My June 1 post, "Mapping County Gas Data", asked a simple question : why can't we use Google Maps to create an adequate county gas data GIS capability quickly and inexpensively?
The question remains unanswered; but, maybe I wasn't very clear about what constitutes quick, doable and adequate.
So, I'll explain more and demonstrate some features of a proposed capability that can be obtained at No Cost to Low Cost to the county. It also will allow citizens and county agencies to access accurate map based information on permitted and producing gas wells, pipelines, and other data at no cost.
Really - "No Cost" ?? "Low Cost" ?? Well, Yes, really !
But it does depend on what we demand in terms of accuracy, currency and completeness, and ownership of the data. I'll discuss these items later; first, here is the No-Low Cost proposal.
No cost is simple. Use what already exists and is widely available on the Internet. Low cost means augmenting an existing capability with more data. Both capability levels are based on use of a Google Map Application with all the built-in features of Google maps provided free by Google, including tutorials on how to add features to one's own map application.
There is an existing application developed by a self-proclaimed technology geek who enjoys real-time mapping applications. You can visit his website at Susquehanna County - Gas Exploration Maps to examine different features and map scales. His maps cover Susquehanna County and several adjacent counties in PA and NY. They provide data on permitted and producing wells, major pipelines and compression stations. He updates them monthly or semi-monthly. They are reasonably complete and accurate.
Simply using this application is the No Cost option. The county should publicise it on a county website so people would know where to find it.
For the Low Cost option, the county could deal with this individual to get more information in his data base or to be allowed to maintain a comparable version of his application which the county would update and extend. An obvious extension would be to add small well gathering pipelines and well access roads based on data from the gas companies. If this data were provided in simple GPS coordinates, it would be easy to include in the Google map application.
There you have it - a basic Gas Data Map capability at No to Low Cost with easy Internet access.
Let's demonstrate the "No Cost" option by some Google Map screen shots, starting with this one, County Gas Map 1, that show the county and gas industry information. The Blue east-west line is the Tennessee Gas Pipeline; red balloons are the locations of permitted gas wells; green balloons locate producing well locations; newly permitted pipelines are shown as blue flags; other icons locate other gas activities.
The second screen shot, County Gas Map 2, zooms to a smaller scale map to show the wells in relation to local roads. We can reduce the scale more and get closer by sliding the Google map scale indicator in the + direction. At this scale we can see a red triangle that depicts the location of a gas compression station.
Clicking the mouse on any symbol, e.g.. a green balloon, causes an info bubble to pop-up with descriptive information on well ID, production or other data.The pop-up for the green balloon directly above the red triangle states it is the Teel 5 well by Cabot, facility ID 700047, the first production well in NE PA. The pop-up bubble for the balloon to the right of it identifies it as Black 2H well by Cabot, Facility ID 706268, which produced 8.3Mmcf/d with a 4 stage frac on 3-3-09.
The information inside an information bubble is whatever the map developer wants to put there. In addition, each bubble has a Google feature that allows you to enter your current location and get a route map and driving directions from your location to the well (bubble)location. Since this is a Google Map application, all the Google map features are available. We could shift from the standard map format, shown above, to one that overlays the data on a terrain map or on satellite imagery. Of course, the satellite imagery would only show features present when the image was taken, such as trees, fields, ponds, and buildings.
So, now lets discuss those mapping performance terms and what they imply for costs to enhance the existing gas data map application.
Accuracy means how precisely the gas location data is measured and plotted on the map. If we demand survey level accuracy, the map capability will be costly and take a while to create. If we can live with accuracy equal to a standard GPS - based automobile or handheld navigation system, we can have a capability fast and at no cost to low cost. I believe that level of accuracy is adequate.
Currency means how timely the plotted data is; for example, if a new well permit is issued, do we want it to be plotted and the map updated within a day? or a week? or would a month be timely enough? Completeness means how much new data is captured and plotted on a timely basis; must it be 100% or is 80-90% enough? Since we have nothing now, I suggest that getting "most" data updated on the map one or twice a month is adequate.
Going from "most" to all or almost all takes us from No to Low Cost or more; going from once or twice a month to daily has the same effect.
Ownership of the data means who has control of the data base and the mapping application. If we demand that the county own it all, it will cost money and employee time. If we are willing to use a product owned and maintained by a third party, then our cost is none to low, depending on what we require of the third party in terms of currency, completeness and assured accessibility to the map application.
Bottom Line - I propose that the county use the above existing application "as is" for an immediate no cost capability. Publicize this on a county website for citizen access.
To gain more capability, define what additional information is needed and conduct two negotiations. First, negotiate with the application developer to add more information in a timely fashion either by him or by a partnering arrangement with the county, possibly by maintaining a county version. Second, negotiate with the gas companies to get timely access road and pipeline data in a format for easy entry into the map application.
Update - I should also reference this other primary source of information on Gas Wells in Susquehanna County PA. The main website is at RLSTORE.COM . It has considerable data on current well activity and maps of well sites. Although the maps lack the scaling and manipulation features of a Google Map application, the data is updated frequently and is available for an $18 annual subscription.
Showing posts with label Natural Gas. Show all posts
Showing posts with label Natural Gas. Show all posts
Tuesday, June 23, 2009
Monday, June 1, 2009
Mapping County Gas Data
My last post discussed the May 28 Gas Force meeting and noted that the county no longer has a GIS capability and could not map gas pipelines, access roads and well locations. I found that surprising since the Penn State Land Analysis Lab had trained the county on a GIS system many years ago and much of the county was mapped by an intern. Way back then, the Penn State Lab was working on a consumer friendly interface to GIS information.
A user friendly Geographic Information System (GIS) would be useful now to keep track of the new gas exploration data. So why can't we get one? Maybe the Penn State lab has some new tools to help.
Then again, maybe we already have a free GIS available . Maybe the real question is : why can't we use Google Map Applications to do the job?
Google Maps is a very user friendly, very large GIS, available free to anyone who wants to design and maintain a Google Map Application.
Some folks have already done so, mapping gas well permits, producing gas wells, major pipelines, and other data on Google Maps. To see a local product, link to Susquehanna County - Gas Exploration Maps . This site, and several other online maps, was developed by "Railroad - RR", a self-described Techno Geek, who is very into maps and real-time data sharing. He maintains it with new data every month or so. There are other interested smart people who do this sort of thing for fun or profit. They gather data from county or state offices where permits are filed.
This information is accessible by anyone with a laptop and internet connection. If the county wants a comparable simple GIS for gas information, this seems like a place to start. If we can define what we want represented, we should be able to find someone to create a new, or modify an existing, map application.
As for populating the data base with new information, define a suitable format for data entry and ask gas companies to provide the data. They may be willing to do so and to use the resulting maps. Or the county could require road access and pipeline data as a public safety measure if we do not already have it.
So, back to my basic question, why can't we use Google Maps to create a county gas data GIS capability? And do it fast and inexpensively ?
A user friendly Geographic Information System (GIS) would be useful now to keep track of the new gas exploration data. So why can't we get one? Maybe the Penn State lab has some new tools to help.
Then again, maybe we already have a free GIS available . Maybe the real question is : why can't we use Google Map Applications to do the job?
Google Maps is a very user friendly, very large GIS, available free to anyone who wants to design and maintain a Google Map Application.
Some folks have already done so, mapping gas well permits, producing gas wells, major pipelines, and other data on Google Maps. To see a local product, link to Susquehanna County - Gas Exploration Maps . This site, and several other online maps, was developed by "Railroad - RR", a self-described Techno Geek, who is very into maps and real-time data sharing. He maintains it with new data every month or so. There are other interested smart people who do this sort of thing for fun or profit. They gather data from county or state offices where permits are filed.
This information is accessible by anyone with a laptop and internet connection. If the county wants a comparable simple GIS for gas information, this seems like a place to start. If we can define what we want represented, we should be able to find someone to create a new, or modify an existing, map application.
As for populating the data base with new information, define a suitable format for data entry and ask gas companies to provide the data. They may be willing to do so and to use the resulting maps. Or the county could require road access and pipeline data as a public safety measure if we do not already have it.
So, back to my basic question, why can't we use Google Maps to create a county gas data GIS capability? And do it fast and inexpensively ?
Sunday, May 31, 2009
Jessup News Post - May 2009
Township Meeting
At a special meeting on 28 April, the township decided to accept a bid for crushing blue stone at the township site and a bid for insurance.
The regular meeting was held on 6 May. There was a brief summary of items from the recent PSATS meeting. Apparently, there is continued pressure from the state to consolidate townships or force more coordination. Most townships officials feel there is good coordination and the state's help is not needed.
Two traffic concerns were discussed. One is a long-standing problem with a resident-business that blocks a local road with stone pallets and trucks. Possible enforcement options were discussed. The second concern was raised by a resident about excessive speeding on a dirt road near homes. Discussion centered on posting a 25 mph limit for that road segment.
The next township meeting will be held on June 3 at 7PM. Additionally, Jessup will host the first quarterly meeting of the NTC on June 18 at 7PM.
Other Meetings
The county gas task force met at 9:30 AM on May28, prior to the economic development board meeting. The meeting centered around items presented by the Central Bradford Progress Authority which supports the task force and the board. Information about the CBPA activities and newsletters can be found at their website.
The discussion continued into the formal board meeting along with a number of other agenda items. The CBPA is gathering information from several sources and direct contacts with gas companies. The material they handed out can be obtained from the Commissioners office. There is a new DEP fact sheet coming out that defines the DEP and Conservation Office roles in monitoring Marcellus wells; for the most part, DEP is in charge of permitting and monitoring.
CBPA is planning to have an "Expo" to foster better understanding of gas company needs and of local sources to supply those needs. A key goal is get more gas related economic activity performed locally by local people. As an example of the problem, some local people obtained water trucks to provide hauling services for well fracing, but their business was not consistent and the gas companies have brought in outfits from other states. The companies have very rigid standards for this and other activities and prefer to deal with a prime supplier who understands the standards and can handle load variations. Hence the need for more specific communications.
A suggestion was made about getting local suppliers to coordinate their activities and offer services through a single Point of Contact to the gas companies to simplify the companies management of suppliers.
There is interest in developing new business opportunities by using some of the gas produced here for local commercial activities. Development of gas-generated electricity is especially attractive and some companies (Claverack was mentioned) are interested in this prospect.
Bob Templeton mentioned that there are two compression sites - one in Springville and one in Rush. It is expected that there will be more activity this year along the route 706 corridor. It also seems that there is no county Geographic Information System (GIS) capability to map well sites, access roads, and pipeline routes, even if provided by the companies. Knowing the location of access roads is important if emergency action is needed; but the planned road routes often change as the well site is developed. Several years ago, the county developed a GIS capability with the help of the Penn State Land Analysis Laboratory. Penn State has a Geospatial Technology program that might be able to help the county .The board asked that the commissioners look into what GIS capability we may still have and what could be obtained.
The CBPA handout included a fact sheet by DEP. There is quite a bit more information from DEP about the Marcellus Shale at this PA DEP website which has a page full of informative links to reports, maps and fact sheets. These range from very brief items to hundred page reports.
Among the better longer items, listed under the FAQs heading, is this new (April 2009) US DOE primer on Marcellus Shale (Gas_Primer_2009.pdf ). I've only skimmed it, but it has a lot of good information.
There are also 1-page maps showing recent well permits and total wells drilled through April 2009. The map of Marcellus wells reveals an interesting line of west-east sites from mid - Tioga County through Bradford County to the heavy heavy concentration of wells in the southwest quarter of Susquehanna County. Through April 2009, there were 497 Marcellus well permits and 1817 non-Marcellus permits issued in the state. That 21% Marcellus permit ratio is quite high and lends credibility to the forecast of substantial activity for the rest of the year into 2010.
Cabot has drilled several horizontal wells which exhibit high pressure and flow. One early well began at 6.4 million cubic feet (mmcf) per day and was producing 4.3 mmcf after 105 days. Two more recent ones showed different decline rates. One well had initial production of 8.3 mmcf and declined to 4.1 mmcf after 60 days; the other began at 8.8 mmcf and declined to 8.0 mmcf after 60 days. More data will be needed to establish confidence in expected decline rates and steady state production; but the initial data is very encouraging.
