High & Dry?

Kalkaska's once-promising natural gas

discovery went from boom to bust overnight. The landowners left in the dust have questions. And they're considering

taking them – and the gas companies they signed with – to court.

KALKASKA – Northern Michigan's landowners are shaking off the collapse of the natural gas bubble last summer and are re-grouping to fight their next battles – perhaps in court.

A number of landowners may soon sue over allegedly broken contracts for mineral rights, preparing to square off against a series of inter-connected gas companies responsible for the leasing. Millions of dollars in leasing bonuses and royalties could be at stake.

"Those bonuses could have been a godsend for a lot of people," says David Petty, a Charlevoix area resident who has organized about 40 property owners for possible legal challenges.

The owners had hoped to profit from the Collinwood shale, a rock layer permeated with natural gas and lying 9,500 feet below their Northern Michigan properties.

In the midst of the boom in mineral-rights leasing last spring and summer, brokers for oil companies signed up hundreds of property owners to lease their mineral rights for hundreds, even thousands, of dollars an acre.

"Some landowners went out and spent the money before they had it," Petty says.

By August, landowners were waking up to a different energy landscape in Northern Michigan.

Norman Groner, supervisor in Excelsior Township in Kalkaska County, says negotiations for a lease on his property fell through as the natural gas rush lost steam. "People got letters saying that everything in effect at that point was null and void."

Chad Anderson, a real estate agent with Coldwell Banker Schmidt in Kalkaska, says a lease on his five acres is up in the air. "Landowners do have rights," he says. "Do I think some oil companies are taking advantage of them? Yes."

Oil companies today are more cautious than they were last spring. If and when leasing resumes on a large scale, the bonuses will be smaller than they were five months ago, observers say. They certainly aren't likely to hit highs of $1,500 or $2,000 an acre again, most agree.

But scores of property owners haven't given up the dream: They are forming grassroots associations to strengthen their hand if and when the next oil company rep knocks on their door.

Joseph Quandt, a Traverse City attorney, says he has nine groups on his client list. "They started banding together in mid- to late June," he says.

"Most of them have consolidated into large blocks for the purposes of leasing," he says. The acreage ranges from 26,000 acres to as few as 2,000.

Owners are also more likely to seek help from attorneys or oil industry experts before signing ease, Quandt says.

"For the most part, people aren't going to sign standard leases anymore," says Quandt. Besides setting lease rates and royalties, the leases can specify where wells can be drilled and how any effects on the environment are handled.

The oil industry brokers may indeed be back at some point, though. Oil companies are still pinning their hopes on the Collingwood shale. Canadian energy giant Encana says it is drilling more test wells to determine its potential.

Kalkaska County remains an epicenter of exploration. It is situated just north of the Encana test well whose up-and-down performance, according to state and oil company officials, first sparked and then helped extinguish the boom.

Most recently Tom Wellman, manager for the minerals and land management of the Department of Natural Resources, says the state issued three test well permits for Kalkaska County, and four more are pending.

"There will have to be a lot of drilling to determine the extent and the productivity of different areas," he says.

Given the slow pace of exploration and the 452,000 acres that will flood the market in a second auction of state land in late October, no one is expecting anything like the bonanza that hit the region last spring and summer.

"We expect that prices per acre will be lower because it seems that some of the bubble has deflated from the original frenzy," Wellman says. "I think it's safe to say that companies are reassessing their position."

One old hand reportedly told a landowner it was "the fastest boom to bust I have ever seen in the oil industry." And some of the oil company tactics after the bust were just as surprising, Petty says.

He himself has worked as a "landman," an agent who acquires mineral rights leases for oil companies, most recently for Sasquatch Exploration LLC in the Gladwin area near Houghton Lake.

But in his seven years in the business, he says he never saw oil companies reject a signed, valid lease. "That's why I was so shocked in my case," he says.

His own lease with Western Land Services of Ludington, was rejected. It called for $650 an acre on his 12 acres. A little-known entity called Northern Michigan Exploration Co. LLC informed Petty of the cancellation – just as it did many other landowners.

Western Land was arranging leases for Traverse City-based O.I.L. Niagara at the height of the boom, says John K. Wilson, Western's CEO. But he says his firm is no longer handling them, and is not responsible for the cancellations. He says he could not reveal who O.I.L. Niagara was representing.

It may take legal action to force that disclosure, says Susan Topp, a Gaylord attorney specializing in natural resources cases.

A spokesman for one of the key players, Oklahoma City-based Chesapeake Energy, could not be reached for comment on its role, if any, in the cancellations. Encana is reportedly honoring leases that were signed and sealed when it began pulling back.

The spokesman confirmed that responsibility for cancellations has been given to Lansing-based Northern Michigan Exploration. This is an entity with ties to Honigman Miller Schwartz and Cohn, one of Michigan's most prestigious law firms.

It shares an address with the law firm's Lansing premises, according to state records. They indicate that its registered agent is John Pirich, a Honigman Miller attorney. He could not be reached for comment for this story

According to Petty, the letters from Northern Michigan Exploration Co. include "no signatures, no phone numbers, and nobody to contact." As reasons for the cancellation, the letters frequently cite the fact that the property in question has a mortgage, is outside of the oil company's target area or missed a deadline for an agreement.

"Those are not legally valid reasons," Topp says. "They are trying to justify what I think is a business decision."

In this view, the leasing brokers ended up in the situation of a home buyer who agreed to buy a $450,000 home before the subprime crisis hit ­ only to see an equivalent home price down the street fall to $250,000 before the ink was dry on the original agreement.

In that case, they might well be tempted to try to extricate themselves the deal. But that option may only be viable if they can afford feel they can prevail in court and can afford a hefty legal bill, landowners say.

"If you or I had signed a contract with a gas company, and we tried to get out of it, we would not have a snowball's chance of success," Petty says