Chevron’s Offer to Western PA School; Dry Gas Worth More?!
The Hempfield Area School District in Westmoreland County, PA is considering a lease offer from Chevron. So far they aren’t happy with the prices being offered:
The per-acre price offered by Chevron "is not where it needs to be," [school business manager Jude] Abraham said. "We’re sitting on a potential offer of $1,500 per acre and 15 percent royalty for five years, and we have to consider whether we want to do this or not."
Hempfield joins the Kiski Area and Mt. Pleasant Area school districts in looking to earn extra revenue from natural gas extraction…
"We want to capitalize on this," Abraham said. "We just don’t want to give it away."*
The really interesting quote in the story, however, is a quote from the school attorney:
Hempfield Solicitor Les Mlakar said the township is not the most attractive to drillers because its deposits are "wet gas," which contains hydrocarbons such as butane and propane that must be extracted before the gas can be shipped to market. Wet gas costs companies more than dry gas, which is considered "pipeline-ready."*
Wait, what? Every press release from drillers in recent memory that has come across MDN’s desk is about how drillers are reducing operations or even leaving dry gas areas so they can drill in wet gas areas! Yes, it does cost more to process wet gas, but then drillers get more money from butane and propane (and ethane) found in wet gas. This is the first time MDN has spotted a comment that says the opposite. Is the school attorney mistaken/misinformed? Was he misquoted in the story? Or (gasp) is he right? For MDN readers in the drilling industry, or anyone who attended the meeting where this was discussed, please leave a comment and enlighten us.
*Pittsburgh Tribune-Review (Mar 14, 2012) – Hempfield Area school land could be leased to gas driller
The Natural Gas companies make on average about $2.00 more for the price of a MMBtu of “Wet Gas” versus dry gas by selling the liquids (Ethane, Butane, Propane, etc). This is the reason many are slowing drilling activity in the dry region of the Marcellus which is in Eastern PA and moving drilling activity to Eastern OH, Southwest PA and Northern WV where you find “Wet Gas”. $2.35 Natural Gas does not support drillling economics and what is happening are efforts to reduce supply, increase demand and drill in dry areas only enough to establish priority areas as “HBP” Held By Production, which extends lease terms as long as there is production. Vertical wells accomplish this cheaper than horizontal wells. Supply has rapidly increased and the 4th warmest winter on record has created a glut that only curtailments in production can correct, but this in turn hurts cash flow for the energy companies. Oil and Wet Gas production are good answers to help their revenue and cash shortfalls.
So you are correct and the Lawyer is wrong. The facts around leasing can be disturbing because one day the offer is there, and the next day it may not be. I heard a story in the Haynesville Shale play of a check being written for multi-millions of dollars and the next week “all” offers were off the table to everyone.
Possibly the landmen who work for Chevron told that to the Solicitor for the school district to increase their leverage. Of course it is technically true that wet gas costs operators more to process than dry gas, but then Chevron would more than make it up in the higher sales price. Just more of the usual deception through half-truths that landmen are notorious for.
Not trying to defend landmen at all, but thought I’d chime in before too much conspiracy theory is spread.
Most if not all of the pipelines in PA require a very dry gas to sell, aka pipeline spec. And yes, it is rather costly and requires some significant equipment and processing to remove the longer hydrocarbon chains in order to make rich gas pipeline spec.
SO, there is a threshold, below which “wet gas” is a nuisance and costs money to process and sell. Once you exceed this economic cutoff, the condensate or more likely NGLs will be sold for more money than it costs to process and it becomes more profitable for wet gas (vs dry). It all depends on where you are in the play.