An interesting observation about the combined gas force - economic board meeting was that there was a good deal of citizen interaction and the focus stayed on useful information. That's a good sign for a starting effort. Currently, the gas force meeting starts at 9:30AM in the small main level conference room. Then the group moves to the large lower conference room for the full economic board meeting at 10AM. Meetings are held on the fourth Thursday of each month.
At a special meeting on 28 April, the township decided to accept a bid for crushing blue stone at the township site and a bid for insurance.
The regular meeting was held on 6 May. There was a brief summary of items from the recent PSATS meeting. Apparently, there is continued pressure from the state to consolidate townships or force more coordination. Most townships officials feel there is good coordination and the state's help is not needed.
Two traffic concerns were discussed. One is a long-standing problem with a resident-business that blocks a local road with stone pallets and trucks. Possible enforcement options were discussed. The second concern was raised by a resident about excessive speeding on a dirt road near homes. Discussion centered on posting a 25 mph limit for that road segment.
The next township meeting will be held on June 3 at 7PM. Additionally, Jessup will host the first quarterly meeting of the NTC on June 18 at 7PM.
Other Meetings
The county gas task force met at 9:30 AM on May28, prior to the economic development board meeting. The meeting centered around items presented by the Central Bradford Progress Authority which supports the task force and the board. Information about the CBPA activities and newsletters can be found at their website.
The discussion continued into the formal board meeting along with a number of other agenda items. The CBPA is gathering information from several sources and direct contacts with gas companies. The material they handed out can be obtained from the Commissioners office. There is a new DEP fact sheet coming out that defines the DEP and Conservation Office roles in monitoring Marcellus wells; for the most part, DEP is in charge of permitting and monitoring.
CBPA is planning to have an "Expo" to foster better understanding of gas company needs and of local sources to supply those needs. A key goal is get more gas related economic activity performed locally by local people. As an example of the problem, some local people obtained water trucks to provide hauling services for well fracing, but their business was not consistent and the gas companies have brought in outfits from other states. The companies have very rigid standards for this and other activities and prefer to deal with a prime supplier who understands the standards and can handle load variations. Hence the need for more specific communications.
A suggestion was made about getting local suppliers to coordinate their activities and offer services through a single Point of Contact to the gas companies to simplify the companies management of suppliers.
There is interest in developing new business opportunities by using some of the gas produced here for local commercial activities. Development of gas-generated electricity is especially attractive and some companies (Claverack was mentioned) are interested in this prospect.
Bob Templeton mentioned that there are two compression sites - one in Springville and one in Rush. It is expected that there will be more activity this year along the route 706 corridor. It also seems that there is no county Geographic Information System (GIS) capability to map well sites, access roads, and pipeline routes, even if provided by the companies. Knowing the location of access roads is important if emergency action is needed; but the planned road routes often change as the well site is developed. Several years ago, the county developed a GIS capability with the help of the Penn State Land Analysis Laboratory. Penn State has a Geospatial Technology program that might be able to help the county .The board asked that the commissioners look into what GIS capability we may still have and what could be obtained.
The CBPA handout included a fact sheet by DEP. There is quite a bit more information from DEP about the Marcellus Shale at this PA DEP website which has a page full of informative links to reports, maps and fact sheets. These range from very brief items to hundred page reports.
Among the better longer items, listed under the FAQs heading, is this new (April 2009) US DOE primer on Marcellus Shale (Gas_Primer_2009.pdf ). I've only skimmed it, but it has a lot of good information.
There are also 1-page maps showing recent well permits and total wells drilled through April 2009. The map of Marcellus wells reveals an interesting line of west-east sites from mid - Tioga County through Bradford County to the heavy heavy concentration of wells in the southwest quarter of Susquehanna County. Through April 2009, there were 497 Marcellus well permits and 1817 non-Marcellus permits issued in the state. That 21% Marcellus permit ratio is quite high and lends credibility to the forecast of substantial activity for the rest of the year into 2010.
Cabot has drilled several horizontal wells which exhibit high pressure and flow. One early well began at 6.4 million cubic feet (mmcf) per day and was producing 4.3 mmcf after 105 days. Two more recent ones showed different decline rates. One well had initial production of 8.3 mmcf and declined to 4.1 mmcf after 60 days; the other began at 8.8 mmcf and declined to 8.0 mmcf after 60 days. More data will be needed to establish confidence in expected decline rates and steady state production; but the initial data is very encouraging.
An interesting observation about the combined gas force - economic board meeting was that there was a good deal of citizen interaction and the focus stayed on useful information. That's a good sign for a starting effort. Currently, the gas force meeting starts at 9:30AM in the small main level conference room. Then the group moves to the large lower conference room for the full economic board meeting at 10AM. Meetings are held on the fourth Thursday of each month.
Thursday, April 30, 2009
Jessup News Post - April 2009
Township Meeting
The Township will participate in a county meeting to decide who will be the single income tax collecting agency for the county per Act 32. The State requires us to hire a single agent to collect all school and town income taxes and then allocate the funds to each. An oversight committee or mechanism is also to be determined.
The NTC decision to meet quarterly was discussed; the next meeting will be hosted by Jessup in June. The Township voted to rescind the Intergovernmental Agreement that established a NTC joint planning committee for planning and zoning and to send a letter to the NTC confirming that and stating that it will not adopt zoning. This follows the recommendation from the March NTC meeting.
The Township has informed COG of its decision to use BCI for building code enforcement; COG asked for a more formal notice to close out their efforts and turn over files for the new service provider.
Some gas companies are offering gravel road services and repairs free and are expressing their desire to help maintain roads in good condition when they use them. They prefer to not have a post and bond ordinance. The Township is still addressing the P&B option as a way to assure cooperation on roads.
There are indications that this year will see considerably more gas well drilling activity in the township; particularly along the RT 706 corridor.
Other Meetings
There was no NTC meeting. The County has established an Ad Hoc task force of existing department heads to discuss and coordinate natural gas issues. It may report publicly before the monthly economic development board meetings. Other Jessup Jottings blog posts comment on potential activities for this task force. The April COG meeting should address the planned study of a regional police force; but , per our township representative, Jessup is not participating in that effort.
The Township will participate in a county meeting to decide who will be the single income tax collecting agency for the county per Act 32. The State requires us to hire a single agent to collect all school and town income taxes and then allocate the funds to each. An oversight committee or mechanism is also to be determined.
The NTC decision to meet quarterly was discussed; the next meeting will be hosted by Jessup in June. The Township voted to rescind the Intergovernmental Agreement that established a NTC joint planning committee for planning and zoning and to send a letter to the NTC confirming that and stating that it will not adopt zoning. This follows the recommendation from the March NTC meeting.
The Township has informed COG of its decision to use BCI for building code enforcement; COG asked for a more formal notice to close out their efforts and turn over files for the new service provider.
Some gas companies are offering gravel road services and repairs free and are expressing their desire to help maintain roads in good condition when they use them. They prefer to not have a post and bond ordinance. The Township is still addressing the P&B option as a way to assure cooperation on roads.
There are indications that this year will see considerably more gas well drilling activity in the township; particularly along the RT 706 corridor.
Other Meetings
There was no NTC meeting. The County has established an Ad Hoc task force of existing department heads to discuss and coordinate natural gas issues. It may report publicly before the monthly economic development board meetings. Other Jessup Jottings blog posts comment on potential activities for this task force. The April COG meeting should address the planned study of a regional police force; but , per our township representative, Jessup is not participating in that effort.
Tuesday, April 7, 2009
County Action on the Gas Rush
After reading a newspaper account of the Susquehanna Commissioners' action on a gas committee or task force, I wrote the following letter to the local papers. It summarizes some of my earlier posts and and offers suggestions for the committee or task force.
To address the Gas Rush, the county plans to have monthly meetings of the department heads involved with natural gas industry activities followed by public information sessions during the regular economic development board meetings.
This seems a good start. It focuses on improving coordination and actions by internal resources while both informing the public and getting their input.
The county could use this process to cooperate with the townships on common key areas. Let's consider a few possibilities in three areas.
Public Data Access and Awareness - Some townships get advance notice from engineering companies about planned well pad sites and from gas companies about likely pipeline routes and road crossings. Do all towns? Is this information and usage coordinated across towns and county offices? Could this planning information be aggregated by the county, perhaps on a public website, for use by citizens as well as towns and planning commissions?
Joint Contingency Planning and Reaction - DEP requires gas companies to place their contingency plan and emergency data at each well site. Are these plans provided to and coordinated with town and county Fire and EMA offices? Is or should the county lead in joint contingency planning between towns, fire departments and adjoining districts? Should this be done also for pipeline routes since the Texas experience is that more fires and emergencies arise from the pipelines than from the wells?
Town Road Access Permissions - Who should give approval for thumper trucks to “thump” or gather seismic data along the public roads or for companies to lay pipelines along road right-of-ways? How should landowner safety and property rights be protected in advance of approval? Pipelines create extensive safety setbacks and restrictions on property uses. Seismic exploration can gather data from deep into adjacent properties where landowner permission or contractual agreement may not exist. Should the county facilitate consistent guidelines to protect property rights as well as public safety?
I'm sure there are many other ideas. Hopefully, these will stimulate a discussion. For more, visit my blog at http://JessupJottings.blogspot.com.
To address the Gas Rush, the county plans to have monthly meetings of the department heads involved with natural gas industry activities followed by public information sessions during the regular economic development board meetings.
This seems a good start. It focuses on improving coordination and actions by internal resources while both informing the public and getting their input.
The county could use this process to cooperate with the townships on common key areas. Let's consider a few possibilities in three areas.
Public Data Access and Awareness - Some townships get advance notice from engineering companies about planned well pad sites and from gas companies about likely pipeline routes and road crossings. Do all towns? Is this information and usage coordinated across towns and county offices? Could this planning information be aggregated by the county, perhaps on a public website, for use by citizens as well as towns and planning commissions?
Joint Contingency Planning and Reaction - DEP requires gas companies to place their contingency plan and emergency data at each well site. Are these plans provided to and coordinated with town and county Fire and EMA offices? Is or should the county lead in joint contingency planning between towns, fire departments and adjoining districts? Should this be done also for pipeline routes since the Texas experience is that more fires and emergencies arise from the pipelines than from the wells?
Town Road Access Permissions - Who should give approval for thumper trucks to “thump” or gather seismic data along the public roads or for companies to lay pipelines along road right-of-ways? How should landowner safety and property rights be protected in advance of approval? Pipelines create extensive safety setbacks and restrictions on property uses. Seismic exploration can gather data from deep into adjacent properties where landowner permission or contractual agreement may not exist. Should the county facilitate consistent guidelines to protect property rights as well as public safety?
I'm sure there are many other ideas. Hopefully, these will stimulate a discussion. For more, visit my blog at http://JessupJottings.blogspot.com.
Friday, April 3, 2009
NARO Comes to Susquehanna
Local natural gas rush watchers were introduced to a new player on 26 March, 2009 when the National Association of Royalty Owners, NARO US , held a public information session at the Mountain View High School auditorium. NARO was established in 1979 and recently formed an Appalachia Chapter to serve the interests of royalty owners in our area.
The meeting was co-hosted by First Liberty Bank and Trust. This NARO PRESS RELEASE describes their agenda and speakers. The auditorium was close to full and presentations were among the best I have seen.
There are other good sources of information, such as the Penn State Natural Gas Impacts website. NARO offers a national perspective and serves as a lobbying activity for the landowners and royalty owners. That's important in an industry with big players competing for advantage in a highly regulated government-controlled environment. For example, NARO is lobbying against the federal proposal to eliminate the 15% depletion allowance that owners get now on their royalty income taxes.
This point was impressed on me by several speakers who emphasized the need for royalty owners to manage their gas interests in a realistic business fashion. It's more than just getting a good lease and collecting checks (if you're that lucky). Think of it as a multi-decade investment business that requires proper structuring and managerial oversight.
