U.S. to allow Shell to begin prep work for drilling in Arctic

ANCHORAGE, Alaska/WASHINGTON, Thu Aug 30, 2012 – Royal Dutch Shell will be allowed to begin some “limited” drilling in Alaska’s Chukchi Sea, the U.S. government said on Thursday, a move the company hailed as a step forward in its long-delayed effort to tap Arctic oil.

The U.S. Interior Department said Shell will be permitted to begin preparatory work in the Chukchi, but cannot drill to areas containing oil until the government certifies its oil spill containment system.

Without that containment system, the department has said it will not allow Shell to drill for oil in the Arctic.

“At this point we don’t know what exactly is going to happen with Shell and whether they are going to be able to complete a well in the Arctic this year,” Interior Secretary Ken Salazar told a conference call with reporters.

Shell’s Arctic drilling plans had appeared on track to begin this year but it has run into delays. The company has spent $4.5 billion so far in its effort to explore for oil and gas off Alaska’s coast.

In addition to seeking modifications to its air-quality permits from the U.S. Environmental Protection Agency, Shell is also still working to get its oil-spill containment barge, the Arctic Challenger, approved by the Coast Guard.

Shell’s vice president for Alaska Pete Slaiby said the government’s decision to allow some drilling was “exciting”.

He said that even if Shell’s activities this year were limited to top-hole drilling, that would be an important accomplishment.

“This is really important to begin to establish confidence that we can do this right,” Slaiby told reporters in Anchorage.

“All this work on top holes is clearly going to help us, as well as put real wind in our sails for 2013.”

Facing delays, Shell has asked the government to extend its oil drilling season in the Chukchi beyond the September 24 deadline currently in place. Without an extension, the chances of completing a well this year are slim, Slaiby said.

How to take advantage of the economic impact of the Marcellus and Utica Shale

Terry Coyne, Grubb & Ellis

The Marcellus Shale is a layer of rock that contains a large amount of natural gas deposits and is believed to be one of the largest natural gas reservoirs in the U.S. Recent explorations have estimated that the Utica Shale, a deeper and larger layer, contains a much greater volume of natural gas.

While these reserves were recognized for years, it was neither practical nor cost effective to drill until recently, due to new extraction methods like horizontal drilling and hydraulic fracturing.

Sales of land in affected regions of Ohio have picked up as investors position themselves to take advantage of the buying and leasing frenzy, says Terry Coyne, SIOR, CCIM, executive vice president with Grubb & Ellis.

“If you’re interested, move quickly,” Coyne says. “Because while most people are not aware of the value of this land, there are speculators moving in who are buying it up cheaply.”

Smart Business spoke with Coyne about how property owners and potential investors can best capitalize on the interest in the Utica and Marcellus Shale.

What is the economic impact of planned drilling in Ohio?

Carroll County is the center of initial drilling development, but the impact will be felt in Summit, Portage and Stark counties as well.

Direct Utica gas exploration and development expenditures amounted to $246 million in 2011. They are estimated to ramp up to $14 billion by 2015. Over the next five years, oil and gas producers are projected to spend more than $34 billion, not including lease and royalty payments.

By 2015, Utica Shale development alone is estimated to create or support more than 200,000 jobs in Ohio. You make money in real estate in areas with employment growth, and that is explosive employment growth.

How is the interest in natural gas from the Utica and Marcellus Shale regions affecting real estate in these areas?

There is gas drilling going on, there are real results, and people are making money. Now, in sleepy towns like Wellsville and Toronto, people are buying property. Whether it’s land or buildings, investors are buying it up for the purpose of servicing the oil and natural gas business.

In Canton, there has been a million square feet of leases or sales in the last 30 days. That’s a lot in any market, let alone in Canton, where properties can stay on the market for a long time. Canton and Akron stand to profit because they fit inside the Utica area, but can offer better proximity and real estate than places like Belmont and Carroll County.

Two brothers that purchased a property outside of Zanesville for $400,000 just sold it for $2.4 million. People are in need of real estate in the shale areas, and if the property is a building that is ready to be occupied today, its value is increased because the demand is real.

Outside of the real estate business, people aren’t recognizing this quite yet. But there are anecdotal tales from the Pittsburgh market, where vacancy rates for industrial and office are both sub 5 percent because the oil and gas service business has descended on these properties for shale development.

In real estate, you want to be in a rising market. This is a rising market.

What can companies that are already established in these areas do to take advantage of the rising market?

You have to work with professionals to do two things: first, negotiate properly for your mineral rights. If you are looking to sell your building, make sure you either retain your mineral rights separately, or if you do sell your mineral rights with the building, make sure your price reflects it. Don’t give away your mineral rights. Retain them or get paid for them.

Second, when marketing your building for this specific use, you should connect with someone who knows the Utica/Marcellus real estate market.

Essentially, there are two ways to make money. One is through royalties; so every time a dollar of oil or natural gas comes out of the ground, the land’s owner gets some percentage of it. These royalties typically used to be 12 percent of the gross, but the standard now seems to be 17.5 percent and some deals have even reached 19 percent.

The other way to make money is through bonus checks, or ‘lease payments.’ For instance, a landowner might be paid 17.5 percent in royalties plus $1,000 per acre. In some situations, purchasers have paid $5,000 per acre just for the right to drill.

If you decide to sell your mineral rights, how can you ensure they are accurately valued?

It’s tricky, because you could just as easily get a dry hole as a hit. In this case, your property income is not very predictable. The best way to find out what the property income will be is to learn what neighboring wells have produced. That is public data that you can find yourself, or you can call an expert.

What kind of development can be expected in the near future?

There is a whole supply chain of vendors and suppliers moving in. We’ve already seen Timken Co., V&M Star and Republic Steel ramp up their capacity for products that are sold into the oil and natural gas supply chain. Then there are companies that haul water, provide mud, or provide well tending services, and others that build hotels and temporary housing, because of the need to handle the population of incoming workers. That will drive retail demand and housing demand.

Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at [email protected] or (216) 453-3001. For more information on Marcellus and Utica Shale, visit www.uticamarcellus.com.