The ripple effect of falling gas prices

Posted Saturday, Mar. 02, 2013  comments  Print Reprints
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The Arlington Tomorrow Foundation, created by the city in 2007 to handle a rush of natural gas-related money, has grown to $96 million as of the end of 2012, including the roughly $9 million added last year.

The foundation knows what it wants to do with the money: Make grants to city departments and local charities to improve life for Arlington residents, Executive Director Carolyn Mentesana said.

What's harder to know is how much bigger the foundation's nest egg will grow, or how fast.

Low natural gas prices the past few years have meant declining tax revenues for area cities, school districts and other taxing entities. Experts say the Barnett Shale probably reached its peak production of just over 6 billion cubic feet a day in 2011, so future royalty payments will be likely tied to prices and shrinking, not growing, production.

That lends support to decisions by Arlington and others to treat the boom as a windfall for long-term investment.

In 2012, natural gas futures prices averaged $2.83 per million Btu, which is roughly 1,000 cubic feet. That was the lowest since 1999, when futures prices averaged $2.32, and was down about 30 percent from 2011.

So far in 2013, the average is $3.33; the price Friday was $3.50.

Exhibit A for that decline is Dallas/Fort Worth Airport, which signed a huge lease in 2006 with Chesapeake Energy, which has since become Tarrant County's largest gas producer. But the airport's royalties fell from $35.1 million in 2008 to $5.2 million last year.

John Terrell, vice president of commercial development at DFW Airport, said the price of gas from the airport's 102 wells averaged just $2.07 per 1,000 cubic feet last year, including a low of $1.30 per 1,000 cubic feet.

The impact of lower prices is evident in the revenue flowing to area taxing authorities, such as cities and school districts. All these figures are for fiscal 2012, which ended Sept. 30.

Fort Worth's natural gas revenues fell 37 percent to $23.1 million.

The Tarrant Regional Water District's oil and gas revenues fell 25 percent, to nearly $21 million.

Arlington nearly bucked the general decline, as its revenues from natural gas dipped less than 3 percent, to $19.1 million.

Cities and tax authorities also receive ad valorem, or property, taxes. Because those also depend on prices, property tax collections are also down.

The appraised value of oil and gas production in Tarrant County, on which ad valorem taxes are based, fell 22 percent, said Lonnie Richardson, director of business, personal property, utilities and minerals for the Tarrant Appraisal District. He said the net taxable value of well sites declined in 2012 to $3.6 billion from $4.6 billion in 2011.

As a rule of thumb, he said, combined taxes for city, county, school districts and other taxing authorities generally total about 2.5 percent of the taxable value of property.

Using that guide, "you'd get about $90 million in tax revenue," he said. The estimate in 2011 was $113 million.

Julie Wilson, Chesapeake's vice president of urban development, said the Oklahoma City producer paid $31 million last year in ad valorem taxes in the Barnett Shale. "The vast majority was to cities and ISDs in Tarrant and Johnson counties," Wilson said.

She said the company doesn't have a count for its royalty payments to cities and schools but said, "We paid just over $176.8 million in royalties to Barnett mineral owners in 2012."

2008: The

good old days

As welcome as those millions in extra tax revenue are, it's clear that 2008 likely represented the peak for local taxing entities in natural gas-related income.

The leasing boom that swept through Tarrant County in particular pushed mineral rights signing bonuses to unheard-of values, swelling public coffers and private wallets alike. (Production had been established before then around Tarrant, starting in Wise County with the Barnett's initial discovery and development, and moving into Johnson, Denton and Parker counties.)

The sharpest example of 2008's bounty is again DFW Airport, whose blockbuster lease with Chesapeake brought in $10,000 an acre. The 18,000-acre airport ultimately booked $185.2 million in bonus payments, half in 2007 and half in 2008.

With 2008's royalty payments and other land use fees, plus the bonus money, the airport earned $131.9 million from natural gas that year. By last year, the total had dropped to $8.7 million, down 57 percent from $20.1 million in fiscal 2011. The airport also received $5 million from Chesapeake last year as part of a settlement of a legal dispute over past royalty calculations.

For 2013, the airport's capital budget anticipates natural gas royalties of $7.3 million, Terrell said, plus whatever land use fees arise. In past years those fees have ranged from about $2 million to $4 million.

Rather than the 300-plus wells Chesapeake planned to drill when the lease was announced, it has drilled 102, Terrell said, the last one in 2009. And last month it asked the airport for permission to delay by a year the six wells it was contractually bound to drill in 2013 and the eight it was to drill in 2014.

The airport approved that request, as did the Dallas City Council. It now awaits an OK by the Fort Worth council, Wilson said.

Building a stash

As disappointing as the airport's recent royalties have been, Terrell pointed out that it has earned a total of nearly $290 million from natural gas production.

It spent $40 million to $50 million right away on upgrades to passenger services like restrooms, seating and television displays, airport spokesman David Magana said.

Other money is going into capital projects like its ongoing $1.9 billion terminal improvement.

"It lowers the amount we have to borrow," Terrell said.

The cities of Arlington and Fort Worth have likewise earmarked sizable portions of their revenues for long-lasting expenses rather than operations.

For example, the Arlington Tomorrow Foundation gets 90 percent of the city's lease bonuses and 50 percent of its royalties, said Roger Venables, assistant director of community development and planning. The foundation has made 276 grants totaling $7.6 million, said Mentesana, its director.

The remaining revenue stays with the city "in support of capital maintenance and improvement projects," Venables said.

The city of Fort Worth has a similar arrangement.

"Since gas revenues are an unpredictable, market-driven and declining resource over time, the city has chosen to dedicate the revenues to capital projects and a trust," Fort Worth city spokesman Bill Begley said in an email. As of Sept. 30, the city had taken in $186 million through its gas lease program, made appropriations of $99.6 million, and held $75.6 million after other fees and interest.

That $186 million is just over a quarter of the city's 25-year estimate of gas-related bonuses and royalties of $697.5 million, a figure that was reduced last year from $1 billion.

Begley said the city hasn't changed its projected revenue number since.

Jim Fuquay,

817-390-7552

Twitter: @jimfuquay

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