COLUMN-Britain's fracking communities eye US-style payouts: Kemp
(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON, Aug 15 (Reuters) - Fracking set off a modern day land rush across the United States, as "land men" acting on behalf of exploration and production companies scrambled to secure rights to drill and fracture underground formations for oil and gas.
Landowners received hundreds or even thousands of dollars per acre in exchange for allowing wells to be drilled and pressure pumped, and hundreds of thousands or even millions of dollars more if the wells struck petroleum and were put into production.
Recently, the rush has cooled. Shell, BHP Billiton and Chesapeake Energy have been forced to take billions of dollars in writedowns because they overpaid for mineral leases that proved less productive than expected.
In many instances, companies have tried to renegotiate, or repudiate the contracts by finding legal defects, as they find themselves with rights to drill and fracture on too many acres, many of them with quite marginal production prospects, amid a glut of gas and oil.
That has not stopped other landowners with older leases, signed before the boom, trying to terminate them in the hope of getting a better deal now.
In the meantime, landowners and communities in other countries with shale gas and oil, such as Britain, can only look on with envy at the riches that fracking has brought.
Even before the first shale oil or gas has been drilled, a three-way fight is erupting in Britain between frackers, the national government and local communities over who gets to keep how much of future revenues.
Whatever the commercial and legal rights and wrongs in individual cases, the prospect of significant local income helped mute opposition and make fracking acceptable in many U.S. communities.
Royalty payments from oil and gas production have helped make North Dakota one of the most prosperous states in the union over the last decade.
But the United States is unusual in that mineral rights are in private ownership. In most of the rest of the world, oil and gas deposits are owned by the state.
In Britain, most mineral rights are privately owned, except for petroleum, which was reserved for the Crown by the 1934 Petroleum Production Act, a reservation confirmed in subsequent legislation.
Similar systems apply in the rest of the world. Oil and gas accumulations, and sometimes other valuable minerals like iron ore or phosphates, tend to be owned by the state.
Landowners and local communities may get small payments to compensate them for surface disruption, but have no legal right to a share in the revenues from the oil and gas.
Local communities get all the downside of oil and gas extraction, without sharing any of the benefits. Little wonder that many communities are less enthusiastic than some of those in the United States to host drilling and fracturing operations.
SURFACE AND MINERALS
In the United States, mineral ownership rights are a matter for state law.
The rights to use both the surface of the land and any minerals beneath generally started out in common ownership.
In some instances, however, surface and mineral rights have been separated.
Surface owners may have sold the rights to any minerals occurring beneath their property (severance via mineral deed) or sold the surface land but retained their right to exploit any minerals under it (severance by mineral reservation).
"When the mineral rights are severed from the surface rights, whether by reservation or deed, the mineral rights are dominant; that is, the owner of the mineral rights has the right to use as much of the surface as is reasonably necessary to explore, produce and transport his or her minerals," according to a useful guide for landowners published by North Dakota's Cooperative Extension Service ("North Dakota Oil and Gas Leasing Considerations" 1981 and 2006).
A similar system applies in other oil and gas-producing states. It also applies in Britain, except the mineral rights owner is the Crown.
But assuming the landowner had the mineral rights in the first place and still retains them, they can expect a stream of payments in exchange for letting exploration and production companies search for and exploit the oil and gas that they own.
BONUSES AND ROYALTIES
On signing a mineral lease, the mineral owner will normally receive a bonus of so many dollars per acre. Bonuses are deliberately agreed in a side document so they remain confidential, even when the lease is placed in the local land registry.
The lease gives an exploration and production company exclusive rights to search for and produce oil, gas and any other stipulated minerals on the leased acres for a period of years.
During the primary term of the lease, the exploration and production company has so many years to drill its first well or the lease terminates. In the meantime, until it commences work, it must make small annual payments to the mineral rights owner called delay rentals.
Once oil, gas or other stipulated minerals start to be produced, the secondary term of the lease comes into effect.
Delay rentals then stop. Instead, the mineral owner is entitled to a share of the production (royalties), either in kind or as cash from the proceeds of sale.
Sometimes royalties are paid minus expenses associated with transporting and marketing the petroleum. Typical royalty rates are 1/18th, 1/6th or 3/16ths, but vary quite widely depending on the level of competition when the lease was signed.
If the mineral owner is in a particularly strong position, they may be able to negotiate an additional overriding royalty, paid from the share of production belonging to the company and free from any of the costs of operation.
In Britain, landowners and local communities will not be eligible for the sort of bonuses, rentals and royalties that come with owning oil and gas.
Instead, Britain's government will levy an effective tax rate of 62 percent in exchange for producing its oil and gas - the same as most offshore operators currently pay for fields in the North Sea.
But to spur shale drilling, which has higher upfront costs, the UK government is currently consulting on a revised fiscal scheme that would cut the effective tax rate to 30 percent.
To quieten local protests, the UK Onshore Operators Group (UKOOG), representing onshore exploration and production companies, has also proposed a series of community benefits, as part of its Community Engagement Charter.
In effect, UKOOG is proposing a system of quasi-bonuses and royalties. Local communities would receive "benefits" worth around 100,000 pounds at the exploration/appraisal stage for each site where hydraulic fracturing takes place.
They would also receive a share of the proceeds at the production stage of 1 percent of revenues with approximately two-thirds allocated to the local community, and one-third to the wider county community.
It is a lot less than minerals owners receive in the United States. Unsurprisingly, many communities likely to host shale wells are already pressing for more.
"Conservative and Labour members of parliament in Lancashire are joining forces to demand more money for their constituents in return for 'fracking rights' after concluding that the current sweeteners being offered are not good enough," the Financial Times reported on Wednesday ("Lancashire MPs join forces to seek fracking sweeteners" Aug 14).
"This is just practical politics," one MP is quoted saying. "We are trying to get the best deal we can for our constituents ... We don't want crumbs off the table."
(Editing by Jason Neely)