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01 28, 2013 by The Advocate
Private landowners are reaping billions of dollars in royalties each year from the boom in natural gas drilling, transforming lives and livelihoods even as the windfall provides only a modest boost to the broader economy.
In Pennsylvania alone, royalty payments could top $1.2 billion for 2012, according to an Associated Press analysis that looked at state tax information, production records and estimates from the National Association of Royalty Owners.
For some landowners, the unexpected royalties have made a big difference.
“We used to have to put stuff on credit cards. It was basically living from paycheck to paycheck,” said Shawn Georgetti, who runs a family dairy farm in Avella, about 30 miles southwest of Pittsburgh.
Natural gas production has boomed in many states over the past few years as advances in drilling opened up vast reserves buried in deep shale rock, such as the Marcellus formation in Pennsylvania and the Barnett in Texas.
Nationwide, the royalty owners association estimates, natural gas royalties totaled $21 billion in 2010, the most recent year for which it has done a full analysis. Texas paid out the most in gas royalties that year, about $6.7 billion, followed by Wyoming at $2 billion, Alaska at $1.9 billion and Louisiana at $1.75 billion.
Exact estimates of natural gas royalty payments aren’t possible because contracts and wholesale prices of gas vary, and specific tax information is private. But some states release estimates of the total revenue collected for all royalties, and feedback on thousands of contracts has led the royalty owners association to conclude that the average royalty is 18.5 percent of gas production.
“Our fastest-growing state chapter is our Pennsylvania chapter, and we just formed a North Dakota chapter. We’ve seen a lot of new people, and new questions,” said Jerry Simmons, the director of the association, which was founded in 1980 and is based in Oklahoma.
Simmons said he hasn’t heard of anyone getting less than 12.5 percent, and that’s also the minimum rate set by law in Pennsylvania. Simmons knows of one contract in another state where the owner received 25 percent of production, but that’s unusual.
By comparison, a 10 percent to 25 percent range is similar to what a top recording artist might get in royalties from CD sales, while a novelist normally gets a 12.5 percent to 15 percent royalty on hardcover book sales.
Simmons added that for oil and gas “there is no industry standard,” since the royalty is often adjusted based on the per-acre signing bonus a landowner receives.
While many people are lured by higher upfront bonuses, a higher royalty rate can generate more total income over the life of a well, which can stretch for 25 years.
Before Range Resources drilled a well on the family property in 2012, Georgetti said, he was stuck using 30-year-old equipment, with no way to upgrade without going seriously into debt.
“You don’t have that problem anymore. It’s a lot more fun to farm,” Georgetti said, since he has been able to buy newer equipment that’s bigger, faster and more fuel-efficient. The drilling hasn’t caused any problems for the farm, he said.
Range spokesman Matt Pitzarella said the Oklahoma-based company has paid “well over” $1 billion to Pennsylvania landowners, with most of that coming since 2008.
One economist noted that the windfall payments from the natural gas boom are wonderful for individuals, but that they represent just a tiny portion of total economic activity.
For example, the $1 billion for Pennsylvania landowners sounds like a lot, but “it’s just not going to have a big impact on the overall vitality of the overall economy,” said Robert Inman, a professor of economics and public policy at the University of Pennsylvania’s Wharton business school. “I think the issue is, what difference does it make for the individual families?”
Pennsylvania’s total gross domestic product in 2011 was about $500 billion, according to the U.S. Department of Commerce.
Inman noted that total gas industry hiring and investment can have a far bigger effect on a state or region, and companies have invested tens of billions of dollars just in Pennsylvania on pipelines, infrastructure, and drilling in recent years.
For example, in North Dakota the shale oil and minerals boom contributed 2.8 percent of GDP growth to the entire state economy in 2011, according to Commerce Department data.
Another variable in how much royalty owners actually receive is the wholesale price of gas. That has dropped significantly over the past two years even as production has boomed in Pennsylvania and many other states. Average wholesale prices went from about $4.50 per unit of gas in 2010 to about $3 in 2012. For many leaseholders, that meant a decline in royalties.
The boom in natural gas royalties has even led to niche spinoff companies that look for lease heirs who don’t even know they’re owed money.
Michael Zwick is president of Assets International, a Michigan company that searches for missing heirs.
“It was an underserved niche,” Zwick said of oil and gas leases. When a company can’t find an heir to lease royalties, the money often goes to state unclaimed property funds.
Zwick said he has found a few dozen people whose gas lease money was being held in escrow, including one who was owed about $250,000 in drilling royalties. But the average amount, he said, is far lower.
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