1. Gas & Oil Taxation Centre County Pennsylvania June 2 2010
3. 2006: 7000 permits
4. 2007: 6,700 PERMITS
5. 2008: 7,200 PERMITS
6. 2009: 6100 PERMITS
7. 2010: 364 permits
8. MARCELLUS: 424 WELLS 2009 &2010
9. MARCELLUS REGION
10. Oil & Gas 2010
12. Energy Outlook
15. Drill Pattern
16. Model Decline
17. Future Pricing
18. Regional Activity
19. Northeast PA Oil & Gas Activity
20. Working Interest Sale: $14,167/acre April 2010 Reliance Industries Ltd. buys stake in U.S. Marcellus Shale natural-gas properties from Atlas Energy Inc. for $1.7 billion.
Equivalent to 120,000 acres, making the price equal to $14,167 an acre of working-interest.
Nearly all undeveloped
Reliance expects to spend $5 billion on the venture over 10 years.
21. Working Interest Sale: $14,000/acre February 2010 Mitsui & Co., announced a $1.4 billion joint venture with Anadarko Petroleum Corp.
Mitsui purchased a 32.5% interest in 306,000 non-producing acres (100,000 net acres)
$14,000 per acre of working-interest.
Texas-based Anadarko has an interest in 716,000 acres in the Marcellus Shale.
Transaction involved unproven working interests in north central Pennsylvania.
22. Working Interest Sale: $2,900/acre May 2010 BG Group acquired a 50% interest in Exco Resources’ 654,000 (net) acres in the Appalachian Basin
Primarily in the states of Pennsylvania and West Virginia for $0.95 billion
Approximately $2,900 per net acre of working-interest.
Transaction includes 5,900 shallow wells (currently producing around 35 mmcfd) – however, real value of the existing wells is access to the deeper Marcellus.
23. Working Interest Sale: $12,000/acre May 2010 Williams Cos., a U.S. natural-gas producer, acquired $501 million in mineral rights from Alta Resources LLC et. Al.
42,000 net acres of working-interest in the Marcellus Shale formation.
Acreage is expected to contain potential reserves estimated at 1.2 trillion cubic feet of gas
Price equates to approximately $12,000 per net acre of undeveloped working interest.
24. Working Interest Sale: $4,827/acre Early 2010, EQT Corp. purchased approximately 58,000 net acres in Marcellus Shale from a group of private operators and landowners.
Acreage located primarily in Cameron, Clearfield, Elk, & Jefferson Counties.
Total consideration is approx. $280 million or 4,827 per acre.
200 mile gathering system
100 producing shallow vertical wells used as access to the Marcellus.
EQT will have more than 500,000 net acres in this play
Most importantly, about 88% of the acquired acreage will be held in fee or by production from existing vertical well
25. Corporate Values (Industry Statistics) Working Gross Income = Gross income – Royalty Expense
Net Operating Income = 0.47 * Working Gross Income
Corporate (Business) Value = 3.81 * Net Operating Income
26. Some Relationships Royalty Rate @ 12.5% = 20% of total Business Value
Royalty Rate @ 18.5% = 30% of total Value
Assuming 9% discount rate on royalty income over 20 year life
28. Mineral Ownership Fee Estate:
Mineral is part of the value of the estate
Deed: mineral value is identifiable
Value of the fee may be impaired or under contractual obligation
Right to deplete (exhaust)
30. Mineral Value When fee:
A royalty valuation is used to estimate what the estate would be worth to the landowner
A business valuation may be used to develop a feasibility study
Working and royalty may be separated
When severed by lease
The royalty value is no longer attached to the land
The working value is the value of the severed estate
When severed by deed
The working value is used to estimate the business value
The royalty value may used to estimate (or carve-out) the transferable value of the mineral-only asset
31. Mineral Value Owned
The lease transfers ownership of the mineral asset (horizon, seam, zone, all, etc.)
Not real estate
Working interest is real estate
Control of the asset
32. Mineral Severance (Coal Basis) 1969: (Pa Supreme Court: Mathies and Consolidated Coal Companies v. Washington County Board for the Assessment and Revision of Taxes, 255 A.2d 906):
“Coal is real estate and where the coal has been severed from the ownership of the surface by agreement or conveyance, the coal is separately assessable and taxable to the owner of the coal estate.”
1970: (Stewart v. Chernicky, 266 A. 2d 259, 439 Pa. 43):
A lease, which provides that lessors who granted and leased to lessees all the mining rights owned including partial rights on various tracts, was equatable to a quitclaim deed of all mining rights controlled by a lessor.
1985 Lichtenfels v. Bridgeview Coal, 496 A 2d. 782, 344 Pa Super. 257):
The sale of coal, in place or in ground, is equivalent to an agreement leasing minerals underneath land until their exhaustion.
This agreement conveys fee simple in minerals to the lessee
Lease is considered an outright grant of the estate, in minerals, to the lessee.
Exclusive right to mine for a mineral and entitled to take as much of those minerals as could be extracted during a twenty-year term of lease – acquisition actual and, therefore, taxable interest in the estate, even though the lease was for a term of twenty years.
33. Severed Mineral Pa 1941: The principles of laws applicable to mining for coal were instrumental in constructing a contract for the mining of limestone (Burke v. Kerr, 19 A.2d 382, 341 Pa. 304).
