Oil and Gas Leasing – How Landowners in “Wet” Gas Areas are Making a “Splash” with Gas Operators

Posted by on April 23, 2012 in NEWS | PUBLICATIONS, Oil & Gas

In representing landowners in oil and gas lease negotiations throughout southwestern Pennsylvania, it is apparent that there has been significant slowing in gas leasing and exploration activity in many areas of the region.  In one recent instance, a gas operator even withdrew offers relating to proposed oil and gas leases for several clients of ours on the eve of the lease signings.  The explanation provided by the landman regarding this particular instance was that the gas operator had become concerned about the steady downward trend in the price of natural gas and this prompted a complete shut down in their leasing activity in the area.

The low price of natural gas does not fully explain the reason why gas leasing activity has slowed in certain areas.  During the same week that the lease offers were withdrawn in the example described above, this law firm was representing other landowners in negotiations with the same gas operator in different areas of southwestern Pennsylvania where the leasing activity remained very active and the offers very competitive.   Our clients that have had offers recently pulled were initially frustrated and confused.  They wondered why there are still a lot of areas in the Marcellus Shale and Utica Shale where gas operators are leasing acreage at a fast and furious pace if the reason for the slowdown in leasing activity in their territory is due to the decline of natural gas prices. What most people are surprised to learn is that not all natural gas drilled in the Marcellus Shale and Utica Shale has the same value.

A better explanation of why leasing activity has slowed in certain areas is that the gas industry is prioritizing their efforts in territories where the natural gas is more value.  There are two types of natural gas that are being produced in the Marcellus Shale, wet gas and dry gas.  Dry gas consists of little more than methane, and when brought to the surface dry gas has very little of the condensable heavier hydrocarbon compounds such as propane and butane.   One benefit of dry gas is that it is typically ready for market at the wellhead, needing little or no additional treatment because it does not contain other liquid compounds which would need to be separated.  The problem with dry gas these days is that methane prices have significantly declined and in the current market dry gas is not as lucrative as wet gas.

Wet gas contains the mix of hydrocarbons that contain a considerable amount of condensable or liquid compounds, such as propane and butane.  These gas compounds need to be separated before the gas can be sold at market.   Although there are costs incurred with separating these compounds, the propane and butane provides added value to the gas processing companies as these gas compounds can be sold separately.  Because of the added value found in wet gas, gas operators are making a strategic effort to focus their drilling activities in areas which contain wet gas.

A common question that clients of ours have these days is how do they know if the natural gas in their area is wet or dry?  In an interview with Mike Bradwell of the Observer-Reporter, Matt Pitzarella, a spokeman for Range Resources, explained in general terms that the “wet gas” region of the Marcellus Shale in south western Pennsylvania is located west of Interstate 79 and north of Interstate 70.   Bradwell, Mike. “Range keeps focus on region”. Observer-Reporter January 31, 2012.  There also appears to be significant wet gas producing areas in western Pennsylvania related to the Utica Shale as well.

So, what does a landowner do if they own gas rights in an area with dry gas?  Probably the best and most simple advice that we can give our clients is to be patient.  Although the leasing activity in certain areas has slowed down significantly in recent months, most gas operators have advised us that they expect the leasing activity to resume within months.  Secondly, it is helpful to remain in contact with the gas operators and leasing agents who were at one time actively leasing in an area but have suspended leasing activities.  We have many clients who we currently represent that are in this situation.  Our goal is to make an effort to remain in contact with the leasing agents on a regular basis to ensure that when the gas operator gives the green light to resume its leasing activity our clients are at the top of their list.  Finally, once a landowner receives a lease offer they should strongly consider seeking the advice of legal counsel who can explain the provisions and legal significance of an oil and gas lease as well as negotiate important revisions to the gas lease on behalf of the lessor.