Barry County eyed in DNR oil gas lease auction May 8

May 6, 2012
| By Pete Daly |
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The state of Michigan’s biannual oil and gas lease auction Tuesday in Lansing will feature thousands of parcels in 23 counties, with the most attention being focused on the 211 in Barry County. Some of those may be of interest to oil production companies, but the auction is also a focus of environmentalists who are not happy with the prospect of drilling in the Gun Lake/Yankee Springs area.

There also may be economic pressure: The May and October oil/gas lease auctions have lately generated significant revenue for the state of Michigan, with the May 2010 auction netting $178 million in bonus payments. The previous auction record of $23.6 million was set back in 1981.

Grand Rapids-based Wolverine Gas & Oil Corp., which is widely known in the U.S. petroleum industry for its spectacular oil strike in Utah in 2003, will send representatives to the auction, although CEO Sid Jansma Jr. said he doesn’t think there is any more interest than normal in this auction.

When asked if he was eyeing any specific parcels up for auction, he replied, “Could be. Otherwise, I wouldn’t have the guys go there.”

He said Wolverine goes to the auctions “because we’re interested in some pieces, and we may or may not be able to buy them because they may go for more expense than we can afford to pay.”

“I’m sure there are one or two companies that are interested in that area and that’s why it gets put up (for auction),” he said.

Jansma was referring to the “nomination” process. The general public — including drilling companies — can “nominate” state-owned parcels for the lease auction, and the DNR may add them after determining that the state legally owns the mineral rights and there are no other issues.

However, the state may list a parcel as non-development-only. That means nothing may be done on the surface, so a drilling company that buys that lease must drill from a nearby piece of privately owned property, with the drill making a turn underground to enter the suspected oil or gas formation horizontally.

All of the parcels in Barry County are non-development leases.

Any drilling being contemplated in Michigan now is for oil, because the price of natural gas at the wellhead is only about $2.30 per thousand cubic feet. Jansma said it was $12 a few years ago, and at $2.30, “you can’t afford to drill wells at that price.”

Of course, world oil prices have gone in the opposite direction, and Jansma said Wolverine will be drilling an oil well near Albion later this year.

RefineryNews.com reported in March that there is a resurgence in oil drilling in Michigan’s southern tier of counties. In 2006, new technologies allowed drilling companies working in old oil fields in Calhoun County to find more oil there. The Albion-Scipio rock formation in Calhoun and Hillsdale counties yielded more than 125 million barrels from the 1950s to the 1970s.

Tom Hoane, a geology specialist in the Mineral Management Division of the Michigan DNR, said there is concern by some citizens in Barry County that the hydraulic fracturing — “fracking” — technology used in wells drilled recently in the northern Lower Peninsula might be used in Barry County, too, “but it’s unlikely that will happen.”

Mike Shelton, a geologist at the Michigan DEQ office in Kalamazoo, said the geologic formations under the Barry County parcels are not suitable for hydraulic fracturing.

Shelton said the fact that the Barry County parcels are non-development may also make them less attractive to drilling companies because of the added expense of having to make a deal with a nearby private land owner in order to drill.

Shelton said a couple of drilling companies that have worked recently in Barry County are “really baffled” that the Barry County parcels were even nominated for the auction. He also mentioned that drilling companies have told him that some drillers will nominate parcels in order to draw attention away from other areas. He said there have been auctions in the past with “lots of land nominated … and then no one even bids on it.”

According to Hoane, attendees at the all-day auction at Constitution Hall in Lansing are generally representing a dozen or more oil and gas production companies.

Jansma said a big out-of-state drilling company had come into Michigan and began buying up mineral rights leases in the northern Lower Peninsula, which got people excited and seemed to lead to the big bidding at the May 2010 auction.

“It was a function of how excited people get,” he said. “And people were stupid to bid the prices up as high as they did. In my opinion, the company that did all the bidding was not well-advised to do it.”

Jansma said one major hurdle in drilling exploratory wells for oil and gas is the fact that the capital can’t be borrowed. He said drillers generally have their own cash reserves and also know other companies that may be willing to put up some cash.

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