What is the value of your mineral rights? According to natural gas producers individuals, companies, organizations, municipalities and school districts stand to profit substantially from leasing mineral rights for production. To be sure, there are some who have received an abundance in leasing bonuses and royalties. This is usually the case where several critical elements converge: (1) a rich gas field is present, (2) the mineral rights owner has a large tract of land for developing, (3) current market rates are high enough to produce substantial revenues and (4) gas drillers have to offer larger bonuses to acquire mineral rights.
Signing bonuses are paid initially when the right to produce minerals is granted by the mineral owner to the gas producer. Royalties are the mineral owner's share of sales revenues from produced minerals. Bonuses are a one-time payment for rights to drill on or under the mineral owner's land, and frequently constitute the bulk of monies to be received unless the producer hits an enormously rich pocket that produces a lot of gas over a long period of time.
Several years ago these factors converged more frequently, and they still happen occasionally, but in many cases one or more factors dilutes the value of mineral rights. Also, reduced production due to decreasing pressure in the well over time yields lower royalty payouts. Royalties in areas where multiple mineral owners share the proceeds, such as in a residential neighborhood where tens or even hundreds of households are co-owners, each with a small plot of land, are diluted substantially so that no one owner gets a large royalty payment. In fact, monthly (or even yearly) royalties may be less than $100 per owner in a shared field.
The 800 pound gorilla in the room is the landman who comes to your door and tells you wonderful stories about how you will become the next Jed Clampett. He will tell you how you can pay for your kids' college education, buy new cars, buy a bigger house in a better neighborhood (hopefully, one that does not have gas exploration as a neighbor) and take that dream vacation you always wanted. Beware the landman, for the truth is not always in them! To their credit, they do not always know that what they are telling people is untruthful. Many times, they are merely repeating what they have been told to say. Their job is to get your name on the dotted line and then let somebody else worry about your health and safety, declining property values, damage to your water, air and soil and answering your queries when those royalty checks fail to appear, or when they arrive in such minute amounts that you are left wondering how you are going to make the payments on that new Cadillac you just purchased on the belief that you would be loading up the car and moving to Beverly ... Hills, that is!
To cite one specific example, On December 7, 2010, Chesapeake Energy conducted a meeting in Grand Prairie, Texas to encourage citizens to compel their City Council to overturn a drilling moratorium. It seems that people in Grand Prairie had started experiencing all the bad effects from urban gas well drilling, frac'ing and production, so they put in place a moratorium while they investigated the whole process and considered stregthening their gas drilling ordinance. In that meeting Chesapeake handed out papers (and it is published on their own website at Grand Prarie Town Hall) in which they made statements such as:
"Show your support for $3 Billion Total Economic Impact for Grand Prairie"
"Without you help Grand Prairie homeowners and business owners will not earn $240 Million in royalties"
"Without your help $105 Million in city and school district taxes will be lost - who will make up the difference?"
Chesapeake’s own website says that the entire industry paid Grand Prairie $132,000 in 2010. By any calculation that is a LONG way from the numbers touted above! The false claims above are the way landmen acquire signatures for leasing minerals, and the amount paid is the harsh reality. The Chesapeake website goes on to say that, with the bonus and royalty money Grand Prairie can by 10 new police cars ($300,000), 7 school buses ($500,000), 2 firetrucks ($1,000,000) and two new school gymnasiums ($5,000,000), but those numbers do not add up when the city only received $132,000 in 2010 - right at the start of those 67 Chesapeake operating wells when the pressure is greatest and the flows should be the highest. (See http://www.mydigitalpublication.com/publication/?i=70751 to read these claims on the Chesapeake Energy website.)
For starters, a city may buy a basic police car for $30,000, but by the time a lighting system, radios, vehicle tracking system, computer system, push bumpers, heavy suspension system, local painting scheme, prisoner cages and other modifications are made the cost will double, and a city is NOT going to get 10 new police cars ready for the streets at $300,000. That is just landman math, and it bares no resemblance to real math in the world where 2 X 2 = 4, or where $300,000 / $60,000 = 5.
What landmen do NOT tell you about is the known hazards of locating a natural gas well so close to homes, schools, childcare facilities, nursing homes, hospitals, parks, playgrounds, golf courses, churches or other places where the general public often meets. And, they do not tell you that no royalty payments will be coming if they drill and do not find a viable flow of gas, or that wells will start to lose their pressure almost immediately, and then fail to produce a viable flow after 5-8 years, declining in production every year from the outset resulting in increasingly lower royalty payments. They certainly will not tell you about all the lawsuits that have been filed by mineral owners whose royalty checks have never come at all. No, instead they will tell you what you want to hear - that allowing production of your minerals is going to be a panacea that allows you significantly boost your income for doing nothing except signing a lease agreement.
Most people are not aware of all the facts about gas drilling and production when approached to lease their minerals, and they do not read the fine print that essentially gives the gas companies carte blanche to use your property as they see fit. Fortunately, most municipalities have some sort of zoning laws that mandate a setback of at least 300 feet from a home, school or other such facility, but the length of a footbacll field is hardly adequate to protect against the dangers of natural gas production, especially when the royalties that are expected turn out to be a fraction of what was projected.
Before signing a lease mineral owners would be advised to seek out other mineral owners in similar types of communities and ask them how they have fared. It would be especially helpful to seek out those who have dealt with the same company to get a realistic expectation of what is coming. Ask multiple people and see if you get the same story from each of them. Once you open that door to drilling for your minerals there is no turning back.
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