Barnett Shale: Has Texas Hit the Mother Lode?

By Lisa Briggs
REAE 5311


Until recently, most people in the Dallas/Fort Worth area paid little, if any, attention to mineral rights. Few even thought to discuss them when buying or selling a home. But in 2005, that suddenly changed. Today, no real estate transaction in the area would be complete without discussing the disposition of these rights. The reason for this sudden change: Barnett Shale.

Background

The Barnett Shale is a geological formation of sedimentary rock located in North Central Texas. It can be traced back approximately 300 million years[i]. These rocks contain ‘sponge-like’ pockets filled with natural gas. Although scientists have long known about the Barnett Shale, it wasn’t until 1980 that technological advances allowed them to reach the gas. Even then, the process was expensive; the hard shale must be fractured (or ‘fraced’) in order to access individual gas pockets.

Hydraulic fracturing, a new innovation developed in the late 90’s, made gas drilling in the shale formations more feasible, but there were still problems. The richest part of the Barnett Shale, its core, lies directly beneath the densely populated city of Fort Worth. Drilling in such an urbanized setting had not been tried before. In 2002 a new method of horizontal drilling made it possible to reach gas pockets up to 6,000 ft. away without disturbing the surface area. This new technology coupled with rising gas prices provided the impetus for the Barnett Shale play.

Because natural gas is the cleanest burning fossil fuel, it has become an increasingly important source of domestic energy. While domestic oil production has declined in recent years, gas production in the U.S. began increasing in 2005; production was up nearly 9% in just the first five months of 2008[ii]. This is due in large part to shale exploration, particularly Barnett Shale, now thought to be one of the largest on-shore natural gas fields in North America. While it was originally thought that gas might be drilled in three North Texas counties, the gas-rich shale extends much further than expected. Drilling has been so successful that estimates now are that it will span as many as 21 counties in North Central Texas and cover more than 5,000 square miles. By mid-year 2007, the Barnett Shale had already produced more than 2.5 trillion cubic feet of natural gas. That’s enough to heat every home in Texas for several years[iii]. In a 2007 study commissioned by the Ft. Worth Chamber of Commerce, the Perryman Group estimated that total production would reach 26 trillion cubic feet of gas. Barely a year later, expectations have now more than doubled - to 55 trillion cubic feet - and as exploration continues, these numbers will likely continue to be revised upwards.

Economic Impact

The Perryman Group reported that by year-end 2007, the Barnett Shale had created 83,823 permanent jobs in the Ft. Worth area and produced $8.2 billion in annual output. This represents an increase of over 50% compared with 55,385 permanent jobs and $5.2 billion in annual output during the previous year. Benefits to the state are equally impressive.[iv] Although estimates may continue to grow, the Perryman Group expects that through 2015, The Barnett Shale will generate 108,000 new jobs and $10.4 billion in output each year. The revenues will come from activities related to gas drilling and exploration as well as from royalty payments, personal income and increased tax receipts from local businesses.[v]
There’s no doubt the Barnett Shale has helped insulate North Central Texas from the economic woes seen in other parts of the country. In fact, according to the US Census bureau, between 2006 and 2007 Dallas/Ft. Worth was the fastest growing metropolitan area in the country. And while much of the country saw rising unemployment, Dallas/Ft. Worth posted the largest number of new jobs in any metropolitan area, nationwide. Much of the job growth can be attributed to gas exploration.[vi]

