By: Clif Little, OSU Extension Educator
Oil and gas exploration may have great economic implications for landowners however; a good lease is not exclusively about money. A good lease is about maximizing economic gains, protecting the land resource and its usability. The terms of a lease like any business deal should be favorable to both parties. For each landowner there will be a different set of goals which influence the terms of a lease. List what is important to you and work with an attorney to incorporate your desires into the lease contract. This factsheet we will discuss how an oil and gas lease may impact landowners.
Storage of gas, brine, oil and other materials
Storage clauses or payment clauses may be utilized to keep a lease in effect regardless of whether oil or gas are found. A property owner should clearly understand all of the different ways their lease can stay in effect. If you do not intend for your property to become a storage unit for oil and gas produced elsewhere, make sure that this is clearly stated in the lease. It may be wise to work with your attorney to create a separate lease agreement for storage if that is your desire.
Strata, pipelines
There may be some advantages to the landowner in leasing to a drilling company only the formations that the company intends to develop. This may free the landowner to lease deeper or shallower formations to another company. In addition, leasing a specific formation to the drilling company may limit the arbitrary assignment or sale of other strata.
Consider the following statements regarding what is being leased: does hereby lease and let unto the Lessee, for the purpose of drilling, operating for, producing and removing oil and gas thereof, and of storing and holding in storage, and removing (sometimes herein referred to as gas storage purposes, storage shall only pertain to oil, gas and brine produced from this leased premise.), including gas lying thereunder, by pumping through wells or bore hole, in and from the marcellus shale formation lying thereunder, and of placing tanks, equipment and structures thereon to procure and operate for the said products, and of laying pipe lines thereover to transport the same from the leased premises and “from other premises” on, over and across the leased premises. Lessor reserves all non-producing formations. Lessor reserves the right-of-way on all lands. Tanks, compressor stations, gas and oil lines shall be treated in this lease the same as the oil and gas well. These items may not be assigned; easements and/or right-of ways shall not be created without written consent of landowner. This lease only pertains to oil, natural gas, natural gas liquids and related hydrocarbons, (referred to in this document as constituents and/or product from which royalty is derived). All other minerals are retained by the Lessor.
Referring to the underlined areas above, the writer has attempted to narrow the scope of the lease to oil, gas, related hydrocarbons of a particular formation. The landowner has attempted to retain all other formations so that these may be leased in the future. Likewise, the landowner has taken precautions so as not to create right-of-ways. In addition, the landowner mentions assignments, attempting to retain the right of consent. If a landowner agrees to assignment of all or part of a lease it might be wise to share in the profit each time the lease is assigned. I can not say if the above terms are written well from a legal standpoint but it is clear in this case what is important to the landowner. For each landowner the above mentioned factors are important and should be individually prioritized and potentially negotiated with the leasing company.
Resolving Disputes
Disagreements between landowners and oil and gas lessees are inevitable. Landowner need to work with their attorney to insert phrases or clauses which will aid in swift, cost effective resolution. One possible method of dispute resolution is to utilize three disinterested persons, one appointed by the lessor, one by the lessee, and the third by the two so appointed, and the award of such three persons shall be final and conclusive. Leases often state issues are not binding unless they have been ruled so in a court of law. This is redundant, since of course, this is always an option. However, most landowners will not take a matter to court because of concern for cost.
Water Protection
While it is unlikely, it is possible your ground or surface water could be impacted from oil and gas exploration or development. Landowners would be wise to document flow rate and quality for all water sources prior to hydrocarbon exploration and or drilling. Many laboratories can perform basic screening of oil and gas contaminants. One such lab is the Penn. State Agriculture Analytical Laboratory. The cost is currently $65 and is subject to change. Kits may be available through your local OSU Extension office. Penn. State may be contacted at 1-814-863-0841.
It would be prudent for landowners to have the lessee test, at their expense and at a lab of lessor choice, for drilling contaminates and related constituents prior to exploration and/or drilling, and following well production. If lessor determines there has been water contamination as a result of lessee’s activities, lessee agrees to provide lessor potable water (provided in like measure quantity/quality as to lessor judgment) and at no expense. Work with your attorney to protect your water source.
Pooling & unitizing
Pooling allows the drilling company to pool or form a drilling unit with adjoining property owners. Unless you have very few acres, exercise caution in granting a company unrestricted pooling/unitization or consolidation. If your land is unitized as part of a drilling unit, you will likely split the royalty with the other contributing landowners. The percentage of the royalty you receive is based on your acreage contribution to the drilling unit. When unitized if the producing well is not on your property you will most likely not receive the free gas payment. This particular area of a lease can be used to bind large tracts of land and tie up a formation. Pooling/unitizing is beneficial to the drilling company allowing them to treat the pooled land as a single lease. Wells drilled anywhere on the pooled acreage may keep the lease in effect. Some states have limited the amount of acreage drillers can pool into one unit. So how many pooled acres is required for a driller to efficiently develop the resource? That is difficult to answer. However, from a large acreage landowner perspective; it would be beneficial to limit the pooled acreage to 640-1280 acres.
In closing, the opportunity to negotiate an oil and gas lease on your farm does not come along often. The terms agreed upon in your lease have the potential to affect the future operations of the farm and the real-estate value. Changes to the lease are usually addressed in an exhibit or addendum. Take time to understand the lease document and seek out an experienced oil and gas attorney for advice. Weigh the factors in a lease, decide what is most important to you and understand what elements you can give up and what elements of the lease you will negotiate.