Thursday, November 11, 2010

Norse Energy’s View of Central New York

While we upstate New Yorkers slept through the wee hours of Nov. 10, executives with oil and gas company Norse Energy Corp. were busy overseas, making a quarterly report to their shareholders from the private businessmen’s club Shippingklubben in Oslo, Norway.
A very approximate, highly generalized depiction of Norse's key leasing and drilling area — shown within the context of county lines, pipelines, and activity from competitors. I believe this map was created around January 2010.
Buried amid all the financial sand and gravel, there were a few key nuggets that should be of interest to anybody who owns land in Central New York — especially land in or near Norse’s key exploration area, which runs from southern Madison County, all the way through Chenango County, and down into eastern Broome County.

Norse currently controls the oil and gas rights to 180,000 acres, although — within the zone where Herkimer sandstone, Marcellus shale, and Utica shale represent over-layered prospects for producing natural gas — that number is more like 130,000 acres.  By industry standards, both Norse and its obscure Herkimer sandstone focus continue to be considered niche operations.  But, year by year, the company appears to be making headway toward what might eventually be a very big payday for its investors.

Norse originally operated stateside as Nornew, and it has amassed its current position over at least the last decade and a half in several ways:  partly by making outright purchases of land (about 5,000 acres); partly by drilling for and producing natural gas, an action which customarily converts ordinary oil and gas leaseholds into long-running, held-by-production leaseholds (about 20,000 acres); and the lion's share remaining (about 105,000 acres) held under leases which are still running undeveloped, their clocks ticking within primary terms.

Though Norse’s statements were intended to be a report covering just third quarter results, July to September, some of the bigger news of interest actually flows from events which have technically occurred since Sept. 30.

I have spent some time indoors on these last few fine November days, mining through all this Business Arcana, in an attempt to glean some insight (at least as filtered by industry’s perspective) for the benefit of upstate landowners and other observers, should any be interested.  To me, the landowners are the ordinary folks who — whether they like it or not, and whether they know it or not — actually do have broncos in this oil and gas rodeo.

Most of the highlights I’ve taken from the digitally videoed remarks of incoming CEO Mark Dice, who replaced Øivind Risberg in September.  If you want to hear it all for yourself, the 43-minute webcast can be found here.  Also, feel free to let your eyes glaze over some of the printed text and numbers, such as available here.

I wasn’t able to get to everything of interest, unfortunately.  Norse’s progress on an 87-mile pipeline connection
, for instance, will potentially have a huge impact on the local shale gas development picture for years down the road.  (Maybe another time.)  But here’s my take on what I did get a chance to contemplate, double-check, and write about.

• Raw land = $10,000 per acre

Let’s start with this.  Norse CEO Dice touts $10,000 per acre as the current rough value of land in Central New York — measured for oil and gas purposes, in a raw, relatively undeveloped state.  He bases his assessment on recent transactions largely driven by Marcellus shale in Pennsylvania.  This, of course, is not about the first round of leasing running from the resource owners to one or another gas company.  Instead, these kinds of numbers are coming from the big-money downstream transfers — by merger or assignment — of those already compiled leaseholds, such as when Chevron purchased Atlas Energy for $4.3 billion, as announced Nov. 9.

[A note of skepticism before I move on:  I did some quick calculator work on the publicized numbers from both the Chevron deal, and from Chesapeake's purchase of part of Anschutz from last week.  Even though dollars-per-acre is a very crude gauge, given that we readers don't have any way of valuing all the specific assets included, I can't make either deal come out as high as $10,000 per acre.  In fact, not even close.]

In a fully developed state of production, Dice asserts CNY land would be worth up to $25,000 to $30,000 per acre.

I'm no expert on land values, but, just to put these claims in perspective, I'm pretty sure there is very little raw land in upstate New York
— outside of maybe some kind of commercially valuable zone in certain highly traveled places — that would have any ballpark, tax-assessed, appraised, or open-market values anywheres near these numbers.

(Also, needless to say, none of these theoretical, speculative land values or lease values can be even remotely approached, in real life, under the current regulatory holdup in New York.)

But it is interesting to think about.

