Crain's Shale Magazine, March 2013

600 attend crain’s Shale Summit, coverage inside

aVOiDing the

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Rich Cochran says drilling can be done in ways that preserve Ohio’s water, topsoil and rural way of life

maKing it here: Ohio manufacturers are already cashing in on the nation’s shale gas boom

Bonus Buys

Mineral rights leasing is spurring a spending spree in Eastern Ohio www.shalemagazine.com

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letter from the editor

Letʼs have a thriller, rather than a drama Even with the Utica shale still in the larval stage of its development, there’s already been no shortage of drama and excitement.

The guy who first spotted the play’s potential, or at least the man who kickstarted interest in the Utica, Aubrey McClendon, appears unlikely to see how it pans out. In the midst of ongoing federal investigations into his financial dealings, he’s said he’ll step down in April as CEO of the Utica’s biggest leaseholder, Chesapeake Energy.

We’ve had our first poster child for what neither the oil and gas industry nor environmentalists want to see when it comes to eco-safety. Youngstown’s Ben Lupo, who’s facing federal jail time for allegedly dumping drilling waste into the Mahoning River watershed. Though he hasn’t been convicted, he’s already been excommunicated by those in industry calling for his head and by state regulators who revoked his operating permits.

Then there are small dramas unfolding all over eastern Ohio. They include the tale I heard of some dairy farmers, upset when a drilling company representative showed up at their door unexpectedly and said they soon would have a five-acre pad on their farm, along with a couple new roads. It seems Grandpa had once signed a lease, that lease had been sold, and now it was owned by someone who drilled wells that Grandpa never envisioned. Lawyers have been brought in on that and many other mineral rights leasing issues.

On top of that drama, and driving it all, continue to be exciting announcements of further developments and capital investment in the Utica play and, thus, in Ohio. From Momentum’s billion-dollar complex built around Chesapeake’s sweet spot of Carroll County to other, similarly large or larger deals announced by MarkWest, Columbia and other midstream developers, the amount of pipelines and processing planned is truly staggering.

It’s an exciting time. One of optimism, and we’re already seeing businesses and tax revenues pop up, while unemployment rates fall in many Ohio shale counties.

It’s also a scary time. No one really knows how all of this is going to change our state, and us, in the long run. While it’s great to see the economic lift that’s genuinely changing lives, we think there’s a great deal of merit to conservationist Rich Cochran’s suggestion that we plan now to preserve much of what we love about our state.

We also hope Mr. Cochran is able to convince folks to deal with the issue with reason — and with more results and less drama.

In fact, let’s hope the drama knob gets a big turn to the left generally.

We’d like to see the excitement knob set on 11 — and just moving ahead as planned would be both rewarding and exciting enough.

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EDITOR dan shingler

ART DIRECTOR lauren rafferty PRODUCTION MANAGER Craig Mackey

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don Fischbach

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CONTRIBUTING GRAPHIC DESIGNER Kristen Wilson

SENIOR ACCOUNT EXECUTIVE adam Mandell

ACCOUNT EXECUTIVES Lindsie Bowman • John Banks Dawn Donegan • Andy Hollander

SUBSCRIPTIONS To start receiving Crain’s SHALE, please purchase a subscription to Crain’s Cleveland Business for one year at $64 or two years at $110.

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table of contents FEATURES 06 Getting it right

10 War of the words

Can Ohio exploit its shale gas and oil, but still protect valuable watersheds, prime soils and natural areas? Rich Cochran thinks it can — if it plans now for a long-term future.

Both sides are firing plenty of ammunition in the battle for public opinion over shale gas drilling.

But is anyone winning?

08 Out of the play With CEO Aubrey McClendon stepping down next month, what’s next for Chesapeake Energy and the Utica shale?

14 A lack of transparency Drillers fought to keep from having to report their Ohio well results more than once a year. They won, but now some investors and community leaders say they’re starved for information they need to plan and pay for the Utica’s development.

MONEY MATTERS 18 Bonus buys Eastern Ohio is now flush with millionaires — good news for folks who sell cars, trucks, farm equipment and other expensive items.

26 Investors near and far see the Utica’s potential

Even in Texas, Ohio’s wet-gas play looks like a big deal, says Houston banker and industry expert Sylvia Barnes.

SUPPLY CHAIN 12 Making it here Ohio’s manufacturers didn’t wait for the Utica to get into the shale-gas-drilling market and many have been selling their wares into other plays.

Now they’ll get an added tailwind from drilling closer to home, they say, as drilling picks up here.

20 Truckin’ Ohio is becoming a hot bed for driving jobs in the shale-drilling industry. But now drivers are becoming scarce for businesses that can’t pay as much as the oil and gas industry.

COMMUNITY PARTNERS:

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WATCHING THE PLAY 16 Shale Summit draws 600 Though the Cleveland area is far from a drilling hot spot, interest in the Utica is still sky high and 600 showed up to learn more about it at the Crain’s Shale Summit last month.

22 Community issues Small towns and townships, as well as bigger cities affected by the Utica, all welcome the economic benefits from Ohio’s drilling resurgence. But some worry about how they’ll plan for their communities to thrive over the long term.

24 HPB lawsuits are coming Now that mineral rights leases are worth big money in Ohio, expect to see a flood of litigation over just which leases are and aren’t “held by production.”

Cover Photo: Hal Stata Productions Photo courtesy of: Chesapeake Energy

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Getting it Right With some forethought and planning today, Ohio may be able to drill for gas and still have its other natural resources for tomorrow By daN shiNGler

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The Utica shale represents a tremendous economic opportunity for many Ohio landowners, businesses and communities — and an equally significant challenge to the Western Reserve Land Conservancy in Chesterland.

That’s because in December the conservancy’s board of directors gave the organization and its CEO Rich Cochran a new mandate: to preserve the natural resources ─ and the quality of life those resources support ─ in the areas of Ohio that will be affected by drilling and shale gas infrastructure. And not just on the 35,000 or so acres that the conservancy controls, but across all of eastern Ohio.

continued on page 28

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Out of the Play

By DAN McGRAW

Aubrey McClendon

The man most responsible for drilling in the Utica shale is stepping down

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ndrew Weissman remembers vividly his first meeting with Chesapeake Energy Corp. CEO Aubrey McClendon in 2004.

Mr. Weissman was, as he is today, a senior energy advisor for the Texas-based national law firm Haynes and Boone LLC and publisher of the well-regarded Energy Business Watch, a market advisory service that analyzes the U.S. and global oil and natural gas markets.

“Horizontal natural gas drilling had just started to get ramped up in the Barnett Shale in Texas, and we were very interested in this new drilling technique and its implications,” Mr. Weissman said.

“We wanted to meet with Aubrey and he said ‘yes’ immediately.

“He asked us questions, mostly on our views of natural gas — and he did this for four-and-a-half hours in Oklahoma City. I have never had a meeting with any CEO like that.”

Mr. Weissman said Mr. McClendon was not the man some might have expected.

“We had heard he could be haughty and arrogant, but I never saw that with him, before that meeting or since,” Mr. Weissman said.

“For the most part, he has always been about learning more, getting as much information as he can. But, in the end, he trusts his own judgment and goes with that, even if it is against the conventional wisdom of the time.”

Swimming against that tide of conventional wisdom, though, apparently has taken its toll. Following a year of declining prices for

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Chesapeake stock, federal investigations into Mr. McClendon’s financial dealings and shareholders calling for his head, Chesapeake announced in January that its founder — and the man who more than any other has made “fracking” a household word — will step down as CEO in April.

After years of heavy spending by Chesapeake, including more than $2 billion for Utica mineral rights leases, investors had worried for some time that the company was over-leveraged. They blamed Mr. McClendon. With Chesapeake’s stock price falling, natural gas prices hitting a 10-year low and $16 billion in debt on the company’s books, Chesapeake investors — led by activist billionaire Carl Icahn (who owns about 9% of Chesapeake’s common stock) — pushed for a change at the top.

They’re apparently going to get it — but now what?

With Chesapeake the dominant player in the Utica Shale, there has been much speculation about how Mr. McClendon’s departure will affect the development of the play in Ohio. Chesapeake has mineral-rights leases on about 1.3 million acres in Ohio, or about 70% of the Utica’s leased acreage. It employs nearly 800 people in the state, up from 40 in January 2011. The company is pulling gas from about 35 wells, with another 40 or so ready to come on line once midstream infrastructure is in place.

A lot of people are counting on Chesapeake to have the wherewithal to drill a lot more.

So, what’s next?

The speculation on what Chesapeake needs to do to right its ship now is no different than when Mr. McClendon was CEO. The company must cut capital spending and sell assets to reduce its $16 billion debt to a more manageable number.

Chesapeake officials declined to be interviewed for this story, but in a prepared statement company chairman Archie W. Dunham praised Mr. McClendon’s past efforts, while citing the need for change.

“He has been a pioneer in the development of unconventional resources, and he has also been a leader in the effort to make the United States energy-independent,” Mr. Dunham stated. “However, as the company moves towards more fully developing the value of its outstanding assets, Chesapeake is at an important transition in its history and Aubrey and the board of directors have agreed that the time has come for the company to select a new leader.”

