Cunningham Energy offers new deal to fund its test-drilling plans in Athens County

Photo Credits: Map courtesy ODNR.
Photo Caption: Attorney John Lavelle, in his letter Friday to landowners who signed his oil and gas leases blamed the lack of big investors in Cunningham Energy’s drilling plans on a new map that shows Athens County well outside the expected “core play area” for developing deep-shale resources in Ohio

Another chapter has opened in the drama that began last fall when a West Virginia oil and gas company came into Athens and started throwing theoretical money around.

A local attorney who has negotiated a lease for deep-shale drilling for hundreds of Athens County landowners with Cunningham Energy of Charleston has informed his remaining clients that the company is now proposing a significantly less lucrative lease.

The new, scaled-down lease deal, according to attorney John Lavelle of Athens, will enable Cunningham (and/or an as-yet-unnamed venture partner) to drill five test wells in different parts of Athens County. Without test wells showing promise, no oil and gas development will occur in Athens County.

The company apparently doesn’t have the financial wherewithal to drill the test wells as well as honor the $2,500 per acre signing bonuses with numerous Athens County property owners. Moreover, it can’t find a joint partner to fund those leases at the $2,500 amount.

The new lease terms, Lavelle wrote in a letter to landowners who had extended their leases with him in March, are based partly on a state geology report indicating that Athens County lies to the south of the prime Utica shale play.

Under the newly proposed lease terms, Lavelle wrote, Cunningham Energy, LLC, is ready to commit to drilling five vertical test wells into the Utica shale formation in Athens County by the end of January 2014. If the wells don’t show that the deep-underground Utica shale layer will be productive here, Cunningham (or whatever company it’s working with) won’t proceed with production wells.

In the meantime, Cunningham Energy is willing to pay landowners a nominal sum to keep their leasing options alive, with a much bigger payout years in the future if the company’s wells become productive.

Rather than paying the $2,500 per acre signing bonus it had earlier been willing to pay, according to a letter Lavelle sent to his clients Friday, the company is now willing to pay the far more modest amount of $125 per acre to keep the already-signed landowners under contract while the company investigates the geology of the county.

The property owners, according to Lavelle, will get the initial reduced payment even if Cunningham doesn’t put together a joint venture to drill. If the project does come to fruition, the leases will pay off $5,700 per acre over the life of the lease – though this will be more of a “back-end” than an up-front payment, and a landowner won’t get this full amount if his or her land goes into oil and gas production and royalty provisions start kicking in. As the amendment states, “The likelihood of that many vertical wells being drilled and finding oil and gas in commercial quantities to hold the leases by production within the time frames in question is very unlikely and highly doubtful so if the results are good, you will likely get most of the bonus rental payment until your property is drilled.”

The higher payment is contingent on the Utica actually producing here, and Cunningham and/or its venture partner drilling production wells. (This prospect also depends on the company’s finding a new investment partner, which according to Lavelle it’s in the process of locating.)

Lavelle said the decision by Cunningham Energy appears to be based in part on information released by state geologists, indicating that Athens County is outside of the richest part of the Utica shale formation for oil and/or natural gas. (He also suggested, however, that the presence of “an outspoken minority group opposed to all hydrocarbon development” may be making Athens County less attractive to investors than other Ohio counties.)

After the Ohio Department of Natural Resources’ state geologist released a map indicating that Athens County may be 20-30 miles south of the high-potential part of the shale play, Lavelle said, a number of Fortune 500-sized industry players dropped their interest in investing in drilling here.

“The big companies are using that map as a bludgeon,” he said. “Basically, they just left the table.”

 

OTHER SOURCES, HOWEVER, HAVE POINTED out that the big companies have their own geology reports, much more sophisticated and complete than anything Ohio’s state geologist has to go by. As a result, the big companies weren’t likely to have been discouraged by the state’s geology report, since they already have their own better information.

In fact, in an interview with The Athens NEWS in late March, state Geologist Larry Wickstrom readily conceded that the newest report is just a semi-informed prediction about where deep-shale drilling will bear fruit in Ohio. The report depends on scanty test-bore evidence, especially in our area, he said, also agreeing that the big oil companies have much better and more valuable information.

Wickstrom made special pains to point out that being placed outside the best-case Utica map doesn’t necessarily mean successful oil and gas development can’t happen in Athens County.

In the interview, Wickstrom emphasized that his agency “fully expects people to go outside that core area and explore, and we hope they do.”

He said he agreed with an oil and gas expert at Marietta College, who March 21 advised not to “abandon the ship” just yet on the oil and gas potential in the Athens area. “My feeling all along is that the most southeastern part of Ohio is on the marginal end, at best, of the Utica-Point Pleasant shale play,” Robert Chase, chair and professor in Marietta College’s Department of Petroleum Engineering and Geology, told The NEWS. “However, until someone gets bold enough to drill something in the area, I don’t think we can conclude there’s nothing here.”

