State auction of oil, gas rights prompts concerns

An article by Angela Niemi    No Comments

A state decision to auction off leases on oil and natural gas rights associated with lakefront parcels in southeast Michigan is being lamented by some Oakland County residents and municipal officials.

The state Department of Natural Resources (DNR) offered state-owned oil and gas lease rights associated with 108,164 acres in 23 counties at an auction held on May 8. It was the first such auction where oil and gas rights associated with state-owned land adjacent to southeast Michigan lakes were offered for lease.

State oil and gas auctions for five-year leases routinely occur twice a year, once in the spring and once in the fall.

Two companies out of Traverse City — Jordan Development Company and Pteradon Energy — leased all the land offered in Oakland County at the recent state oil and gas lease auction, according to the tentative auction results summary posted on the DNR’s website.

The results are tentative pending approval by the director of the DNR at the next state Natural Resources Commission meeting in June.

According to DNR Spokesperson Ed Golder, the mineral and gas rights associated with 91,000 acres of state land were leased at the auction, bringing in a total of $4.125 million. The average bid per acre was $39.90.

“Historically, this was a pretty middling auction,” Golder said. “It wasn’t the smallest. It wasn’t the largest. The largest was in May 2010. It raised $178 million, and on average the bid was $1,500 per acre.”

According to Golder, most of the auction proceeds go to the Natural Resources Trust Fund (NRTF), which under a state constitutional provision can only be used to purchase and develop land for public recreational use. However, if the NRTF is at its cap of $500 million, then the auction proceeds go into the Parks Endowment Fund, which contains money only used for park maintenance. A small amount also goes to the care of fishery and wildlife habitat.

Oral auction bids can be submitted by individuals of legal age; or by a partnership, a corporation, or other legal entity qualified to do business in Michigan.

According to Julie Manson with the state Department of Environmental Quality (DEQ), bidders typically are representatives from the oil and gas industry.

In Oakland County, the mineral and gas rights associated with all 18,347 acres up for auction were leased at the May 8 auction.

The proceeds gained from Oakland County tallied up to $616,514, with the average bid per acre at $33.60.

Pteradon leased 664 acres, while Jordan leased the rest — over 17,600 acres.

According to Golder, all the land leased in Oakland County is classified as “non-developmental.”

“This means the surface of the land cannot be disturbed,” he said. “There can be no drill head or apparatuses on that land.”

However, that doesn’t mean that the oil or gas resources underneath the surface can’t be accessed by drilling horizontally or directionally with the drill head in another location.

“People could buy the property next door to the acreage leased and go in horizontally,” Golder said. “They could also use the (non-development) land to put together a drilling unit. And while the unit cannot be on the non-development land, that land could be included to make a space large enough to satisfy the DEQ’s requirement.”

According to the DEQ’s General Spacing Rules, 40 acre spacing is established for all wells in Michigan, although there are exceptions.

Ben Brower, the vice president of Jordan Development, said company officials believe the Oakland County land involved in last months lease has oil and gas potential. However, in order to utilize the non-developmental land, the company would need to enter into private leases, as well, to meet the DEQ’s drilling unit spacing requirements.

Leasing the mineral rights of a specific parcel doesn’t by itself grant permission to drill a well. According to the DNR, if a lessee chooses to pursue development of the oil and gas rights, separate written permissions — including a drilling permit from the DEQ — must be obtained prior to drilling.

Furthermore, when oil and gas rights are leased, that doesn’t automatically mean a well will be drilled. The drilling of a well doesn’t always tap into commercial amounts of oil or gas.

“The DEQ’s Office of Oil, Gas and Minerals regulates the drilling and completion of oil and gas wells. The DEQ enforces a comprehensive set of regulations designed to protect Michigan’s resources from potential negative impacts from drilling and completing wells,” Golder said.

These potential negative impacts have caused concern in some quarters, including among protesters at the auction held in Lansing last month.

“Some were led out of the room — they had registered as bidders — for causing disturbances during the auction, and one was even arrested,” Golder said.

The protesters aren’t the only ones with concerns.

Citizens of West Bloomfield Township have also expressed reservations about the idea of mineral rights being leased in their area, according to township Clerk Cathy Shaughnessy, who crafted a resolution for the township Board of Trustees to consider in order to try to prevent any drilling for oil or gas in the township.