Both the First Liberty and Lester Greevy presentations discussed options for distributing the the investment estate across generations while minimizing estate and inheritance taxes. I had been considering a Limited Liability Corporation (LLC) option, but Mr. Greevy made some very persuasive points in favor of a Family Law Partnership (FLP). As an example, if the surface and subsurface estates are separated and a subsurface FLP is formed , the limited partners may hold 97% non-voting interest and, because of the non-voting aspect, be discounted 40% on estate tax. The details of selecting a business structure (personal ownership, LLC, FLP, etc.) depend on one's family and financial situation. Since the choice will have a long term impact, it seems wise to get professional legal and financial advice when assessing the options.
Additionally, the subsurface gas rights will be assessed by Pennsylvania for estate/inheritance taxes. This value assessment may be highly speculative since there is little knowledge of how the Marcellus gas well production rates decline over time and what income streams may result. The key seems to be to get good assessment and legal talent on your side to establish a likely income stream and the discount rate for calculating present value of that stream.
Some speakers claimed that Range Resources estimates it can take hundreds of wells to establish the decline rate in a new shale formation (like the Marcellus). The decline rate is the rate at which gas well production declines over time. Usually, a shale well starts at very high rate ( 4 Million or more cubic feet per day) and declines to less than half in 1 to 3 years and tapers off to a constant lower flow for decades. The big question is the shape of that exponential curve. And that is not yet well known.
While the discussion focused on the uncertainties of assessing underground gas value for estate tax purpose, it seems the same problems could arise if the state allows local governments to include gas rights in assessing property taxes as is being proposed by some.
Another point had to do with the establishment of "pools"or "production units" by the gas companies. The companies set these units and, based on the relative acreage of each owner in the unit, allocate the gas production royalties to each owner. By including a small percent of an owner's acreage in a unit, the company may control all the owner's acreage, depending on how the lease is written.
The ultimate size or composition of a pool is not obvious when a permit is issued. As an example, Cabot filed a permit for drilling 65 acres locally; subsequently, they altered the boundaries to make a slightly different area that tied down over 850 acres. The good thing is that other landowners received a share of production royalties; the not so good thing was that some owners had all their land tied up based on a very low percentage share of the unit and royalties. Makes a good argument for establishing acreage (or percentage) limits on pooling and for Pugh clauses in a lease.
State Representative Sandy Major gave a good rundown on pending legislation. You can get details on the state legislature website for HB10, HB977, HB473, HB808, HB934 and its companion SB297, and HB834. She also discussed Governor Rendell's proposed severance tax and the new Republican counter proposal to lease State Forest lands.
HB10 is designed to counter a 2002 State Supreme Court ruling that precludes local property tax assessment on the value of underlying gas. The bill is intended to force only the lease holder (i.e., the gas company) to pay. Having seen an earlier version of this bill, that intention was not explicit. Unless extremely well written, this bill is very dangerous.
It will be litigated by the companies and that litigation is apt to include 2 key points : first, the necessity, in equity, to tax equally all underground gas, not just that leased; second, the validity of existing lease contracts that establish liability of the landowner to pay ad valorem (property taxes) taxes in proportion to his royalty share. In other words, if your gas rights are assessed for $10,000 and you have a 15% royalty rate, you may be liable for added tax on your $1,500 share. Of course you may be due a reduction for the loss of 85% of your gas rights. But what about your neighbor who has no lease? Why should he escape taxation on his assumed underground gas rights? This bill may prove more a problem than a solution.
HB977 has some very desirable benefits. It declares the Marcellus shale gas as being covered by the Oil and Gas Conservation Law with added protection from gas drainage by companies on nearby land. It forbids any horizontal drilling under unleased land. It introduces unitization concepts which should protect the rights of unleased owners, but may need updating to reflect the geologic realities of shale gas deposits as opposed to oil deposits.
The Governor's severance tax proposal is intended to go 100% to the general treasury with no allocation to local governments to cover the cost of services in gas producing areas. This tax is in addition to normal corporate and personal income taxes on gas production and royalty incomes. Even so, I think a severance tax, modified to allocate a fair percentage to the gas producing counties and towns, is preferable to the HB10 property tax proposal.
Finally, the House Energy Tax Force has an alternative proposal to the severance tax. This proposal would lease 390,000 acres of Forest Service lands for a minimum of $2000/acre over the next 3 years. It would produce more income than the severance tax, would not be a dis-incentive to gas production. and allocates a portion of the revenue back to gas producing towns and counties. Although the allocation formula needs reworking to be fairer to the Marcellus Shale areas, this seems the best option for getting new gas related revenue.
All of these bills are being reviewed in committee and it will be a while before anything is settled.
It's not easy to assess the impact of these potential state laws or to track their progress; the same can be said for prospective federal laws and state and federal regulations. Maybe by having Sandy speak, NARO was making a subtle point about their value to land and royalty owners.
The meeting was co-hosted by First Liberty Bank and Trust. This NARO PRESS RELEASE describes their agenda and speakers. The auditorium was close to full and presentations were among the best I have seen.
There are other good sources of information, such as the Penn State Natural Gas Impacts website. NARO offers a national perspective and serves as a lobbying activity for the landowners and royalty owners. That's important in an industry with big players competing for advantage in a highly regulated government-controlled environment. For example, NARO is lobbying against the federal proposal to eliminate the 15% depletion allowance that owners get now on their royalty income taxes.
This point was impressed on me by several speakers who emphasized the need for royalty owners to manage their gas interests in a realistic business fashion. It's more than just getting a good lease and collecting checks (if you're that lucky). Think of it as a multi-decade investment business that requires proper structuring and managerial oversight.
Both the First Liberty and Lester Greevy presentations discussed options for distributing the the investment estate across generations while minimizing estate and inheritance taxes. I had been considering a Limited Liability Corporation (LLC) option, but Mr. Greevy made some very persuasive points in favor of a Family Law Partnership (FLP). As an example, if the surface and subsurface estates are separated and a subsurface FLP is formed , the limited partners may hold 97% non-voting interest and, because of the non-voting aspect, be discounted 40% on estate tax. The details of selecting a business structure (personal ownership, LLC, FLP, etc.) depend on one's family and financial situation. Since the choice will have a long term impact, it seems wise to get professional legal and financial advice when assessing the options.
Additionally, the subsurface gas rights will be assessed by Pennsylvania for estate/inheritance taxes. This value assessment may be highly speculative since there is little knowledge of how the Marcellus gas well production rates decline over time and what income streams may result. The key seems to be to get good assessment and legal talent on your side to establish a likely income stream and the discount rate for calculating present value of that stream.
Some speakers claimed that Range Resources estimates it can take hundreds of wells to establish the decline rate in a new shale formation (like the Marcellus). The decline rate is the rate at which gas well production declines over time. Usually, a shale well starts at very high rate ( 4 Million or more cubic feet per day) and declines to less than half in 1 to 3 years and tapers off to a constant lower flow for decades. The big question is the shape of that exponential curve. And that is not yet well known.
While the discussion focused on the uncertainties of assessing underground gas value for estate tax purpose, it seems the same problems could arise if the state allows local governments to include gas rights in assessing property taxes as is being proposed by some.
Another point had to do with the establishment of "pools"or "production units" by the gas companies. The companies set these units and, based on the relative acreage of each owner in the unit, allocate the gas production royalties to each owner. By including a small percent of an owner's acreage in a unit, the company may control all the owner's acreage, depending on how the lease is written.
The ultimate size or composition of a pool is not obvious when a permit is issued. As an example, Cabot filed a permit for drilling 65 acres locally; subsequently, they altered the boundaries to make a slightly different area that tied down over 850 acres. The good thing is that other landowners received a share of production royalties; the not so good thing was that some owners had all their land tied up based on a very low percentage share of the unit and royalties. Makes a good argument for establishing acreage (or percentage) limits on pooling and for Pugh clauses in a lease.
State Representative Sandy Major gave a good rundown on pending legislation. You can get details on the state legislature website for HB10, HB977, HB473, HB808, HB934 and its companion SB297, and HB834. She also discussed Governor Rendell's proposed severance tax and the new Republican counter proposal to lease State Forest lands.
HB10 is designed to counter a 2002 State Supreme Court ruling that precludes local property tax assessment on the value of underlying gas. The bill is intended to force only the lease holder (i.e., the gas company) to pay. Having seen an earlier version of this bill, that intention was not explicit. Unless extremely well written, this bill is very dangerous.
It will be litigated by the companies and that litigation is apt to include 2 key points : first, the necessity, in equity, to tax equally all underground gas, not just that leased; second, the validity of existing lease contracts that establish liability of the landowner to pay ad valorem (property taxes) taxes in proportion to his royalty share. In other words, if your gas rights are assessed for $10,000 and you have a 15% royalty rate, you may be liable for added tax on your $1,500 share. Of course you may be due a reduction for the loss of 85% of your gas rights. But what about your neighbor who has no lease? Why should he escape taxation on his assumed underground gas rights? This bill may prove more a problem than a solution.
HB977 has some very desirable benefits. It declares the Marcellus shale gas as being covered by the Oil and Gas Conservation Law with added protection from gas drainage by companies on nearby land. It forbids any horizontal drilling under unleased land. It introduces unitization concepts which should protect the rights of unleased owners, but may need updating to reflect the geologic realities of shale gas deposits as opposed to oil deposits.
The Governor's severance tax proposal is intended to go 100% to the general treasury with no allocation to local governments to cover the cost of services in gas producing areas. This tax is in addition to normal corporate and personal income taxes on gas production and royalty incomes. Even so, I think a severance tax, modified to allocate a fair percentage to the gas producing counties and towns, is preferable to the HB10 property tax proposal.
Finally, the House Energy Tax Force has an alternative proposal to the severance tax. This proposal would lease 390,000 acres of Forest Service lands for a minimum of $2000/acre over the next 3 years. It would produce more income than the severance tax, would not be a dis-incentive to gas production. and allocates a portion of the revenue back to gas producing towns and counties. Although the allocation formula needs reworking to be fairer to the Marcellus Shale areas, this seems the best option for getting new gas related revenue.
All of these bills are being reviewed in committee and it will be a while before anything is settled.
It's not easy to assess the impact of these potential state laws or to track their progress; the same can be said for prospective federal laws and state and federal regulations. Maybe by having Sandy speak, NARO was making a subtle point about their value to land and royalty owners.
Sunday, March 22, 2009
Jessup News Post - March 2009
Township Meeting :
The 4 March 2009 meeting dealt mainly with new equipment purchase and rental options, COG services, and SALDO options.
The bids for a new backhoe/loader were opened in the presence of the bidders. A used Case 580M was selected as it was much lower in price and satisfied all requirements.
The advantages of renting a gravel crusher and rental options were discussed.
The town will now conduct it's own building code inspection services under a contract with Building Code Inspectors instead of COG. This action will reduce fees to residents. COG will continue to enforce Sewage codes for the town.
Copies of the county SALDO were obtained last month. A Supervisor met with Bob Templeton to discuss town-county cooperation on use of the county SALDO. The discussion of SALDO options concluded that the town would use the county SALDO rather than form a planning commission and adopt their own. The county planning commission is considering inviting town representatives to working sessions on a quarterly basis.
An engineering company provided their plans for examining potential gas well pad sites in the township along Route 706.
The February NTC meeting was briefly discussed. The NTC was informed of our decision to not zone and interest in withdrawing from the controlling Intergovernmental Cooperation Agreement for Multi-Municipal Planning and Implementation (zoning). They indicated they would review the status of the agreement for the next meeting.
NTC Meeting ( at Choconut ) :
The 19 March 2009 NTC meeting was fairly brief. Bill Stewart noted that there was little current activity of interest to most members and suggested meeting bi-monthly instead of monthly. A majority of the township representatives showed a preference for quarterly meetings and that decision was made. The next meeting will be 18 June 2008 in Jessup.
Liberty Township announced that they had voted to not zone. Bruce Griffis confirmed that Jessup had voted to not zone; he also stated that no decision had been taken on SALDO.
The NTC 2008 Audit reports and the March 2009 Treasurer report were provided. The Treasurer report continues to show $59,639 balance in SALDO-Zoning Funds; this is unchanged since Carson Helfrich returned the funds in December 2008. Ms. Kublo asked whether the towns could use those funds for their own SALDO or other uses.
