“Descend, bold traveler, into the crater … and you will attain the centre of the earth…” Jules Verne, Journey to the Center of the Earth
Imagine traveling a mile or more toward the core of the earth, through layers of quartz, clay and black obsidian glass, through organic rock, fossils, shell and bone, all the while traveling toward hidden fortune and untapped natural resources.
Imagine a fracture of the earth and natural gas spilling forth.
Imagine getting paid thousands, even millions for what lies beneath your golf course or parking lot.
“It’s pure serendipity, a resource that only until recently just sat a mile deep,” said Michael Lawrence, general manager and chief operating officer of Colonial Country Club in Fort Worth, Texas. “This is an asset not normally able to liquefy like land.”
In a windfall of sorts, private clubs in natural gas and shale basin regions of the country (see map, page X) are harvesting the rewards of treasures buried thousands of feet below the surface. “For a country club to be in the gas business is unique,” said Bill Downey, general manager of Beechmont Country Club in Cleveland. “It began after a couple members ran into people from a club in Dublin [Ohio] that was leasing mineral rights. They suggested we look into the potential of gas drilling on our property.”
And, like a growing number of clubs, Beechmont soon formed an unlikely alliance with a driller, PEP Drilling, leasing the rights to the minerals under their property. “We are always trying to find new ways to ease the financial burden, and this is an additional resource we are putting away for a rainy day,” Downey explained. “We worked with a good reputable firm, and there was nominal disruption. Would I do it again? Sure.”
The Wisdom of Experience
Michael Lawrence readily admits to a “cowboy boot culture” at Colonial, the club that hosts the PGA’s Crowne Plaza Invitational.
“I’m wearing them right now,” he said, while taking a short break from putting the final touches on the club’s May PGA event. “There are oil and gas people everywhere. We have a lot of members in the business. They are literally experts.”
So when the club decided to study the feasibility of leasing their minerals, interviewing prospective drillers and negotiating terms were a natural fit for the members of the ad hoc Oil and Gas Committee. “It was full of landmen, gas attorneys, [and] real estate people,” Lawrence said of the process.
If your club isn’t lucky enough to have members who specialize in oil and gas exploration and mineral rights, experts suggest doing your homework prior to signing anything. Ask lots of questions up front, such as does the company have its own drilling equipment? Can the company guarantee a start date? Can the work be done in the months when the club is not as busy?
Other questions might include: How will the company conclude the project in a timely manner? How will the noise from the equipment be muffled? What about the pits and the saltwater disposal areas—will they be covered and remain on the property, or can they be removed? How will the company protect the club’s irrigation systems? And, should you purchase well-capping insurance?
When Canterbury Golf Club in Cleveland began interviewing drillers, Terry Bonar, golf course superintendent, called his peers already in the gas business. “When I found out we were looking into it, I checked with others who had wells to find out about problems and the process,” he said. “They gave me a list of questions to ask.”
That’s why Bonar knew the two 8-foot by 40-foot brine pits PEP Drilling dug near the aquifer wouldn’t harm his pure water reserve. “The guy I talked to at the Ohio Department of Natural Resources, Mineral Resources Division told me I could have them haul [the wastewater] away,” he explained. “Once we set parameters, things went smoothly.”
Courted by two companies, Colonial eventually chose Chesapeake Energy Corporation, signing a deal with a bonus in excess of $2 million and per acre royalties exceeding 22 percent of what is pumped from the property. “We decided to put the money back into the club … not for operations,” says Lawrence. “We want to be good stewards, [so] we have earmarked it for future capital improvements and savings.”
When the Rigs Arrive
Prospectors discovered underground minerals in the 1950s, but the technology to extract them from such depths and from such tight rock formations weren’t developed until recently. While vertical drilling protects delicate areas, it’s still important for clubs to understand the potential disruption and to plan for it ahead of time, noted Bonar. “The timeframe was important to us,” he said. “So we picked a company with their own equipment, so they could guarantee a January start.”
Depending on the type of underground formations, the process varies. At Canterbury, the first well was vertical, drilling straight down. The other two were horizontal going across the land 4,000-feet down to get gas from the middle of the golf course.
Each rig required two 10-feet deep pits, lined with plastic to handle what drillers pulled from the ground. “About half an acre was disrupted during drilling,” Bonar explained. “We made sure we defined the area they needed and then we put up snow fencing around it.”
Once the actual rig goes up, the drilling continues 24 hours a day for about 10 days. “Once it starts, they can’t stop,” said Bonar. And that means lights, noise and generators running round the clock. “They did what they could to muffle the sound,” he noted, adding that a handful of neighbors were unhappy about the noise. “We decided that one person would communicate with neighbors and I never told them a lie. But, I explained the process.”
After the initial drilling, the well is fractured, the rig removed, well heads are installed, pipes connect the well to utility lines, and the area is landscaped. This process can last for several months or longer.
Today, a year-and-half after the process at Canterbury began, the wells run only portions of every hour. “You can kill a well if you draw too much out,” Bonar said. “A pumper checks these wells every day, six days a week, to make sure everything is working right. Two wells run 10 minutes on the hour, and one runs 17 minutes.”
Money, Contracts and Taxes
Even in the best scenarios, wells eventually dry up and the revenue does not continue indefinitely. For example, it’s predicted that the Barnett Shale will continue for about 20 years.
“All wells have a life,” said Doug Howe, incoming chairman of the National Club Association and executive vice president of ClubCorp. “Typically they peak production in the first 24 to 36 months, and then there is a declining production. It’s also important to define post-production restoration in the contract.”
