Hydraulic Fracturing Knocking On Illinois' Doorstep

Hydraulic fracturing and natural gas development, well under way in Ohio and Pennsylvania, may soon come to Illinois, the latest state to experience an energy rush.

Brad Richards, vice president of the Illinois Oil and Gas Association, said southern Illinois is in the midst of an oil and natural gas lease boom.

In places like Wayne, Hamilton and Saline counties, there have been tens of millions, perhaps even a hundred million or more spent to acquire these leases, Richards said in a report on WUIS Radio, an NPR affiliate in Springfield, Ill.

The leases are being bought up in the hope that companies could soon start developing shale formations.

The formations are part of a large basin that straddles the Illinois, Kentucky and Indiana borders, said to hold up to 87 trillion cubic feet of natural gas, according to the Gas Research Institute, which funded a 1994 assessment of the region with the Illinois Basin Consortium.

Hydraulic fracturing requires the blasting of underground rock formations with millions of gallons of water, drilling chemicals and sand to fracture rocks and extract oil, or natural gas as they are released.

The extension of fracking into yet another state comes at a time when the price of natural gas has been declining.

Natural gas on the New York Mercantile Exchange fell four cents in Tuesday trading to $2.18 for every 1,000 cubic feet. The price is now at less than half its 52-week high of $5.13.

Despite the low price, Kevin Reimer, a consultant with the Illinois Oil and Gas Association, said oil and natural gas companies are interested in Illinois because they have reason to suspect the natural gas trapped underground is liquid rather than dry. Liquid natural gas remains more expensive than its dry derivative.

As a result, gas drillers expect they could operate profitable businesses with healthy royalty streams.

Reimer said companies on average lease 80 acres at a time. He said he suspects companies have leased in excess of 300,000 acres in the state.

Illinois has three pending pieces of legislation that would require companies to post the volume of water used when fracking and would have companies conduct well integrity tests and address storage of fracking fluids.

Mineral owners in southern Illinois can expect a signing bonus of $350 an acre and royalty rates of nearly 18 percent, the Chicago Tribune reported.

Laura Harmon, a lawyer with the Illinois Farm Bureau, recommended farmers negotiate as a group with natural gas companies to gain better bargaining power. Before any mention of a royalty is made, they need to negotiate an appropriate payment plan for the surface damages as a result of natural gas drilling.

Natural gas lease contracts usually stipulate how long a company can sit on a lease without drilling and producing oil. Mineral owners in the state will need to determine how long they want their minerals tied to a project that could still be years away.

Harmon said a typical lease contract allows oil and natural gas companies two years to start drilling before the lease is voided.

For the time being, new shale plays such as in Illinois are being gobbled up, but some companies are shying away, preferring instead to focus on oil and natural gas liquids that offer a greater return.

Companies like Chesapeake (NYSE: CHK), ConocoPhillips (NYSE: COP) and BG Group in Britain, in the meantime, announced they will be cutting back on their production of dry natural gas in the U.S., lowering the number of drilling rigs until prices start rising.