The answer was interesting. The residual funds are being reviewed to determine how much is DCED funding which must be returned to the State Treasury, and how much is from township matching funds. The matching funds would go back to the towns based on their initial contribution. The initial match contributions were set by a formula involving town revenue and size. The basic match was 70% DCED to 30% Town.
So, some funds may be due to Jessup and the NTC – DCED review should be followed.
I asked Bill Stewart what they had decided about changing the NTC Intergovernmental Cooperation Agreement, since he had taken that action at the February meeting. He deferred to Bob Templeton who informed us that he had consulted Carson Helfrich. According to Carson, the Agreement had never been signed by all the townships.
In other words, the Agreement had never been properly executed in the first place. Bill Stewart suggested any town that had signed and was concerned should rescind the agreement in a town meeting and inform the NTC. This is good advice, and we should take it.
The revelation that the key intergovernmental agreement was never properly executed is amazing. It is equally amazing that the NTC could not answer the question without recourse to Mr. Helfrich through Mr. Templeton.
It also raises the question whether either the Comprehensive Plan or the Zoning Ordinance were ever legally valid since they were put together under the auspices of a Joint Planning Committee which was not properly formed under the unexecuted (and invalid) Intergovernmental Cooperation Agrreement.
This interpretation of invalidity is consistent with Carson's letter of 13 January 2009, in which he states: “This zoning ordinance as now designed can be adopted by any of the NTC municipalities independent of adoption by the others.” Implicit is the need, under the MPC, for a town to form its own planning commission which then reviews the proposed ordinance as a template and adopts it as their own town ordinance.
I suggest Jessup rescind the “Agreement” and inform the NTC by letter that we rescind it, are not interested in a joint SALDO, and want reimbursement of the funds due us from the residual Zoning – SALDO funds balance.
A citizen suggested the NTC hold a public meeting to discuss gas pipeline routes crossing town borders, safety, and minimal land disruption issues. The ensuing discussion covered pipelines along road right-of-ways and who should be in the approval process since there are safety and setback issues as well as landowner property rights involved.
Some supervisors thought they should have supervisor-only meetings before letting the public in on their thinking. Ironically, it escaped them that a citizen raised the issue and much thoughtful discussion came from the citizens. It seems a missed opportunity to improve citizen-supervisor relations, although a better place for these discussions may be the proposed county gas committee.
The 4 March 2009 meeting dealt mainly with new equipment purchase and rental options, COG services, and SALDO options.
The bids for a new backhoe/loader were opened in the presence of the bidders. A used Case 580M was selected as it was much lower in price and satisfied all requirements.
The advantages of renting a gravel crusher and rental options were discussed.
The town will now conduct it's own building code inspection services under a contract with Building Code Inspectors instead of COG. This action will reduce fees to residents. COG will continue to enforce Sewage codes for the town.
Copies of the county SALDO were obtained last month. A Supervisor met with Bob Templeton to discuss town-county cooperation on use of the county SALDO. The discussion of SALDO options concluded that the town would use the county SALDO rather than form a planning commission and adopt their own. The county planning commission is considering inviting town representatives to working sessions on a quarterly basis.
An engineering company provided their plans for examining potential gas well pad sites in the township along Route 706.
The February NTC meeting was briefly discussed. The NTC was informed of our decision to not zone and interest in withdrawing from the controlling Intergovernmental Cooperation Agreement for Multi-Municipal Planning and Implementation (zoning). They indicated they would review the status of the agreement for the next meeting.
NTC Meeting ( at Choconut ) :
The 19 March 2009 NTC meeting was fairly brief. Bill Stewart noted that there was little current activity of interest to most members and suggested meeting bi-monthly instead of monthly. A majority of the township representatives showed a preference for quarterly meetings and that decision was made. The next meeting will be 18 June 2008 in Jessup.
Liberty Township announced that they had voted to not zone. Bruce Griffis confirmed that Jessup had voted to not zone; he also stated that no decision had been taken on SALDO.
The NTC 2008 Audit reports and the March 2009 Treasurer report were provided. The Treasurer report continues to show $59,639 balance in SALDO-Zoning Funds; this is unchanged since Carson Helfrich returned the funds in December 2008. Ms. Kublo asked whether the towns could use those funds for their own SALDO or other uses.
The answer was interesting. The residual funds are being reviewed to determine how much is DCED funding which must be returned to the State Treasury, and how much is from township matching funds. The matching funds would go back to the towns based on their initial contribution. The initial match contributions were set by a formula involving town revenue and size. The basic match was 70% DCED to 30% Town.
So, some funds may be due to Jessup and the NTC – DCED review should be followed.
I asked Bill Stewart what they had decided about changing the NTC Intergovernmental Cooperation Agreement, since he had taken that action at the February meeting. He deferred to Bob Templeton who informed us that he had consulted Carson Helfrich. According to Carson, the Agreement had never been signed by all the townships.
In other words, the Agreement had never been properly executed in the first place. Bill Stewart suggested any town that had signed and was concerned should rescind the agreement in a town meeting and inform the NTC. This is good advice, and we should take it.
The revelation that the key intergovernmental agreement was never properly executed is amazing. It is equally amazing that the NTC could not answer the question without recourse to Mr. Helfrich through Mr. Templeton.
It also raises the question whether either the Comprehensive Plan or the Zoning Ordinance were ever legally valid since they were put together under the auspices of a Joint Planning Committee which was not properly formed under the unexecuted (and invalid) Intergovernmental Cooperation Agrreement.
This interpretation of invalidity is consistent with Carson's letter of 13 January 2009, in which he states: “This zoning ordinance as now designed can be adopted by any of the NTC municipalities independent of adoption by the others.” Implicit is the need, under the MPC, for a town to form its own planning commission which then reviews the proposed ordinance as a template and adopts it as their own town ordinance.
I suggest Jessup rescind the “Agreement” and inform the NTC by letter that we rescind it, are not interested in a joint SALDO, and want reimbursement of the funds due us from the residual Zoning – SALDO funds balance.
A citizen suggested the NTC hold a public meeting to discuss gas pipeline routes crossing town borders, safety, and minimal land disruption issues. The ensuing discussion covered pipelines along road right-of-ways and who should be in the approval process since there are safety and setback issues as well as landowner property rights involved.
Some supervisors thought they should have supervisor-only meetings before letting the public in on their thinking. Ironically, it escaped them that a citizen raised the issue and much thoughtful discussion came from the citizens. It seems a missed opportunity to improve citizen-supervisor relations, although a better place for these discussions may be the proposed county gas committee.
Saturday, March 21, 2009
Gas Committee Tasks?
The Susquehanna County Commissioners have charged the Economic Development Board with making recommendations for a County Gas Committee. In an earlier post, Here , I offered suggestions and information sources to facilitate discussions about what a county gas committee might do.
This post discusses more specific action areas and tasks for a committee. They are presented in categories of actions, with questions, to stimulate discussions and decisions on priorities and tasks.
Public Data Access and Awareness - Some townships get advance notice from engineering companies about planned well pad sites and from gas companies about likely pipeline routes and road crossings. An engineering company provided their drill pad plans to my town prior to our last meeting. Do all towns get similar advance notice? Is it also the case for planned pipeline routes? Is this information and usage coordinated across towns and county offices? Could well site drilling and pipeline route planning information be aggregated by the County for sharing with towns and citizens, perhaps by a public website? This information could be used by citizens as well as town and county planning commissions.
Joint Contingency Planning and Reaction - DEP requires gas companies to place a plastic cylinder at each well site containing their contingency plan and data in the event of an emergency. Are these plans provided and coordinated with Town and County Fire and EMA offices? Is or should the County lead in joint contingency planning between towns and fire departments and adjoining districts? Should this be done also for pipeline routes since the Texas experience is that more fires and emergencies arise from the pipelines than from the wells?
Town Road Access Permissions - Who should give approval for thumper trucks to “thump” or gather seismic data along the public roads or for companies to lay pipelines along road right-of-ways? Who should be made aware of thumper or pipeline routes in advance of permission? Should landowner permission be a prerequisite to approval since they do own the land under the right-of- ways? Pipelines create extensive safety setbacks and restrictions impacting the landowner use of his property. Seismic exploration data can cover a thousand or more feet from the road and should not be gathered without landowner permission or contractual agreement. New county-wide policies or guidelines may be needed to protect property rights as well as public safety.
Paying for Exploitation Services - Gas companies make extensive use of town roads and require other services as indicated above. These new burdens should be paid for by the companies but there are no tax methods to do so at county/town level. Should the County participate in or form alliances with other counties for legislation to get a substantial portion of gas royalty income tax or severance tax allocated back to the counties and towns that produced the gas? If the gas producing counties and legislative districts combined on this issue, they would be a powerful voice if not a majority in both house.
Of course, it is up to the Commissioners to decide what they want a Gas Committee to do and to select the right mix of talent to accomplish the mission. However, some of the above ideas represent important areas of town and county coordination. If they are not being addressed already by existing offices, the committee may a good focal point for establishing coordination and actions among the towns and the county offices.
This post discusses more specific action areas and tasks for a committee. They are presented in categories of actions, with questions, to stimulate discussions and decisions on priorities and tasks.
Public Data Access and Awareness - Some townships get advance notice from engineering companies about planned well pad sites and from gas companies about likely pipeline routes and road crossings. An engineering company provided their drill pad plans to my town prior to our last meeting. Do all towns get similar advance notice? Is it also the case for planned pipeline routes? Is this information and usage coordinated across towns and county offices? Could well site drilling and pipeline route planning information be aggregated by the County for sharing with towns and citizens, perhaps by a public website? This information could be used by citizens as well as town and county planning commissions.
Joint Contingency Planning and Reaction - DEP requires gas companies to place a plastic cylinder at each well site containing their contingency plan and data in the event of an emergency. Are these plans provided and coordinated with Town and County Fire and EMA offices? Is or should the County lead in joint contingency planning between towns and fire departments and adjoining districts? Should this be done also for pipeline routes since the Texas experience is that more fires and emergencies arise from the pipelines than from the wells?
Town Road Access Permissions - Who should give approval for thumper trucks to “thump” or gather seismic data along the public roads or for companies to lay pipelines along road right-of-ways? Who should be made aware of thumper or pipeline routes in advance of permission? Should landowner permission be a prerequisite to approval since they do own the land under the right-of- ways? Pipelines create extensive safety setbacks and restrictions impacting the landowner use of his property. Seismic exploration data can cover a thousand or more feet from the road and should not be gathered without landowner permission or contractual agreement. New county-wide policies or guidelines may be needed to protect property rights as well as public safety.
Paying for Exploitation Services - Gas companies make extensive use of town roads and require other services as indicated above. These new burdens should be paid for by the companies but there are no tax methods to do so at county/town level. Should the County participate in or form alliances with other counties for legislation to get a substantial portion of gas royalty income tax or severance tax allocated back to the counties and towns that produced the gas? If the gas producing counties and legislative districts combined on this issue, they would be a powerful voice if not a majority in both house.
Of course, it is up to the Commissioners to decide what they want a Gas Committee to do and to select the right mix of talent to accomplish the mission. However, some of the above ideas represent important areas of town and county coordination. If they are not being addressed already by existing offices, the committee may a good focal point for establishing coordination and actions among the towns and the county offices.
Sunday, March 1, 2009
A County Gas Committee ?
Should Susquehanna County establish a County Gas Committee and, if so, what should it do ?
The County Commissioners have discussed creating a "Gas Committee" at recent meetings and have asked the Economic Development Board to address the issue. I attended the 26 February meeting of the Board to learn what was being considered.
The county is rich in Marcellus Shale and the extraction of natural gas is very likely to become a major driver of the county's economy with impacts on public services, infrastructure, and the environment. The Board is an understandable place to start even though the issues may go beyond their normal purview.
While I lack the context of prior discussions, my main impression was that the Commissioners were not going to set the committee's mission and goals. Instead, they wanted the Board to come up with mission, goals, objectives, structure and personnel recommendations - basically from scratch. It is very hard for an advisory board to do this without specific guidance from the executive leadership. The Board accepted the task.