The NYS DEC’s SGEIS is still due out by the end of 2010

The long-awaited final Supplemental Generic Environmental Impact Statement from the state Department of Environmental Conservation, together with that agency’s new (proposed) hydraulic fracturing regulations, remain on track for release by the end of 2010.  (Followed by much additional protest from anti-drillers
, no matter what the state suggests for tougher rules — I'm going to go out on a limb and predict right now.)

“The most recent confirmation of this,” Dice said, occurred Oct. 27, when a key DEC Minerals Division official, Jack Dahl, spoke at a meeting of the Independent Oil and Gas Association of New York (IOGA of NY).

“He said that the DEC still intends and plans to announce the final SGEIS regulations around year end, hopefully before the end of the year,” Dice said.  “So that’s very good news, indeed.  It’s a very important trigger point for this company.”

Norse won't further test for shale gas under the current limits

In previous reports, executives gave out some hope that Norse would test the gas content of Utica shale now — in vertical wells, with a low-volume hydraulic fracturing, which is allowed under current DEC regulations.  At present, Norse actually holds two drilling permits for this sort of project, useable any time through the end of 2010.  But Dice said Norse is not going to do it.

“I don’t think it’s prudent to actually make that investment right this minute,” he said.  “We will start exploring and investing in the shale formations as soon as we understand the environmental regulation, and that uncertainty goes away.  I’m hoping that it goes away within the next month or two.”
Rig contracted to the Norse-Stryker joint venture, as it stood busy drilling the Davis 1H on 11-11-2010.  Even knowing from NYS DEC data where it should be, I had to hunt for it.  I found it tucked behind a cornfield north of Hunsicker-Lawrence Road, Town of Smyrna, Chenango County, NY.  In the background is the valley formed by Pleasant Brook, a tributary to the Mighty Chenango River (Susquehanna Watershed)
Horizontal drilling in the Herkimer restarts after eight-month hiatus

Since approximately February 2010 (and including the whole of the third quarter), Norse’s 14-or-so-year-old drilling effort in Herkimer sandstone (among other targets) has been on hold.  The company reportedly wanted some time to study the problem of water encroaching into some gas wells (later ruled a manageable issue), and also time to shoot some more seismic, and to go looking for a financial partner.  On Oct. 25 — shortly after lining up 50-50 joint venture partner Stryker Energy, LLC, of Ohio — Norse restarted its drilling program by spudding the first new well to have been pin-pointed by reliance on newly acquired 3D seismic data — the Davis 1H overlooking Route 80 slightly west of Sherburne, NY.  The rig was still drilling at the time of Dice's presentation, and the results were not yet known. (Google map of the location here.)

Norse intends to bring in a second rig before the end of 2010, and to continue running two rigs into 2011.  Dice’s reluctantly given prediction was for 30 Herkimer wells to be drilled over eight to ten months, once two rigs get cracking.

Herkimer sandstone is about producing gas, but it's also about HBP

About 20,000 acres out of Norse’s key 130,000-acre position is already represented by leases that the gas company has converted into the indefinitely running status of “held by production.”  This is accomplished by drilling wells to currently permissible zones, other than shale, which, if successful, can then generate production and royalty, or are capable of doing so.  Doing all that work changes the status of the affected leases.  During the two-plus years when New York has been faced with the challenge of regaining its political nerve — in order to walk through a contentious crossroads over shale gas — Norse's plan has been to quietly convert as much leasehold acreage as possible to HBP, usually from Herkimer sandstone. 

Way, way down the road, a big HBP position would give Norse (or a purchaser of Norse) the very valuable asset of having substantial acreage — drill-able for shale gas at virtually any future time, whenever it might make business sense to do so — over which the leases are already established, and do not have to be renegotiated or repurchased.

[Technical note: Unless the landowner — way back at the time of lease negotiations — was so sharp, so well-read, and so leveraged as to have succeeded in including "defensive measures" in his lease, such as the famous "Pugh Clause," then production from any part of the lease indefinitely holds the whole lease — across all idle acreage spread horizontally, and across all idle rock layers spread vertically.  The key word is "indefinitely" — meaning so long as the original well (or followup wells) produce.  That can last a long time.]

