns the rights, we can enter the negotiation phase," he continued. "Land Agents, or 'landmen', will begin meeting with landowners to negotiate a lease to become partners to develop the gas beneath their land. As part of that we offer an upfront leasing bonus that we offer in good faith and we'll work to reach an agreement that allows both parties to benefit. Even if we never touch the surface of the land, by law we still need a lease to drill beneath a landowner's land.
"With that said, it is still business. We're as free to change our offer as the landowner is free to shop around."
One advantage that Chesapeake has now that the company did not have when it first began its leasing phase is production results.
"Despite all of the testing and research we did before drilling in the Marcellus Shale, we never knew for sure how much gas was here until we actually started drilling," Sweeney said. "We didn't have that information when we started. When we began operating in the Marcellus, we negotiated with everyone in good faith that their land would produce gas. Sometimes land exceeded expectations, sometimes it didn't. But we do know a lot more now than when we started."
However, sometimes another gas company can throw a kink in the plan when a landowner signs a lease with that company in an area primarily surrounded by landowners signed with Chesapeake.
"Those leases become marketable entities," Sweeney said. "Leases can be bought, sold and even traded. However, no matter who obtains the lease, the terms of the lease never change. The lease stays the same."
Another hitch that can be encountered when leasing is when a landowner refuses to sign a lease, thus making it impossible to extract the gas from beneath the said landowner.
"Depending on the size of the property, we can drill around them or redesign the unit of the well or wells," Sweeney said. "Ultimately, that can hurt other landowners that do have leases though, because sometimes we'll be forced to drill around them or leave them out of units as well to avoid the unsigned landowner's property, so a landowner in favor of development that signed a lease may be excluded from production."
While the natural gas companies have been credited for the booming of the local economy in recent years with the jobs created and businesses growing or beginning, it would not have been possible without local landowners. By signing leases with companies, including Chesapeake, they also get at least some of the credit for allowing the companies to extract natural gas from under their land and thus allowing the growth of local economies in the Marcellus Shale region.
Johnny Williams can be reached at (570) 265-1639; email: email@example.com.
This story also appears in the latest Northeast Driller, which is available today. To read select stories from the Northeast Driller, visit www.northeastdriller.com.