Economic Downturn Means Lower Gas Royalty and Lease Payments

The natural gas industry had already entered an economic slump before the COVID-19 pandemic struck in March, and the pain being felt by drilling companies is also being shared by landowners receiving monthly royalty checks and those looking to lease their property.

Attorney Joseph Morascyzk discussed the effects on property owners this week during the second of a series of webinars hosted by the Center for Energy Policy and Management at Washington & Jefferson College titled “Effects of COVID-19 and the Economic Downturn on Western Pennsylvania Shale Gas Development.” Morascyzk is a W&J alumnus who is a partner in a law firm that represents landowners in regard to a variety of issues relevant to oil and gas lease transactions. He is also a partner in CX-Energy, which provides brokerage services for gas rights.

He explained because of low gas prices, which have fallen from the $3 per thousand square feet (Mcf) range 18 months ago to well below $2 per Mcf currently, royalty checks are lower, meaning less revenue for landowners. Yet post-production costs, which are the costs of processing and transporting the gas from the wellhead and are deducted from most royalty payments, have remained the same, further reducing the amounts being received. “Post-production costs really affect the bottom line,” Morascyzk said.

In addition, some producers, including CNX and EQT, have temporarily reduced gas production due to low prices by “shutting in,” or turning off, certain wells until prices rise, which is expected later in the year. That could stop checks to some royalty owners.

At the same time, companies are drilling fewer new wells because their budgets have been tightened. This means there is much less urgency for companies to sign new leases for a property, unless it is in their immediate drilling plans. “It’s more of a ‘Don’t call us, we’ll call you’” attitude, Morascyzk said.

Competition for property rights has also fallen as major players have already established their positions in the Appalachian basin. The means lower upfront bonus money for leasing acreage and lower royalty rates. “Instead of waiting for drilling and/or negotiating a lease with unfavorable leverage, many royalty owners have instead chosen to sell their oil and gas rights over the past few years,” his presentation stated.

While the pandemic will lengthen the industry downturn, Morascyzk is “cautiously optimistic” that the situation will improve in 2021. Even though there is continued political pressure against the use of fossil fuels, he believes that Appalachian shale gas will be needed, particularly for power generation, as a bridge and complement to renewable energy in the long term.

The final webinar on July 14 will feature Jesse Bushman, revenue analyst at the state Independent Fiscal Office, who will give a high-level overview of the trends in Pennsylvania's natural gas production and how that affects statewide Act 13 Impact Fee revenues and local government revenues. To register, visit https://www.eventbrite.com/e/effects-of-covid-19-and-the-economic-downturn-on-western-pennsylvania-shale-tickets-107701618440.