One key question, however, remains unanswered: With the Utica Shale wells producing a large amount of the highly profitable “wet gas” — which includes such in-demand raw materials as ethane — will Chesapeake see the play as an income producer that will add to long-term cash flow or as an asset attractive enough to be sold for a nice premium, resulting in immediate cash?

Some speculate that Chesapeake’s board might be looking for someone better than Mr. McClendon at getting the best return on those assets.

“Companies have life cycles, and during various stages it can make sense for some people to leave,” Philip Weiss, an analyst at Argus Research Corp. in New York, said in an interview with Bloomberg News recently. “Aubrey McClendon was very good at accumulating land, but now that Chesapeake is moving into an asset-harvesting mode, they must have decided they needed someone with another set of skills.”

It seems doubtful, though, that the company will find anyone as colorful as Mr. McClendon to replace him.

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BMOC at Duke He started his career as a landman in Oklahoma and Texas. He was often portrayed as a wildcatter who got his overalls dirty on the rigs. But in reality, Mr. McClendon came from old money; his great uncle, Robert Kerr, was the founder of Kerr-McGee Energy and was governor of Oklahoma (Mr. McClendon’s middle name is Kerr).

He graduated from Duke University with a major in history, not engineering or geology. While at Duke, he met his future wife, Katie Upton, (Yes, he’s related to the other Kate Upton, too) whose family started the appliance giant Whirlpool Corp. Still a Duke supporter, Mr. McClendon has donated more than $16 million to the university, which has a building named in his honor.

When Mr. McClendon and his partners founded Chesapeake in 1989, they languished for most of the 1990s. But by 2000, two things happened that buoyed the natural gas industry: utilities in California began substituting natural gas for coal to power electric plants, and horizontal fracturing for shale gas — or fracking — became more cost-effective and began to be used in Texas.

Mr. McClendon jumped in early and continued to buy prop-

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By Dan McGraw

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henever two sides get involved in a public relations battle education,” said Daniel Alfaro, spokesman for Energy in Depth’s over a controversial subject, it seems those at the extreme, along Ohio Project, another oil and gas energy informational arm. with their sometimes exaggerated clams, often get the most “People perceive that this type of drilling is new, but it has been going on in Ohio since 1949. But this is a very technical attention.

So maybe no one should be surprised at the PR wars being industry, and there are many misconceptions about practices and waged over fracking, or that the volume of the rhetoric has been procedures.” pumped up in Ohio as of late.

Some of those opposed to drilling would like the public to some folks defy persuasion believe that flames shooting out of kitchen faucets will soon be A key to finding common ground is often finding common the norm, along with earthquakes rumbling underfoot every few interest, say PR experts. That common ground could be the fact days while headaches and other ill effects become a certainty for that all sides, drillers and environmentalists alike, realize the need anyone unlucky enough to live near a well. Be careful or your for energy generally. But even common ground is not always cows might all drop dead, too. universal.

On the other hand, some pro-drillers “Both sides agree that energy is important, sound as if there are no risks or downsides and oil and gas impacts everyone’s life to fracking at all. Noise and truck traffic in so many ways, from heating their will be barely noticeable, the chemicals home to powering their vehicles to the used in fracking fluids are completely safe, manufacturing of goods in their homes,” and those minor earthquakes have nothing Mr. Alfaro said. “There are a small group to do with fracking or injection wells, some of people who are opposed to all fossil say. It’s a lot like butterfly farming, really. fuels, and we can’t change their minds.

Making sense of all the information that But we can make the case to the rest of the washes over the public is difficult and, so public that increased natural gas drilling far, perhaps nothing has been fractured will be good for the environment and good more than the public’s understanding and economically as well.” opinions of what’s going on and predicted A recent study done for the oil and gas to come. A Quinnipiac University poll of drilling industry in Ohio by New MexicoOhio residents early in 2012 found that based Continental Economics found that 64% felt that the economic benefits of Ohio’s natural gas drilling would save the drilling outweighed environmental the state’s consumers more than $1.5 “What we are seeing is that a lot of concerns. In the same poll, 72% said they billion a year by providing affordable misinformation is coming out on both wanted a moratorium on well drilling gas. That breaks down to $1,300 annually sides, and misinformation should be the until studies could be completed about its for each commercial business, $85,000 common enemy for both.” impact. for an industrial operation, and $214 per - Rob Falls

getting to know you “What we are seeing is that a lot of misinformation is coming out on both sides, and misinformation should be the common enemy for both,” said Rob Falls, president of Falls Communications in Cleveland. “But in the world of social media, misinformation gains credence instantly, and it becomes of the utmost importance to be transparent and quick to respond to any misinformation out there.”

Mr. Falls’ advice to the oil and gas industry? Become a part of the community, a process that involves everything from a completely open information office to presentations to any homeowners’ groups or business organizations that request them.

“If the company is a good company, the public will know that from how involved in the community they are,” Mr. Falls said. “People can tell the difference between a sell-job, and the presentation of clear and accurate information.”

The industry definitely is getting in front of the public when it can. The driller-supported Ohio Oil and Gas Energy Education Program gave 208 public presentations to various business and community groups around the state last year. It also sponsored informational programs in about 1,300 schools.

“The biggest issue for the industry is revolving around

household in annual savings.

But as Mr. Alfaro noted, some are so opposed to fossil fuels that such benefits are disregarded. Self-help author Julia Fuhrman Davis, of Beaver Township in Mahoning County, has fought against all drilling in Ohio and the Youngstown area and works to convince local governments to enact home rule laws that would ban drilling. She rejects any compromises that might permit drilling with more restrictive state laws and higher taxes for the drilling industry; she, and others like her, want drilling stopped, period.

“We need to focus on renewable energy, and natural gas is not a renewable energy,” Ms. Davis said. “The carbon footprint for natural gas is about the same as petroleum, so we should concentrate on solar and wind energy. Any form of natural gas drilling is harmful, and fracking drilling is more harmful than the rest. . . . Shouldn’t we get rid of things that are harmful, instead of regulating harm?”

division in the ranks If the public is divided in its opinion on fracking, so, too, are environmental groups. Jed Thorp, manager of the Sierra Club’s Ohio Chapter, said his group is working hard to get more studies done on potential groundwater contamination, fresh water drawcontinued on page 31

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Making it Here The Real action in the Utica hasn’t even started yet, but Ohio manufacturers are already selling into shale

By Dan Shingler

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oor Northeast Ohio. In many ways, it has seen as much economic hardship as the rural eastern part of the state, but the industrialized and densely populated sections of counties such as Cuyahoga, Mahoning, Stark and Summit don’t get to partake in the growth of the oil and gas industry.

Or do they?

As it turns out, Ohio’s industrial heartland not only is participating in the nation’s shale boom, but many companies there also have been selling into the oil and gas exploration market for some time, often decades. They’re just busier now than they have been in years because of increased drilling and production — not only in Ohio, but across the nation and sometimes even around the world.

Most folks know about the obvious examples: The hundreds of millions of dollars Timken Co. pumped into its Canton steel mills were driven in part by that company’s increased oil and gas business. Republic Steel in Lorain, which, like Timken, makes seamless steel tubing used in well construction, has spent $100 million expanding its operations, too. And Youngstown has a new steel mill built by France’s V&M Star, which along with other energyrelated expenditures represents close to $1 billion in new capital investment in the region.

But there are other, more numerous examples of manufacturing activity driven by the oil-and-gas sector that are scattered across the northeastern quadrant of the Buckeye State.

Links in the chain Joe Halter of Solmet Industries

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Sometimes, like with the steel mills, the items these companies make go into the field.

Take the mandrels that hold drill bits, which are forged at Canton-based Solmet Industries. Those, along with Solmet’s big “cage and bowl” assemblies that allow rigs to manipulate steel tubing, are sold to oilfield service companies such as Schlumberger and others, which then put them into systems they sell to drillers.

“We supply the stuff to the people who make the hardware,” says Solmet owner Joe Halter. “We’re two or three levels down in the supply chain.”

But even where it’s positioned, Solmet feels the tug of the energy industry’s supply chain.

Oil and gas is not a new industry for Solmet, which Mr. Halter originally founded in 1985 to make test forgings for highstrength steel coming out of Timken. In its lobby is a framed 2006 newspaper article about the company’s success with the drilling industry. But increased drilling, across the United States and in other nations, is boosting Solmet’s recent sales.

“We had a great year last year. Our best ever,” Mr. Halter said.

There is a lot of steel going into the ground, as well as into other parts of the oil and gas sector. Drilling rigs are made of it, some tanks that hold natural gas or fracking water are made of it, well pipe is made out of it, and so are the pipes that make pipelines or that go into processing plants that often look like mazes of steel tubes.

That’s what’s been driving Ed Gonzalez’s business, Ferragon Corp., a toll processing company based in Cleveland and with operations there, as well as affiliates in Detroit, Mississippi and Kentucky.

The company takes big rolls of coiled steel straight from the mills, then rolls, stretches, anneals, pickles and slits the metal to exact customer specifications. All four of his plants and all 350 of their employees are going full tilt processing steel for both the oil-and-gas and automotive markets, but demand related to drilling and production represents the fastest-growing segment of his business, Mr. Gonzalez said.

