Gas drillers bid twice what Pa. budgeted
HARRISBURG - Natural-gas drillers yesterday bid $128.5 million to develop 32,000 acres of Pennsylvania state forests, twice the revenue the state had budgeted, prompting fears of a headlong rush to overrun public lands to tap into the rich Marcellus Shale.
Gas drillers offered an average of $4,020 per acre - almost twice the amount that such leases generated less than two years ago - for the right to extract natural gas from six tracts of state forest in north-central Pennsylvania.
The robust bidding was further proof of the intense industry interest in the Marcellus Shale, a vast underground formation stretching from New York to West Virginia, and whose sweetest spots underlie much of Pennsylvania.
But John Quigley, acting secretary of the Department of Conservation and Natural Resources, regarded the successful auction as a mixed blessing, saying the windfall could further whet the appetite of policymakers to lease public land to derive immediate revenue without fully understanding the long-term environmental implications of gas development.
"As we sit here this afternoon, fully one third of the state forest is now leased for gas exploration," Quigley said in an interview yesterday. "I think that raises some important questions. How much is too much?"
Jan Jarrett, president of the advocacy group Citizens for Pennsylvania's Future, also called for a suspension of new leases until the impact of drilling could be measured.
"We believe that's enough," she said. "We believe there ought to be a moratorium on further leases on state land until a study can be done to determine what the impact is on the forests and the other uses of the forest."
Rather than leasing more public land, Quigley encouraged policymakers to enact a statewide severance tax on natural gas as a more sustainable revenue source. Gov. Rendell, who last year delayed imposition of a severance tax after the gas industry told him the tax would stymie new development, has called on the legislature to enact the tax by July 1.
An industry trade representative declined to comment on the calls for a severance tax, but lauded the lease sale.
"This shows the industry's ability to generate wealth for Pennsylvanians," said Kathryn Klaber, president of the Marcellus Shale Coalition.
The state conservation department conducted the bidding under duress after the legislature ordered it to generate $60 million for the general fund with new gas leases. The department selected six tracts totaling 31,967 acres and set a minimum bid of $2,000 an acre.
The drillers have a month to send their checks to the state treasury for the new leases, and the $68.5 million that exceeded the legislature's target will flow into the state's Oil and Gas Lease Fund, which under state law must be used for conservation purposes.
Jarrett suggested the state use some of the funds to buy the mineral rights that it does not now own under about 85 percent of the state's parks. Without the rights, the commonwealth has little control over drilling activity on those lands.
"The state cannot prohibit drilling where they don't own mineral rights," she said. "That puts the best areas for public recreation at risk."
But the legislature can order that money in the Oil and Gas Lease Fund be spent for other purposes, and the windfall is likely to trigger a scramble in Harrisburg to redeploy that revenue in the state's cash-strapped budget.
With the new agreements, about 692,000 acres of the 2.1 million acres of state forest will be under lease - that includes about 290,000 acres on which the state does not own the mineral rights. About 750 wells are in production on conservation department lands, but only three of them tap into the Marcellus. State officials expect more than a thousand Marcellus wells could be developed in the next decade.
Five companies yesterday were the apparent high bidders for the new leases located in the Elk, Moshannon, Sproul, Susquehannock, and Tioga State Forests in Cameron, Clearfield, Clinton, Potter and Tioga Counties.
Seneca Resources was the winning bidder on two tracts. The other successful bidders are EXCO Resources Inc.; Anadarko Exploration & Production; Chesapeake Appalachia L.L.C.; and Penn Virginia Oil & Gas Co., based in Radnor.
The new state leases, which are much more environmentally restrictive than the private-sector agreements, limit the drillers to building 123 well pads totaling no more than 645 acres on the six leases - about 2 percent of the land. Marcellus gas developers typically install multiple wells on each site, and tap into the mile-deep formation with a horizontal drilling technique that allows them to reach laterally for thousands of feet.
The new leases also call for the drillers to pay royalties of 18 percent for gas sold from the wells, much higher than the 12.5 percent state minimum. State officials say the revenue generated from royalties from successful wells can far exceed the up-front lease fee.
The growth of Marcellus activity, and its economic potential from public lands, has been staggering.
Until 2007, the state's Oil and Gas Lease Fund had generated $153 million over five decades.
In 2008, in a single auction of new leases, the conservation department generated $166 million from 74,000 acres, surpassing the total generated in the previous 53 years. Those leases went for an average of $2,243 an acre.
Just eight years ago, the state offered 218,000 acres of gas leases in northern Pennsylvania. The gas industry protested the rate of $30 an acre was too high and declined to bid for most of the tracts. Only a quarter of the acreage was leased.
Contact staff writer Andrew Maykuth at 215-854-2947 or email@example.com.