More Money, More Problems: The real cost of the Kalkaska natural gas war could be local drill operations.

KALKASKA – May 4, 2010, the most extraordinary day in the history of oil and gas development in the State of Michigan, was a downer for local exploration companies. For the most part, Michigan companies – many of which are based in Traverse City – sat on the sidelines while a few out-of-state companies spent astonishing amounts of money speculating on natural gas thought to be trapped deep underground Kalkaska's sandy soil.

In the past, the price to lease the rights to take oil and gas from beneath an acre of land topped out at a couple hundred dollars. During the Lansing event where swaths of Kalkaskan land went on the auction block, some acres were going for thousands of dollars.

The worst may not be over; the sky-high speculative pricing might have driven up the cost of doing business in northern Michigan for the foreseeable future.

"This is not a good day for us," says Benjamin Brower, vice-president of Jordan Exploration in Traverse City, the day after the speculation frenzy. "It's been a what-are-we-going-to-do kind of a day."

It's hard to overstate the magnitude of what happened in Lansing that Tuesday. In the course of a single auction, the state made about as much money leasing out its oil and gas rights as it has since it began selling mineral rights. The exuberance was fueled by speculation about natural gas reserves in a layer of the earth that, in Michigan, had never been developed until earlier this year when a test well went in near Lake City.

The discovery of large amounts of accessible gas would be welcome news in Michigan. Natural gas is the one fossil fuel produced in any significant volume in the Great Lakes State.

In the late 80s and 90s, thousands of wells were drilled into a shallow formation known as the Antrim Shale, and it became one of the larger sources of gas in the United States. But the pressure in those wells will eventually wind down, and the 1,400 people working in oil and gas in northern Michigan would be glad to find new formations to exploit.

Bill Rolinksi with R and B Resources in Gaylord says this new wave of natural gas development – into a layer known as either Collingsworth or Utica – will be different from the Antrim in a couple of ways: fewer wells will be needed, but each will be much more expensive to drill than with past wells. A well into the Collingsworth costs millions of dollars; Antrim wells cost a couple hundred thousand dollars.

Rolinski says Michigan companies will have a hard time competing with the war chests of major oil and gas developers who are buying up all the leases: "You're talking about billions of dollars of capital available and very few Michigan companies have access to that kind of money."

But some oil and gas explorers are skeptical about the return likely on any investment. They contend that one well proves little, and that in the past, dozens of wells would have to be drilled into new formations before the price of leases shot up. (And they never shot up like this.)

So what's driving this high-priced gas rush? Big pressure and big money. Skeptics say large oil and gas companies are under immense pressure to find new resources, and they have the ability to spend large amounts of money on even the smallest chance of a big payback.

"I think it's a Wall Street type play," says Benjamin Brower of Jordan Exploration.

Regardless of what caused the bidding war, local oil and gas companies will now have to pay more to lease mineral rights from private landowners. They say the value of oil and gas rights was skewed so badly in that one-day bidding war that problems for the foreseeable future are imminent.

"This acreage could have been leased a year ago for $10 an acre," says Bob Mannes, owner of CORE Energy in Traverse City. "It might be worth $5 dollars an acre or it might be worth $5,000. You just don't know." BN