Barnett Shale 

Natural Gas 101

What is natural gas?

Natural gas is a gaseous fossil fuel containing mostly methane. It is the cleanest burning fossil fuel. The primary uses of natural gas are residential (22%), commercial (14%), industrial (43%), electric utilities (18%) and transportation (3%). The federal government projects use of natural gas in the U.S. will increase 64% in the next two decades, with electric generation and industrial uses leading the way.

What’s the difference between the energy created from natural gas and oil?

Natural gas is the cleanest-burning hydrocarbon, burning 43% more cleanly than coal and 28% more cleanly than oil. And it offers a domestically abundant supply that strengthens our local economies while reducing our dependence on unreliable and sometimes hostile foreign resources.

How does natural gas help minimize air pollution?

Cleaner-burning fuel means that natural gas usage creates dramatically less emissions that escape into our air. With fewer burn emissions, air pollution is reduced and the air quality improves. Learn more about clean energy from the American Clean Skies Foundation.

Does natural gas drilling impact the water supply?

The process of drilling natural gas wells includes the use of water to drill and create fractures in the geologic structures, allowing the release of natural gas trapped inside the shale. However, natural gas drilling consumes less than two percent of all consumed water in the region.

How are greenspace sensitivities respected?

Chesapeake believes that the drilling process should be as environmentally friendly as the natural gas we’re producing. That’s why we go above and beyond to treat essential greenspace and groundwater resources with the utmost of care, and, whenever possible, leave the site in better condition than when we began. Generally, the completed sites blend in to our urban fabric better than other public utility infrastructures.

How does natural gas drilling improve the urban environment?

Although drilling for natural gas may cause minimal and temporary inconvenience in the immediate area common to any construction project, these wells generate extra revenue that our cities can used to pay for things like new roads, schools and parks throughout the community. Frequently, the addition of natural gas wells in any neighborhood is less obtrusive long-term than new retail space, residential units, or office development which might have occurred on the same site.

Barnett Shale 101

What is the Barnett Shale?

The Barnett Shale is a geologic formation of sedimentary rocks that contains natural gas. Experts suggest that it may be the largest onshore natural gas field in North America. The Barnett Shale has already produced more than 3.4 trillion cubic feet of natural gas – enough to produce the energy needed to heat every home in Texas for years to come – and is expected to produce an additional 30 trillion cubic feet of natural gas resources.

Where exactly is it?

The Barnett Shale formation is estimated to stretch across 20 counties in north central Texas, covering approximately 5,000 square miles. The major portion of potential development is located directly beneath Tarrant, Johnson and Dallas counties, about a mile and a half underground.

What energy companies are operating in the Barnett Shale?

“Energy companies” are not all alike. Some companies specialize in leasing mineral rights or running title research. Others are major exploration and production (E&P) companies — also referred to as “operators.” Yet others are service companies working primarily for operators in drilling or completion functions. Publicly traded E&P companies with strong operations in this market include Chesapeake, Devon, EOG, Quicksilver, Williams and XTO Energy. There are also many smaller, privately-owned or foreign-owned energy companies involved in the play. It’s smart to check out the background and references of any companies you may be working with.

Who is Chesapeake?

Chesapeake Energy is the #1 driller in Texas and in the U.S. of clean-burning natural gas, and was named Best-Managed Energy Comapany by Forbes in 2007. We were also named "Hydrocarbon Producer of the Year" at Platts Global Energy Awards, and received the "Excellence in Innovation and Diversity" award for our unprecedented work at DFW International Airport. In 2008, Fortune magazine voted us one of the "100 best Companies to Work For." Our highly skilled teams are among the industry’s best, with a 98 percent drilling success rate. The company has been doing business in Texas since 1990 and has numerous offices throughout Tarrant and Johnson counties, including a corporate office in downtown Fort Worth. 

Leasing 101

What exactly are mineral rights and surface rights?