Ferragon’s sales were up 20% last year from levels of 2011 because of shale drilling, Mr. Gonzalez said, and profits were up by an even higher percentage. He opened a new plant in Wilder, Ky., last year because of the demand.

“That plant would not be there had it not been for shale,” Mr. Gonzalez said.

Add the demand from shale gas to increased business from Mr. Gonzalez’s other major market, automotive, and the company soon might need to add capacity he said, noting that he’s planning to double the size of his Detroit plant soon, and also is considering opening a fifth plant somewhere in Ohio.

Lifting all boats Up in Mentor, Roll-Kraft has about the same view of the oil and gas industry as Mr. Gonzalez, because it’s at roughly the same place in a long supply chain.

Roll-Kraft makes the rollers that form steel, like the stuff Mr. Gonzalez sells, into tubing. A flat piece of steel goes through a series of rollers and each bends and forms the steel a bit, until — after passing through enough rollers — a flat strip becomes a tube with a lengthwise slit that can be welded. That’s how flat coiled steel becomes pipe, and eventually a key part of the infrastructure to carry gas, oil and other related resources. continued on page 32

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Leasing & Real Estate Mergers & Acquisitions Financing Exploration & Production Regulatory Compliance Government Relations Tax Planning Calfee’s Energy & Natural Resources Team has answers to your questions about mineral rights, leasing and drilling to and producing from the Marcellus and Utica Shales. Contact a team member at 216.622.8336.

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By Dan McGraw

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early everyone watching the development of the Utica shale play would like a better view of what’s going on, in order to judge whether the play will live up to what have been some bold predictions of its scope, not to mention its effect on Ohio and other states.

But with reporting requirements set at annual intervals in Ohio, there is little to go on, aside from optimism and estimates.

There are optimistic estimates from drillers, some of which, to be fair, have backed up their claims with billions of dollars of investmens. But real, hard numbers are hard to find and often change over time.

The Ohio Department of Natural Resources in a 2011 report estimated the Utica Shale’s recoverable reserves range from a low of 3.75 trillion cubic feet of natural gas and 1.31 billion barrels of oil to a high of 15.7 trillion cubic feet of gas and 5.5 billion barrels of oil.

Fast forward to late 2012 and the U.S. Geological Survey estimated that the Utica contained about 38 trillion cubic feet of “technically recoverable” natural gas.

The chasm between such varying estimates is huge to anyone trying to make investment decisions about the Utica, or plan for its infrastructure needs.

A lot of people and a lot of money are waiting to see whether optimism or pessimism proves to be true before they jump into the Utica Shale play that runs under big parts of Ohio, Pennsylvania, West Virginia and New York. They would get the information they seek sooner if there were more data from the early wells that have been drilled in the formation, they say. But one place where the data is and likely will be slow in coming is Ohio — the Utica’s hot spot for oil and natural gas liquids.

It all has to do with what and when the drillers are required to report on the output of their producing wells. Ohio requires drillers to report only once a year, while states such as Louisiana, Texas, North Dakota, Michigan and others require monthly reporting. In Pennsylvania, home to the Marcellus shale that overlaps the Utica, reporting is required every six months.

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Stale numbers A year is a long time in a fast-moving play, and drilling in Ohio’s Utica Shale is relatively new, so information is at a premium. The current system doesn’t make much sense to many.

“The drilling information that the state releases after the reports are due in March is very stale once it is made public,” said Andrew Thomas, a longtime Louisiana oil and gas attorney and executive-in-residence with the Energy Policy Center in the Maxine Goodman Levin College of Urban Affairs at Cleveland State University.

“The drilling companies have fought any kind of reporting they have to do in Ohio that is more frequent than on an annual basis... so they can protect their individual business interests,” Mr. Thomas said. “But the state shouldn’t be just protecting one group, because there are so many parties interested in what is happening in the drilling play in Ohio, and the argument can be made there will be more economic investment if there is more data available.”

States are sensitive to the risk of publicly releasing information on drilling activities by private companies, especially continued on page 33

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pparently, there are a lot of business people in Northeast Ohio who want to know more about the Utica shale and its effect on the state and it’s economy — some 600 of them showed up for the Crain’s Shale Summit 2013 on Feb. 5.

The audience, to no one’s surprise, was made largely of business people. But, while they had plenty of questions to ask about how the Utica would develop economically — and possibly benefit their businesses in the process — they also had plenty of other questions about how shale drilling would impact the environment and the quality of life in eastern Ohio. In fact, probably half or more of the questions asked during the various panel discussions held throughout the day dealt with issues of environment, safety and community planning.

That was fine with most of the expert speakers at the event. Former Shell Oil Co. CEO John Hofmeister made such concerns the centerpiece of his address, advising listeners that the Utica represents both a tremendous economic opportunity, and a challenge to manage properly. His fellow keynote speaker, Western Reserve Land Conservancy CEO Rich Cochran, told the audience that, while he was not looking to stop drilling in the state, he will be working to protect other natural resources with planning and forethought.

Ohio Environmental Council deputy director Jack Shaner was also on hand to discuss and answer questions about environmental concerns surrounding fracking.

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Not that there were not speakers focused more sharply on the economic and development impacts of the Utica. Momentum M3 Midstream CEO Frank Tsuru held the crowd’s attention with details of his company’s plans to spend a billion dollars on pipelines, processing facilities and other midstream infrastructure projects in Ohio this year. Included in his presentation were some stats that showed how the Utica, with a lifetime return on investment of about 90% estimated for its wells so far, is leagues ahead of other shale plays around the U.S. in terms of the profitability of its drilling. The play’s wet gas, which contains more and more valuable components than plain methane, along with high production rates are making drilling in the Utica particularly profitable, Mr. Tsuru explained.

All in all, it was a great event — the second largest ever held by Crain’s in Cleveland — and nearly all of the feedback we received was positive.

If you missed it, you missed a lot. But if you’d like to catch up, you can find coverage of much of the event at www.crainscleveland.com or at the website of Crain’s media partner for the summit, ideastream, at www.ideastream.org. n

Keynote sponsor:

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in partnership with:

3.

4.

5.

6.

7.

9.

8.

10.

11. (opposite page) 1. morning Keynote, john hofmesiter 2. moderator, rick jackson, 90.3 WcPn ideastream and panel 3. Crain’s dan shingler interviews, Keynote sponsor, huntington national bank, daniel p. Walsh 4. lunch Keynote, rich cochran, 5. 600 attendees filled executive caters of landerhaven for the event 6. david mansbery, julie gurney, elene West, tim West & kevin margolis (benesch) 7. Crain’s Publisher

12. in partnership with:

brian tucker addresses the audience 8. attendees and sponsors had time to network. 9. frank tsuru, ceo and President m3 midstream llc 10. rocco dipuccio, jack kahl, nick baulas and robert perry 11. dan Waldeck, greg ferrence (first merit bank)

site sponsor:

and james marra 12. Panel; balancing economic gain and environmental safety

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Scott Cole, of Huebner Chevrolet-Subaru says he’s selling a lot of new vehicles -- especially the white trucks used by many drillers.

Bonus Buys A

Leasing Cash Drives Local Purchases

By Chrissy Kadleck

n official tally does not exist, but it’s safe to say billions of dollars are being pumped into eastern Ohio to lease mineral rights from rural landowners, who suddenly are awash in cash.

Often conservative in more than just their politics, most of the new rural rich aren’t prone to flashy spending. But some of this new money is being spent, and the signs are there if you look: Shiny new pickups and SUVs line driveways. Conspicuously modern and large new homes dot a few fields. Scaffolding has sprung up around older homes, all amid quite a few new barns protecting expensive new farm implements.

Granite countertops may be status symbols in suburbia, but it’s heated concrete barns and shop floors that count here in the Utica Shale territory.

Still, automobiles, and especially trucks, are perhaps at the top of most shopping lists, and spending on those items is felt at places like the Thomas Chrysler Dodge Jeep Ram dealership in St. Clairsville.

Robert Thomas, who co-owns the 95-year-old family business, said the dealership recently moved into a new, 47,000-square-foot building — not necessarily because of the shale boom, but just in time to be ready for it.

Fortunate son-in-law “We have had a definite increase in business. There is always somebody coming in here who’s got their gas and oil money,” said Mr. Thomas, who estimated that of the 60 new and used vehicles

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he sells a month, 10 are due to the shale industry coming to the state. “(Landowners) are buying a little bit of everything — cars, Jeeps and trucks,” Mr. Thomas said. “I had one lady come in and buy her son-in-law a brand new Jeep Wrangler.

“We are also getting people who work in the industry — welders, pipeliners and geo-guys — buying vehicles. One company has bought 15 vehicles from us.”

“It’s been fun,” he said. “I’ve actually had customers of mine who have never really bought a new car before in their lives, and the only thing they ever owned was the dirt on their property, and now they are millionaires. How awesome is that? You can take somebody from poor status — like the Clampetts in The Beverly Hillbillies.”

In Carroll County, the most active place for drilling so far, Huebner Chevrolet-Subaru is seeing similar sales from landowners, and also a substantial pickup in sales to fleet operators, said owner Scott Cole. He’s invested not just in inventory, but in gearing up his service operations to handle shale-gas customers who need their equipment at the ready.

