“Come and listen to my story ‘bout a man named Jed, poor mountaineer, barely kept his family fed.” I can’t get the theme song from “The Beverly Hillbillies” out of my head these days.
What’s putting it there is all the hoopla and activity in Lycoming County, Pennsylvania, where I live (and other counties, as well) over natural gas. The gas lease folks have been diligently tracking down owners of land, trying to sign them up for leases. There are rumors of large ‘signing bonuses’ and royalty payments in excess of 15%.
It has made our once quiet county courthouse Recorder’s Office a hotbed of activity, and there are rumors Mrs. Annabel Miller, the Recorder of Deeds, actually had to tell some of these folks how to behave. (!) New computer terminals were added; and the title searchers who work there all the time mutter about books being misplaced, some say on purpose. All the gas company representatives are looking for the same thing—parcels of land, the larger the better, which still have gas and oil rights intact. That in and of itself is interesting—the title searches go back 150 years for this stuff, and I am told that on several parcels, the rights have been sold or leased more than once. Whoops!
Why here in north central PA? Well, we sit on Marcellus black shale, which runs from the southern tier of New York into West Virginia. According an article online from Penn State University, the Marcellus shale could (optimistically) contain 516 trillion cubic feet of gas. The other attractive part of the Marcellus shale is that there are fractures in it. The fractures allow drillers to drill vertically, but then branch off horizontally, and this is considerably cheaper ($800,000 versus $3 million), according to PSU geoscientist Terry Engelder. The article I found you can read as well, at: http://live.psu/edu/story/28116.
The big news locally, and of interest to you and me, is what it is doing to our real estate market. There are rumors on top of rumors about lease prices, sale prices, estimates of royalties, etc. I can affirm that I know of two sales that were upset at the last minute by an owner deciding maybe he didn’t want to transfer those rights. A parcel priced for $190,000 one day jumped in asking price to $5 million after an oil and gas company rep talked to the owner. So, owners are sitting tight, preferring to gamble on the future value, rather than sell today.
Brokers and appraisers with a grain of sense are refraining from trying to value these rights; just last week I appraised a 40 acre farm for an estate. Thankfully, the decedent had already leased the mineral rights—but I had told the executrix going in: “I don’t value minerals, gas, oil, or timber.”
I know the theory of how to value land with and without mineral rights; but my problem, and one my fellow appraisers share, is an absolute lack of market data. What we need, as all appraisers know, are some nice paired (or almost-paired) sales–land with mineral rights intact versus land without mineral rights intact.
We won’t know the value of these rights, as it affects market value, until we can observe parcels sold with and without the gas and oil rights. Adding to the general furor is that within the past month, virtually all of our local governmental bodies woke up and smelled the gas–or smelled the problems. You see, to extract that gas from the Marcellus shale requires water. Lots and lots and lots of water, which they want to take from our streams and rivers.
One gas company, rumor has it, has applied to take 90 million gallons of water out of Pine Creek everyday. It’s almost September, and Pine Creek is low. I have no idea where they’d find 90 million gallons. The gas companies return the water when they are done with it and they have cleaned it back up–but only about 65% of it actually comes back. The balance is lost to evaporation, or drains deep into the ground. This puts the nascent gas industry up against another strong industry in north central PA–farmers. Our farmers have for years irrigated using the water in the West Branch of the Susquehanna River. Our local municipalites are busy passing permit requirements, limits on how much water can be taken, etc. in order to stay ahead of the curve on this boom.
So, if the cost of extraction goes up, logic would say the royalties offered would go down. But who knows how it will play out? I’m reminded of another thing I observed a few years back as an appraiser. As we all know, appraisal theory says that if a ‘stick’ from the bundle of rights is removed, the value is diminished.
Well, a few years back, several farmers in the Nippenose Valley of Lycoming County opted to sell their development rights through the local county ag office, which implements the Commonwealth of Pennsylvania Agricultural Conservation Easement Purchase Program. When farmers sell their development rights, they are selling them forever. They are granting a permanent agricultural easement on their land. I sit on the local ag board for my county. Well, some of our farmers went right ahead and sold the rights. Then they turned around and sold their farms–at top dollar–to Amish Farmers moving to our county from Lancaster County, where the price of farmland is now prohibitive. The fact that they couldn’t develop the land didn’t bother the Amish buyers one bit. It sure as heck bothered me and other appraisers. Here are comps that don’t have development rights–selling for essentially the same price per acre as comps that do. It reminded me ever so much of the arrival of our first baby, twenty-some years ago. I diligently read Brazleton and Penelope Leach, plus any article I could get my hands on. However, to my great consternation, our new daughter didn’t comply at all. She didn’t do what the books said she was going to do; and she did things they didn’t say she would do. My husband’s pithy response to my distress: “I guess she hasn’t read all those baby books yet.” Well, here’s the problem we have as appraisers—the buyers in the marketplace haven’t read all those appraisal books yet. Some of them continue to act contrary to the way we think they should.
Sometimes what they do appears to make little sense. And, at the end of the day, our job is to take the market data and make sense out of it. So, I’m sitting back and watching my market with respect to the gas leases. I’m waiting to see if some semblance of a pattern emerges. I’m reading all I can get my hands on about this, from other industry experts. And, I’m wary….because at the end of the day, the consumer hasn’t read all those appraisal books yet.
Melanie J. McLane, ABR, CRB, CRS, ePRO, GRI, RAA, SRES, 32 year veteran of the real estate industry. Offering training, speaking and consulting throughout the industry, I teach everything from ABR to USPAP. Certified ePRO Instructor. To contact me, email me at: melanie@TheMelanieGroup.com or visit my website: www.TheMelanieGroup.com