In an attempt to get or clarify some executive guidelines, I commented that the "Committee" might try to do three things : Educate the public ( in conjunction with Penn State's efforts - Don't be redundant); Establish a forum for county offices to discuss and coordinate their actions on gas extraction issues ( safety, roads, etc.); and Identify key legislative or regulatory issues for the County to pursue.
I did not ask whether the committee should be "inward"focused per the first two items above or "outward" focused per the legislative item, which might entail suggesting alliances of legislators or counties for coordinated action (e.g. lobbying). It became clear that the Board would have to define these guidelines for themselves. The main resource for them was their contract staff, the Planning Authority (PA), which had obtained information about two other county committees. Reviewing those documents can be useful if one focuses on committee effectiveness rather than just structure and process.
OK; that's what was. Now what should be done?
Simple answer - I really don't know. But I'll offer a few more suggestions that might help the Board develop recommendations for a county gas committee; or at least stimulate some discussion about what a committee should and could do. The overall guideline should be to prioritize effort - don't do what others are doing; do things that get actions and results.
First - I still like the above 3 objectives : Educate Public ( and Listen); Coordinate Internal Resources; Influence Legislation. These are reasonably distinct areas of endeavor which could be pursued separately. They are not in priority order. The Board should refine and prioritize.
Second - Recognize our strengths and resources : we have a Planning Commission, an EMA office, a Conservation office, a Penn State Extension Office, and other resources ( including knowledgeable citizens) that can be tapped or coordinated.
Third - Accept our limitations : we are a small 41,000 person county with limited volunteer and financial resources. Prioritize on the doable (e.g. if the commissioners won't lobby or permit it, downplay legislative initiatives).
Fourth - Face the inevitable : Expect the commissioners to deflect public concerns onto the committee. Be prepared to listen and do triage ( executive action, staff referral, noted for consideration).
Fifth - Consider organization flexibility - e.g., short term task forces, formed from people who present issues strongly and knowledgeably, to report out with actionable recommendations.
Sixth - Review some pertinent literature but don't get carried away by academic breadth and comprehensiveness - remember item (3) above.
Penn State has a good website on Natural Gas Impacts ( http://naturalgas.extension.psu.ed ) with a lot of information as well as many links to documents and presentations. They link several publications on local government issues and on organizing a local task force.
Of course, there are also some good earlier posts on this blog, Jessup Jottings (http://jessupjottings.blogspot.com) ; and I'll be adding more in the future. This is an important issue and I wish the Board success.
The County Commissioners have discussed creating a "Gas Committee" at recent meetings and have asked the Economic Development Board to address the issue. I attended the 26 February meeting of the Board to learn what was being considered.
The county is rich in Marcellus Shale and the extraction of natural gas is very likely to become a major driver of the county's economy with impacts on public services, infrastructure, and the environment. The Board is an understandable place to start even though the issues may go beyond their normal purview.
While I lack the context of prior discussions, my main impression was that the Commissioners were not going to set the committee's mission and goals. Instead, they wanted the Board to come up with mission, goals, objectives, structure and personnel recommendations - basically from scratch. It is very hard for an advisory board to do this without specific guidance from the executive leadership. The Board accepted the task.
In an attempt to get or clarify some executive guidelines, I commented that the "Committee" might try to do three things : Educate the public ( in conjunction with Penn State's efforts - Don't be redundant); Establish a forum for county offices to discuss and coordinate their actions on gas extraction issues ( safety, roads, etc.); and Identify key legislative or regulatory issues for the County to pursue.
I did not ask whether the committee should be "inward"focused per the first two items above or "outward" focused per the legislative item, which might entail suggesting alliances of legislators or counties for coordinated action (e.g. lobbying). It became clear that the Board would have to define these guidelines for themselves. The main resource for them was their contract staff, the Planning Authority (PA), which had obtained information about two other county committees. Reviewing those documents can be useful if one focuses on committee effectiveness rather than just structure and process.
OK; that's what was. Now what should be done?
Simple answer - I really don't know. But I'll offer a few more suggestions that might help the Board develop recommendations for a county gas committee; or at least stimulate some discussion about what a committee should and could do. The overall guideline should be to prioritize effort - don't do what others are doing; do things that get actions and results.
First - I still like the above 3 objectives : Educate Public ( and Listen); Coordinate Internal Resources; Influence Legislation. These are reasonably distinct areas of endeavor which could be pursued separately. They are not in priority order. The Board should refine and prioritize.
Second - Recognize our strengths and resources : we have a Planning Commission, an EMA office, a Conservation office, a Penn State Extension Office, and other resources ( including knowledgeable citizens) that can be tapped or coordinated.
Third - Accept our limitations : we are a small 41,000 person county with limited volunteer and financial resources. Prioritize on the doable (e.g. if the commissioners won't lobby or permit it, downplay legislative initiatives).
Fourth - Face the inevitable : Expect the commissioners to deflect public concerns onto the committee. Be prepared to listen and do triage ( executive action, staff referral, noted for consideration).
Fifth - Consider organization flexibility - e.g., short term task forces, formed from people who present issues strongly and knowledgeably, to report out with actionable recommendations.
Sixth - Review some pertinent literature but don't get carried away by academic breadth and comprehensiveness - remember item (3) above.
Penn State has a good website on Natural Gas Impacts ( http://naturalgas.extension.psu.ed ) with a lot of information as well as many links to documents and presentations. They link several publications on local government issues and on organizing a local task force.
Of course, there are also some good earlier posts on this blog, Jessup Jottings (http://jessupjottings.blogspot.com) ; and I'll be adding more in the future. This is an important issue and I wish the Board success.
Saturday, February 28, 2009
Mathematics, Gas, and Taxes
Let's have fun with mathematics, starting with some interesting numbers about Susquehanna County.
We have 823 square miles of land area and 9 square miles of water; about 932 sq. miles total.
Pennsylvania has 46,058 square miles of surface. Dividing that into 832 yields 1.81% as The County share of the State's surface area.
Geologists and gas companies claim that 60% of the State's area overlays the Marcellus Shale deposits from which we hope to produce large amounts of natural gas. That works out to about 27,600 square miles. Susquehanna County is completely in that area. So, we overlay about 3% of the Marcellus Shale area in the state. The thickness of the shale layer in Susquehanna County is considered to be about twice the average. So, the shale gas value of our deposits is probably a much higher percentage, say perhaps 6%.
There are several estimates of the value of the Marcellus Shale. All are highly speculative until more drilling and production experience is gained. Governor Rendell uses an estimate of $1Trillion in his budget fact sheet on his proposed severance tax. On that basis, at just 3%, the county would have about $30Billion of shale gas under the surface. At higher % estimates for greater thickness, the value could double to $60Billion.
What do those numbers mean in more human terms - like an acre? At 624 acres per square mile times 830 acres in the county, the county has about 518,000 acres. Dividing that into $30Billion gives a value of about $58,000 per acre. At the higher percentages, that could exceed $100,000/acre. Pretty high for most land here!
Of course, these are "averages" and the real value of any specific parcel can be dramatically different depending on what really lies below and can be extracted. In the last couple of years gas companies have paid 5-year lease prices from $25 per acre to over $2,500 per acre for parcels with roughly comparable gas extraction potentials.
The lease prices vary based on the awareness of the landowners, the degree of company competition, the rising price of natural gas, and expectations of high payoffs from a small portion of the large amounts of land leased. Only some of the payoff may come from actually extracting gas from a parcel. The payoff can also come from flipping leases to other companies or from using the land for pipelines at very low annual payments instead of the high gas royalties hoped for by landowners. Some of the leased land will never be worth exploiting and it may be years before that culling is done.
For these reasons, using the lease price as a fair valuation of the underlying gas is apt to be very misleading. Yet, the county commissioners and township supervisors associations propose to use the lease price as the basis for taxing gas rights (or possible deposits) as property. The resulting tax may require companies and landowners to pay disparate amounts for similar parcels regardless of whether they can get any value from the assumed gas deposits.
How a property tax would be written to protect landowners from additional property taxes when they get no revenue is unclear. A severance tax avoids this issue by only taxing the produced gas. If there is no production, there is neither tax nor royalty income. At least, no one is threatened with foreclosure for failing to pay taxes on non-existent gas deposits, as might happen with a property tax.
Unfortunately, the Governor's proposed severance tax is intended to be used to reduce the state deficit and to pay for projects in the cities and counties that have nothing to do with the production of the gas. The burden of paying for gas-production related services (roads, social and law enforcement, etc.)will fall on the producing counties and towns that may see little of the state severance tax.
Before we jump on the need for any new taxes,it's worth noting that successful gas production yields both corporate income taxes and royalty income taxes to the state. The problem is that the state does not allocate a fair share of those taxes back to the local governments that provide the essential services.
The gas-producing counties and towns deserve a fair share of any gas related taxes whether from royalty income tax, corporate income tax, or severance tax. Getting it depends on the effectiveness of our legislators in writing a fair share allocation into the tax laws. And that brings us to some other numbers.
The US Census Bureau estimates Susquehanna County population at 41,123 in 2007. The comparable 2007 estimate for Pennsylvania was 12,432,792 ( the updated Jan09 estimate is now 12,419,930). New county data will be available in April, but the Susquehanna County population will still be about 0.3% of the state population.
So, 3%-6% of the Marcellus Shale gas value is located on land populated by only 0.3% of the voting public. These numbers do not look good for Susquehanna County getting its fair share of any natural gas tax devised in the political horse trading arena of the State Legislature.
Some other numbers may improve the outlook. As a percentage of the state, our population is only 0.3%; but we are 1.5% of the 67 counties; and we elect 1% of the 203 state representatives and 2% of the 50 state senators. Those numbers look more promising.
If we add representatives and senators from other Marcellus Shale areas, the numbers start to look like a strong minority voting block; if we add the other oil and gas producing areas of the state ( mostly the western half), the numbers have the potential to be a decisive voting block. As a reference point, last year,the DEP issued over 7000 gas well permits, but only 450 were for Marcellus Shale gas (about 15% of these in Susquehanna County).There may be a lot of allies for allocating a fair share of state (income or severance) tax revenues derived from gas production back to the producing towns and counties.
Of course, that's just potential; making it real requires a lot of alliance building around some common interests. And that effort is in the realm of politics not mathematics.
We have 823 square miles of land area and 9 square miles of water; about 932 sq. miles total.
Pennsylvania has 46,058 square miles of surface. Dividing that into 832 yields 1.81% as The County share of the State's surface area.
Geologists and gas companies claim that 60% of the State's area overlays the Marcellus Shale deposits from which we hope to produce large amounts of natural gas. That works out to about 27,600 square miles. Susquehanna County is completely in that area. So, we overlay about 3% of the Marcellus Shale area in the state. The thickness of the shale layer in Susquehanna County is considered to be about twice the average. So, the shale gas value of our deposits is probably a much higher percentage, say perhaps 6%.
There are several estimates of the value of the Marcellus Shale. All are highly speculative until more drilling and production experience is gained. Governor Rendell uses an estimate of $1Trillion in his budget fact sheet on his proposed severance tax. On that basis, at just 3%, the county would have about $30Billion of shale gas under the surface. At higher % estimates for greater thickness, the value could double to $60Billion.
What do those numbers mean in more human terms - like an acre? At 624 acres per square mile times 830 acres in the county, the county has about 518,000 acres. Dividing that into $30Billion gives a value of about $58,000 per acre. At the higher percentages, that could exceed $100,000/acre. Pretty high for most land here!
Of course, these are "averages" and the real value of any specific parcel can be dramatically different depending on what really lies below and can be extracted. In the last couple of years gas companies have paid 5-year lease prices from $25 per acre to over $2,500 per acre for parcels with roughly comparable gas extraction potentials.
The lease prices vary based on the awareness of the landowners, the degree of company competition, the rising price of natural gas, and expectations of high payoffs from a small portion of the large amounts of land leased. Only some of the payoff may come from actually extracting gas from a parcel. The payoff can also come from flipping leases to other companies or from using the land for pipelines at very low annual payments instead of the high gas royalties hoped for by landowners. Some of the leased land will never be worth exploiting and it may be years before that culling is done.
