One more indication that Ohio is poised for a multibillion-dollar oil and gas boom is new information that companies from Texas and Michigan are making offers to buy up existing royalty rights from landowners.
The companies are offering cash — up to $250,000 in some cases — in exchange for the landowners’ royalties on future natural gas production.
The companies are gambling that they can make more money in the long run than they are spending up front to purchase the royalties on existing and future wells.
The fact that such companies are active in Ohio in the last few weeks is additional proof that Ohio is on the verge of a major natural-gas boom made possible by deep, horizontal drilling and fracturing in the Utica shale under the eastern half of Ohio. That boom may produce tens of billions of dollars of natural gas, oil and natural gas liquids: ethane, butane and propane.
Drilling companies have been securing leases on thousands of acres for the purpose of sinking wells. In some cases, property owners become members of an aggregation, joining other landowners to negotiate for the best offer possible.
The landowners are paid royalties for oil and gas extracted from wells on their properties, or if part of an aggregation, they may receive a portion of royalties from a nearby well. Royalties continue annually for as long as the well produces, which can be more than 40 years.
Among the companies identified so far as making offers to buy the royalty rights are Noble Marcellus LP of Fort Worth and Venable Royalty Co. of Dallas.
Dale Arnold of the Columbus-based Ohio Farm Bureau Federation said he is getting questions from puzzled Ohio landowners who aren’t quite sure what to make of the unsolicited offers. He said at least two companies from Texas and one from Michigan, which he did not identify, have made the offers.
Many of those getting offers own leases dating back to the 1940s, not just new leases tied to the Marcellus and Utica shales, he said.
Caution urged
“What’s happening today in Ohio is legitimate. It’s legal. It’s very real,” he said. “It’s something new to Ohio, although it’s occurred in other states. For us, it’s new and it’s different.”
His advice to landowners: Be careful and know what you are doing before you sign anything. Check out the companies and confer with a qualified attorney. Consider the offer very carefully.
“Be aware that if you accept such an offer, you no longer control the mineral rights under your property,” he said.
To date, Ohio has permitted 64 horizontal wells to tap into the Marcellus and Utica shales. To date, 19 of those wells have been drilled and the preliminary findings are very promising, according to Oklahoma-based Chesapeake Energy, one the biggest players in Ohio.
Most drilling companies pay a standard 12.5 percent royalty, although that figure is higher in some cases in eastern Ohio.
It is difficult to gauge whether an Ohio landowner would be better off with the cash up front or by keeping royalty rights that could produce income for decades, Arnold said.
Columbus attorney W. Jonathan Airey of Vorys, Sater, Seymour & Pease LLP said he is not surprised by the newest development, and he expects the companies to be “reasonably aggressive” in trying to acquire royalty rights.
The companies are interested because it appears likely that the royalty stream from Ohio’s Utica shale formation will be significant, he said.
“They are convinced that the upside is there,” he said.
There is no direct connection between the royalty-seeking firms and the drilling companies, but the parties obviously know each other, he said.
The royalty-seeking firms could encourage drillers to develop parcels on which they have a financial interest, he said.
Acquiring land
Acquiring the old leases also helps drillers acquire more land and boosts drilling access to the Utica shale, Airey and Arnold said.
In general, leases for mineral rights do not limit drillers to older, shallower oil and gas deposits. Generally, drillers are free to go after any natural gas formation.
New vertical-and-horizontal wells would have to be drilled on the leased land to reach the deeper Utica shale, they said.
Venable Royalty Ltd. is interested in acquiring royalty rights on 3,000 to 5,000 acres in Ohio, said Patrick Van Ooteghem, director of mineral and royalty purchasing for the 80-year-old firm.
“Absolutely, it’s a gamble on our part … but we’re good at what we do and we’ve been doing it a long time,” he said in a telephone interview. “We have a good track record and we make fair offers and give people more options.”
His company is interested in all or part of royalty rights from old leases and from newer leases where wells have not been drilled, he said.
The company will hedge its gamble by purchasing royalty rights across a large area, he said.
Venable Royalty has been active in shale drilling areas in other states in recent years, but it expects to be one of the bigger buyers in Ohio’s Utica shale, he said.
For some people, it may be advantageous to take the money up front to pay off bills, mortgages, medical bills and college rather than wait up to seven or eight years for a well to be drilled and to determine how successful that well might be, he said.
Most leases give the oil companies five years plus a five-year extension to drill wells.
Some wells are more successful than others, even those in close proximity, and that affects royalty payments, he said.
Selling off royalty rights to such companies is “another option for landowners,” Van Ooteghem said.
Efforts to contact the other royalty-buying companies active in Ohio were unsuccessful.
Promise of profit
In its letter to landowners, Noble Marcellus says its offer is a chance for landowners “to profit from your oil and gas interests now.”
Its offer could be beneficial if the landowner has an immediate need of cash, the firm says.
Getting wells drilled and additional gas pipelines could take years, the letter says.
“Regulatory issues, specifically water use and treatment and lack of infrastructure, could dramatically slow the pace of drilling and require years to solve,” it says.
Every area where wells are developed has “good wells and bad wells which leads to lucky and unlucky mineral owners,” Noble Marcellus says in trying to sway landowners.
“Selling a small portion of your oil and gas interests will allow you to profit without having to rely on being one of the ‘lucky’ ones. Do you want to gamble with something this valuable, or sell a small portion for a big profit, while retaining the rest?
“We expect to buy oil and gas interests over many different areas, spreading our risks and guaranteeing some will be successful.”
Noble Royalties Inc. of Addison, Texas, is one of the biggest royalty-seeking firms. The company has paid $1 billion for royalties since 1997 from 145,000 properties in 30 states. Its Web site says it is “actively looking at Ohio.”
Bob Downing can be contacted at 330-996-3745 or bdowning@thebeaconjournal.com.