When negotiating contracts, Howe suggests doing your homework. In other words, check on the driller prior to signing. Often state departments of natural resources keep information on violations.
Also, define the length of the lease term and whether there are primary and secondary terms. Define access: Ingress and egress. Are there sensitive areas like irrigation or fairways you want excluded?
Define space boundaries and secure a legal definition for the area leased as well as penalties for violations. Define royalty due dates and remedies for default, and define access to information, too. Have someone from the club—many choose the golf course superintendent—assigned to daily contact with the drillers. And make sure to establish a time limit and responsibility for property repair and restoration in the contract.
Lastly, ask to be informed if your lease is sold or assigned to another company, and ask about post production. When the well is no longer productive, who will pay post-production costs?
“We were very careful with our contract,” remarked Mike Hardy, secretary of the National Club Association and a member of Canterbury Golf Club who served on the mineral leasing committee. “Check the record of the driller and have your greens superintendent in daily contact with the drilling process.”
Another consideration is tax ramification.
“There are some tax restrictions,” noted Kevin Reilly, CPA, of PKF Witt Mares in Fairfax, Va. “And the other issue is, what are you actually selling or leasing: rights or property?”
The way Reilly explains it, to maintain not-for-profit status, 35 percent or less of revenue can come from sources other than members. If cash received falls in the 35 percent or less limit, the club is safe.
“If you make too much money you have to ask, are we a private club or an oil generator,” Reilly said.
Howe also suggests hiring a good oil and gas attorney before negotiating and signing a lease. ”I think it holds great potential as an alternative revenue source for clubs,” he says. “But make sure you are protected.”
Kathleen Phalen Tomaselli is a contributing editor for Club Director.
Learning the Lingo
Bonus: Cash consideration paid to a landowner or mineral owner on the execution of an Oil, Gas and Mineral Lease.
Delay Rental: Yearly payments made during primary term to delay drilling.
Directional Well: Drilled at a vertical angle from a common drilling pad to reach a location beneath land where drilling cannot be done. For example, on the green.
Drilling Mud: Fluid circulated down the drill pipe and up the annulus during drilling operations to remove cuttings, cool and lubricate the bit, and maintain a desired pressure in the well.
Hydraulic Fracturing also known as fracking: Water mixed with sand is pumped under high pressure, creating fractures in the rock and releasing additional gas volumes.
Landman: Person who negotiates oil and gas leases with mineral owners, cures title defects, and negotiates with other companies on agreements concerning the lease.
Oil, Gas and Mineral Lease: The agreement outlining the basic terms of developing lands or minerals such as royalty to be paid, length of time, and description of lands.
Pipeline: All parts of a physical facility through which gas is transported, including pipe, valves, and other appendages attached to the pipe, compressor units, metering stations, regulator stations, delivery stations, holders, and fabricated assemblies.
Primary Term: The initial period in an oil and gas lease to develop the property.
Pugh Clause: Limits holding non-producing lands or depths beyond primary term of lease.
Royalty: Funds received from the production of oil or gas, free of costs, except taxes.
Do You Have a Fortune Underfoot?
To drill or not to drill? Many clubs are evaluating the lucrative mineral production options available in their region. With the advent of horizontal drilling country clubs are leasing their mineral for significant amounts. The map shows shale gas basins in the U.S.
Barnett Shale of the Fort Worth Basin in Texas is the most active in the United States. The first Barnett Shale well was completed in 1981 in Wise County. Drilling expanded greatly in the past several years due to higher natural gas prices and use of horizontal wells to increase production.
Fayetteville Shale produces gas in the Arkansas part of the Arkoma Basin.
Antrim Shale of the Upper Devonian in Michigan produces along a belt across the northern part of the Michigan Basin.
The Upper Devonian Shale’s Appalachian Basin has produced gas since the early 20th century. The main producing area straddles Virginia, West Virginia, Kentucky, but extends through central Ohio, along Lake Erie into the panhandle of Pennsylvania.
The Marcellus Shale in Pennsylvania, once thought drilled out, is now estimated to hold available gas with horizontal drilling.
Floyd Shale is a current gas exploration target in the Black Warrior Basin of northern Alabama and Mississippi.
Conasauga Shale wells are currently being drilled to produce gas in northern Alabama; activity is in St. Clair, Etowah and Cullman counties.
The Devonian-Mississippian New Albany Shale produces gas in the southeast Illinois Basin in Illinois, Indiana, and Kentucky.
Maverick Basin operators have completed approximately 50 wells in the Pearsall Shale in the south Texas.
A Checklist for Negotiating an Oil and Gas Lease
- Check out the lessee
- Agree on deal terms first
- Determine the lease form to be used
- Negotiate the lease terms
- Include a complete legal description of the leased premises
- Limit the lease to oil and gas
- Include a royalty clause that covers post-production costs, affiliate sales, processing costs, due dates of royalty and remedies for default, and minimum royalties
- Define “operations”
- Include Pooling and Pugh clauses
- Include continuous operations clauses for tracts of significant size
- Include a depth severance clause
- Realize that the rights of the lessee can be assigned at any time
- Delete the warranty of title
- Limit the effect of the “force majeure clause”
- Provide a broad indemnity clause that satisfies the “express negligence” rule
- Address the use of division orders
- Include provisions for the protection of the surface if owned by the lessor
- Determine if well plugging insurance should be required
- Include a clause about access to information
- Include a note on the use of bank drafts
- Determine whether to seek the rights to seismic data covering the land acquired during the lease term