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Chesapeake retreat ends American energy land grab

By Edward McAllister
NEW YORK | Tue Jul 10, 2012 1:21am EDT

(Reuters) – About six years ago, an army of agents hired by energy companies started desperately courting landowners across the United States whose farms and ranches happened to sit atop some of the richest oil and gas deposits in the world. And so began one of the biggest land grabs in recent memory.

Those days are over.

U.S. energy titan Chesapeake Energy is quickly cutting back on an aggressive land-leasing program that in recent years has made it one of America’s largest leaseholders, putting an end to half a decade of frenzied energy wildcatting.

Beset by growing governance and financial problems, and a sharp slump in natural gas prices, the No. 2 U.S. gas driller is reducing by half the ranks of its agents, known in the industry as landmen.

With little evidence that its competitors are taking on the role of leading industry lease-buyer, Chesapeake’s new found frugality is expected to usher in a more sedate period of U.S. land buying, and a sizeable cultural shift for an industry that has been acquiring new acreage at almost any cost.

A surge in drilling into rich shale-gas seams from Pennsylvania to Texas has pushed natural gas prices to 10-year lows, forcing producers, including Chesapeake, to cut output and put the brakes on new wells.

Drilling simply to hold on to leases represents about half of U.S. natural gas output, analysts say, which has helped keep production at record highs despite plummeting prices. Leases held by energy companies tend to last about three years, but will typically remain valid indefinitely if an energy company drills wells and produces fuel on the leased acreage.

It should be fairly easy for drillers to re-hire agents and secure more land when prices recover, according to landmen sources, and production is not expected to be affected immediately. But a lull in leasing could briefly affect production longer term, given that it takes up to six months to secure large tracts of land.

“Chesapeake has always been a bellwether for where the next big play is. It would come, lease large blocks and send a signal to the market,” said Adam Bedard, senior director at Bentek Energy in Colorado. “Without them, the pace of land acquisition might slow.”

In a move to mollify disgruntled shareholders, Chesapeake plans to reduce its use of contracted landmen from 1,300 now to 650 by the end of the year, said Chief Executive Aubrey McClendon, who was stripped of his chairmanship last month after Reuters reported a series of governance missteps.

The reduction, which is expected to help reduce towering debt levels, marks an 80 percent decrease from its peak of 3,400 landmen, McClendon said.

CULL BEGINS

The cull has begun. Over the past month, 225 contracted landmen were cut from Chesapeake jobs, said one Ohio-based landman, who, like most in the close-knit industry, would only speak off the record.

“Chesapeake’s activity level in the Appalachian region is minimal now. It has devastated the (landman) industry,” the source said. “The Chesapeake debacle is one thing, but the rest of the industry shortfall is because a lot of the projects are intertwined with Chesapeake,” he added.

The Oklahoma-based company has become one of the largest leaseholders in the United States, amassing more than 15 million acres of land for drilling or an area about the size of West Virginia.

One mid-sized U.S. brokerage that does lease work for Chesapeake has experienced a 15 percent to 20 percent fall in business over the last 90 days due to a slowdown not just in Chesapeake activity but across the board, a manager for operations at its eastern division told Reuters. About 15 percent of that company’s business comes from Chesapeake, he said.

“We are getting to the point where companies are becoming more cautious – that is what we are seeing,” he said, asking that he not be named.

Other major producers, including Encana Corp, Royal Dutch Shell and Chevron, said they are not planning to materially change their strategy of land acquisition or staffing numbers, suggesting a gap might be left as Chesapeake, long the pioneer in drill leasing, retreats.

“We have not reduced our land staff nor have we made any changes in the way we conduct land operations,” said a spokesman for Encana, one of Chesapeake’s main land-leasing rivals. Encana employs an in-house staff of about 170 workers in its land department. Shell also said it was “not planning any major staffing level changes in our land function for leasing activity.”

THE GLUT

Landmen in the field reckon companies are now well-placed to increase leasing again when they need to, but it could take up to six months between a decision to lease the land and the drilling, potentially creating a lull in activity, sources said.

While a fall in leasing will affect the landmen, it is unlikely to affect gas output for quite some time given the amount of land already leased and the hundreds of wells drilled that have yet to begin producing.

“The huge land grabs in the gas plays are coming to an end,” said one energy hedge fund manager. “Even without more leasing, however, these companies have backlogged a huge inventory of drilling locations.”

The backlog of 3,500 oil and gas wells in the United States is about 1,000 more than usual, according to Randall Collum, a natural gas analyst at Genscape in Houston.

It could take more than a year to exhaust the natural gas portion of that supply as pipelines come online to connect new producing regions, such as in Ohio, to areas of higher demand, he said. Moreover, the reserves accumulated over the last decade are expected to take longer to dwindle away.

That scenario is likely to put a cap on prices in the near term, with or without Chesapeake.

AFTER THE BOOM

When U.S. drillers employed new technologies during the last decade to economically tap oil and gas from shale rock, results showed the potential for a massive revival in waning domestic production.