“We like to have white trucks on hand,” said Mr. Cole, noting that many of his new oil and gas customers run fleets of white trucks. That way, he’s ready when they need to add more vehicles, such as the half- and three-quarter-ton pickups that now line his back lot as a testament to his faith. continued on page 34

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Truckin’

By Doug Livingston

S

ince 1995, the Big Rig Truck Driving School in Canton has given more than 3,400 students the training needed to get a commercial driver’s license, or CDL — a necessity for anyone who hopes to drive a truck for a living, whether they are carrying water for the oil and gas industry or hauling trash for a local municipality.

In a region where tough economic times are never a too-distant memory, the school always has attracted students who were looking for a new career, but lately business has been picking up at a brisk pace and enrollment was up about 40% last year over 2011, said school president Michael Lattavo.

“We have noticed that class sizes have increased,” said Mr. Lattavo, who says there is a simple explanation for his surge in business — oil and gas companies are in need of more truck drivers than are currently available and they are paying higher wages to get them.

While Mr. Lattavo’s experience might be anecdotal, the statistics back him up. A recent study of the state’s trucking industry by the Benesch law firm and the Ohio Trucking Association found that 92% of Ohio trucking companies expect to see their business grow over the next five years, and 47% said they’ll be looking to hire more drivers.

Perhaps not coincidentally, the Utica Shale also covers about half the state.

“The survey illustrates the degree to which shale energy is an economic game-changer,” says Benesch partner Richard Plewacki, who worked on the study and represents clients in the trucking industry.

Allstate Peterbilt general manager Dean Martin sees the same thing from his office in Cleveland. Mr. Martin doesn’t run a school, but sells trucks — big ones. His tractors have been a popular item among drillers, service companies and trucking firms, thanks to the activity in the Utica, he said.

One company alone ordered 200 tractors in late 2012, and Mr. Martin’s company bought another truck dealer in Youngstown last year so it could expand in the Utica and Marcellus plays. It also kept open a dealership in New Philadelphia that had been marked for closure.

“We never wanted to be in Youngstown, we didn’t intend to stay in New Philly — now we’re happy to be in both,” he said.

Mr. Martin sees something besides rising sales — a new breed of driver is entering the business. They are drivers who have experience with school buses or other commercial vehicles, but not necessarily with big rigs, which is why Mr. Martin said he now sells a fair number of trucks with automatic transmissions.

“We have to appeal to a whole new driver pool now,” Mr. Martin said.

Following the money Even behind-the-curve government data suggests there may be no better place to find a high-paying job as a truck driver than eastern Ohio — and those in the industry say wages have only gone up since the government’s statistics were collected.

According to the latest figures from Bureau of Labor Statistics,

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the average annual wage in eastern Ohio for heavy-duty and tractortrailer truck drivers was the highest in the nation, at $52,310 in 2011 — a 48% increase from 2006.

Since then, demand for drivers has increased rapidly, say drillers and trucking experts. Many companies now report paying drivers $70,000 a year or more to haul fracking water and flowback from wells — and with overtime, truckers can earn substantially more.

This surge in demand is taking place just after the number of truck drivers in eastern Ohio shrank in recent years, putting drivers in short supply. The number of employed truck drivers in the region dropped by more than 20% from 2008 to 2011, the BLS found, as the recession temporarily decreased the need for drivers hauling more traditional cargo, such as crates and boxes from manufacturers.

As a result, competition for a shrinking pool of drivers has pitted traditional trucking companies against what many in the industry say is a better-paying, more convenient job: trucking for the gas and oil industry.

“Standard truck companies have been losing a good deal of drivers to the oil and gas industry,” Big Rig’s Mr. Lattavo said.

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That’s a big incentive for Mr. Lattavo’s trucking graduates, who prepare themselves to work in the oil and gas business by spending more time on hazardous material training and how to haul fluids that can shift weight during transit, he said.

Larry Davis, president of the Ohio Trucking Association, a nonprofit that promotes Ohio’s trucking industry, also has seen the trend.

He said he’s aware of many drivers who have signed up to work in the oil and gas industry “so they can go home at night.”

That’s what brought former long-haul trucker Scotty Clark east from New Mexico. Now a fleet manager for Energy Construction Management in Cambridge, Mr. Clark said he originally moved east two years ago to trade his long routes for shorter hauls carrying water for drillers, which allows him to spend more nights at home with his family.

“That’s a big benefit, and a reason a lot of drivers come to work in oil and gas,” Mr. Clark said.

Then there’s the money. On top of higher initial salaries, oil and gas truckers receive signing bonuses and quicker pay raises than other drivers, Mr. Lattavo said.

The increased demand has stretched the work force thin, though.

“Any truck company you talk to is going to tell you that they need more drivers,” said Mr. Davis, whose association represents more than 800 trucking companies.

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The shift is on Danny Fowler, owner of D & V Trucking, Inc. in Columbiana County, watched a dozen drivers leave last year, which was more than 25% of his company’s drivers.

Mr. Fowler said he doesn’t blame his “guys” for taking higherpaying jobs. “Hey, it’s capitalism,” he said.

Mr. Fowler said he believes some of those drivers will return in the future, but in the meantime, his company has thrived on more business from the same companies that have taken his drivers. D

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coMMUnIty IssUes

Small towns and rural areas in Ohio’s Utica shale play welcome the economic development that drilling brings, while they worry about the long-term consequences for their communities

L

by chRissy KadlecK

arry Kosiba’s nice “retirement job” of rolling into the office at 9 a.m. and collaborating with locals on economic development projects to benefit his quiet, rural area is barely recognizable.

The executive director of the Sustainable Opportunity Development Center in Salem now works fast and furious to keep up with the rigorous demands of an oil-and-gas industry poised to transform his city of 12,000. Economic development used to be a pursuit. Now, it’s a race.

“My job is 24-7, 365 days a year,” Mr. Kosiba said.

“I tried to go on vacation for 10 days and I bet I had 150 emails and 60 phone calls,” he said. “It has really changed the lifestyles of us economic development professionals in the field. Since we are a one-person shop here, it is hard to keep up with it all.”

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The rapid pace of development is just one of the many issues facing community leaders at the epicenter of the Utica shale in places such as Coshocton, Canton, Salem, and Portage County.

As they grapple with immediate concerns — poor infrastructure, housing shortages, a dearth of skilled workers and protecting agricultural environments — they echo a similar sentiment: The decisions they make to support growth today have to be sustainable for the next 10, 20 or 30 years, long after the boom of the shale play has faded away.

Dorothy Skowrunski, executive director of Coshocton Port Authority, said her financially strapped county of 37,000 residents is looking for ways to safeguard its base of tourism and agricultural activity while managing the potential environmental

concerns of drilling on its rich lands.

“In Appalachia, where the flatlands are, we are feeding people, not only grains but cattle, dairy, eggs and poultry,” Ms. Skowrunski said. “We want to protect (those food sources) and we want to make sure to protect the land, air and water.”

The county is counting on the Ohio Department of Natural Resources and the Ohio Environmental Protection Agency to help it safeguard the environment.

“We know that agriculture and tourism help sustain our community when the times are really bad,” Ms. Skowrunski said.

Planning ahead Ms. Skowrunski, who heads the Port Authority’s Economic Development Resource Center, oversees a Community Development Council that is spearheading a comprehensive strategic planning effort to identify challenges and opportunities and to develop short-term, mid-range and long-term goals.

“We don’t know what we don’t know. But we have to do our best to plan for growth our communities can sustain,” she said.

“Today I got a call from the local hotel saying that somebody from the oil and gas industry says they need housing for 500 people. Well, that’s going to be a challenge. Rural areas don’t have the hotels. We’re better off than some of the areas because we have some hotels because of tourism.”

Take Salem. This community has an old shuttered hotel under renovation and four other national hotel chains that are interested in building there, Mr. Kosiba said.

“What do I need five hotels for in a city of 12,000 people?”

Mr. Kosiba said. But, he added, “we can’t turn it away.”

“If you want to come build a hotel, be my guest, I guess, but it is going to be a challenge for us to go ahead and maintain those three to five to 10 years down the road,” he said.

In urban areas such as Canton, housing stock is becoming a problem, with vacant or foreclosed properties often a source of controversy.

“Instead of tearing down a house, why can’t communities look at available housing stock and develop some incentive for workers to locate (to) them?” said Dennis Saunier, president and CEO of Canton Regional Chamber of Commerce. “That type of initiative will help re-stabilize those communities.”

Finding the best ways to house hundreds of short-term workers from Oklahoma and Texas will take creative thinking, Ms. Skowrunski said.

“There are opportunities for RV parks to be developed,” she said. “And in the city of Coshocton, we are building a new elementary school campus and three elementary schools will be vacated. Maybe we take one of those schools and turn it into a man camp. Maybe the answer is temporary housing that the oil-and-gas industry is mandated to remove once they vacate.”

Workers, roads needed Work force development is at the top of the list for all communities impacted by the shale oil-and-gas play. continued on page 29

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23

EXPECT LITIGATION CONCERNING “HBP” STATUS OF LEASES

A

by Donald P. Fischbach

s the value of mineral rights leases has skyrocketed in eastern Ohio, questions are arising regarding the party an operator must go to (and therefore should pay) in order to acquire a valid lease in order to drill, particularly where a previous lease has been granted for the same property.

