Natural Gas: a Ponzi Scheme?

Fleased — a play on the word “fleeced” — is an organization dedicated to helping disillusioned landowners escape from gas leases.  After a workshop in Norwich, NY, Ellen Anderson posted the following report:
“Be careful what you wish for.”

That should be the mantra for landowners who sign gas leases, especially those who are blinded by the  signing bonus, free money which can range from $20 to well over $8,000 per acre, and the promise of lottery-winner royalties for years to come.  Too often landowners have minimal understanding of the legal intricacies of the contractual agreement, which invariably favors the gas and oil corporation. The seasoned attorneys throughout the industry write leases with so many technical provisions that landowners often cannot cancel them even after they expire.

To their dismay, they discover that they have to file a cancellation notice with the county clerk and must notify the lease holder and all “assignments” – that is,  all the other companies that have bought up all or parts of the lease.  The gas industry makes assignments without any requirement to notify a lease holder. The burden of research falls upon the landowners to find out all (and all means all) of the assigned owners, and they often learn that assigned owners have multiplied like cockroaches.

 Meanwhile, the design of the leases allows the gas company to send another payment as originally agreed in the contract, thereby renewing the lease.  The company needs only to claim that they have started a work project on any spacing unit, which can consist of many properties, forcing all of them to renew their leases.  “Starting a work project” can consist of an act as simple and basic as parkihg a bulldozer on the 640 acre spacing unit.

What about those royalties on the scale of winning Power Ball?   As with investors in Hollywood movie contracts and Broadway musicals, there are no profits until all of the costs of drilling the well have been met – yes, all of the “costs” and as before, all means all. 

As with multi-million-dollar movie and Broadway productions, the gas industry can make a case for showing no profit.   To paraphrase a famous New Yorker cartoon: A man in a suit standing at his desk  is talking on the phone while looking at his calendar. “Thursday’s no good. How about never?  Is never good for you?

Many land owners may learn that their best chance for seeing that financial windfall is never.

In Lewis Carroll’s Through the Looking Glass, Alice is running with the Red Queen: “Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

The Red Queen is today’s gas industry.  Currently there is no profit in the sale of the gas. In fact, it costs more to produce it than the companies can sell it for.  Since they have to keep drilling to justify the conditions of the leases and sustain them, there is such a glut of gas on the market that profits are impossible. In North Dakota, where the focus is oil, they simply burn off the methane because it’s practically worthless; flares light up the landscape day and night as far as the eye can see.  Since the sale of leases is essential to eventual profits, gas companies have to keep drilling in a negative market to hold onto leases and to convince more people to sign leases.

Gas companies profit not by selling gas, but by bundling leases (like subprime home mortgages!) and selling them on the market for far more than they paid the property owner – without the knowledge of the lease holder.  A company can sell part of a lease to many buyers so that the varied, nebulous strings attached to a lease like a spider web make it extremely difficult for landowners to extricate themselves.

Who buys these bundled leases? Foreign countries that pay much more for gas overseas than we do. Gas companies that paid 15 billion dollars for leases last year may have sold them for 17 billion dollars in the commodities market. But the corporate gas and oil attorneys designed those contracts to ensure that not a penny of that two billion dollar profit flows back to the original landowners.

Bernie Madoff is spending his life in prison for managing a Ponzi scheme which he could have maintained for decades longer if it hadn’t failed when Madoff reached the tipping point and couldn’t pay the bills. 

Right now the gas companies have reached the tipping point where the Ponzi scheme is failing because the awful truth is dawning upon the buyers of these bundled leases:  The Red Queen can’t keep running as fast as she can forever.  It costs too much to drill without profit and they cannot maintain continuous sales of gas leases indefinitely, so the gas companies are withdrawing.

This is why Norse Energy in Chapter 7 bankruptcy, liquidating its assets, and Chesapeake Energy is 19 billion dollars in debt and has sold half of the company to a Chinese corporation.

The process is bound to implode, leaving behind contaminated aquifers, increased cancer rates, devastated landscapes, dashed hopes and dreams, and a huge expulsion of methane gas in the atmosphere, further pushing global warming to the irreversible tipping point.