The Pennsylvania Supreme Court found that an agreement by which land owners “granted, bargained, sold, or let and leased limestone under land with the right of ingress to mine and remove limestone in consideration of a royalty for the limestone mined, was a sale of limestone in place as land.”
In this case, consistent with earlier cases, the court found that the royalty interest retained by the landowners constituted a personalty and not realty. The royalty interest as personal property is not subject to real estate assessment.
Therefore, the limestone in place and subject to the lease became a “severed estate” and taxable as realty with real estate taxes, which are the responsibility of the lessee or mineral operator.
The court found that calling the severed estate real property was consistent with market factors. The court further stated that this status was particularly applicable since the mineral lessee can, and frequently does, mortgage and trade the mineral estate gained by lease
34. Severed Mineral Oil and Gas Pa Com. Pl. 1938: An oil and gas lease, granting the right to take minerals that are exclusive and unlimited in quantity and purpose, is a sale in place. The grantee is vested with a freehold estate in minerals (Brown v. Thompson, 86 P.L.J. 497, I Fay L.J. 178).
Pa Super. 1975: A lease agreement granting to the lessee the exclusive right to remove all oil and gas on the premises for a term of one year "and as long thereafter as oil or gas is found" results in a separate mineral estate being created. Such an estate was a taxable realty, and a subsequent treasurer's sale of the estate for nonpayment of real estate taxes was valid ( 21 P.S. § 2 see also Baird’s Appeal, 132 PA Super. 573, 1 A.2d 485).
Assessment of real estate taxes on a 7/8th interest in oil and gas on premises was proper, despite the contention that it was impractical to tax an interest of an unknown quantity. (Pennsylvania Bank and Trust Co., Youngville Branch v. Dickey, 355 A. 2d 483, 232 Pa. Super. 224).
Pa. Com. Pl. 1940: Where a lease gives the right to mine and operate for oil and gas for a definite period and to continue as long as oil and gas should be produced, the lessee acquires an interest in the gas as real estate (Bickerton v. Vaughn, 38 D. & C. 645, 88 P.L.J. 393, # Fay. L.J. 105).
35. PA Supreme Court Overturns Taxation The 2002 Pennsylvania Supreme Court case (Independent Oil and Gas Association of Pennsylvania (IOGA) vs. Fayette County) got us here today. In that case, IOGA made many claims:
The legislature never intended to allow assessment of oil and gas
PA counties were alone in taxing oil and gas interests
Oil and gas interests were too intangible (fugacious) to assess
Assessment of oil and gas violated the concept of uniformity of taxation
The Pennsylvania Supreme Court overturned years of property taxation as it related to severed active oil and gas estates.
The court found that the estate was not specifically identified in the legislation (circa 1930’s/1940’s) enabling Counties to assess real property.
The court determined that the oil and gas estate was not “land” and was therefore not taxable under the statute.
Court challenged Legislature to correct it
36. Contrary to Court Decision It can be argued that the legislature did contemplate the taxation of oil and gas and other minerals, for example:
Section §5020-419 Assessment of Auxiliary Forests:
“All surface land which has, since the fifth day of June 1913, been classified and set apart as auxiliary forest reserves .... be rated in value for the purpose of taxation, not in excess of one dollar ($1)....
“provided, however, that if the said surface land be underlain by coal, iron ore, oil, gas, or other valuable minerals, said minerals may be assessed separately.”
37. Taxation was “Well Settled” in 1910 Oil, gas, and minerals reserved from the grant of the surface of several tracts now in separate ownership:
If they are real estate, of course they can be taxed as such, and whether they are or not always depends upon the nature of the reservation or grant.
However, a mere license to mine coal or to drill for oil and gas, unaccompanied by the right of ownership in the minerals underlying the surface, does not constitute an estate in land.
On the other hand, oil, gas, and coal are minerals and when the title to the same is severed from the owner of the surface and is vested in a separate owner, an estate in land is created, which if it be of any value, may be taxed.
When the assessor goes upon the land, it is his duty to make a valuation upon information or knowledge which will furnish some definite fixed basis of valuation:
A mere naked reservation of oil and gas in a deed without any other facts to base a valuation upon is not sufficient to warrant the assessment of taxes.
Development in the neighborhood, sales of oil or gas lands in close enough proximity to add value, or any other element of value which may form a basis of valuation may be taken into consideration by the assessor or other taxing authorities,
It should always be borne in mind that real estate is the thing being dealt with and that oil and gas are considered real estate and if there be no oil and gas there is no real estate.”
PA Supreme Court (1910) found that the taxation of mineral estates including oil and gas was “well settled” (Rockwell vs. Warren County; 228 Pa. 430; 77 A. 665; 1910 Pa. LEXIS 502):
38. Relative Value Sharing $46 billion in Market Value
39. Centre County
40. Centre County Situation 224,000 acres of Marcellus Shale
800 +- Active Wells
600 +- pre 2006
200+- since 2006
2 +- Marcellus Wells
224,000 acres of Marcellus Shale
Potential for 1400 to 2500 new wells
Development will take years
41. Centre County Values Existing Shallow Wells : $30 to $60 million
Marcellus Severed acreage $3,000 to $15,000 per acre
Based on recent potentially comparative sales of undeveloped gas estate
$100 to $500 million depending on acreage severed
Future Values Based on the economic reality of the wells as they are brought on line: $250 to $500 million
Jeffrey R. Kern, ASA
Resource Technologies Corporation, Po Box 242, State College, PA 16801
814 237 4009