In situations where there is a valid lease, a prospective developer must obtain rights from the lessee.

Where a prior lease has expired, however, the rights can only be obtained from the mineral owner. In most cases the landowner retains ownership of his minerals and merely leases them to an energy company in exchange for rents and royalties.

As you might expect, the question of Don Fishback, Partner, Calfee whether a prior lease has expired often is difficult to answer and hotly contested.

One provision common to almost all oil and gas leases is the habendum clause, which determines how long the lessee’s interest will last. The habendum clause normally provides for a primary term of a fixed length (for example, five years), and a secondary term lasting as long as oil or gas is “produced” from the property.

During this secondary term, the lease is said to be “held by production,” or “HBP.” A frequently litigated matter involves defining “production,” and what type of “production” is sufficient to keep the lease in effect.

The answer to this question can vary from state to state, but Ohio courts have taken the approach that “production,” as used in most leases, requires the actual extraction of oil or gas. But how much oil or gas? So far, courts in Ohio have required that production be “in paying quantities.”

The next question, of course, is what constitutes production in paying quantities? The term “paying quantities” has been interpreted as meaning enough oil or gas to yield a profit after de-

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ducting the operating costs. However, there is uncertainty about what types of costs can be considered and Ohio courts have not really specified the amount of profit required to constitute “production in paying quantities.” Arguably any profit, regardless of how small, could be sufficient.

Generally, “production” need not be continuous to preserve a lessee’s interest. It is common for production volume to vary over time, particularly when maintenance or repair of wells and production equipment is required. Thus, courts have held that a temporary stoppage in the production of oil or gas from a well is generally not enough to terminate the lease, so long as the lessee makes a good faith effort to resume production.

In assessing such efforts, all circumstances must be considered, including the length of the delay and the reason production stopped. This assumes the lease is silent on the topic of a temporary cessation of production.

As with any contract, the parties to an oil and gas lease are free to specify and agree to their own terms. For instance, parties may wish to provide that a well may be considered “producing” if it is merely “capable of production,” as opposed to actually producing.

At least one Ohio court has interpreted the phrase “capable of production” broadly, finding that a well was “capable” of producing in paying quantities even where the gas could not be sold without being processed, and no connection to a processing facility existed. As the court concluded, the lessee had the ability to connect to a processing facility if it so chose (the facility was within close enough proximity), and therefore the well was “capable” of production. Even in some states where “capacity” for production is the default meaning of “production,” courts have not been so lenient when analyzing an habendum clause.

Ohio law is not fully developed on this and other oil and gas lease provision issues, which are beyond the scope of this article.

However, with the increase in activity expected to evaluate and develop the Utica shale formation, litigation over the status of prior leases can be expected, and the issues discussed in this article will be some of the key issues in that litigation. n Don Fischbach a Partner at Calfee has more than 30 years of experience in the oil and gas exploration and production business. He counsels clients on matters of lease acquisition, operations, finance, land, exploration, risk management, government relations/regula-tion, labor, and litigation. He can be reached at dfischbach@calfee.com.

truCkin’/ from page 21 & V hauls slag, coal and building materials that many oil and gas companies use in the drilling and well construction process.

Industry experts estimate that each well requires 1,000 or more truck trips to transport materials and haul off waste water.

Ohio hasn’t experienced an uptick in truck driving positions since before the 2008 recession. John Jones, an economist at the Bureau of Labor Statistics, said the recession wiped out several trucking companies, and Ohio was not immune to those job losses.

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But after reviewing labor data that suggested a plunge in trucking occupations and a surge in trucking salaries, Mr. Jones concluded that “perhaps lower-paying companies are going out of business” while the gas and oil industry compensates with highpaying jobs.

And the jobs available to workers with commercial driver’s licenses aren’t limited to just driving trucks on the road. “Frackhands,” who primarily operate machinery used in the hydraulic fracturing process, also are required to obtain a CDL, though truck driving may only account for two days out of a 15- to 30day frack job.

Go-Frac, based in Fort Worth, Texas, performs hydraulic fracturing in the Utica Shale play and employs frackhands from its Cambridge office. Office manager Lisa Allen says the shale boom has fueled the demand for qualified workers.

Go-Frac employees must live within 50 miles of the Cambridge office, primarily as a safety measure. That 50-mile radius has provided no shortage of available workers, who are more than a little aware of the high pay rates available in the shale gas industry.

“We’re overwhelmed with applicants,” said Ms. Allen, who expects the shale play’s growth to accelerate in 2013.n

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Investors near and far are eying The Utica

A

by Sylvia Barnes

fter looking for oil and gas from Pennsylvania to Texas over the last 150 years, the domestic oil and gas industry has turned its attention back toward Appalachia and the Utica Shale.

The Utica has the industry abuzz because of the basin’s considerable resource potential and the relative abundance of the play’s oil and natural gas liquids (NGLs). According to the U.S. Geological Survey, the Utica could yield the equivalent of 45 trillion cubic feet of natural gas (or 7.5 billion barrels of oil equivalent) in the form of oil, natural gas and NGLs. That’s about 3% of the U.S.’s total resources and more gas and oil than Chevron Corp. and BP have in their proven domestic reserves, combined.

In addition to its sheer size, the Utica’s liquids-rich resources make it an exciting investment opportunity for producers looking to diversify their reserves and production mix. Overproduction has driven dry natural gas prices in the U.S. to new lows, leaving oil and gas companies scrambling to ramp up production of oil and NGLs. For many companies, the emergence of the liquids-rich Utica is an excellent opportunity to do so.

On top of that, the basin’s promising, albeit limited, well results have stirred excitement in the investment community. The Utica’s most profitable wells are being drilled in southern Ohio (Belmont,

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Guernsey, Noble and Monroe counties) and central Ohio (Columbiana and Carroll counties) with stunning success. Chesapeake Energy, the area’s most active operator, has reported wells with initial production (IP) rates of up to 3,000 barrels of oil equivalent per day.

Gulfport Energy, another active Utica operator, has reported IP rates of up to 2,914 barrels of oil equivalent per day. Compare these results to other domestic onshore wells, where 500 barrels of oil equivalent per day are solid IP results, and it’s easy to see why the Utica is a rising star in the oil patch.

The emergence of the Utica as one of the nation’s premier onshore opportunities is being heralded by industry heavy-hitters and Wall Street alike. “[T]he best returns are in plays like … the Utica,” explained Chesapeake Energy CEO Aubrey McClendon in his third quarter 2012 earnings call, “and that will remain the case … we expect meaningful production contribution from the Utica in 2013.”

Moreover, Credit Suisse oil and gas equity research analyst Mark Lear recently claimed that “Utica economics are [not only] good … they could be some of the best U.S. E&P onshore.”

Investment in the Utica Despite limited well results, large-scale acreage transactions in

the Utica have grown from an average of three deals per year from 2008 to 2010 to 18 deals per year in 2011 and 2012. Acreage valuations in the area have exploded. While these large-scale acreage deals were completed at an average of less than $1,600 per acre from 2008 to 2010, average acreage values in 2011 and 2012 were nearly $5,000 per acre.

The proliferation of large deals in the Utica has attracted attention from some of Wall Street’s most high-profile and sophisticated investors. When Chesapeake Energy was looking for capital to fund a Utica joint venture with an undisclosed international partner in late 2011, it found a willing consortium of private equity investors led by EIG Global Energy Partners, a leading global capital provider with $14 billion deployed in over 290 energy companies and projects in 33 countries. The consortium, which also included The Blackstone Group, one of Wall Street’s largest and most influential private equity firms, provided nearly $1.3 billion in capital in exchange for preferred equity shares and overriding royalty interests in the first 1,500 wells drilled.

In tandem with Wall Street, select international investors are sinking money into eastern Ohio. Total S.A., a major international oil and gas producer headquartered in France, purchased a 25% interest in 619,000 Utica acres for approximately $2.3 billion. The deal valued the acreage, which ranges from Portage and Trumbull counties in the north to Guernsey and Belmont counties in the south, at $14,993 per acre and is the largest transaction in the area to date.

What to expect The extensive investment in the Utica is expected to benefit the surrounding area considerably. According to a study prepared jointly by the faculty and staff of Cleveland State University, Ohio State University and Marietta College entitled An Analysis of the Economic Potential for Shale Formations in Ohio, increased economic activity related to the Utica is expected to add nearly $5 billion to Ohio’s annual gross product by just 2014. The study also predicts that by 2014, Utica Shale development in Ohio will provide 65,000 jobs, at an average annual income of over $50,000 per job, creating an additional $3.3 billion in state labor income. The study anticipates the jobs will come largely from construction-related trades, while employment for truck drivers, engineers, technicians, office workers and land men should also see appreciable gains.

the next chapter The latest chapter in Ohio’s oil and gas narrative is currently being written. Claims of “the best U.S. E&P onshore [economics]” have some of the industry’s most preeminent players flocking to the area and investing considerable sums at increasing valuations. The development and production of Ohio’s liquids-rich hydrocarbons is still in its infancy, so the full extent of its economic benefits has not yet been realized. But even conservative projections indicate these benefits will be significant and last well into the future. n Sylvia Barnes is a Managing Director and Head of KeyBanc Capital Markets Oil & Gas Group in Houston.

