Inquiring minds want to know! What does the 2020 landscape look like for oil and gas mineral and landowners in West Virginia and Ohio? That’s the (twenty-twenty) million-dollar question! While I can’t offer an answer that you can take to the bank, all indications point to a down year for the oil and gas industry. Industry contacts that I’ve spoken to in the last several weeks have echoed those indications. However, that’s not to say that 2020 and the coming years won’t present opportunities for oil and gas mineral and landowners. Read more to get the scoop!
Natural Gas Price Stagnation
At the beginning of 2014, Appalachian natural gas prices soared above $5/mcf. Less than a year later, by spring of 2015, natural gas prices had bottomed out to less than $2/mcf. As a result of this decline, some producers went bankrupt. Other, better-positioned producers predicted a return of higher gas prices and used this decline as an opportunity to accumulate more assets on the cheap.
To date, those predictions have failed to materialize. Since early 2015, with the exception of the yearly winter gas price spikes, prices have rarely exceeded $3/mcf. Even worse, 2019 was an exceptionally bad year for Appalachian natural gas prices with prices hovering around $2/mcf for most of the year. Clients of mine have shown me royalty statements showing that producers are reporting sales prices approaching $1/mcf.
I don’t claim to be an expert on the economics of oil and gas producers. That being said, I can safely say that it’s hard—to say the least—to turn a profit when gas is selling for $1-2/mcf.
Gas Prices Affect Lease Offers
So, Appalachian natural gas prices are really low. So what? Marcellus and Utica producers have seemingly given up hope on a return of higher gas prices in the near term. Thus, if Marcellus and Utica producers can only expect to sell gas at $2-3/mcf—if not less—in the short term, they’re not willing to offer bonus payments and royalty rate and terms on par with what we’ve seen in the past few years.
You might be asking yourself, hasn’t the price of natural gas been in the $2-3/mcf range for quite some time now? Why only now would producers dramatically reduce their lease offers? From my perspective, it can be directly tied to a lack of competition among producers. Each producer has carved out their area of interest within our communities through lease trading with each other. If your acreage is in a Chevron area, chances are only Chevron will be interested in taking a lease. If there’s no competition, why would Chevron be motivated to offer anything more than what it feels justifies the return on the gas?
What does this mean for mineral owners who have acreage available to lease in 2020? Simply stated, expect bonus offers and royalty rates to significantly decrease. Some producers, including EQT, have refused to offer “paid-up” leases and instead seek to pay yearly delay rentals as a way to limit costs to landowners. Others may have acreage available to lease and may not be able to find any producer interested in leasing simply because they don’t want to spend 2020 money on acreage not in immediate drilling plans.
All is not doom and gloom though! Read to the end to find out what you can do.
Gas Prices Affect Need for Infrastructure
With lower gas prices, many producers are also scaling back production plans. That means less wells being drilled and less acreage being put into production. That means less need to for oil and gas infrastructure—well pads, access roads, facilities, and pipelines. Thus, Marcellus and Utica landowners can expect a down year for opportunities to take advantage of pipelines deals, etc.
Producers Selling Marcellus and Utica Assets
Some producers aren’t just scaling back their Marcellus and Utica operations. Some are selling assets or leaving Appalachia altogether.
- In November 2019, EQT announced that it was selling over $1.5 billion of Marcellus, Utica, and other assets in West Virginia, Ohio, and Pennsylvania. Currently, EQT has operations throughout Ohio (including Belmont, Monroe, and Jefferson Counties among others), West Virginia (including Marshall, Wetzel, Tyler, Monongalia, and Marion Counties, among others), and southwestern Pennsylvania.
- In December 2019, Antero announced that it was hoping to raise upwards of $1 billion by selling a significant stake in its Marcellus and Utica assets. Antero has focused most of its operations to Tyler and Doddridge Counties, West Virginia.
- Also in December 2019, Chevron announced its plans to sell all of its Marcellus and Utica assets and leave Appalachia. As far as Marcellus and Utica is concerned, Chevron is closed for business. Chevron has focused its operations to Marshall County, West Virginia.
It’s not too difficult to tell why. A quick look at Marcellus and Utica producers’ stock prices tell you all you need to know. During 2019, Range Resources’ stock price declined by over 60%, Antero’s stock price declined by close to 80% and EQT’s did the same by close to 50%.
All Is Not Doom and Gloom!
Just because 2020 should be a down year, that doesn’t mean that Marcellus and Utica mineral owners don’t have options.
As I always remind my clients, there is no “going” rate for anything, whether that be bonus payments or pipeline payments. So, while initial lease offers will all but certainly be drastically reduced, what an individual mineral owner can expect for his or her individual property is dependent upon how much a producer “needs” that property under lease. For example, if a producer needs your property to “complete” a production unit or pool, then a mineral owner has more leverage to demand a better bonus and royalty rate as well as other lease terms.
On the other hand, if acreage is not a “need” for a producer, a mineral owner can always wait for greener pastures in the future—being either when oil and gas prices rise or when their property becomes a need.
Moreover, I’m always beating the drum for land and mineral owners to join together and collectively negotiate in order to build leverage. My firm has had incredible success in doing so. There may be opportunities to form a landgroup or even a group of neighbors to gain more together than they could individually. Only time will tell.
The point is there are options, and to determine what your individual options may be—and how much leverage you may have—is especially tricky with the current economics underlying the oil and gas industry.
My goal is to always identify each and every option for my clients so that they can make the very best decision for themselves. That means different things for different clients. Some may have an immediate need for money for whatever reason and want to take the best deal available right this moment. Others may be willing to wait for better opportunities in the future. No two clients are the same, and my representation of individual clients must (and does) mirror that fact.
If you want to learn more about your options in 2020, please call me at 304-845-9750 or email me at email@example.com. I’d be happy to discuss any oil and gas matter you have and schedule a free, no-obligation consultation. There is never any fee due to me unless you sign our fee agreement and we deliver results to you.
Gold, Khourey & Turak has represented land and mineral owners in West Virginia, Ohio, and Pennsylvania on all oil and gas matters for over a decade. The results speak for themselves—GKT has secured hundreds of millions of dollars for oil and gas mineral owners throughout the Ohio Valley.