“The state of Michigan (leased) the mineral rights for about 37 acreage parcels in West Bloomfield,” Shaughnessy said. “There were quite a few parcels that were listed near Cass Lake — either under or near the lake. And they were nominated (for the auction) by an individual in Traverse City who is involved with a company that is involved with oil and gas. While the law doesn’t allow us to forbid it, we are hoping that by passing a resolution saying we oppose any oil or natural gas drilling in the township that we can prevent it from happening.”

The West Bloomfield resolution also opposes “any and all directional drilling originating in another community and terminating under” the township.

“You can horizontally drill from about a mile and a half away,” Shaughnessy said. “So, someone could be drilling in Waterford and then underground drill horizontally for a mile and a half to Cass Lake.”

The resolution passed unanimously — at least among the five board members present at the meeting on May 14.

West Bloomfield resident Kathy Chiaravalli initially brought the issue to the township board’s attention. She said she’s concerned the state is not making enough money on oil and gas leases compared to the potential environmental risks.

“Oil companies make a fortune, yet they don’t clean up their messes that well,” Chiaravalli said. “I’m just concerned about the water I drink, and the water my kids swim in. I don’t like the idea of them fracking near my lakes. If they are going to frack, let’s develop clean frack water. Once one lake is contaminated, all the lakes are interconnected through the watersheds. Oakland County is one big wetland.”

Hydraulic fracturing, more commonly known as “fracking,” is a well stimulation process used to extract underground resources, including oil, natural gas, geothermal energy, and water. It’s used by gas producers to stimulate wells and recover natural gas from sources such as coal beds and shale gas formations, according to the U.S. Environmental Protection Agency (EPA).

The process uses thousands of gallons of water, mixed with chemicals and sand, to create fissures in rock formations to release oil and natural gas.

A study conducted by the EPA in 2004 concluded that there was little-to-no risk of fracturing fluid contaminating underground sources of drinking water.

In 2005, Congress exempted hydraulic fracturing from the federal Safe Drinking Water Act.

Since then, however, there have been complaints of water contamination following the use of fracking in several states, including Wyoming and Pennsylvania, which has raised concerns across the nation.

While her concerns have not been abated, Chiaravalli, who attended the May auction, said she was pleased by the solidarity shown among township officials.

“It’s a rare moment when all the township officials are in agreement, and they are about this,” she said.

While Shaughnessy said board members discussed drafting an ordinance prohibiting drilling in West Bloomfield, they were told by the township attorney that was not possible.

“We can’t override the state on oil and gas drilling. However, we are looking at including stronger language to environmental ordinances to deter oil and gas drilling,” she said.

Nevertheless, West Bloomfield’s Development Services Director Marshall Labadie shared his opinion in a letter to the township board, that since parcels with mineral rights available are surrounded by lands that are “owned by the township, other institutions, and/or (are) densely developed by many private property owners,” West Bloomfield should not have be too worried.

“These areas are not ideal for setting up drilling and extraction operations as they would need to procure large areas of land held by private property owners,” he further wrote. “The cost of drilling and extraction must be supported by significant volumes of oil and gas that are most likely not available under the small tracts of land available for drilling and extraction. Thus, their business model does not fit. I would be concerned in the rural areas of the state as well as state forests, parks and game areas that house protected species and high quality streams and unique wetland systems. I truly

believe West Bloomfield and its surrounding communities are OK.”

Brower said Jordan Development has fielded calls from concerned citizens.

“We have received calls from a few people who were concerned, in particular from West Bloomfield Township. We told them we do not intend to drill in that township. That area is not our focus,” he said.

Nevertheless, Chiaravalli said a petition drive has been started.

“We want citizens who live on the lake to write Gov. (Rick) Snyder and (Oakland County Executive) L. Brooks Patterson because we don’t think the state is making enough money to cover the risks. Perhaps they can have auctions where certain areas start at a higher bidding price depending on the higher risks associated with the area being auctioned,” she said.

More details on the auction can be found at the DNR’s website, www.michigan.gov/dnr.

This map of Oakland County is shaded to indicate the parcels where natural gas and oil rights were leased at a May 8 state Department of Natural Resources (DNR) auction in Lansing. The oil and gas rights associated with 18,347 acres in the county were leased for a total of $616,514, with the average bid per acre at $33.60. The leases carry a five-year terms. Two companies out of Traverse City — Jordan Development Company and Pteradon Energy — leased all of the Oakland County rights available during the May 8 auction. Pteradon leased the rights associated with 664 acres, while Jordan leased the rights to over 17,600 acres. (Oakland Lakefront graphic/Marcia Reimer)