In 2006 and 2007, companies began rushing to acquire new leases. Geologists pored over maps, in search of the sweetest acreage. Landmen were hired like never before, court houses in energy-rich regions filled with workers quickly securing leases. Rural and depressed areas in Pennsylvania, North Dakota, and Ohio became, by geological coincidence, new target areas for energy companies.

Teams of between 50 and 100 landmen were charged with securing hundreds of thousands of acres in a matter of weeks. Some would knock on landowners’ doors, while others specializing in title work would make the lease legally secure and determine, among other things, who receives royalties on the production.

Chesapeake led the charge, spending billions of dollars a year on speculative leasing, helping to push land prices higher in energy-rich regions. In 2011, it became the lead acreage holder in the Utica formation shale in Ohio with 1.5 million acres, and was the first to publish production figures from new wells there.

After Chesapeake arrived, other majors such as Anadarko and Exxon Mobil quickly followed. Much of the best drilling areas have already been swept up in what is now thought – though not fully proven – to be one of the most promising oil and gas plays in the country.

Now, five years after the boom began, natural gas output is at an all time high. The success has, in many ways, backfired. Prices have dropped so far that companies can barely afford to drill in pure natural gas plays. Chesapeake, the self-proclaimed ‘champion’ of U.S. natural gas, is facing a $10 billion cash-flow shortfall this year, forcing it to rein in spending.

“It will slow down the overall aggressiveness if Chesapeake isn’t out there leading the charge,” said Genscape’s Collum. “But it is all about prices. If prices rise then companies will come back in.”

(Additional reporting by Joshua Schneyer in New York and Anna Driver in Houston; Editing by Leslie Gevirtz)

Colombia: ‘Carbon credit’ scheme a cover for land grab

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Sunday, March 4, 2012
By James Bargent

When the paramilitaries of the United Self-Defense Forces of Colombia (AUC) arrived in San Onofre in northern Colombia in the late 1990s, they came after dark, dragging people from their homes and disappearing into the night.

Soon, they did not need the cover of darkness. People were executed in public plazas in broad daylight. Women and young girls were openly raped and abused.

Since the demobilisation of the local AUC bloc in 2005, 42 mass graves have been discovered in the municipality. Locals say about 3000 people disappeared ands tens of thousands fled their homes and abandoned their land to escape what one survivor called a region of “concentration camps”.

Seven years on from the AUC demobilisation, San Onofre is now the site of thousands of hectares of teak trees belonging to one of Colombia’s five biggest companies, Argos S.A.

In February last year, Argos’ commercial monocrop plantation was approved for the United Nations’ Clean Development Mechanism (CDM) carbon trading scheme. This means it can sell carbon credits to industrialised countries trying to meet Kyoto Protocol emission reduction targets.

The company says the plantation will capture 37,000 tones of CO2 a year for 25 years – worth about $12.5 million in the current carbon market. It also plans to use another teak plantation in the nearby municipalities of El Carmen and Ovejas for the CDM.

Argos claims the teak plantation is helping fight climate change and contributing to the sustainable development of a conflict scarred region, but the project has proved controversial.

Survivors from the paramilitary era and land restitution campaigners claim the plantation and its CDM status is not only an attempt to cash in on the lucrative carbon credits market, but also legitimise a mass land grab that followed paramilitary violence, and prevent land restitution to a displaced population.

The municipalities of San Onofre, El Carmen and Ovejas are in the Caribbean region Montes de Maria. A heavy guerilla presence in the area led to the creation of AUC bloc, the “Heroes of Montes de Maria” in 1997. The paramilitaries soon gained complete social and economic control of the region by murdering, torturing and displacing local farmers with the support of local state security forces.

Between 1995 and 2005, 54 massacres were reported in the three municipalities of San Onofre, Ovejas and El Carmen and, says government agency Accion Social, 117,097 people have been displaced there since the paramilitaries first arrived.

The AUC era ended with demobilisation in 2005. However, in 2008 El Espectacor reported a new invasion, of “strange personalities” in bulletproof Hummers.

A land grab ensued, in which desperate, indebted or frightened people were pressured into selling property. Abandoned land was snapped up by speculators.

Next came big business. What had previously been an area of smallholder and subsistence farming rapidly became dominated by large-scale agro-industrial enterprises ― dairy, timber, African palm and teak.

As the land became more concentrated in fewer hands, the landscape of Montes de Maria began to change. Most of Montes de Maria is now owned by just a handful of large businesses, among them Argos, which owns an estimated 12,500 hectares.

Argos claims it bought its land in San Onofre directly from the owners in 2005, after the paramilitaries had left. However, the CDM validation report indicates it first bought land in 2003 and continued to do so until 2008.

Camilo Abello, the vice-president of corporate affairs at Argos, claims the company entered “a completely peaceful zone. The Argos representative who made the purchases was able to go into the zone because there were no paramilitaries, there was no violence.”

