Now, the Real Utica Shale Money Begins to Flow
CARROLLTON, Ohio -- Doyle Hawk reaches into the top of his dining room cabinet and produces a rectangular sheet of paper folded once -- a check for $9,800 -- the first royalty payment of many more to come based on the 35 acres he owns that are tied into a nearby Utica well unit.
“Who would’ve ever dreamt this?” asks Hawk, a farmer and former Carroll County commissioner, as he glances at the check from Chesapeake Energy Corp. “Five years ago, you couldn’t get a lease here.”
Natural gas is flowing – albeit slowly – through producing Utica shale wells and what few pipeline networks exist in Carroll County. And now, so is the money.
With most of the bonus cash related to initial oil and gas leasehold and pipeline agreements paid out to landowners throughout the region, the first sign of what likely is sustainable wealth in the form of royalty payments is starting to appear.
These royalties, along with additional business brought in as a result of the oil and gas industry, stand to not only have a dramatic effect on the economy of Carroll County and the livelihoods of its residents, but also those landowners in Columbiana, Trumbull and Mahoning counties where new wells are expected to come online this year and next.
Hawk, a longtime farmer who with two sons owns more than 500 acres in Augusta Township, says the first check arrived May 3 for three months of production from the Lozier well. A monthly payment will follow based on production levels of that particular well during a 30-day period.
Hawk acknowledges the amount of this first check is simply a taste of what’s to come for him and hundreds – maybe thousands – of other landowners in the Utica shale, the rock formation 8,000 feet below eastern Ohio that contains valuable natural gas and natural-gas liquids. “I’m part of about 10 different drilling units,” he reports.
Hawk says he and his sons have roughly 500 acres tied to eight or 10 wells in Augusta Township. One, the Hawk well, is on his land and involves some 200 acres. If production of the Lozier well is any indication – monthly royalty payments compute to $93 per acre – then Hawk and his family stand to become very rich, very quickly, this year.
“We were curious about what our check would look like the first time around,” Hawk smiles. “We’re pleased with what we got out of it.”
Hawk is optimistic that production levels at the Lozier well will rise because pipeline and processing infrastructure is still lacking in this part of the Utica shale. Once the pipelines are laid and the new cryogenic plant under construction in nearby Kensington in Columbiana County begins operations, the wells can flow at a higher capacity.
Plus, he says, the Lozier unit was shut down for two weeks so another gathering line to the well could be connected. “So, it’ll do better next month,” he says. “When you shut it down, you take production away for that period of time.”
And, he says, two additional wells are permitted for the Lozier unit, which should boost future production.
Hawk projects his royalty payments will average between $100 and $120 an acre per month. The first payment on a producing well usually comes three months after it’s hooked up, and the company – in this case, Chesapeake – cuts a check for the first 90 days of production. Monthly checks will follow as long as the well is producing, and are based on the amount of acreage tied to the unit, the royalty percentage rate in the lease agreement, and how much oil and gas the well produces.
By August, Hawk projects that he and his wife will receive their initial royalty check for the well on his 200 acres. Based on his model, that first payment alone could bring in between $60,000 and $72,000, followed by checks of $20,000 to $24,000 every month.
More should follow in the next year. Hawk personally has 40 acres tied into his son’s unit, the Jeffery well; another 70 acres that’s part of the Martin well; 10 acres that’s part of the Mills unit; and about 60 acres vested in another nearby well. A smattering of acreage graces parts of five other well units in the area, he reports.
According to the Ohio Department of Natural Resources, there are 15 permitted wells in Augusta Township, where Hawk lives. Five are in production.
What’s intriguing is that Hawk’s lease is conservative compared to other leases signed during the height of the land scramble in the Utica. He and other farmers in Augusta Township signed leases early in the play, before word got out about the Utica’s potential. In 2010, Hawk negotiated a new lease with Lisbon-based Patriot Energy, which called for standard royalties of just 12.5% of gross production per acre, and a bonus payment of $5 an acre. Chesapeake then purchased the lease from Patriot a year later.
By 2011, as news circulated about the Utica find, Chesapeake was offering bonus payments for leases that exceeded $6,000 per acre, and royalty rates were signed as high as 20% of gross production.
Carroll County has emerged as the center of oil and gas exploration throughout the state. Between January 2011 and May 2 of this year, 253 horizontal wells were permitted in Carroll County, according to data from the Ohio Department of Natural Resources. Forty-five of these wells are listed as producing.
All but 13 of the 253 permits were issued to Oklahoma City-based Chesapeake, which became the first major energy company to canvass and develop the Utica early in the play.