Watch closely in order to see the dawning of “split estates” under CNY

“Split estates” is a legal shorthand phrase for describing land ownership in the wake of a “severance” between surface ownership (which traditionally pays all the property taxes), and mineral ownership (for which New York and many other states have no established way of collecting property taxes — at least not prior to the development of a producing oil or gas well).

This kind of shared land ownership is relatively common in parts of Appalachia, especially in areas with long histories of fossil fuels exploration and development.  It often develops into a source of thorny controversy, because it greatly skews the distribution of costs and benefits in resource extraction between two very differently motivated parties — a surface owner, and a mineral owner.  Outside of Western New York, it is very uncommon for mineral severances to complicate or plague the ownership of significant chunks of land in upstate New York.  But now that’s changing, and Norse (along with the property tax foreclosure mechanisms of both Chemung County and Broome County) is among the initiators in making it happen.

Here's how:  The third-quarter report shows the company is in the process of selling surface-rights-only over the 5,000 acres of farmland that it had purchased outright, rather than leasing, sometime since Marcellus shale mania first swept the CNY landscape, starting in early 2008.  The company is looking to generate $1.5 million in deals scheduled to close by the end of 2010, and to eventually generate $5 million to $8 million total.  But, of course, Norse plans on retaining the mineral rights underlying all this acreage — which is likely to either directly state, or to indirectly imply, the right to future access for drilling, etc.

It might not become an issue for years or decades, but — when it does — you will have a surface owner with trees, or corn, or a house, on the land, having no choice but to work things out (for very little financial compensation) with a mineral owner who’s now ready to get access to his or her natural gas (and has the well-established legal right to do so).

Norse is heartened by the results of the mid-term elections

Dice called the results “amazing” and said it represented “an incredible shifting of power in the United States… Voters sent a very clear message to their elected officials. And we saw a big shift, a movement of power, as more and more Republicans were put in control, and more and more Democrats were asked to move on.  This is very pro-business, very positive for the energy industry.”

“In New York, there’s a clear economic need for more investment. The projected budget deficit in the State of New York is $9 billion, so there’s definitely an economic incentive for further investment in the Marcellus. They can see what’s happening right across their borders in Pennsylvania.”

Dice also called attention to the still-unresolved race between NYS Senator Antoine Thompson (D-Buffalo), who currently trails the challenger — Mark Grisanti, a Democrat who ran as a Republican — by 598 votes in a contest that will depend on a recount and absentee ballots.  Thompson’s district, on one hand, covers a heavily Democratic part of Buffalo.  On the other hand, Buffalo is also the leading city within New York for hosting the home offices of a significant number of regional oil and gas-related enterprises, including Norse.

Thompson upset shale gas proponents by using his chairmanship of an environmental committee to propose and push through a Senate-passed moratorium on all drilling permits involving hydraulic fracture completions through May 15, 2011.  The measure hasn’t been ruled on by the Assembly, or by the Governor.  The measure would effectively overlap and expand upon the coverage of the current fracking moratorium — which is administrative, in that it's controlled by the Governor and the DEC — which doesn’t have a formally announced end point.

“The sponsor of the frack moratorium appears to have lost his seat to a Republican,” Dice said.  “I won’t say that it’s all because of his position with regard to fracking — I don’t believe that.  But it is an important movement.”


Tom said...

Andy, thanks for posting this. My wife believes she drove by when you were taking this picture. Veteran's Day morning, 9ish?
Glad I found your blog. Tom

tom said...

And they've been burning that well off since sometime Sunday.

Andy Leahy said...

Tom — Yup, that was me and my friend from Sauquoit, who remembered to bring a camera. We stopped by prior to a hike around the DEC's Rogers Environmental Center, nearby in Sherburne (great place, BTW). You got any pictures of the Davis 1H flaring?

Tom said...

I don't, though I intended to. The second night was spectacular. They've been moving equipment by us all day and are setting up down the road at what I believe is the Sweezy 2h well. I'll get pictures when they flare it.
Heard today that the DEC is closing Roger's Center at the end of the year due to budget cuts. Now the signs can be changed from "No Drill, No Spill" to "No Drill, No Roger's Center".

Anonymous said...

It would be great to be updated on the flaring and progress of the drilling.
I´m sitting in Norway and are waiting for Sgeis and the flow of the first Well.

tom said...

Andy, here is a link to a picture of the flaring: