About Air and Water

Sunday, August 12, 2007

Boom or Fizzle

By JEFF MOSIER - The Dallas Morning News - Sunday, August 12, 2007

Barnett Shale natural gas has made boomtowns out of many places in North Texas. But for some, a bust might be on the way.

The exponential growth of drilling in the massive gas field has made millions for local governments. However, the dramatic increase in tax rolls has eased in some early exploration hot spots and reversed in others, thanks to lower natural gas prices last year and migration of new drilling southward.

Denton County's mineral values dropped by about $1 billion this year, and Wise County lost $190 million in value. Both were on the leading edge of the Barnett Shale boom.

The mineral values in Tarrant County grew slightly, but the two school districts with the highest mineral values saw their numbers slide.

"It's great to have this value," said John Marshall, Tarrant County's chief appraiser. "But I've warned them [local governments] that counting on this being steady every year is not a good idea."

Tarrant County's mineral values are up 18 percent in 2007, which is a trickle after nearly doubling in each of the two previous years. Mr. Marshall said Tarrant County's mineral values will eventually peak and possibly drop steeply like in Denton County – although no one can predict how quickly.

The early signs of a decline are already here.

The mineral values of the Eagle Mountain-Saginaw school district in northwest Tarrant County – where the county's early drilling started – dropped by nearly 9 percent. And Northwest Independent School District in Denton County, which has more than $2 billion in mineral values, saw an even sharper decline.

An 11 percent drop in the average natural gas price in 2006 contributed to the slump, but it's also the result of more drilling moving toward southern Tarrant County and Johnson and Parker counties.

Some companies have even started exploring in Dallas County. Since December, permits for 22 wells in Dallas County have been approved by the Texas Railroad Commission. Wells have been cleared in Dallas, Grand Prairie and Irving as well as areas in Dallas/Fort Worth International Airport and just north of Waxahachie.

Budget concerns

A slowdown won't make a critical difference at budget time for many cities and school districts – most of which count mineral values as less than 2 percent of their total tax base.

For others, this could be a bigger problem.

Krum ISD Superintendent Troy Hamm said his Denton County district was classified as poor just six years ago.

Since then, the property values skyrocketed from $182 million to $723 million – a majority of that from gas. Mineral values now make up nearly half the district's tax rolls.

Recently, Mr. Hamm received a letter from the Texas Education Agency naming Krum a property-wealthy district that must share revenue with poorer districts.

"How long we can maintain it, I don't know," Mr. Hamm said.

Mr. Hamm said the new gas well money has helped boost teacher pay to a competitive level and eased the cost of a bond package that included an early childhood center and fine arts auditorium at the high school.

At the same time, his district's mineral wealth – down 8 percent this year – might have peaked. The drop was offset by new strip malls and subdivisions filled with starter homes, but that gave the district a slim 4 percent growth in its tax base.

Mr. Hamm said the 1,400-student district hasn't spent its entire windfall. Krum ISD expects to have about $6 million in reserves, which is enough to operate for about six months and perhaps cushion its finances against the volatile mineral values.

"We've been cognizant of the fact that this well will run dry soon, if you'll pardon the pun," Mr. Hamm said.


Natural cycle

The mineral values in booming areas tend to have a sharp incline and then a sharp decline just because of the nature of the calculation.

The mineral values are calculated only when a well starts producing, but then reserves are depleted every day. If prices remain steady, the values rise only if the number of new wells drilled outpaces the declining value of the existing ones.

Gas wells in the Barnett Shale tend to be very productive during the first year of operation, so the decline in mineral values for an active well is particularly steep. Vic Henderson, engineering services manager at Pritchard & Abbott Inc., which estimates the mineral values for local appraisal districts, said it's common for production to drop by 50 percent or 60 percent by the end of the first year.

The wells are projected to keep producing for at least 12 to 15 years, although Mr. Henderson believes they could pump natural gas out of the Barnett Shale for even longer.

Julie Wilson, a spokeswoman for the Chesapeake Energy Corp., said her company has plans for new wells at least through 2013, although that could change with technological advances or more restrictive city ordinances.

Gas wealth hasn't made a difference for every school district with wells. Janice Cooper, superintendent of the Lake Worth school district, said she hasn't seen much of an upside.

"We do nothing but go backwards," she said. "As our appraised values go up, the state sends us less money."

Dr. Cooper said the boost from drilling in the Barnett Shale has been offset in her district by the educational funding formula set in Austin. Mineral values make up more than 38 percent of the district's tax rolls.

Now, mineral wealth in the Lake Worth district is starting to drop slightly – 15 percent this year. Dr. Cooper said she hopes that as the values decrease, that will lead to an increase in state funding and keep the district's finances steady.

"I hate to say that things could get worse because I know they can, but I don't anticipate that will be the case," she said.

A different view

Not everyone is expecting a quick increase and quick decline when it comes to mineral values.

Mickey Hand, chief appraiser for Wise County, said his decline in mineral values mostly comes from the drop in natural gas prices. He also said that drillers have shifted their focus to more suburban areas. Drilling is generally prohibited within 300 feet of homes – although that can increase to 1,000 feet depending on the city ordinance – so many energy companies are trying to get wells in place ahead of subdivisions.

"They are not in as quite a hurry here," Mr. Hand said about his still mostly rural county.

But he said he expected the gas companies to return soon and focus more on Wise County when the suburban and urban areas are tapped out.

In the Denton County town of DISH, mineral values make up two-thirds of the tax base.

Mayor Calvin Tillman said the 25 percent drop in mineral values this year will cut deeply into his finances. The town will lose about $10,000 from an $80,000 budget.

Luckily, Mr. Tillman said, the town has $20,000 in reserves to possibly hold it over until an 80-home subdivision starts selling. The town also intends to annex more land.

"I think we're going to be OK," he said. "We've made it a priority to replace the gas money."
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