Not surprisingly, gas exploration has also had an impact on the real estate market. In March, 2008 The Perryman Group reported that retail vacancy rates were down and office space was full in the downtown Ft. Worth area. In addition, rental rates had increased by over 23% in the Central Business District. The housing market has also been bolstered by the inflow of labor. Over 38,000 home sales have thus far been attributed to activity in the Barnett Shale.[vii] An even larger impact on the housing market can be attributed to the leasing of mineral rights. Because mineral rights are owned by individuals and governments, gas companies can’t simply drill where they choose; they must first obtain permission. Gas companies began soliciting mineral leases by sending out an army of ‘landmen’ to knock on doors in targeted areas. Their goal was to lease the sub-surface minerals from as many individuals, businesses and public entities as possible. In exchange for the right to drill, they offered a one-time signing bonus and a royalty, a portion of the profits generated from any gas retrieved under the property. The initial bonuses were reported to be “as high as $300” with royalties between 12.5% and 18%. But as the Barnett Shale received increasingly more attention, property owners became more ‘gas-savvy’. They soon began banding together in groups and demanding more. Signing bonuses increased slowly at first, but as groups got larger and more powerful, lease incentives began to skyrocket. Soon there were reports of neighborhoods receiving bonuses of as much as $30,000/acre and royalties of 27.5%. Many wondered where it would end.

Signing bonuses and royalties have undoubtedly been a boon to the area. Cities have signed leases for the sub-surface minerals in parks and schools and have also leased out much of the land used for drill sites. Ft. Worth estimates it will earn nearly a billion dollars from bonus and royalty payments over the next 20 years[viii]. The money will benefit everyone in the area, allowing for improvements to infrastructure and providing funding for additional city services and programs. Thousands of individual mineral owners and businesses have also leased their mineral rights with the anticipation of big paydays. But amid this rush to cash in, many have had concerns about both the short and long-term effects of drilling on property values. Once drilling begins, the site operates 24/7. There are issues with noise, bright lighting, truck traffic, road damage and more. The gas rig reportedly remains in place for about 45 days before being dismantled and moved. After that, the area is restored and most of the disruption abates, but the well continues to operate and can do so for 30 years or longer and additional wells can be drilled from the same site. Depending on city ordinance, some homes can be as close as 200 feet from a drill site (Ft. Worth city ordinance requires a 600 foot setback). For some, that’s too close for comfort. Pockets of residents in various neighborhoods have organized ‘no lease’ groups, encouraging residents to refuse to lease their minerals rights. Two recent drilling-related accidents in the area – one involving a fatality – have brought increased attention to these concerns.

Don Young who founded Fort Worth Citizens Against Neighborhood Drilling Ordinance (FWcanDo), cites the following as his group’s most important concerns regarding urban residential drilling:[ix]

Ø Safety, which includes the possibility of accidents and blowouts
Ø Property marketability, including the possibility of diminished real estate values near rigs
Ø Environmental concerns, including air pollution, soil contamination, water pollution, loss of green space and diminished water supply
Ø Compromised neighborhood integrity, including noise, trash and overall disturbance from drilling activity
Ø Lack of oversight regarding unscrupulous mineral leasing, drilling and maintenance

Some residents believe the risks of having a nearby well are offset by the monetary rewards, but not every homeowner within a well’s drilling radius is entitled to collect bonus or royalty money. Mineral rights are not part of the surface estate and can be bought and sold independent of that estate. Because of the potential for income, most mineral owners in the area are now keeping the sub-surface rights when selling property. Others are using them as a bargaining tool in real estate transactions. Builders and developers are also retaining minerals rights and leasing them out for entire sub-divisions before even beginning to build. In addition, speculators are buying up large tracts of land just to obtain the rights and flip the property. This isn’t just happening in Texas, but also in places like Pennsylvania and Louisiana where gas exploration is now underway. As a result, most area homebuyers today must endure the noise and inconvenience without any direct compensation.

To date, there’s been no evidence that gas exploration has affected overall property values in either direction, and drilling hasn’t caused assessments to change. But it’s still early - The Perryman Group believes activity in The Barnett Shale could last as long as 80 or 90 years. As taxing authorities gain a better understanding of how gas exploration will affect home values, many residents are likely to see changes in their property tax bills. There will no doubt be some who challenge assessments, either because they feel their home values have truly suffered or because gas exploration has caused increased valuation and higher property taxes.