For these reasons, using the lease price as a fair valuation of the underlying gas is apt to be very misleading. Yet, the county commissioners and township supervisors associations propose to use the lease price as the basis for taxing gas rights (or possible deposits) as property. The resulting tax may require companies and landowners to pay disparate amounts for similar parcels regardless of whether they can get any value from the assumed gas deposits.
How a property tax would be written to protect landowners from additional property taxes when they get no revenue is unclear. A severance tax avoids this issue by only taxing the produced gas. If there is no production, there is neither tax nor royalty income. At least, no one is threatened with foreclosure for failing to pay taxes on non-existent gas deposits, as might happen with a property tax.
Unfortunately, the Governor's proposed severance tax is intended to be used to reduce the state deficit and to pay for projects in the cities and counties that have nothing to do with the production of the gas. The burden of paying for gas-production related services (roads, social and law enforcement, etc.)will fall on the producing counties and towns that may see little of the state severance tax.
Before we jump on the need for any new taxes,it's worth noting that successful gas production yields both corporate income taxes and royalty income taxes to the state. The problem is that the state does not allocate a fair share of those taxes back to the local governments that provide the essential services.
The gas-producing counties and towns deserve a fair share of any gas related taxes whether from royalty income tax, corporate income tax, or severance tax. Getting it depends on the effectiveness of our legislators in writing a fair share allocation into the tax laws. And that brings us to some other numbers.
The US Census Bureau estimates Susquehanna County population at 41,123 in 2007. The comparable 2007 estimate for Pennsylvania was 12,432,792 ( the updated Jan09 estimate is now 12,419,930). New county data will be available in April, but the Susquehanna County population will still be about 0.3% of the state population.
So, 3%-6% of the Marcellus Shale gas value is located on land populated by only 0.3% of the voting public. These numbers do not look good for Susquehanna County getting its fair share of any natural gas tax devised in the political horse trading arena of the State Legislature.
Some other numbers may improve the outlook. As a percentage of the state, our population is only 0.3%; but we are 1.5% of the 67 counties; and we elect 1% of the 203 state representatives and 2% of the 50 state senators. Those numbers look more promising.
If we add representatives and senators from other Marcellus Shale areas, the numbers start to look like a strong minority voting block; if we add the other oil and gas producing areas of the state ( mostly the western half), the numbers have the potential to be a decisive voting block. As a reference point, last year,the DEP issued over 7000 gas well permits, but only 450 were for Marcellus Shale gas (about 15% of these in Susquehanna County).There may be a lot of allies for allocating a fair share of state (income or severance) tax revenues derived from gas production back to the producing towns and counties.
Of course, that's just potential; making it real requires a lot of alliance building around some common interests. And that effort is in the realm of politics not mathematics.
Wednesday, February 11, 2009
More on Taxes and Gas Extraction
With the release of the Governor's budget, the issues discussed in my last post become more immediate and focused. The Governor proposes a severance tax of 5% plus 4.7 cents per thousand cubic feet (mcf) of gas at the wellhead ( Marcellus Budget ). At the current market price of about $4.60/mcf, that is effectively a 6% tax. This severance tax will be the political ground zero for all legislative negotiations on taxing natural gas.
I have argued against the property tax assessment of gas deposits and rights based on lease value, as advocated by both the CCAP ( County Commissioners Association of Pennsylvania and the PSATS ( Pennsylvania State Association of Township Supervisors) in their 2009 priorities lists. I believe those taxes are neither fair nor practical to administer. With the Governor's proposal on the table, they are a distraction to a political strategy of gaining a local government allocation of any severance tax revenues.
I still believe that the gas extraction business will more than pay its way based on the additional corporate taxes and royalty income taxes that it generates. And it will grow our economy. A substantial portion of those new revenue streams from existing taxes should be allocated to the local counties and towns that are producing the gas and bearing the burdens of servicing the industry's needs.
That should happen in any event; but it may not be practical to get it now. If a severance tax is in our future, we should be sure to get a substantial revenue stream devoted to the producing counties and towns. We also need to be sure we do not overtax and become less competitive than other gas-producing states. A 6% severance tax may seem small compared to Texas's 7% tax; but Texas has no income taxes and that makes them more attractive than us to gas producers.
We need a balanced tax policy that keeps us competitive and fairly recompenses the gas-producing towns, counties, and land owners. That should result in property tax reductions in those towns and counties. From a practical politics standpoint, the best strategy is to abandon the PSATS and CCAP positions on property tax assessment of gas rights and focus on getting a substantial allocation of the severance tax to the producing counties and towns to reduce property taxes and to fund the local services that are essential to efficient gas production. This funds allocation could be administered as easily as the liquid fuel tax for road maintenance.
By the way, the Governor's Marcellus Budget, above, estimates severance tax revenues of $1,819.3 Million over the next 5 years. Susquehanna County overlays about 3% of the Marcellus Shale deposits in Pennsylvania. However, based on shale thickness and drilling activity, our share of the state's gas production is likely to be considerably higher ( maybe 6-10%) over the next 5 years. With a 6% share, Susquehanna county would generate $109 Million of that 5- year revenue stream. A substantial portion of that would pay a lot of local bills.
For the record, I'm attaching a copy of a letter to the local newspapers on this topic; hopefully it will be published in the 18 February editions. The letter :
Fair Taxes from Gas Extraction
Under current state law, towns and counties cannot assess property taxes on gas deposits or rights. Hence, they get no additional revenue from natural gas extraction, but must keep the roads and bridges open under heavy truck traffic and provide social and law enforcement services.
Both county (CCAP) and township (PSATS) associations propose the State allow property taxes on gas rights based on lease values. This proposal is neither fair nor practical.
How do we assess fairly the "value" of underground gas rights separately from surface rights? Gas companies pay different lease prices for comparable land at different times. If gas can't be extracted or the property is not leased, is the value zero? It's hard to make fair assessments and to administer this tax.
Governor Rendell proposes a new severance tax on gas at the wellhead of effectively 6% at current prices in addition to existing income taxes on royalties and corporate earnings. Too much taxation can drive gas producers to other states. We need a balance that keeps us competitive and fairly recompenses the gas-producing towns, counties, and landowners.
If gas is extracted, State tax revenue is increased by the new profits and royalties. By allocating a significant part of gas-based royalty and corporate income taxes and, if passed, severance taxes to the counties and towns from which those tax revenues were generated, the gas-rights owners pay a tax not paid by surface-only owners. The new revenue can pay for the new services and reduce local property taxes. Any severance tax should be kept low to encourage production here and should flow mostly to the gas-producing local governments.
This approach treats both types of property owners fairly, pays for the added community services,and can be administered as easily as the gasoline/fuel tax allocation for road maintenance. For more information, go to www.jessupjottings.blogspot.com.
I have argued against the property tax assessment of gas deposits and rights based on lease value, as advocated by both the CCAP ( County Commissioners Association of Pennsylvania and the PSATS ( Pennsylvania State Association of Township Supervisors) in their 2009 priorities lists. I believe those taxes are neither fair nor practical to administer. With the Governor's proposal on the table, they are a distraction to a political strategy of gaining a local government allocation of any severance tax revenues.
I still believe that the gas extraction business will more than pay its way based on the additional corporate taxes and royalty income taxes that it generates. And it will grow our economy. A substantial portion of those new revenue streams from existing taxes should be allocated to the local counties and towns that are producing the gas and bearing the burdens of servicing the industry's needs.
That should happen in any event; but it may not be practical to get it now. If a severance tax is in our future, we should be sure to get a substantial revenue stream devoted to the producing counties and towns. We also need to be sure we do not overtax and become less competitive than other gas-producing states. A 6% severance tax may seem small compared to Texas's 7% tax; but Texas has no income taxes and that makes them more attractive than us to gas producers.
We need a balanced tax policy that keeps us competitive and fairly recompenses the gas-producing towns, counties, and land owners. That should result in property tax reductions in those towns and counties. From a practical politics standpoint, the best strategy is to abandon the PSATS and CCAP positions on property tax assessment of gas rights and focus on getting a substantial allocation of the severance tax to the producing counties and towns to reduce property taxes and to fund the local services that are essential to efficient gas production. This funds allocation could be administered as easily as the liquid fuel tax for road maintenance.
By the way, the Governor's Marcellus Budget, above, estimates severance tax revenues of $1,819.3 Million over the next 5 years. Susquehanna County overlays about 3% of the Marcellus Shale deposits in Pennsylvania. However, based on shale thickness and drilling activity, our share of the state's gas production is likely to be considerably higher ( maybe 6-10%) over the next 5 years. With a 6% share, Susquehanna county would generate $109 Million of that 5- year revenue stream. A substantial portion of that would pay a lot of local bills.
For the record, I'm attaching a copy of a letter to the local newspapers on this topic; hopefully it will be published in the 18 February editions. The letter :
Fair Taxes from Gas Extraction
Under current state law, towns and counties cannot assess property taxes on gas deposits or rights. Hence, they get no additional revenue from natural gas extraction, but must keep the roads and bridges open under heavy truck traffic and provide social and law enforcement services.
Both county (CCAP) and township (PSATS) associations propose the State allow property taxes on gas rights based on lease values. This proposal is neither fair nor practical.
How do we assess fairly the "value" of underground gas rights separately from surface rights? Gas companies pay different lease prices for comparable land at different times. If gas can't be extracted or the property is not leased, is the value zero? It's hard to make fair assessments and to administer this tax.
Governor Rendell proposes a new severance tax on gas at the wellhead of effectively 6% at current prices in addition to existing income taxes on royalties and corporate earnings. Too much taxation can drive gas producers to other states. We need a balance that keeps us competitive and fairly recompenses the gas-producing towns, counties, and landowners.
If gas is extracted, State tax revenue is increased by the new profits and royalties. By allocating a significant part of gas-based royalty and corporate income taxes and, if passed, severance taxes to the counties and towns from which those tax revenues were generated, the gas-rights owners pay a tax not paid by surface-only owners. The new revenue can pay for the new services and reduce local property taxes. Any severance tax should be kept low to encourage production here and should flow mostly to the gas-producing local governments.
This approach treats both types of property owners fairly, pays for the added community services,and can be administered as easily as the gasoline/fuel tax allocation for road maintenance. For more information, go to www.jessupjottings.blogspot.com.
Wednesday, January 28, 2009
Natural Gas Taxes and Services
What's a fair and reasonable way for townships to tax natural gas ?
That's the essence behind a discussion at the NTC January meeting. The discussion was about a PSATS (Pennsylvania State Association of Township Supervisors) proposal to levy property taxes based on the value of leases. It was a pretty vague proposal and the consensus was that it would be too hard to administer and should be opposed. One person argued that it was fair to tax the underlying gas value since some properties were being sold without gas rights. So, the gas rights owner escaped property taxes while the surface rights owner paid the full tax burden.
Interesting issue - I agree with both positions.
The problem is that Pennsylvania tax policy has a serious imbalance between the taxes municipalities can levy and the services demanded by gas extraction. While I can't comment on the PSATS proposal because the specifics were not defined, I can discuss the issues involved in making a fair tax and offer some suggestions.
If you don't want to read the full discussion, here is my bottom line. The state should allocate a significant part of its gas-based royalty income and, if passed, severance taxes to the counties and towns from which those tax revenues were generated. The new revenue can pay for the new services and reduce local property taxes. It can be administered as easily as the gasoline/fuel tax allocation for road maintenance.
Municipalities rely mainly on property taxes, which are split roughly 1/4 to town, 1/4 to county, and 1/2 to school. While they can impose a 1% earnings tax ( shared 50-50 with schools), that tax does not apply to gas royalties. So a town gets no additional revenue from gas extraction; but the town is expected to keep the roads open under heavy truck traffic. This results in an imbalance between service demand by and revenue from gas operations. Much the same happens for county bridges and for other social and law enforcement costs.
Seeking extra revenue for the extra costs is reasonable. If the only source is a property tax, everyone pays the price for services required for only a few. Of course, one way out is to charge the gas companies a high enough fee for heavy weight truck volume on the roads under a Post and Bond ordinance to pay for damage repair. Every town should be doing this. And the state legislature should increase the bond limits and fees appropriately.
There is still the question of other costs and of how to split fairly property taxes between the surface owner and the gas rights owner. Today, the surface owner pays the full tax. If he does not own the gas rights, perhaps he is being overcharged compared to someone who owns both.