Surface rights are the rights for use of the surface of the land for residential, agricultural, recreational, commercial or other purposes. Mineral rights are the right of ownership of the mineral resources below the surface. Mineral ownership entitles the owner to explore for, develop and produce the mineral resources. Minerals can be retained, transferred, leased or sold much like surface property. It is possible to own the surface rights to a property (e.g. the land on which your home is built) without owning the mineral rights.When mineral rights are sold separately from the surface property, they are said to be severed. 

Q.  How do I know if I own mineral rights on my property?

Owning a piece of property does not automatically mean you own the mineral rights. There are many cases where the original owner sold the surface rights, but retained the mineral rights. A search of your deed or property title can disclose whether you own your minerals. If your current deed doesn’t specifically discuss minerals, you may need to look back through deeds of previous owners. This is why title searches are necessary to confirm mineral ownership.

What is a mineral lease?

A mineral lease is a binding contract that gives an energy company the right to extract and produce the mineral owner’s natural gas. Typically, the owner of the mineral rights is paid a sum of money (the “bonus”) when such a lease is signed. Then, the mineral owner will receive a recurring payment based on the percentage of a well’s production and on the amount the operating company is paid for the natural gas (the “royalty”).

What’s the difference between leasing and selling my mineral rights?

Leasing is a revenue-sharing arrangement where you share in the proceeds of any minerals produced from your property for as long as the lease is in effect. Selling your minerals is a different transaction: you permanently forfeit all mineral/subsurface rights to the purchaser in exchange for a one-time payment.

How do I begin the process?

Getting started is easy. If you own property in the Barnett Shale, send us an email at AskChesapeake@chk.com with your property address. A representative will contact you soon. Or, if you prefer, click here for a list of Chesapeake Energy authorized leasing agents.

What do I need to know before signing a mineral lease?

There are many factors to consider before and during the leasing process. The main consideration is to discover who will ultimately be producing your minerals, regardless of which company offers you the lease. The operating company is the one that will actually drill and produce your minerals; possibly but not necessarily the same one that offers you the lease. Also consider the reputation and stability of the leasing company, the volume of leases they have generated in this market, the company’s relationship to the mineral producer, and their commitment to the community as demonstrated through corporate contributions or civic service.

What operating company should I look for?

Well-established companies with proven track records and drilling success rates will generally produce a better well, which means more royalty income for you. It’s also important to choose an operator with the financial strength to hire the best people and provide the best equipment, with the durability to maintain the well for the next several decades. There are several excellent operators in the Barnett Shale, but there are also young start-up companies with little expertise or capitalization.

What are the terms of a typical lease agreement?

The basic lease agreement involves an initial bonus payment for signing the lease, royalty percentages to be paid if natural gas minerals are found and extracted from the property, and a time frame within which the energy company has to begin operations. If natural gas production does occur, the lease is in effect for the life of the well, which could be 20 years or more.

Why is my bonus offer different than others in my city?

Bonuses are generally calculated on a per-acre basis, so your lot size may be a factor. Other factors may include availability and cost of a wellsite, proximity to existing pipelines, access to seismic testing, geology of the area, offset production and existing competition.

I want to know more. Is there information I can download to review the leasing process?

Chesapeake Energy has created a leasing brochure that details the leasing process and other important questions you might have. To download a free copy, click here.

What is a bonus?

Commonly, the term bonus refers to the “up-front” money paid to the owner of the mineral rights in consideration for signing an oil and natural gas lease. It is generally calculated on a per-acre basis, sometimes with minimum amounts guaranteed for the lease regardless of lot size.

What is a royalty?

A royalty is a percentage of production, based on the amount the operating company is paid for delivering natural gas to market. Royalty payments start after natural gas is produced and these payments continue for the life of the well — which could be 20 or 30 years.

Are royalty and bonus amounts determined?

Many factors determine the royalty and bonus amounts proposed, including size of your lot, competitive offers in your neighborhood, anticipated geological risks in your area, availability and accessibility of drilling sites, proximity of pipelines and production results in your area.

How and when are they paid out?

Bonus checks are typically paid within 45 business days of signing the lease agreement. Royalty payments begin only if your property is placed in a producing unit — meaning when and if natural gas is actually produced and sold. The time from lease-signing to mineral production can vary from months to years, and is determined by many factors. While the bonus money is attractive because it’s immediate and tangible, generally the royalty income is more substantial because it can last for decades.