Seven permits in the county belong to Rex Energy Corp., based in State College, Pa., and one of its wells has begun producing, according to ODNR records. Five other permits were issued to EnerVest, based in Houston. Sierra Resources LLC, also of Houston, has secured a single permit to drill in Carroll County.
It’s still unclear how productive these Utica wells will be. Energy companies were mandated to deliver their annual production reports to ODNR in March, but as of press time, the agency had not released these figures. The consensus in Carroll County is that the results will be good.
“I think the numbers are going to be great,” says Glen Enslen, who retired May 3 as Carroll County’s economic development director. “Everything’s changed here. It seems to be expanding and intensifying.”
The amount of truck traffic throughout the county has increased “exponentially,” Enslen says, and no fewer than 25 companies have located in the area solely because of the oil and gas industry. “The challenge for us is that we’ve got to concentrate on sustainable development and business.”
Although activity is bustling throughout the county, Enslen wants to see the area lure interests that are more diversified and in it for the long haul. “We need a comprehensive strategy to attract businesses 30 years from now,” he says. “I’m not sure how you do that.”
For example, developing traditional infrastructure such as water and sewer service to areas outside the village of Carrollton is a priority, Enslen says. The advent of the oil and gas industry to this region of Ohio is nothing short of a dramatic reversal of fortune for a community that has struggled with high unemployment, brain drain and declining industry, he relates.
“I’ve worked in Appalachia forever, and I’ve never seen anything like this,” Enslen remarks. “We’re going to turn the corner. This is our shot.”
The Carroll County unemployment rate in March stood at 8%, higher than the statewide average of 7.3%, but substantially lower than the 13.6% the county registered for the same month in 2009.
Wealth has also begun to circulate throughout the community, observes Amy Rutledge, executive director of the Carroll County Chamber of Commerce and Convention & Visitor’s Bureau, in Carrollton. “We’ve gone from a sleepy little town where nobody came to visit to a community that’s busy all the time,” she says.
Rutledge reports that signing bonuses alone created a clique of millionaires throughout the county, while employees from out-of-town pipeline, trucking and energy companies have all moved in and are spending money locally.
Sales tax revenue in Carroll County, she reports, jumped $600,000 in 2012 compared to 2011, a 31% increase. And in the month of January 2013, sales tax collection was already $100,000 greater than it was the same month in 2012.
Housing remains tight, Rutledge adds, as energy employees from Texas, Louisiana and Oklahoma search for lodging. “Campgrounds are filling up,” she remarks.
Bed tax revenue collected from the county’s single hotel, the Days Inn Carrollton, shows that the hotel is running “90% to 95% occupancy 100% of the time,” Rutledge reports. A new Microtel & Suites is expected to break ground soon, and the Atwood Lodge has reopened in response to the influx of oil and gas workers and executives now crisscrossing the county.
“There’s also the potential for a third hotel being built,” she says.
And, new businesses are beginning to flourish here, Rutledge says. AMS Uniforms, a company whose traditional business is selling scrubs to medical professionals, has expanded its line to supply flame-resistant apparel and boots to the oil and gas industry and recently opened a shop on Canton Road in Carrollton. Praxair has also opened an office along the thoroughfare.
Rutledge says it’s still difficult to peg just how much wealth is circulating throughout the region. “Local landowners have fixed up their properties, buying new equipment, so there’s a general facelift across the county,” she reports.
While this newfound wealth has affected routine commerce in Carroll County – traffic snarls were never a problem – it hasn’t altered the overall way of life in the community, Rutledge says.
“Most farmers live a conservative lifestyle and will continue to do that,” Rutledge says. “I know one couple in their 80s who purchased their first brand-new car – a Subaru Outback. They’re not trying to put on airs or be a part of the nouveau riche.”
What she does see is the profound sense of relief on farmers’ faces that comes with paying off debt and reducing financial stress: “You worry about how you’re going to pay bills – especially dairy farmers.”
As for Doyle Hawk, he says his family’s farm has always done well, but he no longer needs to rely primarily on his corn and bean crops for income. “They’re projecting another drought this year,” he says, glancing over a vast tract of land near the Hawk well. “Carroll County has struggled since the beginning of time,” Hawk reflects. “It’s our turn to collect some of it. That’s all. It helps to pay the bills, upgrade a little bit.”
And, there’s some money left over to spend on leisure. “My wife and I are thinking of taking a trip.”
Where to? Hawk was asked.
“I don’t know,” he replies. “Maybe Kentucky.”
EDITOR'S NOTE: This story was first published in the MidMay print edition of The Business Journal.
Copyright 2013 The Business Journal, Youngstown, Ohio.
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