By Business First of Buffalo

A Buffalo company has sold 31,600 acres of land in Pennsylvania that lies across the Marcellus Shale formation.

Zone Oil & Gas LLC sold the land, primarily in Potter, Tioga, Somerset, Fayette and Westmoreland counties, for around $15 million and an overriding royalty interest on the acquired acreage.

Zone Chairman Thomas O'Neill Jr. said his company was formed three years ago with partner William Ziegler to acquire land, then sell it to a company that would drill the natural-gas rich shale formation. Over the last three years, O'Neill estimates Zone made around 400 real estate transactions to acquire the 31,600 acres, which O'Neill described as "mostly rolling country rural property."

He did not disclose how much Zone spent of those transactions.

The land was sold to Zone¹s joint venture partner, Penn Virginia Corp., which O'Neill anticipates would install five to seven wells this year and begin drilling.

The overriding royalty interest, O¹Neill said, frees up Zone from any costs or encumberences related to the drilling, and that Penn Virginia would pay for 100 percent of the well¹s costs but not receive 100 percent of the revenue.

Because of the overriding royalty interest, he said, Penn Virginia would receive 84 percent of the reserves generated by the properties.

"We have no drilling cost risks, because we are not part of that process," O'Neill said. "We are selling land for cash and an override, so the better (Penn Virginia does), the better we'll do."

It's been estimated that hundreds of trillions of cubic feet of natural gas lie within the Marcellus Shale that stretches from New York through West Virginia.

While the shale is being drilled in other states, New York is reviewing aspects of drilling operations as it pertains to the shale formation, identifying risks and mitigating them through strict permit conditions and other regulatory tools. High-volume drilling of the shale is effectively on hold in New York until the state Department of Environmental Conservation finishes a thorough environmental review.

Copyright 2010 American City Business Journals

Copyright 2010