I leased my mineral rights. Why did I receive a 1099 form?

Chesapeake properly reports lease bonus payments as Rents in Box 1 of Form 1099–MISC. Lease bonuses are a form of rental payments (paid in advance of drilling) that give us the right to explore for minerals and are received upon the execution of an oil and gas lease.

Why are bonus payments and royalty payments reported differently?

Payments to land owners are considered royalties only after the well begins producing. A lease bonus is not considered a royalty because the payment is made before natural gas production commences and is determined without regard to any possible production. A royalty represents the cash value paid based on a percentage of gross oil and gas production from the property. Royalty payments are reported in Box 2 of Form 1099–MISC.

Most land owners are concerned with the classification of lease bonus payments as royalties, because of the ability to deduct depletion expense on royalty payments. According to the Internal Revenue Code §613A(d)(5), percentage depletion is not allowed on lease bonuses, and the term “gross income from the property” (for the purposes of the depletion calculation) shall not include any lease bonus, advance royalty, or other amount payable without regard to production from the property. Since lease bonus payments are not subject to depletion, it is inappropriate to classify this income as Royalty Income in Box 2 of Form 1099–MISC.

What is a lease broker?

Typically, lease brokers are individuals who work independently or for a lease acquisition company (or lease brokerage firm) on behalf of certain operators. Their job is to acquire mineral leases in a specific geographic area for an E&P company to produce. Brokers may or may not be trained as landmen and may possibly represent more than one E&P company. Be sure to find out which one they represent in your area.

How do I know which operating company a broker represents?

Though you may receive letters from several different brokers claiming to represent the same operating company (such as Chesapeake), the best way to find a legitimate broker connection is to call or visit the operating company’s website for a list of approved brokers.

Division Orders & Revenue

What are Division Orders?

Division orders are documents that verify a mineral owner's interest in a producing well and are sent out after a well has begun producing. The division orders serve as a communication between the mineral owner and natural gas operator verifying:

• legal description of producing property 
• mineral owner net revenue interest in the producing well
• mineral owner Tax ID Number (usually Social Security Number)
• legal agreements (terms of lease)

For more information or a tutorial on division orders, please click on the link below:

American Royalty Council

Frequently Asked Revenue Questions

How do I change my address?

Please notify Chesapeake promptly of any change in your mailing address. This notice must be in writing with your signature or the signature of your appointed agent. Please include your owner number, old address and new address, including the zip code. For your protection, address changes will not be accepted by telephone. Mail changes to:

Chesapeake Energy Corporation
Division Order Department
P.O. Box 18496
Oklahoma City, OK 73154-0496

Can I set up direct deposit?

Chesapeake is now offering an electronic funds transfer (EFT) option for its revenue interest owners. This service is provided for your convenience and is at no additional cost to you. EFT payments are only available for accounts drawn within the United States. If you elect to receive electronic payments, you will no longer receive your payment detail by mail. However, you can access the detail on-line and you can even have this detail emailed to you through this website. Please complete the attached enrollment form, with a voided check, and return to the address provided. If you have any questions about the enrollment process, please contact our Division Order Department at 405.879.9335 or email them at inquiryDO@chk.com

What is the purpose of my "Owner Number?"

You have been assigned an exclusive owner number to distinguish you from Chesapeake's other interest owners. When communicating with Chesapeake, please include your owner number.

Why have I not received my check?

The most common reason is because your account has not reached your minimum pay status. Chesapeake remits revenue to you once your balance exceeds $100 unless you have previously requested (from Chesapeake) to be set up with a $25 minimum pay status. Amounts over $10, but under your minimum pay amount, are paid annually in July.

Occasionally, payments are held due to matters which create uncertainty as to ownership, such as a notice of death, change of address, transfer of property, assignment of interest or legal dispute. Payments due are accumulated and released when the matter affecting ownership has been resolved. Inquiries regarding suspense balances must be communicated in writing to our Division Order Department.

When should I receive my check?