As the drilling inches farther south in search of oil and liquid natural gas, production in nearby areas will have more bearing on what happens here. So far the closest oil and gas deep-shale wells are in Noble and Muskingum counties, but plans are afoot for wells in Morgan and Washington counties, two counties adjoining Athens to the north and east.

Another source familiar with the oil and gas industry and market noted that Cunningham’s difficulty in finding a venture partner may be because the big players in the oil and gas industry are busy developing deep-shale prospects elsewhere. With fully committed materials and crews, they can’t commit too early to an uncertain play, since most leases have a five-year production window.

This point is actually made in Lavelle’s letter to lease-holding landowners on Friday. In explaining why Cunningham has had difficulty finding a Fortune 500 venture partner, Lavelle writes, “The onset of thousands upon thousands of other Utica shale acres available on the market in proven geological counties in eastern Ohio has further exasperated (sic) marketing efforts of our leaseholds. The risk involved with a dearth of information pales against the known quantities elsewhere.”

 

CUNNINGHAM HAD SIGNED LEASE options with many local landowners agreeing to pay a $2,500-per-acre signing bonus, plus 16 percent royalties on any oil or gas drilled from their land. The company reportedly has options on around 100,000 acres in the county, about 36,000 of them using the Lavelle lease terms. They originally had signed property owners representing 42,000 acres, though some apparently didn’t renew after being offered an extension in mid-March.

Lavelle said Friday that with the current uncertainty about whether drilling in Athens County will be profitable, he felt the best move for his landowner clients was to work out a deal to keep their drilling leases with Cunningham viable, and get the company to commit to gathering some hard scientific data.

“It’s basically allowing us to keep our landowner-friendly leases alive,” the attorney explained. The reduced per-acre payment, he said, “is basically pocket change (landowners can collect) while they’re drilling the wells.”

Lavelle, who will still receive $25 per acre for providing “landowner-friendly” leases to his clients (with the potential for an additional $25 an acre later, if the play proves out), said Cunningham is now aiming to put together about 40,000 acres in Athens County to drill. That $25 fee means the initial payment to property owners will be $100 an acre.

The attorney said that in addition to letting landowners keep their involvement alive in the potential payoff of local oil-and-gas development, the new lease terms will help provide the hard test data on the shale play here that up till now has been difficult to come by.

“We felt this was the only way we could ever get those five vertical test wells drilled,” he explained.

In his letter, Lavelle stressed that while the new development may seem like taking one step back to later take two steps forward, he remains confident that Cunningham does want to drill here, though the drilling may be the more traditional vertical type rather than horizontal.

“It is my belief that Cunningham Energy remains committed to proving the viability of the Utica play in our area,” he assured his clients.

 

ONE PROPERTY OWNER WHO originally signed Lavelle’s Cunningham lease, and then signed the extension in March, told The NEWS Sunday that he doesn’t intend to sign the new offer. “I am not going to sign the extension,” said the property owner, who asked that his name not be used because of the sensitivity of the issue. “I think it would be silly to put a well on my property for $150 an acre more or less, and if nothing comes up, then I got a mess to deal with. If they drill somewhere and they hit good, then I can sit back and wait for the offers.”

 

Source: http://www.athensnews.com/ohio/article-36820-cunningham-energy-offers-new-deal-to-fund-its-test-drilling-plans-in-athens-county.html

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One response to “Cunningham Energy offers new deal to fund its test-drilling plans in Athens County

  1. The article makes a number of important points, all of which raise questions about the signing bonuses and about whether drilling will be done at all.

    Cunningham Energy has scaled back the bonus payments that it’s willing to pay landowners who sign new leases with the company. $125 an acre, minus a $25 fee for Lavelle, is far less than the initial offer of $2,500 an acre, of which Lavelle was expecting $50 an acre for his legal services. This has to be discouraging for interested landowners.

    Cunningham and a venture partner, yet to be found, will eventually pay a landowner bonuses of up to $5,700 an acre if drilling commences on the land and if oil or gas is discovered. The article does not make clear the terms (the timeline) under which the additional bonus money is distributed. Apparently, however, the money would be given in increments rather than in a lump sum. The article also points out that bonus payments will cease as soon as the first royalties are distributed. This provision is ambiguous and surely unsettling for any potential lessor.

    The project to drill five wells in various parts of Athens County depends on Cunningham finding a “joint partner” to do the drilling. This is far from a certainty, given that Cunningham has failed to find a venture partner after trying for at least the past six months. Additionally, the available geological evidence, though limited, indicates that Athens is on the outer edge of the Utica shale formation where there may not be potentially profitable supplies of oil or gas to extract.

    Those of us who are opposed deep shale gas mining in Athens or who want strong regulations in place before mining begins have been given some hope by these recent developments. There is a chance that, after all, mines will not be drilled at all in Athens.

    However, there is another problem facing the county. Gas/oil drillers in Pennsylvania and West Virginia are bringing their wastewater, product water, brine, or whatever, to be dumped into poorly regulated and perhaps unsuitable injection wells in Athens.

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