Signing Bonus and Royalty
Before a company can explore or drill, they must have the mineral rights to 60%
of the land in a production unit. Production units are typically 640 acres. The companies offer landowners a signing
bonus for their mineral rights. Historically, this has been $5 to $50 an acre in year 1 with $5 to $10 an acre in years
2 through 5 and the right of the gas company to extend the lease for 5 additional years for the same schedule of payments.
If the gas company actually begins operations on a productive well, the contract
moves into another phase and the landowner receives a royalty in lieu of the sign-up bonus. Although signing bonuses generate
an enormous amount of interest because they are guaranteed income, royalties can be significantly higher. A royalty is a share
of a well's income. The customary royalty rate is 12.5 percent of the value of gas produced by a well. This is actually
the minimum the gas company can pay by NY state law. Higher royalty rates are sometimes paid for properties that
are likely to produce gas.
Royalties are divided among all eligible property owners within a production unit
(an area of land that is thought to contribute gas to a producing well - typically 640 acres). The amount paid to each eligible
property owner is based upon their ownership share. In numbers:
- A landowner with 100 acres will receive about 2% of the profits if they have a 12.5%
royalty and are part of a 640 acre unit.
- If everyone in the unit receives a 1/8th or 12.5% royalty, for each $1 million in
profit, the landowners split $125,000 and the gas company retains $875,000. An increase in the royalty to 15% still nets
the gas company $850,000 of each milion.
While the proportions appear small, the royalties shared by eligible property owners
from a well yielding over one million cubic feet of natural gas per day can be millions of dollars per year. Note that as
profitable production is more predicatble and multiple land owners work as a group, both signing bonuses and royalties have
been increasing.
Tax Implications of Signing Bonuses and Royalties
Signing bonues are taxed as ordinary income. The federal government provides a depreciation
allowance for royalty income. At this time, NY state does not.
Drilling Activity
Several companies are actively drilling, leasing or planning activity on Marcellus
Shale properties. Range Resources, North Coast Energy Inc., Chesapeake Energy, Chief Oil & Gas LLC, East Resources Inc.,
Fortuna Energy Inc., Equitable Production Company, Cabot Oil & Gas Corporation, Southwestern Energy Production Company,
and Atlas Energy Resources are all involved. Shares of most of these companies are up strongly over the past two years.
The
Pennsylvania Department of Environmental Protection says that drilling permits are up about 25% since 2005 and much of the
activity increase can be attributed to wells targeting the Marcellus shale. Some of the new wells are yielding millions of
cubic feet per day and that has companies working hard to acquire leases on desirable properties and complete new wells.
New York properties along the Pennsylvania border have elicited the most interest
to date but the state has frozen horizontal drilling permits until an environmental impact study is completed.
PRIMARY SOURCE: http://geology.com/articles/marcellus-shale.shtml
Marcellus Shale - Appalachian Basin Natural Gas Play:
New research results surprise everyone on the potential of this well-known Devonian black shale.