Looking Forward



The recent economic crisis has sent markets reeling. The oil and gas market is no exception. Gas prices have plunged from over $13/Thousand Cubic Feet in July to only $6.54 in October. That’s a drop of over 50% in only three months. Many gas company’s stock prices have been cut by as much as 70%. In response, the major gas companies began cutting back on both production and lease offers in the Barnett Shale area. Many rescinded lease offers they had already approved. Gone are the $30,000/acre paydays. Instead, mineral owners are now being offered $4000-$5,000/acre. Royalty offers have also decreased from a minimum of 25% of profits to only 20%. Some believe this is only a temporary glitch in the road and that when the economy recovers, the offers will again increase. Others think this may be the end of the gravy train. No one knows for sure. Oil and gas attorney, Mark Nastri, has counseled his clients to be patient. Nastri contends that the minerals aren’t going anywhere and neighborhood groups that hold their ground will be rewarded in the end.[x]
Stages of Exploration Barnett Shale Wells



Today, anyone driving on the highways of Ft. Worth or through the many side streets of the city can’t help but notice the gas rigs towering above school yards or competing with high rises for attention in the downtown area. At the end of 2006, there were already 500 wells within the city limits. Another 660 are expected to be drilled by 2010. The Texas Railroad Commission, the regulating body for oil and gas exploration, currently has nearly 10,000 gas wells registered and over 5,000 permitted drill sites.[xi] Although the current economic crisis has caused a pull back in production, no one yet knows how long it will last or how severe its impact will be. Experts do however agree that exploration in The Barnett Shale and other shale formations throughout the country is a necessary step toward energy independence. With regard to North Central Texas, the overall consensus is that the long-term benefits of drilling far outweigh the costs to the area. And while the true effects of this type of wide-scale urban drilling may not be known for decades, most are optimistic that with regulatory vigilance and careful planning residents will grow comfortable with the changing landscape.

Helpful Links:

Texas Railroad Commission
University of Texas Bureau Of Economic Geology
Interstate Oil and Gas Compact Commission (IOGCC)
U.S. Department of Energy Public Utility Commission of Texas
Barnett Shale Energy Education Council

Cited References:
[i] DFW TexStar Land Services, L.L.C.
www.dfwtexstar.net/BarnettShale.htm

[ii] Drilling Boom Revives Hopes for Natural Gas
Clifford Krauss
Sep 7, 2008
http://www.nytimes.com/2008/08/25/business/25gas.html?_r=2&em&oref=slogin&oref=slogin

[iii] DFW TexStar Land Services, L.L.C.
www.dfwtexstar.net/BarnettShale.htm

[iv] Drilling for Dollars:
An Assessment of the Ongoing and Expanding
Economic Impact of Activity in the
Barnett Shale on Fort Worth and the Surrounding Area
The Perryman Group
March, 2008
www.barnettshaleexpo.com/docs/2008_Report.pdf

vBarnett Shale gas field paying off
55,000 jobs, homeowner royalties part of $5B impact
Laurie Fox / The Dallas Morning News
May 17, 2007

[vi]North Texas economy lifted by Barnett Shale gas
Anna Driver, Reuters News
Apr 4, 2008
http://www.telerate.com/article/rbssEnergyNews/idUSN0331328420080404?pageNumber=2&virtualBrandChannel=0

[vii] Drilling for Dollars:
The Perryman Group

[viii] OpCit.

[ix] They're getting to know the drill
Homeowners wooed by oil companies hoping to tap into mineral rights
Laurie Fox and Marice Richter / The Dallas Morning News
March 27, 2007

[x] Northeast Tarrant Gas Leasing Organization website
at: http://www.freewebs.com/netglo/

[xi]The Texas Railroad Commission Field Data Report
at: www.rrc.state.tx.us/data/fielddata/barnettshale.pdf Economic Development &

Pictures:

Gas Exploration in the City of Dallas
Economic Development & Housing Committee
September 5, 2006
http://www.dallascityhall.com/committee_briefings/briefings0906/20060905_EDH_gasexploration.pdf

Drilling for Dollars:
The Perryman Group