Oil & Gas Leasing: Dangers & Problems

Oil and Gas owners beware! Northwest Pennsylvania is the target of several large gas development companies, including Range Resources and Shell. Owners of gas rights are being approached by “land men” who seek to lease the oil, gas and mineral rights as cheaply as they can, some land men represent themselves or small companies. Once they obtain a number of leases close together, they market these leases in a package to large companies who will develop the gas by drilling.

New oil and gas development is far different than the gas drilling of the past. Present developers are drilling deeper wells, between 6,000 and 10,000 feet deep into the shale. Marcellus Shale has been the desired layer in eastern and central Pennsylvania. Northwestern Pennsylvania has Utica Shale which is 4,000-6,000 feet deep. Most shale gas drilling involves a single vertical shaft with laterals extending out from the bottom, often reaching a mile or more in each of several laterals. A new lease should include much higher initial payment, known as the bonus. This may be $2,000 to $4,500 per acre, far more than the past leases that sometimes provided for $10 per acre. A new lease will not provide for free gas to a home on the leased property. This is because newly developed shale gas contains a composition which makes it burn very hotly, too hot for home furnaces and appliances. Shale gas must be treated and refined before it can be used to power homes, and it is unsuitable for direct use. Shale gas may be characterized as wet or dry. Dry gas contains mostly methane.  Wet gas contains components which can be separated into useful energy producers such as methane, ethane, butane, propane, and pentane. Wet gas is more valuable than gas without such components.

When considering a gas lease, a landowner should consider the following issues:

1) Do you own the oil, gas and mineral rights? It is possible that these rights have been sold separately years ago, or might have been excepted and reserved by a prior owner. These rights if held by someone other than the owner of the surface land, are known as severed rights. If you own these rights, you have the rights to lease them.

2) Is there an existing oil and gas lease on your property? If so, is it active, such as an existing well is present and is producing oil and/or gas? Is the lease still in force because the land is pooled or unitized with neighboring lands? The unitization means, although no well exists on this parcel, you are receiving royalties or delay rentals, which are payments provided for in the lease. So long as a well is drilled and in production, or royalties or delay rentals are being paid the lease is binding and enforceable. Some older leases may have lapsed for nonpayment or because a former producing well has been shut in or capped.

These first two questions can be answered by obtaining a title search. When someone buys land, a title search is usually obtained. Title must be “marketable” and “insurable” by the insurance companies. These standards involve a title search going back 60 years or a bit longer. However, for oil and gas rights, the search must examine the title back to 1850, as oil and gas development in Pennsylvania began shortly after that. If you are considering buying land with the hope of obtaining a new gas lease and a large bonus, it is vitally important to obtain the full search back to 1850.

When you execute a lease, the developer lessee will obtain the full gas title search, and if problems are found, such as a severance of the oil, gas and minerals, the lease may be cancelled and the bonus is then lost. To prevent such a bad result and huge loss of the bonus the landowner should check the title and seek and resolve problems. Some old gas lessees will relinquish an abandoned lease. If the lessee refuses, or perhaps can not be found or identified, a landowner can record an Affidavit of Nonpayment and Nonproduction as proof that the lease has lapsed. If there are old leases or severed rights that cannot be resolved, a court action may be needed. If the landowner takes action in advance so that the rights are cleared, the developer will then pay the large bonus.

In negotiating a gas lease, new issues arise. A landowner should carefully consider if he or she is willing to allow drilling anywhere on the land. The new shale gas well takes up to five acres or more of land to drill and establish a pool from which the external gas is extracted. The well is fractured using chemicals and large quantities of water. New road access is needed and many trucks will enter and leave the property. The days of a small blue-green tank on a few square feet of land are long gone. The landowner may seek the right to approve a well site location, or may agree to a lease with no drilling, so that the well must be placed on someone else’s land.

A developer may want to include a provision that only a portion of the leased land may be developed. If so the landowner may seek a clause to obtain release of undeveloped acres so they can be leased to another company. This can be very important. For example, a 100 acre farm is to be leased. The developer may want to include only 10 acres in the actual pooled or unitized production unit. This means far lesser royalties to the owner. Worse it often means the other 90 acres are “held” or tied up in the lease and cannot be developed by any other driller.

The ability to bargain with gas developers or their land men is all about leverage. An owner with 20 acres of land, negotiating alone, has no power and the developer does not need the small parcel. The drilling can be done to avoid this parcel. The landowner can not negotiate variations in the form lease. Someone with 200 acres has more leverage but may or may not succeed in obtaining better terms. It is possible to join a landowner association and bargain as a combined force covering several thousand acres. This can be a much more powerful position for negotiating.

Learn your rights before signing any lease. New law is being made with the spread of Shale gas development.  Ask for help before you lease.

By Lisa Pepicelli Youngs, Esq.

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