Chevron Appalacia Deal Will Net SB 15% Of Energy Proceeds From Pennsylvania Property

Last week, the City of San Bernardino entered into an agreement with a division of Chevron allowing the oil giant to draw oil and natural gas out of 4.678 acres the city has mineral rights to in the Keystone State.
In February 2017, the San Bernardino Police Department was bequeathed an undivided 20 percent interest in the oil, gas and mineral rights of a 23.395 acre property in Westmoreland County, Pennsylvania from the estate of Frances M. Todd. In her last will and testament, Todd, a resident of San Bernardino, left the bequest to the San Bernardino Police Department “to be used for the K-9 program and vests.” The police department later received an unsolicited offer from Brighton Resources, Inc. which represents Chevron Appalachia, LLC, to lease these mineral rights for a period of five years with a single five-year extension. The initial offer was $1,500 per acre along with royalties of 15 percent net of well production. That offer was later increased to $2,500 per acre and fifteen percent net of well production
The police department recommended acceptance of the Chevron Appalachia LLC lease offer, suggesting the funds could be “placed in a city trust account, specifically restricted to their utilization for the SBPD K-9 program in compliance with the specific bequest made by Frances M. Todd Estate, with no corresponding police department budget offset.”
City staff seconded that recommendation, noting “the agreement will generate $2,500 per acre and 15 percent net of well production. The funds will be used to augment the K-9 program in the police department.”
Accordingly, the city council entered into the arrangement with Chevron Appalachia LLC, leasing the company 4.679 oil and gas mineral acres in Westmoreland County Pennsylvania for a period of five years with the option of a single five-year extension.
While the deal guarantees the police department will see a $58,475 windfall over the next five years, it is hard to say what the city might be giving away. Westmoreland County sits atop the Marcellus Shale. According to the Pennsylvania Independent Oil & Gas Association, “Marcellus Shale is a deep geologic formation stretching more than 95,000 square miles through parts of Ohio, Pennsylvania, West Virginia and New York. Formed about 380 million years ago, the Marcellus Shale is rich in organic material from plants and animals. As these organics were compressed through time and geologic pressures, natural gas was trapped in the shale’s natural fractures. The Marcellus Shale formation is found 4,000 – 8,500 feet below ground surface and is between 50 and 200 feet thick. The high-volume reservoir of natural gas in the Marcellus Shale formation is estimated to hold more than 500 trillion cubic feet of natural gas. Even if only 10 percent of the gas is recovered, it is enough to fuel the United States for two years and would be worth more than one trillion dollars.”
As San Bernardino does not have the means to do oil and gas exploration in Pennsylvania nor the means of harvesting those resources, it has entered into the arrangement with Chevron Appalachia, which in any event is doing exploratory work in the area with a mind toward tapping into the Marcellus Shale. Nevertheless, San Bernardino’s willingness to be satisfied with a mere 15 percent of the revenue from the venture on property over which it has substantial controlling rights is well below the industry standard.
A combination of factors is driving the interest in developing natural gas from the Marcellus Shale. Primarily, improved techniques such as three-dimensional imaging and horizontal drilling have greatly enhanced the ability to produce natural gas economically from other shale formations in the United States, and they are now being used to access gas in the Marcellus Shale formation. Because of past and current drilling in the Marcellus Shale formation, much is known about its characteristics. In addition, the economics between natural gas prices and close proximity to gas-hungry Northeast markets have made the Marcellus Shale an excellent exploration opportunity.

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