“Typical” Michigan Oil and Gas Lease Auction Casts Doubt on Collingwood Shale Formation

Earlier auction that set state records prompted projections of a new natural gas boom.

Five months after the richest auction of state-owned oil and gas mineral rights in Michigan history prompted sweeping predictions of a natural gas bonanza, a second state mineral auction late last month produced a comparatively subdued response from energy developers.

Photo © Heather Rousseau / Circle of Blue

Arnie Workman and Mike Rudolph were among the 400 people who jammed Reed City’s Church of the Nazarene for a meeting on oil and gas leasing on Friday, July 23, 2010. At the top of the list of concerns: how to lease their minerals effective and learning more about the potential environmental risks of developing Michigan’s Collingwood Shale.

The auction’s results quelled speculation about the size of the natural gas reserve in Michigan’s Collingwood Shale.

The mineral right sale, which occurred from Oct. 25 to Oct. 27, raised just $10 million on the lease of 273,000 acres, or less than $40 per acre. A total of 450,000 acres had been offered for lease, which was much more land than the state typically offers.

In contrast, on May 4 energy developers spent $178 million for the rights to drill — nearly as much as Michigan had earned in its past 81 years of state mineral auctions combined. Bidders paid an average of $1,507 per acre for 118,000 acres across 22 counties, with one lease in Charlevoix County going for $5,500 per acre.

Much of the interest in the May sale was due to a Missaukee County test well drilled into the Collingwood Shale, a two-mile-deep geological formation rich in natural gas that undergirds much of northern Lower Michigan. Known as the Pioneer well, the Missaukee well is owned by the Encana Corporation — Canada’s largest natural gas developer. The well produced an average of 2.5 million cubic feet of natural gas a day for 30 days, making it the most prolific single source of natural gas in Michigan. While production then dropped to 800,000 cubic feet per day, the output is still significant for a Michigan gas well.

The interest also ignited concerns that the Collingwood Shale play could put Michigan’s environment and natural resources at risk. The hydraulic fracturing, or “fracking,” used to break up the shale and release the gas in the formation involves injecting millions of gallons of water and a cocktail of chemicals into the ground, and disposing of the contaminated water that results.

Other states have reported problems with fracking, with communities in Wyoming and Pennsylvania reporting incidences of water contamination and methane mixed with drinking water in shale gas development areas and New York instituting a moratorium on further development pending further research by state authorities.

Michigan officials told Circle of Blue that the state has some of the toughest regulations in the country for overseeing oil and gas development.

Mary Dettloff, spokeswoman for the Michigan Department of Natural Resources and Environment, told Circle of Blue that October’s “fairly typical auction” does not mean that interest in the Collingwood formation has peaked.

“We know that there’s still interest in it, given the enormous natural gas capacity in the state,” Dettloff said. “I think we will have to wait a few more auctions to see if a trend emerges.”

On the eve of the October auction, some were still predicting that the surge in interest would continue. The Muskgon Chronicle reported while the auction was underway that it could eclipse the size of the May auction.

But Interlochen Public Radio reported the day before the auction that interest in the Collingwood formation seemed to have cooled off since May. One geologist had questioned the commercial viability of the Encana well, and reports were circulating that oil and gas companies had stopped leasing mineral rights from private property owners, IPR reporter Bob Allen said. A state official speculated to Allen that the oil and gas company moves could be part of a strategy to dampen interest in the formation and lower the prices that the companies had to pay.

“It could be just a strategy, or it could be an indication that this is already over before it started,” Allen said.

Sources: Detroit News, Interlochen Public Radio, Muskegon Chronicle