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SUMMARY AIRPORT PARTICIPATION IN OIL AND GAS DEVELOPMENT This synthesis explores oil and gas development on or near airports from four different perspectives: (1) the regulatory perspective; (2) the airport business perspective; (3) the operational and safety perspective; and (4) direct airport experiences in recruiting quali- fied operators, crafting leases, managing exploration and extraction programs, and han- dling volatility in revenue streams from rents and royalty payments. While oil and gas extraction has occurred for many years, the period following the tragic events of September 11, 2001, saw a convergence of multiple catalysts to inspire an energy boom. These catalysts included the following: ⢠A national will to make the United States energy-independent ⢠Rising prices in both oil and gas that made more expensive methods of extraction financially feasible ⢠Advanced technologies in hydraulic fracturing and directional drilling that made it possible to extract oil and gas from shale and other tight rock/sand formations ⢠Airline bankruptcies and mergers that contributed to airport sponsor uncertainty about funding long-term capital projects ⢠Strong sponsor interest in developing alternative revenue streams to fund airport operations and improvements. In this environment, certain airports in Arkansas, Colorado, Louisiana, New York, North Dakota, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming had the opportunity to participate in the energy boom. From the sponsor perspective, exploitation of oil and gas provided potential revenue streams. From the energy company perspective, an airport offered a large contiguous mass of land under single ownership. From 2001 until the Great Recession in 2008, airport sponsors experienced both the opportunity and the challenges of oil and gas extraction. This synthesis reports on some of the lessons learned as energy prices went from their highest levels (in the mid-2000s) to some of their lowest (in 2015 and 2016). As the price of oil and gas has a long history of volatility, a view of the full price cycle has particular utility. To understand the full context of oil and gas activity on airports, the research team explored the federal, state, and local regulatory framework and reviewed airport sponsor oil and gas leases as well as municipal permits and ordinances. Perhaps the most informa- tive aspect of the research was targeted interviews with eight airports that had oil and gas experience. Other information was collected about each airport from FAA 5010 reports and enplanement data and from telephone calls to FAA Airports Regional and District/ Development Offices. Overall trends in oil and gas pricing were developed from informa- tion available from the U.S. Energy Information Administration.
2 CASE STUDIES The airports that participated in the case studies illustrate different approaches to oil and gas extraction that include both directional drilling from outside airport property and develop- ment of oil and gas wells on airport property. The case studies also demonstrate how airports evaluated the market, solicited interest, and negotiated lease terms. The volatility of oil and gas prices has a strong effect on bonus payments, royalties, and levels of activity. Table 1 lists the airports studied and highlights the key features of their oil and gas development activities. TABLE 1 AIRPORT CASE STUDIES Commercial Airports Code Oil & Gas Activity Dallas/Fort Worth International DFW Multi-city/county jurisdiction; one of the first airport gas leases; market timing, bonus and royalty payment methodology. Denver International DEN Existing oil wells on property, multiple operators over time, DEN exercises right of first refusal, airport owns wells, third-party management. Elmira-Corning Regional ELM In response to FAA requirements for on-airport gas devel- opment, developer relocated off-airport and entered into a pooling agreement with landowners. Gas extraction ended with NY ban on high-volume fracturing at shallow depths. Pittsburgh International PIT Extraction of gas from coal; price/Mcf critical for develop- ment timing. Sloulin Field International ISN Off-airport directional drilling for oil and gas; airport relo- cating but keeping revenue-producing property. General Aviation Airports Arlington Municipal Airport GKY Directional drilling for natural gas from off-airport; exten- sive permitting and licensing process developed. Denton Enterprise Airport DTO City ordinances developed to control surface development of well pads and roads. Extensive application, permitting, and lease process for natural gas development. Greeley-Weld County Airport GXY Combination on- and off-airport oil and gas extraction. Air- port sponsor careful to separate oil and gas activity from airport operations area; example of successor lessee. Source: Prepared by KRAMER aerotek. Note: Mcf = 1,000 ft3 GOVERNMENT OVERSIGHT OF OIL AND GAS Many different federal, state, and local agencies oversee oil and gas extraction, shipment, reclamation, and cleanup. In March 2016, the FAA published Advisory Circular (AC) No. 150/5100-20, which pulls together existing FAA policy, guidance, standards, and obligations as well as other laws that apply to oil and gas extraction on federally obligated airports. The AC addresses construction, drilling, operations, well closures, and reclamation. Chapter 2 of this synthesis provides a summary of the AC and addresses aspects of state and local regula- tions. There are wide variations in state statutes and ordinances regarding oil and gas extrac- tion. While states and local municipalities enforce federal laws, environmental cleanup and restoration protocols are implemented primarily at the state level through land use controls regulated and enforced at the local level.