“Juan Carlos”, a San Onofre local whose family sold their land to Argos, disagrees.

Juan Carlos’ family owned land close to the El Palmar ranch, headquarters of the infamous local AUC leader known as “Cadena” and site of a mass grave containing 72 tortured and mutilated bodies.

“We had to sell the land because we were in an unbearable situation,” he said, “Our lives were in danger.”

Juan Carlos said his family had to ask Cadena permission to sell to Argos. He said that although he knew of no formal contact between the AUC and Argos, paramilitaries visited the farm while the Argos representative was measuring the land.

Government statistics show that nearly 2000 people were forcibly displaced in San Onofre in 2005, more than in the previous two years. More than 1000 people were also displaced in 2006 and again in 2007.

Murder and displacement rates have dropped sharply since, but government risk reports on San Onofre show a renewed and growing paramilitary presence in the area.

In El Carmen de Bolivar and Ovejas, Argos bought land from the speculators who flooded the region in the wake of the paramilitaries.

One of the main sources was a group of powerful businesspeople and ranchers called the Amigos de Montes de Maria. Locals say they pressured campesinos into selling their land and evicted families from land bought for agro-industrial projects.

Testimonies collected for two NGO reports said that in at least one case Argos bought land acquired by Amigos de Montes de Maria from demobilised AUC members who had displaced its owners.

Residents also report how one alleged demobilised AUC member, Silvio Flores, went to work for the company after it bought the land he managed on behalf of a member of the group. Locals claim Flores then began pressuring other campesinos to sell; abusing and threatening them, killing their animals and burning down houses.

In the report, residents of Ovejas also describe being threatened by heavily armed camouflaged men who claimed to be the company’s security.

Argos denies any involvement in pressuring people to sell or buying from displaced people. “What we did was buy from people who wanted to sell,” said Camilo Abello, “without any coercion or pressure”.

Abello also denied any links to paramilitary groups and claimed the company does not use any type of security at the plantations. According to Abello, the company is helping the region by creating jobs.

“We don’t think that we are taking advantage, on the contrary we are supporting the reconstruction of the fabric of society, we are investing in a post-conflict zone,” he said.

The issue of land ownership in Montes de Maria has been complicated further by Colombian President Juan Manuel Santos’ new flagship policy ― the Victims and Land Restitution Law.

The law is designed to address the desperate plight of the estimated 3-5 million Colombians forced from their lands into city slums and squatter camps by conflict and violence. Its main focus is the restitution of lands to the displaced.

Critics of Argos claim the company is using the teak plantations and their CDM status to ward off the danger of losing their lands because of the Victims Law. If Argos faces claims on its Montes de Maria land, it can retain the plantations by exploiting a loophole in the restitution process.

The Victims Law says land will not be taken from companies that are using it for agro-industrial enterprises if the company can prove it bought the land in good faith. Instead, the authorities will try to negotiate a financial agreement between company and claimant.

Colombian Congressperson Ivan Cepeda campaigns on land rights and has raised the issue of Montes de Maria land grabs to Congress.

“The operation [Argos] has done in Montes de Maria is a clear example of how the government’s proposed restitution with the Victims Laws is going to work,” he said. “All of this is a big, sophisticated operation to legalize the lands they have robbed from the campesinos.”

Cepeda is scathing of Argos’ claims to have acted in good faith when it bought the lands.

“[Paramilitary violence] did not happen in isolation,” he said. “It is a fact of public knowledge and frankly it is illogical and incomprehensible that these businesses did not know which land they were dealing with and who had lived on that land.”

He added: “[Argos’ project is] a business that it is presenting as clean when in reality it is a business drenched in blood ― the blood of campesinos that were the victims of massacres.”

The company itself says it welcomes the Victims Law and would cooperate fully with any claims on land owned by the company.

In October, Cepeda wrote to UN Secretary General Ban Ki-Moon urging him to expel Argos from the CDM program and enforce the UN Global Compact, which commits associated companies to human rights, labour, environment and anti-corruption principles.

Ban did not publicly respond, but the CDM board chair Martin Hession said responsibility for the matter lay with the Colombian government.

“Primarily, it is for (them) to resolve issues like this as they certified the sustainable development of the project,” he said in an interview with Point Carbon News.

A spokesperson for the Colombian Ministry of Environment and Sustainable Development said, “Only the CDM Executive Board can take this decision [to remove Argos’ approval].”

Compared with the horrors of the turn of the century, life for the campesinos of Montes de Maria is quiet. But with growing tensions over landownership and the resurgence of paramilitarism, violence and conflict still lurk beneath the surface.

“We believe that it is not going to stay calm,” said “Andres”, a campesino from Ovejas.

“It is going to continue, we are going to see deaths here, we are going to see pressure, we are going to see evictions and displacement because they are going to try to reclaim the land like a debt and we are not going to let them.”

[The names of the campesinos interviewed for this article have been changed to protect their identities.]

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