The negotiation of a Marcellus Shale lease is all about price and protection. You need a lawyer. You cannot expect the form lease brought to you by a landman to protect you. Call us at 412.391.2515 before you negotiate
The Marcellus Shale and the Western Pennsylvanian
Do you own more than 10 acres of land in Western Pennsylvania? Have been approached by a gas drilling company about a lease? Do you want help in finding a company to lease your gas rights?
The Marcellus Shale has become a hot topic for Western Pennsylvanians. Hardly a day goes by for a Western Pennsylvanian without news relating to the Marcellus Shale. Of course, it wasn’t long ago that most people had never heard the term “Marcellus Shale.” However, the Environmental Protection Agency reported that “it is projected that shale gas will comprise over 20% of the total US gas supply by 2020.” So what is Marcellus Shale?
The Marcellus Shale is a thin sedimentary rock layer. It is primarily black shale, with strains of limestone. Its name comes from a large outcropping near the village of Marcellus, New York, in the Finger Lakes region. The rock layer is under most of West Virginia, much of Pennsylvania and parts of Ohio, Maryland, New York and Ontario. It was deposited approximately 400 million years ago, and in some areas, it is much closer to the surface than others.
Due to a variety of factors, the Marcellus Shale formation contains a large and virtually untapped natural gas reserve. Because of its location near many major cities, the transportation and production costs of the gas can be lowered, allowing gas companies to provide lower rates to consumers. Unfortunately, there may be many severe environmental consequences associated with the exploitation of the gas reserve. Some of the consequences are so severe that the health of those living in this region may be threatened. It is the battle between the need for inexpensive fuel and the need to protect the environment and public health that has made Marcellus Shale such a hot button political topic.
The is one more component to the story. The Marcellus Shale formation has the potential to be a major economic driver for Western Pennsylvania. Many Western Pennsylvanians are employed by gas production companies, and in the coming years, it is likely that even more will find work in gas production. Moreover, many Western Pennsylvanians are supplementing their income by leasing their property rights to gas companies. The Pennsylvania Department of Agriculture has warned landowners that if you own property and are considering leasing your rights to a gas company, you need a lawyer. The law firm of Behrend and Ernsberger, P.C. is capable of handling your legal needs as you consider the pros and cons of Marcellus Shale production.
The Oil, Gas and Mineral Lease
As a landowner, your primary concern should be with your rights. Specifically, as the landowner, you may or may not have rights to the oil, gas, and mineral rights (OGMs) underneath the surface. In order to extract gas from below your property, the company needs to own the OGMs. The standard business practice is for a company to attempt to secure the OGMs of many property owners in the same area so as to create a large area in which they are the only company in control of the OGMs in that area. It is important to note that the OGMs may have already been purchased on your plot. Various companies began purchasing the OGMs in Western Pennsylvania as early as 1860. A title search may be necessary to determine if you own the OGMs or not. If the title search reveals that no predecessor in your chain of title sold the OGMs, then you probably own the OGMs. If you do not own the OGMs, be aware that Pennsylvania recognizes the right of the owner of OGMs to recover the gas below your property, often to the detriment of the surface rights. The Pennsylvania Department of Environmental Protection has warned landowners that “oil or gas could be produced or captured from a well outside your property tract boundaries.”
If You Own the OGMs
If you own property over a certain number of acres, the OGMs to your property and you live in Western Pennsylvania, chances are that at least one of the more than 60 gas companies operating in Pennsylvania would be interested in leasing the OGMs from you. You would be wise to hire an attorney to counsel you in this process. The gas company will be trying to get as much as it can from for as little cost as possible. One mistake in the lease can cost you a significant amount of money. Penn State University offers a “Royalty Calculator” for free on its website- click here to see it.
Leasing Landmines: Avoid These Traps
The first trap that you can fall into while negotiating with the gas company is that you may end up selling more rights than you think. If you agree to sell all OGMs, the gas company may take the gas, but if another mineral is discovered underneath your property, you will have lost out on a chance to make another lease for the extraction of that mineral. In the lease, you may specify exactly what OGMs you are selling. Additionally, if there is a strain of Utica Shale underneath your layer of Marcellus Shale, there may be more gas that could eventually be recovered.
The second trap isn’t so much a trap as it is a chance to increase your payments. In addition to the lease amount, if the gas company extracts gas, you have a legal right to royalties equal to at least 1/8 of the value of the produced gas. However, you may be able to negotiate a higher amount.
The third trap is a tax trap. If you have a “current agricultural use valuation,” (CAUV) gas production can cause a change in your CAUV and an increase in your property tax. You negotiate with the gas company ahead of the CAUV change to prevent you from being stuck with the entire rise in property tax.
The fourth trap is related to fifth. You may be able to negotiate the location of the well. As such, you can take the location of your home and your fields into account.
The fifth trap is particularly dangerous for farmers and others who use the surface land as part of their livelihood. Drilling for natural gas is a major operation which requires access roads in addition to the well itself. The area around the well and the roads can easily become polluted and agriculturally unproductive. Therefore, as a landowner, you must insist on specified damages in the written lease. If the company will be cutting down trees, you have a right to be paid for the trees that are felled. If the access road will be close to your home, you have a right to compensation for noise or to insist that the company takes steps to abate the noise. If crops are damaged or no longer will grow, you must protect your right to compensation in the lease.
The sixth trap that you need to avoid is what happens at the end of the lease term. It is in your best interest to negotiate that you, or your successor landowner, will have a “right of first refusal” at the end of the lease. Many leases include “automatic extensions.” The right of first refusal will allow you to seek a better deal at the end of the lease. Moreover, if a well is still uncapped at the end of the lease, questions about the well and any equipment may still exist.
If you do not want to lease your OGMs, be aware that the Commonwealth of Pennsylvania may issue a pooling order which means that the company can begin extracting the gas without a lease. You will be paid royalties that are prorated to your share of the pool of gas that was extracted.
If you do not own the OGMs
If you do not own your OGMs, you still should contact a lawyer immediately after the OGM owner notifies you that they are planning to explore or drill. Know that the OGM owner can, and will, exploit the OGMs below your surface. However, most are willing to work with a landowner to find the best compromise possible. The OGM owner may not trample your crops, cut down your trees, or interfere with your livelihood without providing compensation to you. As such, you may be able to contract with the OGM owner for a damage rate. You may also be able to negotiate the location of the well.
Whether you own the OGMs to your land or no, it is important that you DO NOT LET THE GAS COMPANY TAKE ADVANTAGE OF YOU! Call a lawyer immediately before signing any documents with the gas company. You have significant property and financial rights at stake. The Marcellus Shale has provided Western Pennsylvanians with a unique opportunity to profit of their lands. This opportunity is coupled with significant dangers, to the property owners and to the residents of the region. The legal team at Behrend and Ernsberger, P.C. is ready and able to help you safely enter the dangerous game of Marcellus Shale leasing- call us today at (412) 391-2515.