Monday, February 14, 2011

The Economic Reality of Leasing Your Land for Gas Drilling... and more

My own personal economic 'rant' & 'rambling' on the gas & oil industry... for what it's worth.

I hear so many well meaning people say, "Gas drilling will be an economic 'boom' for Pennsylvania, and allow many cash strapped farmers to keep their farms, and provide jobs, jobs, jobs."

Let me say, I am not an economist. However, I do pride myself in having a certain amount of intellectual curiosity and a fair degree of common sense.

That being said, when I first learned the 'land men' were coming to my town in Sullivan County, PA, I went to the local volunteer fire hall to 'get leased up' like almost everyone else in town. I listened to the same sales pitch everyone I've spoken with since has heard. "It's a standard contract, it's the best offer you'll get, we probably won't even drill, the process is 100% safe, nothing to worry about, AND we'll write you a check right now!"

*I thought... "This sounds too good to be true.", so I told the land man that "it sounds reasonable, so I'm going to take this contract home, read it over a few times, have my attorney look at it, and I'll let you know what I decide." He seemed rather annoyed that I would even doubt his 'word' on what a good deal this was, and if I didn't sign the contract right then and there, it wouldn't be good the next day. (BIG RED FLAG!) So, I told him that if it's not going to be a good deal for me tomorrow, I can't be a good deal for me today, so for me it's 'no deal'.

Then, I started hearing ominous rumours about how the industry has been less than honest in these dealings, so I began looking into other states that this was happening in other states.

Well, it seemed the more I learned, the more I was convinced I had made the right decision not to sign, but I was also somewhat alarmed by the horror stories of contamination, ruined communities, industry lies, etc., etc. But right now, I want to focus on the economic realities that I discovered.

In all the states that this industry has invaded, approximately 2% of the people who leased actually became wealthy as a result. The majority of the people actually ended up LOSING what ever wealth they may have had, and another small percentage just about broke even.

You see, most leases (to be fair, not all) state that whatever percentage of 'royalties' the land owner is entitled to are paid only on the 'profit' from the gas drawn from their land, and most gas companies need to recapture at least 100% of their costs before any royalties are paid out. Also, if your land becomes part of 'group' or 'block' of property owners, you will only recieve a percentage of the royalties.

EXAMPLE: You agreed to a 16% royalty on the gas under your property. However, your property has since been 'pooled' or 'grouped' with nine other properties. Now, you'll be getting one-tenth of the 'royalties' from that gas. Your 16% just became 1.6%.

Also, in case the land man didn't tell you, you'll owe taxes on that 'royalty'. It may even put you into a higher income tax bracket! It must also be said that the yield of most gas wells is at it's highest level (70%) during the first eighteen months of operation. That's when the gas company is recapturing their 'costs'. So now, you're collecting 'royalties' on the back end as the yield is dropping off.

The other economic 'myth' is the jobs the industry will create. Of course, there will be some local jobs created initially, but most (approx. 80%) will go to out-of-state company workers. The local jobs are usually low end, labor jobs. Many of those jobs will vanish once the pads are drilled and the wells are in production mode, so they're 'temp jobs'.

Now, let's take into consideration the jobs the industry will cost in Pennsylvania. Traditionally, the number one industry in PA has been tourism. That will abruptly end as more wells are drilled. After all, who in their right mind would vacation anywhere near an industrial operation of this magnatude?

Other industries that will ultimately suffer are agriculture, hunting & fishing, logging/lumber, new home building, small businesses, and state forestry jobs. After all, farmers won't be doing much farming if there land is covered with gas wells, compressor stations, and pipelines. No farming = no local produce. Massive deforestation for well pads, etc., etc., will result in fewer trees. Too few trees = no logging. Also, industrialized state forests will have little or no use for traditional forestry jobs either. It has been projected that PA will lose as many as 90,000 non-gas industry jobs in the next decade.

As the industry moves in to PA, so will the corporate chain store like Walmart, Home Depot, Lowe's, as well as chain restaurants and fast-food eateries. They will quickly eliminate the mom & pop family businesses. Of course, these corporate run businesses will create some jobs, too, but once again, they'll be low-end minimum wage jobs. The local hardware stores, the general stores, small town bars, bed & breakfasts, family owned and operated restaurants will all be a thing of the past.

Local real estate also traditionally suffers. Home prices drop because no one wants to live near an industrial region of this size, while property taxes increase to offset the cost to repair roads, and built water treatment facilities.

The reality is, this will be a realtively short-term 'boom' then a temporary 'shift' in the job market. In twenty, maybe thrity years, the industry will leave many parts of PA. What it will leave behind will not resemble what we have now, nor will it be a place wear most people would want to live. PA will be left with the inevitable long-term/permanent 'bust', that this industry traditionally leaves in it's wake.

The esthetic scenery, the high quality streams, the waterfalls, the incredible mountains and vistas, the clean air, the wonderful wildlife and plant life, will all be gone forever.

We will have traded all that we have now, and everything else that has made PA so special for generations, including our precious water, for the empty promise of wealth, fleeting jobs, a severly compromised ecology, and a devestated economy. And, the saddest part of it all, is that we will only have ourselves to blame.

Next time you're near a drill site, listen to the sound of the drilling rig. It's telling us our future as it goes.... boom-shift-bust, boom-shift-bust, boom-shift-bust, boom-shift-bust, boom-shift-bust.... as it sucks the life out of Pennsylvania. 

At least that's what it sounds like to me. ~JT

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