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Western Reserve Land Conservancy/ from page 7 “It’s going to require a tremendous amount of effort,” Mr. Cochran said in February, when he was still early in the process of developing a strategy to accomplish his board’s goals.

One thing Mr. Cochran said he determined early on, though, was that his organization would seek to work not against drillers and midstream developers, but in collaboration with them — along with community organizations, landowners, local government officials and environmental groups.

After studying other shale plays that are further along than the Utica — including the Eagle Ford play in Texas, which Mr. Cochran said has a size, resource mix and population density similar to the Utica — he has learned two valuable lessons already.

One is that fighting against the development of rich oil and gas fields not only doesn’t work, but also may not be in the best interest of some of the landowners the Western Reserve Land Conservancy wants as allies.

The second lesson is that, without proper foresight, planning and collaboration, the negative effects of drilling can be far more damaging to natural resources than they need to be.

“There’s plenty of land area to accommodate the oil and gas development without impacting the land’s resources permanently,” Mr. Cochran said. “If we do it in a thoughtful, planned, collaborative way, we think (development) can be done in harmony. If not, we think it can be done with unintended negative consequences.”

The concern, he said, is that collaboration hasn’t take place in other shale plays and, as a result, resources such as surface water, farmland and green spaces have been affected more than was necessary.

Roads, wells, processing facilities and pipelines, in many cases, could have been sited in ways that minimize their impact on the environment, but the planning to do so was not in place. Mr. Cochran said.

That’s because, in part, too many people have dug in their heels in broad opposition to drilling and have not been reasonable or pragmatic, he maintains.

“There has not been a lot of thoughtful, collective, collaborative planning done,” Mr. Cochran said. “There’s been a lot

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of fighting done and what happens is the oil field gets developed regardless, because we live in America and it’s your land and it’s your right to develop it.”

So the conservancy will take another tack. It is one that relies on forming a consensus and coalition of like-minded people and organizations early in the Utica’s development, before drilling and midstream construction go too far for any planning to take place.

After allies in industry Not everyone agrees that the conservancy is on the right course. Mr. Cochran and his organization have been the focus of criticism.

On radio talk shows and at public appearances, Mr. Cochran has been called everything short of a heretic and traitor for his apparent friendliness with the oil and gas industry. While he has sought to dispel what he said are untrue rumors that the conservancy has signed new leases for oil and gas drilling, he’s quick to say that his organization needs to work with the industry — and sometimes must.

“Sometimes, people give us land to preserve that’s already been leased,” Mr. Cochran said.

In such cases, where someone deeds land to the conservancy on which there already is gas drilling, or for which active leases are in place, drillers have the same legal rights to the property that they would anywhere else. So, Mr. Cochran said, it’s in the best interest of the conservancy to have good communications and relationships with drillers in order to secure as much cooperation from them as possible when it comes to locating roads and wells.

Mr. Cochran said he also hopes industry executives will be part of his steering committee and will be among his supporters. The communications behind the conservancy’s efforts will cost hundreds of thousands of dollars, and any

Rich Cochran actual new land conservancy projects in eastern Ohio could cost millions, Mr. Cochran said, so fundraising will need to be done.

“I’ve talked to the presidents of oil companies about this and the presidents of midstream companies . . . The good news is that, universally, everyone thinks this is a good idea,” Mr. Cochran said.

So far, no drillers or energy companies officially have thrown their support behind the conservancy’s efforts. But the oil and gas industry is hungry for good public relations. Drillers are not rejecting the effort out of hand; they just want to hear more, said one Columbus-based lobbyist and consultant to the industry.

Will money change farmers?

Mr. Cochran clearly has some wellplaced connections in the industry. Frank Tsuru, CEO of M3 Midstream, one of the largest developers in the Utica and Marcellus shale regions, said he greatly respects Mr. Cochran, noting that the two

are on good terms and speak regularly.

But the constituency Mr. Cochran might need to court most heavily could be the farmers and other landowners of eastern Ohio whose resources, aside from oil and gas, he hopes to protect. Will they trade convenience or more rapid development for a better landscape and water resources in the future? Should oil and gas somehow fund the protection of certain land and water? Should some property be dedicated to farming, even if it is leased to drillers and its former occupants leave?

Those are the types of things Mr. Cochran said should be discussed.

On that point, Mr. Cochran has a strong message — act now to protect prime, arable soils and valuable watersheds or risk losing them in the future. A “perfect storm” of rapid development is brewing, he said, and if it isn’t managed early and with forethought, it’s bound to have unintended consequences that could have been avoided.

He knows that, culturally, the people who own the land know the value of their resources.

“The landowners, for 150 years in these counties, they have known and taught their children and each other: You don’t develop prime soils, you don’t pollute your surface water resources and you don’t pave over prime wildlife areas.”

But shale gas development carries with it a new risk, he says — the same landowners who have relied on their land to sustain them through years, and sometimes even generations, no longer need such sustenance.

“Everybody who’s got 100 acres or more is going to be rather wealthy in some of these counties, if not all of them,” Mr. Cochran said. “They’re not going to be reliant on these natural resources any more . . . they may just pick up and move.”

Anticipating the tsunami Mr. Cochran is undaunted. The mission is too important and waiting to act is not an option, he said.

Unfortunately, there’s no real map to follow: The Western Reserve Land Conservancy might be the first conservancy of its kind to attempt such an undertaking, said Rand Wentworth, president of the Land Trust Alliance of Washington, D.C., which is affiliated with 1,700 trusts and conservancy groups across the country.

“I haven’t seen a land conservation group say ‘Let’s convene all of the players, elected officials, oil company officials and developers, let’s convene all of them and discuss what we want this to look like in 50 or 100 years.’ That’s a visionary approach.

It’s wise and it’s forward thinking,” Mr. Wentworth said.

Other groups have been taken by surprise by rapid shale gas development, but the Western Reserve Land Conservancy might be in a better position than most after seeing development take place elsewhere, and is smart to act now, according to Mr. Wentworth.

“What’s different about what the (Western Reserve Land Conservancy) is doing is, there, the tsunami has not yet struck with its full force,” Mr. Wentworth said. “Eastern Ohio still has a chance to think about what it wants to look like 100 years from now.” n

Community Issues/ from page 23 “As wells get drilled in earnest, you start to see a demand for drivers with CDL (commercial drivers) licenses” as well as for skilled welders and maintenance workers, said Brad Ehrhart, president of Portage Development Board. “We have only had about six wells drilled in the county, and right now my unemployment rate is 6.2%. Our employers are having trouble finding skilled workers and the wells aren’t even drilled yet.”

Mr. Ehrhart said his county is addressing the issue by bringing in technical schools to try to train workers in twoyear degree programs.

In Canton, Stark State College of Technology has announced plans to build a $10 million downtown campus with a focus on oil-and-gas training, Mr. Saunier said.

For now, though, and for the foreseeable future, workers remain scarce, which is creating an intense competition for qualified help.

“When the water holes start drying up, the animals start looking at each other differently,” Ms. Skowrunski said. “We have industries here that have good welders, truck drivers and maintenance guys. Companies cannibalize from each other because there is just not enough of those people to go around.

“Now, with the oil-and-gas industry coming in, we know that there is going to be a strain on resources, so we need to get people educated, trained and experienced so they can fill in the gaps that the industry is going to need.”

Infrastructure, and the lack thereof, is another costly concern that rural communities such as Coshocton and Salem must include in their planning.

“We need to do some effective planning at the local, state and federal levels and working with the oil-and-gas industry to find ways to supply them with the infrastructure they need,” Mr. Kosiba said. He is lobbying for completion of the State Route 62 bypass around Salem and widening state Route 30 to a four-lane road through Columbiana County — the only section of the road that has only two lanes.

“We need to get truck traffic out of downtown because it is crumbling the interior structure of our buildings,” Mr. Kosiba said, adding there is $1.2 billion of construction ongoing within 25 miles of Salem.

While it’s unknown what will happen with a proposed severance tax increase on drilling, Ms. Skowrunski and Mr. Kosiba believe strongly that those resources should stay in Appalachia to develop the infrastructure and prepare for future economic growth.

“Most of our county roads are dirt roads,” Ms. Skowrunski said. “There is nothing paved. How do you move heavy equipment on dirt roads?” n

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Out of the play/ from page 9 erty and leases and invest huge amounts of capital even as the glut in the market his company helped produce drove down gas prices. But along the way, Mr. McClendon made some enemies.

While he was investing heavily in shale drilling in West Virginia, the Clean Skies Coalition, which he founded and financed, launched an ad campaign titled “Face it. Coal is Filthy.” Some West Virginia political and business leaders were quite upset, and Chesapeake had difficult times with state regulators as it tried to drill there.

