Stubbornly low natural gas prices are leaving Pennsylvania property owners, big and small, with diminished royalty checks even as record amounts of gas are pulled from the commonwealth’s shales.
The price slump has left shareholders angry and companies promising to slow new development. Royalty owners — those who have leases with drilling companies and share a stake in the gas sold from their property — have few options but to hope for prices to rebound.
“You don’t control the well so you can’t turn off your production. You don’t get to say, we’ll hold it until next month, if prices go up,” said Robert Sher, president of the Pennsylvania Oil and Gas Landowner Alliance.
Lower natural gas prices, driven in large part by a supply that has outpaced demand, make a dent in state and local budgets as well.
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The commonwealth is one of the largest royalty owners in Pennsylvania, with more than 260,000 acres of state forests, parks and waterways leased for oil and gas development.
Similar amounts of gas were produced from state lands managed by the Department of Conservation and Natural Resources in fiscal years 2018 and 2014 — roughly 430 billion cubic feet — but the state’s royalty revenue was cut in half last year, dropping from $135 million in 2014 to $67 million in 2018.
Gas price fluctuations explain most of that drop, DCNR press secretary Terry Brady said.
In 2014, gas produced from commonwealth land sold at an average of $4 per thousand cubic feet. In 2018, gas sales averaged $2.80/Mcf.
Now, the sale price is even lower, “holding in the $2.25/Mcf range, which will certainly begin to impact our revenue forecast we made last year for this time period,” Mr. Brady said.
Like other royalty owners, the state can do little about it.
“There are no controls or measures we can take to avert this,” Mr. Brady said, “as gas prices are totally out of our control and business decisions to shut-in [wells] at various times are not forbidden under the lease terms.”
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Pennsylvania’s annual shale gas impact fee — which funds environmental, infrastructure and local government projects — is also influenced by the price of natural gas. The price slump threatens to drag down those payments, too.
If the average natural gas price on the New York Mercantile Exchange drops below $3 per million British thermal units for 2019 — as it is on track to do — drilling companies will pay $5,000 less per horizontal well than they did this year.
That would drop total impact fee revenues to $201 million for the year — nearly $47 million less than state and local governments would share if average prices remained above $3, according to Independent Fiscal Office projections from June.
“Based on current and projected prices,” the IFO said, the decreased-fee scenario “is more likely to occur.”Natural gas spot prices decreaseWeekly spot prices for natural gas at the Dominion South Point trading hub in southwestern Pennsylvania have declined steadily this year.NATURAL GAS WEEKLY SPOT PRICES, 2018-1908-24-2…09-14-201810-05-201810-26-201811-16-201812-07-201812-28-201801-18-201902-08-201903-01-201903-22-201904-12-201905-03-201905-24-201906-14-201907-05-201907-26-201908-16-2019$0$1$2$3$4$5Source: Dominion South Point | Graphic: Chance Brinkman-Sull
Pressure on the checks
Sale price isn’t the only factor depressing royalty checks.
In a low-price environment, companies may look for new ways to take post-production costs out of royalties, said Dan Brockett, a Penn State Extension energy educator. Those are the expenses that accrue between a wellhead and the point of sale, which landowners are often obligated to share.
“Some producers may be searching for ways to share the pain,” he said.
Low prices are also prompting gas companies to pull back on new development. Six drilling rigs left Pennsylvania the week ending Aug. 23, the largest decline of any state, Mr. Brockett pointed out. In the second quarter of 2019, drilling began on 163 new horizontal wells in Pennsylvania — the lowest number in nearly three years, the IFO reported.
Mr. Sher said companies are sometimes offering lower rates to renew leases with landowners or declining to renew leases right now.
In one example, he said, “They told the landowner it’s just not economical to move ahead. We’re going to give up this lease and maybe we’ll come back in a couple years when prices improve.”
Being prepared
In the recent past, the drag on Appalachian natural gas prices came from a regional glut exacerbated by limited pipelines available to ship fuel to more lucrative markets. But with new pipeline capacity, regional prices are closer to national benchmarks.
The problem now is low commodity prices across the U.S., Mr. Brockett said.
“All of this news for royalty owners leads to generally lower royalty checks and emphasizes the importance of checking monthly royalty statements for anomalies, and planning finances to account for lower amounts coming in,” he said.
That’s also the advice Andrew Gans, a Bethel Park-based financial consultant with the firm Rockcliff Capital, shares with his clients.
Production from a Marcellus or Utica shale well drops off rapidly over the first five to seven years before easing into a slower rate of decline. Even if prices remained the same, a landowner making $1,000 a month in royalties from a new shale well could expect to make $150 a month on that well five years later and $75 a month three years after that, Mr. Gans said.
“The majority of the royalty owners that I’ve talked with, they actually save a lot of it, because they know it’s going away,” he said.
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