ROCK SPRINGS, Pa. — “Are there too many zeroes behind that number?”

It’s a question Penn State Cooperative Extension educator Robin Kuleck stopped asking — wondering if that $200,000 natural gas lease she was reviewing was really supposed to read $20,000, or maybe just $2,000 — after she learned the potential income behind natural gas leases in the Keystone State.

That potential is huge; massive Marcellus shale deposits chock full of natural gas pockets cover an eastern swath of Ohio, two-thirds of Pennsylvania and nearly all of West Virginia, giving landowners a chance to cash in big time.

Extension specialists warned farmers at last week’s Ag Progress Days in Rock Springs, Pa., to double- or triple-check a lease before signing, and to manage the income or royalties wisely.

Drilling

Dave Messersmith, an Extension educator from Wayne County, Pa., said landowners are sometimes blown away by the income potential drillers offer and make hasty decisions to sign on the dotted line, but he warns against it.

“Talk to people before you sign. See what the neighbors have heard,” he said.

“And consider that most well pads are 5 acres. You’ll have to have an access road and deal with traffic and noise; how well would you like that?” he said.

See other coverage from Ag Progress Days:

Ag Progress Days: Vegetable oil looks like tractor fuel

Ag Progress Days 2008 in photos

Take time

“People spend a lot of time figuring the terms of the lease and doing research, and you should put the same amount of time into the next important step, managing the income you’ll have wisely,” he added.

Messersmith said he’s heard many stories of farmers getting a huge gas well paycheck in the mail, then not being sure how to spend it or manage it wisely, he said.

Worse yet, he said, are the farmers who spend money they’re promised that never comes, then get stuck with bigger debts and headaches.

“Learn to live with your deal,” Messersmith warns. “You signed [the lease] and even if you hear of the neighbor getting more, it’s a done deal.”

“People spend a lot of time figuring the terms of the lease and doing research, and you should put the same amount of time into the next important step, managing the income you’ll have wisely.”

Dave Messersmith

Penn State Cooperative Extension

Changes

Messersmith said there are many ways a landowner can make money off the natural gas below their property — from a lease, royalty income, pipeline right-of-way, or from related services like providing water and stone.

But he cautions against getting too excited and seeing dollar signs too soon.

“Production may decline 70 percent in the first year, and then another 30 percent the next year,” he warned. “You’ve got to look at the life of the well because your later checks will be much smaller,” he said.

“Plan accordingly,” he recommended. “Don’t build a standard of living off what that first month’s check is.”

Paperwork

Other experts are recommending professional help for landowners faced with the prospect of gas wells on their property.

Extension’s Cathy Bowen said it’s beneficial for a lease owner to form a support team including a certified professional accountant, attorney, insurance agent, and financial planner or adviser.

Bowen said not all of these experts will have experience negotiating natural gas leases or knowing tax implications of owning one, so be sure to seek out one who has that knowledge.

“Don’t be shy. Ask them questions. It’s your money and your life, so get the information you need,” Bowen said.

Uncle Sam

Robin Kuleck said another implication of having a gas well on your property — and a concern that often goes unaddressed until it’s too late — is the possibility your income will climb significantly and put you into a higher tax bracket.

“Every situation is different, depending on whether you have other income, your age and family structure,” Kuleck said.

Kuleck also warned retired landowners that payments may make Social Security payments taxable, so be sure to consult a tax professional.

“Work with them to understand the tax forms and be sure everything is filled out correctly. It’s your money and your signature on the tax form. It’s your responsibility.”