In 2008, he and Texas wildcatter T. Boone Pickens backed a California ballot initiative that would give tax breaks to people buying compressed natural gas cars. But Mr. McClendon’s $250,000 donation to the swift-boat campaign against 2004 presidential candidate John Kerry (questioning Sen. Kerry’s Vietnam experience), and his $650,000 contribution to an anti-gay marriage group offended many left-leaning California voters. The CNG tax break failed.

His investments in proposed developments on environmentally sensitive areas in Oklahoma and Michigan, to build high-end condominiums and marinas, left bad tastes in the mouths of citizens in those states. But what might have ultimately led to Mr. McClendon’s resignation was his unquestioned belief that natural gas would replace oil in just about all energy capacities, and that he — both for himself and the company — could bet huge amounts of money that those changes in energy usage were coming no matter what.

cause the company needs either capital from the sale of some of its assets or new infrastructure that would enable it to bring more wells and revenue online.

“Their Utica (wells) might be profitable in the future, but given the wait for midstream infrastructure to get the gas out of those wells and to market, it might make sense for them to divest of those properties given the cost it will take to hold on to them,” Mr. Hanson said.

“They’ve put a lot of money into the ground, and they aren’t getting much from it right now.

So it makes sense, if they have to get rid of $4 billion to $6 billion in debt quickly, and to cut expenses, these [Utica shale] wells might be the best way to do those things.”

A change in ownership doesn’t mean the Utica won’t be drilled, though. Most in the Ohio oil and gas industry say they expect Chesapeake to retain and develop some of its Utica leases, while others likely would be sold to other energy companies that are just as eager to develop them as Chesapeake would be.

Whether Chesapeake owns the leases or not, the gas and oil is still down there and plenty of other companies now know how to find and extract it.

Selling the leases might take time, though. Chesapeake has been marketing leases on about 337,000 acres in the Utica — about a third of its holdings in the play — since the summer of 2012, and has yet to announce a deal.

“Their Utica (wells) might be profitable in the future, but given the wait for midstream infrastructure, it might make sense for them to divest of those properties.”

Down, but hardly out In addition to running up Chesapeake’s debt, Mr. McClendon lost vast sums of his own personal wealth. In 2008, he was forced to sell nearly all of his Chesapeake stock — 33.5 million shares — at depressed prices when margin calls came due. He borrowed more than $840 million from a company that also lends to Chesapeake, using his personal stakes in well profits as collateral. The federal government is investigating the legality of those loans.

But Mr. McClendon will hardly leave a pauper. His personal net worth was still estimated by Forbes at more than $1 billion until he was dropped from the magazine’s list of billionaires on March 5. He’ll receive about $50 million upon leaving the company, however.

As for Chesapeake in the Utica Shale, Morningstar analyst Mark Hanson thinks the company’s lease acquisition program in eastern Ohio “will slow or come to a halt,” given the infancy of its production there and the company’s financial demands.

That won’t be because of Mr. McClendon’s departure, but be-

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Visionary risk taker As for Mr. McClendon’s legacy, Energy Business Watch publisher Mr. Weissman thinks Mr. McClendon over the long term will be seen as a visionary who helped transform the United States from being a nation dependent on foreign oil to a country that produces its own energy, and in a way that is better for the environment.

“As we look through history, the 19th century was the century of coal, the 20th century the one of oil, and the 21st century will be known as the century of natural gas,” Mr. Weissman said. “Aubrey McClendon was one of the first in the energy industry to see natural gas in a different way, and it was his determination and willingness to take risky capital bets on new technology that has fundamentally changed the energy equation for the United States and the world.”

“He made some bets, and he’s paid the price. But it is that attitude that moved shale forward spectacularly quickly — and we are beginning to see Mr. McClendon’s passionate work on getting natural gas to the public markets, with lower heating costs, and eventually lower transportation costs.” n

War of the words/ from page 11 down from wells, and air emissions from methane gas leakage.

But not everyone in the environmental movement agrees that those studies are the best option.

“It is so important for the gas drilling executives from out-ofstate companies to come here and talk to local officials and get the lay of the land of how this state works.”

“There is a debate now about whether a vehicle operating on natural gas reduces the carbon footprint, and there is a lot more gray area there than there was 10 years ago,” Mr. Thorp said. “And in this age of social media, anyone can proclaim themselves an expert. That is one of the toughest issues in the environmental movement these days. A lot of times the person seeking information will trust the local guy more than the Sierra Club. We must work hard so the environmental community does not become its own worst enemy.”

But doing that is costly. Mr. Thorp said The Sierra Club is looking at putting initiatives on the Ohio statewide ballot, ones that would increase taxes on gas drilling or ban drilling in state parks. But getting the 650,000 signatures that would be needed — at an estimated cost of almost $2 million — makes that extremely difficult.

And there is another problem for the environmentalists.

“Some of our members think that getting taxes raised on drillers would make local government more dependent on gas drilling revenues, which they think could lead to more drilling and less regulation,” Mr. Thorp said.

Meet the people Fighting such tax increases has become a priority for the oil and gas industry of late, as Gov. John Kasich continues to propose them. They were losing that fight going into the spring, with more than half of polled Ohioans favoring a tax increase on the industry, especially if it meant lower state income taxes generally. But the fact that pollsters have switched their focus away from whether drilling should be banned, and on to whether it should be taxed, may show in itself the industry’s progress on the PR front.

At this point, the drilling industry has the advantage in terms of the money and organization to get its message out. But the public still has questions, and many feel the gas drillers need to go a little further in getting their message out to property owners

signing leases, as well as to people seeking jobs and business opportunities.

Industry supporters say the industry would also do well to focus on how natural gas produced in the United States can be a big part of the nation’s ability to be less dependent on foreign oil and could boost U.S. manufacturing.

Tim Miller, a senior vice president at Fahlgren Mortine, a public relations firm with offices in Columbus, Cincinnati and Cleveland, said “finding the middle ground right now is best for both sides.”

“I’m originally from Perry County (in southeastern Ohio), and a lot can be learned from coal mining in that part of the state,” Mr. Miller said. “Over time, input from the people that lived near and worked in the coal operations made it safer and more beneficial for all of those involved. And the message was that, properly done, coal mining was beneficial for the nation as well.

“It is so important for the gas drilling executives from out-ofstate companies to come here and talk to local officials and get the lay of the land of how this state works,” Mr. Miller said. “Have them be honest and show how this can be done safely, and be willing to give a little to let people see that they have an interest in this working long-term.

“In a lot of situations like this, you have some people who can’t be convinced no matter what,” Mr. Miller said. “But one thing I always found is that the people in Ohio have some common sense and can find a middle ground. That can be done with both sides participating if it is done in a sound way.”n

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Making it here/ from page 13

Steve Young looks over rollers awaiting shipment from Roll Kraft

“We know it’s going to make tubing for oil and gas,” Mr. Gehrisch said of the new product on his factory floor, based on his conversations with customers across the country and around the globe.

A walk through Roll-Kraft’s main plant floor confirms that oil and gas not only is the fastest-growing market for the company, which Mr. Gehrisch said has been booking record sales, but it’s keeping Roll Kraft’s main plant hopping.

“This is pretty much all for oil and gas,” said vice president Steve Young in front of a floor full of rollers on a winter tour.

Meanwhile, larger, publicly traded companies also are seeing strong revenues from the oil and gas sector. Among them is Parker Hannifin Corp., which says its business units that sell wellhead seals or custom-engineered tubing products are seeing a boost.

In Garfield Heights, Chart Industries Inc. makes heat exchangers that are used in gas-processing plants. New plants aren’t being built as quickly as they were in 2011 and 2012, but more are planned and the company expects to benefit from continued midstream energy development.

“We will see a continued increase in opportunities for new ethylene plants . . . gas

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processors believe 2013 could be similar to 2012 for new projects and brazed aluminum heat exchangers work,” said Chart chief financial officer Michael Biehl.

Meanwhile, smaller companies, some of them new, are seeing even bigger gains relative to their size.

In Kent, Jim Maiorana took his welding skills and began producing tank trailers that are used by trucks to haul fracking water to and from well pads. The president of Mac Liquid Tank Trailers says he is busier than he even imagined he would be as drillers and service companies around the Utica region send their trucks to him to be outfitted.

With each new shale well requiring a thousand truckloads of water or more — not to mention flowback water that then must be hauled to injection wells or other facilities — there’s no shortage of demand for trailers, Mr. Maiorana said. He’s as busy looking for skilled welders as he is searching for new customers.

Not new, just better The depth of the manufacturing sector’s participation in what seems like a new industry in Ohio is not surprising to some with an eye on the region’s industrial base.

“We have a lot of companies that have

decades of experience working with the oil and gas industry,” said Ed Weston, a supply-chain expert who works with the manufacturing advocacy and consulting group WIRE-Net in Cleveland.

Mr. Weston also founded GLWN, also known as the Great Lakes Wind Network, which has more than 1,000 members nationally. Today, he not only works with companies trying to sell into the wind energy business, but also into the shale gas market. He recently discovered something interesting about those two sectors.

When WIRE-Net conducted a survey of some of its members last winter, it found companies that were successful in the oiland-gas industry were also successful at penetrating the wind market, and vice versa.

The survey’s results indicate that synergy could be important to Ohio manufacturers that hope to break into the state’s growing natural gas drilling business.