But how to compute fairly the percentage of taxes due to each owner? How do we assess or price the "value" of underground gas rights separately from the "value" of surface rights? If the gas rights are leased instead of owned, should the leasing company pay a property tax for its fair share? Companies do get loans and financing based on the value of their leased gas reserves, but they also change those values based on market factors, just as they pay more or less to lease equivalent properties at different times. If it gas can't be extracted from a property, the value of those gas reserves have zero value.
As an example, the Wall Street Journal reported today that Chesapeake Energy " said it will record a $1.8 billion fourth-quarter impairment charge to its natural gas and oil properties, ... The charges are an admission that some of the assets the nation's largest natural-gas producer acquired are no longer worth as much as once thought." This is a quarterly change in assessed value made by one leading gas company; others may change differently. How can county tax assessors keep up with this sort of changing market value and be fair to all?
Furthermore, since the Rule of Capture law applies to Marcellus Shale gas, the gas is considered "fugitive" (like a deer) and able to flee from parcel to parcel and belongs to whoever drains (captures) it with a well. That's not a good basis for tax assessment. I agree with the man who said it would be too hard to administer.
So what to do? The problem is hard to solve locally because the state has created this imbalance by its tax policy and the state should correct its policy to solve the problem.
The State gets additional gas-based income taxes from the companies and from the royalty owners. Some of that should be sent to the counties and towns that are providing the services that make possible the added revenue.
The legislature considered a severance tax bill last session. A severance tax taxes the value of gas removed or sold as it happens. No one pays unless they also are making money from the gas sale. If one is passed, it should have explicit provisions for sending a high percentage of the tax revenue to the specific counties and towns that are producing the revenue. That would assure that the gas profits pay for the added services. The additional revenue could be used to reduce property taxes in those towns and counties.
By allocating gas-based state royalty income or severance taxes back to the towns and counties that produce those revenues, the gas-rights owners pay a tax not paid by surface-only owners. By allowing some property tax reductions for the surface owners, this approach provides a fair tax balance for the two types of property owners. And it is easy to administer.
If you agree, let your state Representative and Senator know.
That's the essence behind a discussion at the NTC January meeting. The discussion was about a PSATS (Pennsylvania State Association of Township Supervisors) proposal to levy property taxes based on the value of leases. It was a pretty vague proposal and the consensus was that it would be too hard to administer and should be opposed. One person argued that it was fair to tax the underlying gas value since some properties were being sold without gas rights. So, the gas rights owner escaped property taxes while the surface rights owner paid the full tax burden.
Interesting issue - I agree with both positions.
The problem is that Pennsylvania tax policy has a serious imbalance between the taxes municipalities can levy and the services demanded by gas extraction. While I can't comment on the PSATS proposal because the specifics were not defined, I can discuss the issues involved in making a fair tax and offer some suggestions.
If you don't want to read the full discussion, here is my bottom line. The state should allocate a significant part of its gas-based royalty income and, if passed, severance taxes to the counties and towns from which those tax revenues were generated. The new revenue can pay for the new services and reduce local property taxes. It can be administered as easily as the gasoline/fuel tax allocation for road maintenance.
Municipalities rely mainly on property taxes, which are split roughly 1/4 to town, 1/4 to county, and 1/2 to school. While they can impose a 1% earnings tax ( shared 50-50 with schools), that tax does not apply to gas royalties. So a town gets no additional revenue from gas extraction; but the town is expected to keep the roads open under heavy truck traffic. This results in an imbalance between service demand by and revenue from gas operations. Much the same happens for county bridges and for other social and law enforcement costs.
Seeking extra revenue for the extra costs is reasonable. If the only source is a property tax, everyone pays the price for services required for only a few. Of course, one way out is to charge the gas companies a high enough fee for heavy weight truck volume on the roads under a Post and Bond ordinance to pay for damage repair. Every town should be doing this. And the state legislature should increase the bond limits and fees appropriately.
There is still the question of other costs and of how to split fairly property taxes between the surface owner and the gas rights owner. Today, the surface owner pays the full tax. If he does not own the gas rights, perhaps he is being overcharged compared to someone who owns both.
But how to compute fairly the percentage of taxes due to each owner? How do we assess or price the "value" of underground gas rights separately from the "value" of surface rights? If the gas rights are leased instead of owned, should the leasing company pay a property tax for its fair share? Companies do get loans and financing based on the value of their leased gas reserves, but they also change those values based on market factors, just as they pay more or less to lease equivalent properties at different times. If it gas can't be extracted from a property, the value of those gas reserves have zero value.
As an example, the Wall Street Journal reported today that Chesapeake Energy " said it will record a $1.8 billion fourth-quarter impairment charge to its natural gas and oil properties, ... The charges are an admission that some of the assets the nation's largest natural-gas producer acquired are no longer worth as much as once thought." This is a quarterly change in assessed value made by one leading gas company; others may change differently. How can county tax assessors keep up with this sort of changing market value and be fair to all?
Furthermore, since the Rule of Capture law applies to Marcellus Shale gas, the gas is considered "fugitive" (like a deer) and able to flee from parcel to parcel and belongs to whoever drains (captures) it with a well. That's not a good basis for tax assessment. I agree with the man who said it would be too hard to administer.
So what to do? The problem is hard to solve locally because the state has created this imbalance by its tax policy and the state should correct its policy to solve the problem.
The State gets additional gas-based income taxes from the companies and from the royalty owners. Some of that should be sent to the counties and towns that are providing the services that make possible the added revenue.
The legislature considered a severance tax bill last session. A severance tax taxes the value of gas removed or sold as it happens. No one pays unless they also are making money from the gas sale. If one is passed, it should have explicit provisions for sending a high percentage of the tax revenue to the specific counties and towns that are producing the revenue. That would assure that the gas profits pay for the added services. The additional revenue could be used to reduce property taxes in those towns and counties.
By allocating gas-based state royalty income or severance taxes back to the towns and counties that produce those revenues, the gas-rights owners pay a tax not paid by surface-only owners. By allowing some property tax reductions for the surface owners, this approach provides a fair tax balance for the two types of property owners. And it is easy to administer.
If you agree, let your state Representative and Senator know.
Thursday, January 22, 2009
Facing The Gas Rush With Flexibility Not Zoning
Last month, the citizens of Franklin Township polled themselves about zoning. Their poll showed a 65% response rate with 87% opposed to zoning. That response was more than double the response to the original NTC survey of 2003 with a very different outcome. With time and awareness, people had become far more interested and opposed.
Their town leaders should listen to their views and act accordingly. Indeed, all towns should make a comparable assessment before voting any new regulation so dramatically different and rigid as zoning.
There are benefits and costs to zoning. A major cost and risk is rigidity of zoning ordinances, especially those based on a comprehensive plan that never considered natural gas exploitation. The “Gas Rush” is new and gas exploitation is likely to be the primary driver for our economy.
State code does not allow zoning ordinances to be changed rapidly or frequently, with even less flexibility for joint ordinances or individual ordinances subject to a joint planning commission.
We need to understand the real changes facing us and be able to adapt quickly and flexibly. Consider this excerpt from the Penn State website on Natural Gas Impacts - Local Government Information: "Many local governments will need to greatly expand and upgrade their comprehensive community planning efforts. The fast pace of gas drilling--and all of its related activities--means planning has to be done on a continuous, daily basis. Every new well drilled changes the community a little bit. Once-a-month meetings of the planning commission can’t keep up with the change. New thinking about how to plan for gas exploration must also exist."There are alternatives to zoning that can meet local needs and provide for flexible county-town partnerships. For more facts, references, and ideas on gas and zoning, along with a high-growth non-zoning success story, visit this website at http://jessupjottings.blogspot.com/.
To meet the uncertainties of the gas rush, we need flexibility not rigid zoning based on a plan already overtaken by events.
( This post also appears as a "letter to the editor" in the 28Jan'09 editions of the Susquehanna County Transcript and the Susquehanna Independent.)
Their town leaders should listen to their views and act accordingly. Indeed, all towns should make a comparable assessment before voting any new regulation so dramatically different and rigid as zoning.
There are benefits and costs to zoning. A major cost and risk is rigidity of zoning ordinances, especially those based on a comprehensive plan that never considered natural gas exploitation. The “Gas Rush” is new and gas exploitation is likely to be the primary driver for our economy.
State code does not allow zoning ordinances to be changed rapidly or frequently, with even less flexibility for joint ordinances or individual ordinances subject to a joint planning commission.
We need to understand the real changes facing us and be able to adapt quickly and flexibly. Consider this excerpt from the Penn State website on Natural Gas Impacts - Local Government Information: "Many local governments will need to greatly expand and upgrade their comprehensive community planning efforts. The fast pace of gas drilling--and all of its related activities--means planning has to be done on a continuous, daily basis. Every new well drilled changes the community a little bit. Once-a-month meetings of the planning commission can’t keep up with the change. New thinking about how to plan for gas exploration must also exist."There are alternatives to zoning that can meet local needs and provide for flexible county-town partnerships. For more facts, references, and ideas on gas and zoning, along with a high-growth non-zoning success story, visit this website at http://jessupjottings.blogspot.com/.
To meet the uncertainties of the gas rush, we need flexibility not rigid zoning based on a plan already overtaken by events.
( This post also appears as a "letter to the editor" in the 28Jan'09 editions of the Susquehanna County Transcript and the Susquehanna Independent.)
Tuesday, December 16, 2008
Natural Gas Summit - Local Government and Legal Tracks
I did not attend all the other tracks. Hopefully, Penn State will post the slides on the Natural Gas Summit conference website. Meanwhile, here are some notes from the Local Government and Legal tracks.
Impact on Local Roads :
A Local Government session was devoted to Road Impacts and conducted by Mr.Tim Ziegler of the Center for Dirt and Gravel Roads. The emphasis was very strongly on the need for having a Post and Bond Ordinance, the monitoring needed to determine damage, and the engineering required upfront to establish a legally solid base for the ordinance. It takes a 6 or more months to schedule the engineering, so advance planning is key. The handouts list publications and organizations that are useful, e.g. PennDOT Pub 221.
He recommended being proactive, getting an ordinance in place, and going to the gas companies early to negotiate on how they can help prevent or fix problems. It may be necessary to rebuild a road and the companies could help by putting in a stronger base before bringing in trucks. Get a properly signed Excessive Maintenance Agreement early and make it fit your needs. Then monitor the status of the roads and traffic.
During the discussion, we heard that Sullivan County was paying, or reimbursing their towns, for the P&B engineering studies. No other county seems to be doing that. Susquehanna County Commissioner Warren expressed interest in this and in determining what could be done to protect bridges which are a county responsibility.
Legal :
Lester Greevy, Esq., presented another version of a talk he has given at several Penn State sponsored meetings to educate people about gas leasing pitfalls and benefits. He gave several slides which may be available at other Penn State sites. He did make two significant new announcements. First, the gas companies are lobbying heavily to get Eminent Domain privileges for laying gas pipelines and are trying to trade that for going along with some of the other bills pending in the legislature. Second, there is a new Appalachia Chapter of the National Association of Royalty Owners ( NARO) which can provide a useful forum for local landowners who have leases or are considering them.
Ross Pifer, Penn State Dickenson School of Law, discussed ten currently pending law cases. Several have to do with the constitutuonality of leases which reduce the state minimum 12.5% royalty by deducting expenses. The first such case was filed against Cabot by Susquehanna County residents and remains undecided. A key point is what is a suitable remedy - termination or reformation of the contract. The comments seem to indicate reformation is more likely but the terms are hard to determine - e.g. set new $ figures now when the prices are lower than last summer or at those higher numbers when the cases were filed.
Two key cases involve whether a town's zoning law could regulate gas drilling operations. The two County Courts ruled differently, but the Commonwealth Courts ruled in favor of the gas company in both cases saying that the State Oil and Gas Law preempted the zoning ordinance. However, other ordinance provisions which do not conflict with the O&G law may apply. A third case was initially resolved on that basis. The Supreme Court has heard arguments on appeal and a ruling is expected by next summer which may settle the issue of extent of preemption. Some other cases are pending on environmental aspects. A case is pending trail on the right of a gas company to establish a gas storage field under land in Bradford County using eminent domain pursuant to the Natural Gas Act, 15U.S.C. s 717f(h).
