Subject: Natural Gas Update - 2/14/10
Several of our members have contacted us regarding the South Maine Coalition's proposed deal with Inflection Energy that was recently announced in the Press & Sun Bulletin and how it may affect our group.
Since the South Maine Coalition has kept the details about their proposed contract very much to themselves, we can only reply based upon the newspaper article that we’ve all read. It is our understanding that the wildcat gas
company, Inflection Energy, was organized within the last year and we would question what kind of capital they have to pursue or even back their endeavor should something go wrong as it has in Pennsylvania with Cabot Oil & Gas – or is their intent to turn over the leased property for a profit?
The payout of the sign-up bonus monies over eight years as Inflection Energy continues to develop their leaseholds would most likely negate much of the $6,000 per acre bonus monies since once the acreage is unitized or the company starts operations upon the leasehold properties most contracts stop other payments. Therefore, property owners might only receive one or two payments of the “signing bonus” monies. Remember that 3,200 acres will only support five 640 acre units for horizontal drilling so it doesn’t take too much effort on the gas company’s part to tie up all of the property to cancel further payments other than royalties.
Of course, as the newspaper article pointed out, the real money to the landowners is derived from the royalties. The concern here is that the article indicates that the royalty is 20% “subject to certain deductions”. These
deductions can be set by the gas company so there is a question as to what the real royalty might be.
We certainly hope the South Maine Coalition’s attorney has taken the steps necessary to minimize exposure. The bottom line is that "the devil is in the details" and the details are in the contract -- and we don't know what that contract states.
While we have been somewhat negative, our hope is that their legal representative is on top of all the concerns that are obvious to the landowners as well as those that can arise from misinterpretation and ambiguities of a
typical gas contract. If their groundwork has been done, the group is to be commended and we all wish them well since their success is ours as well. We were particularly happy to see the attention that is being paid to less than 5000 acres when associated with Millennium pipeline system. This could be the first real deal in what will be, no doubt, more that will come to our area in the following months. Companies are still reluctant to obligate themselves until the moratorium is lifted on drilling in the Marcellus.