3 LESSONS LEARNED FROM AIRPORT EXPERIENCES The airport case studies provide a rich trove of information that is summarized in the report; however, each case study is well worth reading for any airport contemplating an oil or gas lease or reviewing current holdings. Here are some of the highlights. Value of Planning Ahead Most airports reported that a proactive, advance approach to addressing an oil or gas oppor- tunity helped with the timing of entry into the market. Extra lead time allowed municipali- ties to discuss and implement drilling ordinances, land use controls, a permitting process, solicitation of bids, and maximum control over lease terms. Detailed Lease Terms Airport sponsors and municipalities can exercise the greatest leverage at the time of lease negotiations. Once the lease is executed, it is difficult to modify its terms. The lease ideally covers all terms in detail and leaves no gray areas for dispute. Both operating procedures and rent for surface and subsurface activity are covered in a lease. Restrictions on Assignment The case studies show a history of energy company turnover through mergers and the sale of leasehold interests. It is important to stipulate airport sponsor approval prior to any assignment of the lease to another company. Times of Drilling Operations and Noise Abatement Measures Airport sponsors are advised to anticipate noise and nuisance complaints by setting times of operation for all drilling activities and requiring implementation of noise abatement measures. Location of Drilling Sites and Pipelines With land use controls and lease terms, it is important to identify drilling sites on the air- port property that comply with FAA guidelines and assurances and with the National Envi- ronmental Policy Act of 1969 (NEPA). Planning for road access and pipeline placement in public rights of way or on common easements will preserve the integrity and safety of airport operations and future development opportunities, and will minimize road damage and conflict with other pipelines and utilities. Disclosure Initial market research and valuation of mineral estates will position the airport sponsor in negotiations. While this information is often proprietary, the land planning process is public. The airport sponsor determines its disclosure policies in advance, in accordance with state laws. Royalty Payments The basis of royalty payments is critical. Royalty payments are calculated as a percentage of product produced at the wellhead (gross) or by subtracting the costs of production (net). A gross basis is more straightforward and easier to administer.
4 Right of First Refusal Most of the case study airports experienced assignment of oil and gas leases to other parties during the term of a lease. The City and County of Denver added a right of first refusal clause that enabled it to buy back the leasehold when a lessee proposed assignment. Through this process, Denver International Airport now owns oil and gas wells on airport property and has contracted with a third-party manager to operate the wells. Revenue Diversion Federal Grant Assurance 25 requires that revenue generated for oil and gas development be retained for airport purposes, consistent with the FAA revenue use policy. In the case of oil and gas development, some municipalities and townships have made capital expenditures that support the development. The City of Denton and Dallas/Fort Worth International Air- port (DFW) negotiated with the FAA to allow for certain payments back to municipalities. The City of Denton negotiated with the FAA to reimburse the city for some annual indirect costs, such as firefighting and property damage remediation. This agreement worked effec- tively when the price of gas was high and royalties could support the indirect costs. However, as gas prices declined, the airport was no longer able to fund the indirect costs shouldered by the city. Before signing its oil and gas lease, DFW obtained permission from the FAA to use approximately $19 million of bonus money received to repay the initial capital investment of the DFW owner cities. All subsequent revenue went into DFWâs joint capital account and stayed with the airport sponsor per Grant Assurance 25. Professional Expertise and Experienced Contractors Several of the airports interviewed emphasized the importance of retaining expert legal advice, professional mineral estate appraisers, and contractors with environmental assess- ment experience who are committed to oil and gas industry best practices. Off-Airport Versus On-Airport Wellheads Where state law permits pooling or unitization, the airports interviewed recommended using off-airport wellheads for horizontal drilling under airport property. This approach results in fewer FAA compliance requirements and less administrative burden for the airport operator. Volatility of Oil and Gas Prices Energy prices regularly rise and fall, and this volatility affects revenue streams from royalty payments. Market conditions also influence the size of initial bonus payments and the roy- alty rates offered. Airport sponsors would do well to pay attention to fluctuations in oil and gas prices, as they will directly affect royalty payments. It is important to develop diversified revenue streams to fund airport operations and not depend primarily on oil and gas royalties.