Legislative :
Rep. Garth Everett discussed the bills in the legislature. While none of these passed, all or most will be introduced again next session. Several bills address various forms of assessments, and severance or royalty taxes which the state could apply. Others seek to protect rights of surface owners and to clarify the rights of landowners by applying the Oil and Gas Conservation law to the Marcellus shale layer and preventing underground trespass by horizontal drilling ( Bill proponed by Reps. Major and Pickett). There is a bill proposed that would put PennDOT in charge of ensuring gas developers restore all roads used in gas development. This would would relieve small townships of the burden of dealing with gas developers and provide a single point of contact for the developers. There is another proposal to establish an independent commission to study all the Marcellus gas development issues and recommend legislation. This session gave the impression that it might take a long time to get the issues resolved.
Impact on Local Roads :
A Local Government session was devoted to Road Impacts and conducted by Mr.Tim Ziegler of the Center for Dirt and Gravel Roads. The emphasis was very strongly on the need for having a Post and Bond Ordinance, the monitoring needed to determine damage, and the engineering required upfront to establish a legally solid base for the ordinance. It takes a 6 or more months to schedule the engineering, so advance planning is key. The handouts list publications and organizations that are useful, e.g. PennDOT Pub 221.
He recommended being proactive, getting an ordinance in place, and going to the gas companies early to negotiate on how they can help prevent or fix problems. It may be necessary to rebuild a road and the companies could help by putting in a stronger base before bringing in trucks. Get a properly signed Excessive Maintenance Agreement early and make it fit your needs. Then monitor the status of the roads and traffic.
During the discussion, we heard that Sullivan County was paying, or reimbursing their towns, for the P&B engineering studies. No other county seems to be doing that. Susquehanna County Commissioner Warren expressed interest in this and in determining what could be done to protect bridges which are a county responsibility.
Legal :
Lester Greevy, Esq., presented another version of a talk he has given at several Penn State sponsored meetings to educate people about gas leasing pitfalls and benefits. He gave several slides which may be available at other Penn State sites. He did make two significant new announcements. First, the gas companies are lobbying heavily to get Eminent Domain privileges for laying gas pipelines and are trying to trade that for going along with some of the other bills pending in the legislature. Second, there is a new Appalachia Chapter of the National Association of Royalty Owners ( NARO) which can provide a useful forum for local landowners who have leases or are considering them.
Ross Pifer, Penn State Dickenson School of Law, discussed ten currently pending law cases. Several have to do with the constitutuonality of leases which reduce the state minimum 12.5% royalty by deducting expenses. The first such case was filed against Cabot by Susquehanna County residents and remains undecided. A key point is what is a suitable remedy - termination or reformation of the contract. The comments seem to indicate reformation is more likely but the terms are hard to determine - e.g. set new $ figures now when the prices are lower than last summer or at those higher numbers when the cases were filed.
Two key cases involve whether a town's zoning law could regulate gas drilling operations. The two County Courts ruled differently, but the Commonwealth Courts ruled in favor of the gas company in both cases saying that the State Oil and Gas Law preempted the zoning ordinance. However, other ordinance provisions which do not conflict with the O&G law may apply. A third case was initially resolved on that basis. The Supreme Court has heard arguments on appeal and a ruling is expected by next summer which may settle the issue of extent of preemption. Some other cases are pending on environmental aspects. A case is pending trail on the right of a gas company to establish a gas storage field under land in Bradford County using eminent domain pursuant to the Natural Gas Act, 15U.S.C. s 717f(h).
Legislative :
Rep. Garth Everett discussed the bills in the legislature. While none of these passed, all or most will be introduced again next session. Several bills address various forms of assessments, and severance or royalty taxes which the state could apply. Others seek to protect rights of surface owners and to clarify the rights of landowners by applying the Oil and Gas Conservation law to the Marcellus shale layer and preventing underground trespass by horizontal drilling ( Bill proponed by Reps. Major and Pickett). There is a bill proposed that would put PennDOT in charge of ensuring gas developers restore all roads used in gas development. This would would relieve small townships of the burden of dealing with gas developers and provide a single point of contact for the developers. There is another proposal to establish an independent commission to study all the Marcellus gas development issues and recommend legislation. This session gave the impression that it might take a long time to get the issues resolved.
Monday, December 15, 2008
Penn State Natural Gas Summit - Key Presentations
I attended Penn State's first Natural Gas Summit last week (December 10-11) at State College. The web site shows the agenda and co-sponsors and, we were told, will eventually have copies of slides from the presentations. Penn State announced they would hold the conference annually.
The highlights were the kick-off talks by Terry Engelder and by John Pinkerton about the Marcellus Gas Shale Play and the dinner talk by John Matthews about experiences from the Barnett shale play in Texas. There were also separate tracks focused on legal, local government, workforce, and environment. I'll cover the legal and other tracks in another post.
Dr. Engelder is Professor of Geoscience at Penn State and has estimated the size of the Marcellus gas resources in the hundreds of trillion cubic feet (cf). Of course, those deposits underlie several states. In PA, the deposits seem best in a SW-NE corridor which includes Susquehanna County. He estimates recovery potential in the good areas at about 64 billion cf per section (1 sq mile) based on horizontal drilling techniques. This estimate is substantially higher than his earlier estimates and seems based on a few recent drilling data points; and he does hedge his estimates.
Mr. Pinkerton is the CEO of Range Resources, the company that has developed most of the novel drilling technology. Range Resources also has large leaseholds and several drilling operations in PA. He painted an optimistic picture of minimum environmental disruption and large potential revenues if the producers were not regulated out of profitable drilling. One example showed a single wellhead with 6 horizontal lines draining a 500 acre parcel. Other estimates indicated more lines or pads, depending on the rock structure which can force a shortening of the horizontal lines. Estimates of line length ranged from 2000 to 4000 feet. He projected that they would drill 250 horizontal wells in 2009 (up from 50 in 2008) in PA and that company investments would shift from 75% leasing to 75% drilling. With the decline of natural gas prices from $9/mcf to $6/mcf (m = thousand), we should expect lower rental/bonus prices in 2009 as well as fewer lease offers.
Before discussing the dinner speech, it may be worth noting that neither Cabot not Chesapeake were sponsors or speakers at this conference. Their views of the immediate future might be somewhat less rosy as indicated by this article in today's Wall Street Journal U.S. Drilling Activity Off Sharply : "Most industry analysts now expect hundreds more rigs to fall idle by the middle of next year. Some industry experts suggest a drop of as many as 1,000 rigs, which would represent a 50% decline from the peak set in September. That would leave fewer rigs running than at any time since 2003."
Mr. Matthews is a County Commissioner of Johnson County, TX, at the heart of the Barnett Shale play. The Barnett Shale play has been active for 20 years, covers much less geography than Marcellus Shale play but includes more developed areas including the Dallas - Ft. Worth airport. He seems to have foreseen that WSJ article because he reminded us at several points that the companies can turn off the pumps and leave for periods when the economics turn sour.He discussed the substantial growth of jobs in the 12 countys of the Barnett Shale play; noting that PA might experience less because the Marcellus shale covers so many more states and square miles.
The well drilling activity is very intense 24/7 in an area and then moves to another area. After initial fracing of a well, a second fracing often occurs 6 months later, then another after 18 more months, and another 2 years later. So, there are bursts of temporary work and then slowdowns in an area. He cited the need to adapt to this pattern and to protect residents by specific ordinances that address items like sound barriers and directional lighting around the drill rigs, water access for fracing and fraced water treatment and disposal (both of which need a lot of trucks), repair or rebuild of roads, and pipeline safety. He noted that Texas can fund localities and help the local county/towns deal with these issues better than PA with its current state laws. These laws often make it easier to negotiate "voluntary" road rebuilding by the companies. Roads are a big issue beyond damage by truck weight and volume. Big drilling rigs may need all of a road with height and width requirements that may close down a road and require takedown of powerlines. These issues go beyond much of what I've heard discussed locally and indicate a very real need for considerable flexibility in local preparation and action.
Interestingly, most of the gas explosions in Texas are on the pipelines not the well sites. This is important since the legal track revealed that the gas companies are lobbying heavily for Eminent Domain rights for pipelines. That could create a serious problem for farms and rural areas if the Legislature changes the law to allow it.
The highlights were the kick-off talks by Terry Engelder and by John Pinkerton about the Marcellus Gas Shale Play and the dinner talk by John Matthews about experiences from the Barnett shale play in Texas. There were also separate tracks focused on legal, local government, workforce, and environment. I'll cover the legal and other tracks in another post.
Dr. Engelder is Professor of Geoscience at Penn State and has estimated the size of the Marcellus gas resources in the hundreds of trillion cubic feet (cf). Of course, those deposits underlie several states. In PA, the deposits seem best in a SW-NE corridor which includes Susquehanna County. He estimates recovery potential in the good areas at about 64 billion cf per section (1 sq mile) based on horizontal drilling techniques. This estimate is substantially higher than his earlier estimates and seems based on a few recent drilling data points; and he does hedge his estimates.
Mr. Pinkerton is the CEO of Range Resources, the company that has developed most of the novel drilling technology. Range Resources also has large leaseholds and several drilling operations in PA. He painted an optimistic picture of minimum environmental disruption and large potential revenues if the producers were not regulated out of profitable drilling. One example showed a single wellhead with 6 horizontal lines draining a 500 acre parcel. Other estimates indicated more lines or pads, depending on the rock structure which can force a shortening of the horizontal lines. Estimates of line length ranged from 2000 to 4000 feet. He projected that they would drill 250 horizontal wells in 2009 (up from 50 in 2008) in PA and that company investments would shift from 75% leasing to 75% drilling. With the decline of natural gas prices from $9/mcf to $6/mcf (m = thousand), we should expect lower rental/bonus prices in 2009 as well as fewer lease offers.
Before discussing the dinner speech, it may be worth noting that neither Cabot not Chesapeake were sponsors or speakers at this conference. Their views of the immediate future might be somewhat less rosy as indicated by this article in today's Wall Street Journal U.S. Drilling Activity Off Sharply : "Most industry analysts now expect hundreds more rigs to fall idle by the middle of next year. Some industry experts suggest a drop of as many as 1,000 rigs, which would represent a 50% decline from the peak set in September. That would leave fewer rigs running than at any time since 2003."
Mr. Matthews is a County Commissioner of Johnson County, TX, at the heart of the Barnett Shale play. The Barnett Shale play has been active for 20 years, covers much less geography than Marcellus Shale play but includes more developed areas including the Dallas - Ft. Worth airport. He seems to have foreseen that WSJ article because he reminded us at several points that the companies can turn off the pumps and leave for periods when the economics turn sour.He discussed the substantial growth of jobs in the 12 countys of the Barnett Shale play; noting that PA might experience less because the Marcellus shale covers so many more states and square miles.
The well drilling activity is very intense 24/7 in an area and then moves to another area. After initial fracing of a well, a second fracing often occurs 6 months later, then another after 18 more months, and another 2 years later. So, there are bursts of temporary work and then slowdowns in an area. He cited the need to adapt to this pattern and to protect residents by specific ordinances that address items like sound barriers and directional lighting around the drill rigs, water access for fracing and fraced water treatment and disposal (both of which need a lot of trucks), repair or rebuild of roads, and pipeline safety. He noted that Texas can fund localities and help the local county/towns deal with these issues better than PA with its current state laws. These laws often make it easier to negotiate "voluntary" road rebuilding by the companies. Roads are a big issue beyond damage by truck weight and volume. Big drilling rigs may need all of a road with height and width requirements that may close down a road and require takedown of powerlines. These issues go beyond much of what I've heard discussed locally and indicate a very real need for considerable flexibility in local preparation and action.
Interestingly, most of the gas explosions in Texas are on the pipelines not the well sites. This is important since the legal track revealed that the gas companies are lobbying heavily for Eminent Domain rights for pipelines. That could create a serious problem for farms and rural areas if the Legislature changes the law to allow it.
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