Allegheny County's airport gas drilling pact with Consol a great deal, lawyer says
March 5, 2013 10:00 AM
By Andrew McGill Pittsburgh Post-Gazette
Some consider it the biggest economic opportunity in Allegheny County history. Others call it a bum deal that gives away the store.
Wherever their opinion fell, few of the politicians who debated the county's deal with Consol Energy to drill for natural gas at Pittsburgh International Airport last month could speak on the specifics of the 40-page contract with Consol. After all, they're not energy lawyers.
But Kit Pettit is.
An attorney at the Downtown firm Bernstein-Burkley who has reviewed more than 1,000 drilling leases for landowners -- including his parents -- Mr. Pettit read over the Consol contract at the Post-Gazette's request. His analysis compared the terms of the lease with area standards, looked into the fine print and examined concerns raised on council.
His opinion: Allegheny County is getting a great deal.
"It is one of the best leases that I've had an opportunity to review," he said. "I own some property in Washington County, and I would sign my property under this lease without qualification."
The lease still is drawing negative reaction from those against drilling, some of whom are expected to attend tonight's county council meeting.
Mr. Pettit said the most obvious sign of the care put into the contract may be its size. Most leases run six to seven pages, including an addendum, but the Consol contract is six times longer.
Then there are the protections: more reports, extra bond money, legal concessions. Most favor the county, Mr. Pettit said.
The bottom line, however, is the bottom line. Through negotiation, the Allegheny County Airport Authority upped Consol's per-acre bonus payment to $5,000 an acre, netting $50 million in the first year. Normal leases go for $2,000 an acre in that area, Mr. Pettit said.
The authority also gets annual royalty payments of 18 percent on all well revenue produced. Not only is that higher than average -- most royalties now go for between 15 percent and 17 percent -- but it also releases the authority from chipping in on gas transportation costs, a common requirement.
Right up the highway from the airport, Mr. Pettit recently negotiated a lease that paid $1,500 per acre and a 17 percent royalty. He considered it a bargain. The county's deal is in a whole different league.
"That is above market right now," he said.
Before county council voted 9-4 to move the deal forward last month, council director of legislative services Jared Barker outlined two dozen concerns in a memo shared with several members. Chief among them was the lack of an end date, allowing Consol to hold onto the land even if it was making only a token effort to drill wells.
His point was echoed by council member Barbara Daly Danko, D-Regent Square, who compared the contract to the children's show "Lamb Chop" -- "It goes on and on and on," she said.
That's completely normal in the industry, Mr. Pettit said. Most leases signed these days don't specify a term, ending only when the wells no longer produce gas.
"From a lessor's perspective, if you have a well that's producing and you're receiving royalty checks, the last thing you want to do is terminate that lease," he said.
Council members also questioned the breadth of the contract, leery over provisions that would give Consol oil and gas rights down to the center of the Earth. Why weren't they restricted, they asked, to a certain depth?
That's also standard, Mr. Pettit replied. While older contracts held drilling rights to specified shale formations, most now throw in the whole shebang, figuring it's easier to lease to one company than to negotiate several times.
"If there's only one lessor for all of the formation, it prevents disruption of the surface. It avoids operation conflicts," he said. "It would almost be analogous to allowing two planes to run parallel on the same runway."
Ironically, clauses designed to add transparency are partially to blame for the lease's unwieldy girth. Allegheny County likely will have access to contracts with vendors, production data and drilling logs -- disclosures rarely made to regular homeowners.
The airport authority also has added rights in settling title disputes and an extra $1 million bond beyond what state law requires.
The county's lawyers appear to have left no stone unturned, Mr. Pettit said. So how did the authority get such a deal?
Much of it has to do with the sheer size of the parcel involved, Mr. Pettit suspects -- 9,000 acres, several hundred times larger than an average lease and almost four times as big as the largest deal Mr. Pettit is working on.
Getting a chunk of land that size removes many of the obstacles that routinely plague drillers, such as land disputes, voids in coverage, donut holes.
So Consol is likely getting as good a deal as it's giving. But the energy attorney sees nothing wrong with that.
"I've represented hundreds of clients with respect to oil and gas leases, and I would advise each and every one of them, if provided the chance to sign this lease, to sign it," Mr. Pettit said.