“It shows that the future of American manufacturing is really tightly intertwined with American energy and American clean energy,” Wire-NET president John Colm said of the findings. “For those concerned about jobs in the gas industry, this is not a bunch of projections from think tanks in Cleveland or Columbus. It’s real.”n

A lack of Transparancy/ from page 15 It also makes the job of local governments harder, he said. in relatively new spots such as the Utica Shale. They often try to “And as a government entity, (Carroll County) would like to have accommodate drillers with large operations within their borders, because state regulators know that the drillers consider their results better information on what wells are producing more, so that we to be trade secrets — and one driller might move in on another’s know there will be more drilling in certain areas of the county and hot spot if it can find out where it’s located. Most states that require we can plan for infrastructure improvements like roads and sewers monthly output reports offer a period of confidentiality for two to in that area.” Mr. Wheaton said.

While the state reports that more than 200 wells have been six months to protect drillers.

Ohio passed a bill last summer that set many of its existing drilled, output information on about only 40 is expected to be availdrilling rules. In its early versions, the law — Senate Bill 315 — able in April, based on the March reports from drillers. One reason contained language that would have required drillers to report well more wells are not expected to report in March is because many results on a quarterly basis. However, drillers were able to lobby wells are sealed up for two to four months after they are stimubehind the scenes to keep the reporting regulations limited to an lated, or fracked with water and high pressure — the “shake and bake” period as it is called — before annual basis, lawmakers say.

“What is happening right now is production begins. Others have been “They lobbied hard that (more drilled, but not brought into producfrequent) reporting would be so that we are basing our tion as they await gathering lines. difficult for them to comply with,” “What is happening right now is said former Ohio Rep. Mark Okey, information on just a handful of that we are basing our information D-Carrollton, who served on the wells that were drilled 18 months on just a handful of wells that were Ohio House Agriculture and Natural drilled 18 months ago for investors Resources Committee while SB 315 ago -- for investors who want to who want to make decisions on milwas being crafted. “But we all know lions and millions of dollars in inthat the monthly reporting would make decisions on millions and vestments,” said Tommy Pritchard, help property owners get better millions of dollars in investments.” director of energy investment bankdeals, because those property owning for Imperial Capital LLC, a New ers would have information about what wells in the area were producing and (more frequent reports) York-based investment firm.

“Ultimately, if we get the information quicker, the economic would give them more information in negotiations.” impact in Ohio can be bigger and quicker that it will be by withholding the data,” Mr. Pritchard said.

Once is enough Ron Mills, an energy analyst for Johnson Rice & Co., a New Two of the biggest gas drillers in Ohio, Chesapeake Energy and Gulfport Energy, would not respond to questions about Ohio’s well Orleans-based investment firm, said the investment community reporting policy. They referred questions to Rhonda Reda, execu- “obviously would like to see more data from Ohio drilling.”

“Under the current rules, we are basing investment decisions tive director of the industry-supported Ohio Oil and Gas Energy Education Program. Ms. Reda said the annual reporting does pro- on just a handful of wells operating there,” Mr. Mills said. “Other states are able to handle more frequent reporting and Ohio should tect drillers’ investments, which is why they support it.

“When you are investing, let’s say $14 million, in well drilling be able to do that as well.” in certain areas, it doesn’t make sense to have all that information out there so that competitors can move in quickly without doing the same costly research,” Ms. Reda said.

In terms of information for investors, Ms. Reda said shale gas drillers are often public companies, so they must comply with their own regulations when it comes to keeping their investors informed of their results. Outside of that, an annual report to the state is plenty, she said.

ODNR is getting quarterly production data from the drillers to estimate severance tax revenue, but those figures are not made available to the public. The revenue data, per state law, is only used for planning purposes by the ODNR, such as determining the number of well inspectors needed in the state, said agency spokeswoman Heidi Hetzel-Evans.

More is better Proponents of more frequent well reports cite a “more information is better” refrain. Carroll County Commissioner Thomas Wheaton said the lack of more frequent numbers on well output “keeps the value of leasing to the property owners lower because it suppresses competition.”

A lot on the line Rob Nichols, a spokesman for Gov. John Kasich, said more frequent reporting rules are unlikely in the near future.

“The bill (the Kasich) administration wrote had quarterly reporting rules in it, but the Legislature changed it to annual reporting,” Mr. Nichols said.

Dale Arnold, director of energy services for the Ohio Farm Bureau Federation, said members of his organization are very concerned “about finding out how big the Utica shale play is now and will be in the future before they start negotiating” their lease deals.

“Property owners would like to know in what range their leases might be worth, do some financial planning on what their royalty checks might be, and to know what some of the inconveniences property owners in their area might have to go through if a lot of wells are drilled.”

Mr. Arnold doesn’t foresee the policy changing, though.

“It is less costly for them to do it on annual basis, and that alone will probably keep a lot of this data private, even though there are very good arguments for the public good to make this information public on a more frequent basis,” Mr. Arnold said. n

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Bonus Buys/ from page 18

Dave Smith says he’s selling more Harleys, thanks to shale money.

A mobile strippers’ pole? Yep But even with all the additional zeros in their bank account, most people are not spending foolishly. (Editor’s note: Even some good ol’ boys who showed us their drivable dance stage, complete with a “strippers’ pole” mounted in the center, used a very well-used Oldsmobile to make their masterpiece.)

Most people are still concerned about the price of what they buy and negotiate to get the best deal they can, Mr. Thomas said. But he understands the urge to spend, too.

“I did the same thing. I was fortunate enough, I had six and half acres and we leased ours to Chesapeake (Energy) back in July for about $5,000 an acre,” he said. “I went out and stimulated the economy and I bought a $25,000 Harley. The rest we put in savings and we’ll use it in the spring to take the kids on vacation somewhere.

My wife and I are going to treat it like money that was found that we can do whatever we want with it.”

That’s a sound as sweet as a rumbling V-Twin engine to folks such as Dave Smith, owner of Freedom Harley-Davidson in Canton, who says his sales are up and rising, in part because of the shale boom. Freedom is fortunate to sit near the Utica headquarters of Chesapeake Energy and some oilfield service companies, and also near Interstate 77, which runs south into the shale play. All of those factors have helped.

“We’ve sold some bikes to landowners. We’ve also sold some to the guys working and doing the drilling,” Mr. Smith said.

Plowing money into tractors Farmers, of course, are business people, too, and they often reinvest their newfound capital into old livelihoods.

Jon Jones, vice president of sales and one of the owners of D & J Sales and Service Inc. in Cadiz, said his family business had its best December in 23 years of selling farm equipment.

“December is traditionally a big month because farmers have tax write-offs, but it’s never been anything like this. A guy would come

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in and buy one piece and now we are seeing guys buy four, five, six pieces at a time,” said Mr. Jones, whose company is the largest dealer of Vermeer hay equipment in Ohio.

“We have seen the effect of this shale money in the last two years as different areas around here get leased and a lot of it is coming from Belmont County now,” he said.

Mr. Jones said his total sales in the last month of 2012 were up about 50% from December 2011 and soared 75% from levels of December 2010. Leading the way were sales of high-end tractors and hay equipment such as round balers, rakes, mowers and loaders.

“It’s really a nice thing to see somebody who has worked their whole life and made money to pay their bills, but they never had anything extra, to come in and buy a complete line of equipment,” Mr. Jones said. “I have had several deals totaling $100,000 plus.

“In the part of Ohio where this is happening, it’s not uncommon when someone buys a tractor that it’s a 20- or 25-year investment,” Mr. Jones said. “For a lot of people this might be the first new tractor they have ever owned.”

Service and repair work also has tripled in terms of volume and dollars, he said, as more idle equipment has been brought back into working order.

“It’s been a real blessing. We moved to a new facility in October 2011 so that now we have 22 acres on a main road,” Mr. Jones said.

“We made a big investment to move here and our timing couldn’t have been any better.”

To protect and preserve But it’s not all about spending money on new toys. Many landowners express a strong desire to provide for their families through succession planning, estate planning and creating trusts to preserve the money for future generations.

Daniel Riemenschneider, an Akron tax partner with Bruner-Cox LLP who works on tax issues for many landowners with valuable mineral rights, said many of his clients are sharing and enjoying their newfound wealth, but they are doing so conservatively. “(They’re) making significant gifts to their children and grandchildren, paying debts, and buying a really nice pickup, four wheeler and tractor or farm implement,” he said. At least one client used his money to increase his landholdings, he added.

Larry Cain, who helps his father and other landowners in Belmont County with mineral rights issues, says a lot of old-timers are mostly concerned about protecting what they get for their families.

“This money coming into this area is an amount of money these people never thought they would have to manage. To them it’s somewhat of a stressful time to plan for their families and future generations,” Mr. Cain said. “For the generation of my father, he has no real need or wants for the money and his desire is to see the next generation to get it.”

Mr. Cain said that sort of thinking, especially by older folks, goes back to the conservative way that people live in this part of the state. They don’t have a lot of wants, he said; they just provide for their needs.

“I don’t think you’ll see a lot of the wild spending that we hear about with lottery winners,” he said about his group of soon-to-be wealthy landowners. “They want to be good wise stewards of this money and they take very seriously the impact this money could have on future generations.” n

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