Monthly checks for both oil and gas revenues are mailed by the last business day of the month. If you have not received your check by the 15th of the next month, please call our revenue hotline at (405) 879-9333.

If you would like to know what a revenue check looks like, click here.

What are "stale-dated" Checks?

Our revenue checks are not negotiable after 90 days. If you did not deposit your check within that time frame, we must re-issue the check. Please return the check to our Revenue Department (click here for address and contact information), and we will take the necessary steps to include this amount (with full detail) on your next revenue check.

Why is backup withholding deducted from my revenue check?

A valid Tax Identification Number or Social Security Number must be provided to Chesapeake for reporting and identification purposes. If it is not, the Internal Revenue Service requires withholding of 28 percent of all revenues (30% for foreign residents) until the information is provided.  

For more information regarding Division Orders and Revenue please visit our
Well Owner Relations homepage.

Geology

The Barnett Shale is a 330 million year old geological formation of sedimentary rock that contains natural gas. Experts suggest that it may be the largest onshore natural gas field in North America. The Barnett Shale has already produced 3.4 trillion cubic feet of natural gas with expectations to produce an additional 30 trillion cubic feet. The formation is estimated to stretch across 17-20 counties in north central Texas, covering approximately 5,000 square miles. The major portion of the development, also known as the "sweet spot: of the shale is located in Tarrant County, about a mile underground.

 Natural gas drilling in north central Texas became economically feasible for development in the early 2000s, when advanced drilling and completion techniques were developed. Horizontal drilling enables production companies to tap into natural gas reserves in the Barnett Shale.

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Economic Impact

The 39,000,000,000 b00n for North Texas

When you take a closer look at it, the numbers are staggering. The Barnett Shale is currently the most prolific natural gas field in the nation, sitting on top of a reserve of 39 trillion cubic feet of natural gas. The economic implications for North Texas are profound.

A recession flu shot

While the rest of the U.S. economy struggles with an economic downturn, particularly in the housing and banking sectors, Barnett Shale area communities are largely insulated because of the job growth that natural gas drilling is generating. According to Ben Loughry, DFW managing partner of Integra Realty Resources, “Fort Worth is in an enviable position, because of the continued immigration to the area, which has created a demand in the housing market.”

The economic ripple effects

According to noted author and economic forecaster Dr. Ray Perryman, “The Barnett Shale’s positive ripple effects have been profound. Exploration, drilling and production have added thousands of jobs to local economies and millions of dollars in investment.” This has a ripple effect that enriches residents, cities and school districts by millions of dollars annually in bonus and royalty payments. He adds, “This, in turn, is raising property values and, therefore, property taxes from which county and city governments, schools and other public entities benefit.” Lastly, it is estimated that bonuses and royalties paid to local property owners will approach one billion dollars in the coming year.

How drilling benefits are being reinvested

• The city of Mansfield has funneled a large portion of its royalty money into its park budget
• Fort Worth has earmarked more than $26,000,000 in Barnett Shale revenues to help fund a $435,000,000 flood control project

The Tarrant County Junior College District has pledged more than $3,900,000 in lease signing bonuses toward student scholarships

Perryman notes that that the Shale’s current output of $8.2 billion has spurred more than 83,000 jobs and, looking forward, is expected to account for 108,000 jobs and $10.4 billion in economic output by 2015.

In Tarrant County, natural gas has added 15,000 jobs in the past 12 months,* generating $11,500,000 in revenue and contributing $23,900,000† to local school districts. It has been a direct boon for engineering firms, contractors, trucking companies, CPAs and law firms, not to mention indirectly benefiting the construction, housing, retail, restaurant and entertainment sectors.

To put it in perspective, the Barnett Shale provides roughly three times more jobs to the local economy than American Airlines does.

The economic ripple effect

The Perryman Report, 2007, is an assessment of the ongoing economic benefits to cities and communities from revenue generated by  natural gas exploration and production in the Barnett Shale. Dr. Ray Perryman is a nationally renowned economist and author who conducted the study using information obtained from participating natural gas operators. For the a copy of the report, please click here.

*Fort Worth Star-Telegram
†Perryman Report, 2007

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