Matthew Mullen
As recently as two months ago the major players in the natural gas industry were offering record signing bonuses to neighborhood families. Local households were elated as some could expect to receive signing bonuses in excess of $25,000 per mineral acre. With a typical neighborhood lot being around a third of an acre, many people were expecting to receive signing bonuses of around $8,500. Local residents were also expecting royalties at around 25% of the yield of their property. However, all of this occurred in a very small window. Many people were unable to capitalize on these superior offers as they had been told to wait and wait by their neighborhood associations only to be disappointed at the gas companies who would soon rescind these offers.
One neighborhood alliance, the Southwest Fort Worth Gas Alliance, achieved one of the most lucrative gas lease offers in the metroplex to date with a signing bonus of $27,500 and a 23% royalty. The terms of this contract were approved on September 9th and the company rescinded the terms of the contract on October 14th after only calling nine of the twenty-five neighborhood associations to sign. The remaining neighborhoods received the following in lieu of their signing bonus.
“Vantage is very disappointed to have to come to this decision and it is not one that we take lightly. Effective immediately, we are canceling all scheduled lease signings after October 14th, 2008 but will continue to honor all executed lease agreements accompanied by a bank draft. We apologize for any inconvenience this decision may cause you and we cannot stress enough that this decision was made entirely by Vantage and your negotiating committee is not responsible in any way for this outcome. The decision on the order of priority for neighborhood signings was driven solely by Vantage based on an assessment of available unleased acreage and proximity to known drill site locations. During this entire process, we observed your negotiating committee work tirelessly and selflessly on your behalf to arrive at the original arrangement that was beneficial to the community as a whole.
Vantage expects to continue to be active in Tarrant County, but at lease terms that more accurately reflect current and expected oil and gas fundamental economics. We realize this may not be a good outcome for many of you, but we wanted to address it directly and openly with you as soon as we came to this very difficult decision. If you should have any additional questions, we encourage you to contact your homeowners’ leadership representative.” (Biemans)
The most obvious reason many of the gas companies are cutting back on so much spending is the state of the economy. Many of the players in the natural gas industry are privately funded, which means that owners are risking their own money in signing leases and locating drill sites. With all of the contract offers being rescinded shortly after the Dow Jones Industrial Average fell below 10,000 it is hard to argue that keeping funds close to the chest for the gas companies is not a smart business decision. The next reason that many companies are pulling back in the market is that natural gas prices have fallen to a price that has not been matched in since 2002. With gas prices this low the basic rules of supply and demand govern that suppliers are not willing to supply as much, which is what we are seeing in action today.
There are reasons to look to the future, however. The same reasons that gas companies have stopped signing are the reasons the gas companies could come back with similar offers in the future. The drop in natural gas prices is at six year low, but cannot be expected to stay this low forever. Eventually gas prices will once again rise and the gas that is still in the ground underneath all of these local homes will once again be sought. The other reason mentioned, the economic turmoil faced by America today, will also be relieved. One cannot say this with evidence of the measures that will be taken to stimulate the economy, but one must be optimistic because if nothing is done new gas contract signings will be the last of our worries. Once these two key factors come back into favor gas leases will again be signed with favorable bonuses.
On the other hand, Julie Wilson, top executive for Chesapeake claims that the company “is still very much active [in lease signings] but at lower rates and in selected areas. Unless you have executed and delivered a lease to us or our agents, we’re not accepting them at the old rates. I suspect $5,000 is going to be the new top, not the new bottom.” (Fuquay) Many other gas companies concur. I must say that I pray they are wrong as I was one of the homeowners that was left out of the lease signings and I feel that after missing out on $27,500 per mineral acre I will never be able to bring myself to sign under the current lease terms being offered.
Works Cited
Perry, Mark J.. "Natural Gas Prices Fall ." MrSwing.com. 8 Nov. 2008
"Southwest Fort Worth Alliance - Home." Southwest Fort Worth Alliance - Home. 8 Nov. 2008
Fuquay, Jim . " XTO, Chesapeake, others rescind." Star-Telegram.com. 17 Oct. 2008. 8 Nov. 2008
Biemans, Roger J., and John D. Wehrle. "Letter to All Residents of the Southwest Fort Worth Alliance From Vantage Energy." Vantage Energy 12 Oct. 2008
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