March 2019
http://www.canadacreekranch.com
President’s Message: March 2019
In February Riverside Energy, one of three companies operating
natural gas wells on Ranch property, notified the Board of their
intention to close and plug the 19 wells they operate. Their
notice stated that continued operation would be uneconomical.
In accordance with our contract with them, the Board has until
mid-May, 2019, to determine the best way forward for the Ranch
and communicate that decision to Riverside Energy. It is
Riverside’s intention to begin closing and plugging their wells
shortly after that deadline has passed.
This month’s message will highlight a bit of the history and
impact of natural gas extraction on the Ranch and mention the
options the Board will be considering. Once the Board reaches
a decision the details and our rationale will be explained in a
future President’s Message.
As a disclaimer, I am not an expert in either the history or the
operation of the Ranch’s gas wells. Other members may have
more detail to offer; but my purpose here is simply to put this
development into the broader perspective of our Club’s
circumstances and interests.
As early as July, 1998, the Board of Directors authorized
agreements allowing several companies to explore and extract
natural gas from under the lands owned by the Club.
Agreements to allow additional gas wells were authorized in
2006, and the last of our wells was drilled in 2008. The Ranch
received some up-front money and periodic royalty payments
based on the volume of gas extracted and the market price of
that gas. In total, 49 wells of these wells are still operating. From
an environmental perspective, the wells and associated
transportation pipelines were installed with approval and
oversight from the Michigan Department of Environmental
Quality (MDEQ).
In 2002, Members approved the creation of the Resource Fund
designed to receive these royalty payments, invest them for
growth, and use them for “extraordinary expenses” described
in Article IV, Section 4 of our By-Laws. Sometime later, to hold
Dues to a minimum, the Members voted to divert 20% of the
natural gas royalties to the Operating Fund and another 60% of
those royalties to the Capital Fund – leaving 20% of the royalties
in the Resource Fund to be invested and grow over time.
Additionally, 50% of the annual investment earnings of the
Resource Fund were approved for transfer to the Capital Fund.
As the wells came online their output volumes increased, the
unit price for natural gas rose, and the royalty revenue increased.
It reached a peak in 2008, in which year the Resource Fund took
in royalties of $346,370 or about $173 per membership.
Since that time both volumes extracted and the unit price of
natural gas have dropped significantly. The combination of
decreasing volumes and lower unit prices have reduced the
royalty revenue to a small fraction of what it was at its peak (see
multi-year chart on page 8). In 2018, total natural gas royalties
amounted to only $40,904 – or about $20 per membership. The
19 wells Riverside operates accounted for $14,491 of that revenue,
or about $7 per membership.
To recap, Riverside Energy has decided it can no longer
profitably operate its 19 wells on CCR. The remaining wells are
operated by Enervest (29 wells) and Lambda (1 well). To date,
we’ve heard nothing from these companies about their intention
to close the wells they operate.
The Board is faced with options that include: CCR taking over
the operation of Riverside’s wells; negotiating the sale of
Riverside’s wells to another operator; or allowing Riverside to
close and plug their 19 wells. If these wells are closed and
plugged, the MDEQ will again be providing appropriate
approvals and oversight – all to ensure the protection of our
lands and waters.
Our General Manager continues to explore these options and
will be making recommendations to the Board well in advance
of the May deadline.
The best days of receiving royalty income from our gas wells
are behind us. It is unlikely unit prices for natural gas will
rebound to anywhere near the historic highs of the mid-2000’s.
The remaining wells are aging and their output volumes
continue to decline.
The decline in output volumes and unit prices have resulted in
total natural gas revenues that pale by comparison to those of
only a few years ago. Yet demands on our Operating Fund and
Capital Fund continue despite the reduction in natural gas
revenue. The Board and Management continue to assess
spending demands and securing adequate revenue to meet
those demands with two goals clearly in mind: 1) ensuring the
Ranch continues to offer excellent member experiences, and 2)
prioritizing our use of financial resources so those experiences
continue to be delivered now and long into the future.
With the Members’ understanding and support I am confident
in our ability to successively navigate these challenges.
As always, I invite your questions or comments on these
messages.
Respectfully,
Ray Karbon