1. Why Your Attorney Should Review Your Lease Before You SignThink about it. How can we advise hundreds of landowners that the lease we develop and eventually offer (or any lease for that matter) will satisfy legally all of the concerns of all of the landowners? We can’t. While we are confident that the lease we will develop, in the first instance, will protect the interests of the landowners and their property rights, we cannot and will not give you legal advice. A lease is an important document that affects your title and property rights. In most cases, it is a positive encumbrance on your title, especially if the lease were producing income for you. But some people, if you were to sell your property, may consider a lease to be negative. The new owners may not want anything to do with oil and gas development and want the surface of the land entirely preserved. The important considerations are not only the upfront money but also the long-term consequences of having a lease and a well or wells on the property. It is important that the lease include terms under which a lease could be terminated. Many leases do not adequately address this issue. Does one well producing on the property hold your 1,000 acre parcel under lease indefinitely? Our lease will be comprehensive and will deal with this issue among many others. But the final answer is that a lease is a contract and should be considered in that light. All of the regulatory and government groups advise you to seek your own attorney's advice before signing a lease. We absolutely agree.
2. The Balance Between Royalty Rates and Upfront Bonus Bids
In the context of leasing systems used by state and federal governments for years, the bonus or upfront bids were a small proportion of the overall income that could be produced from a property if a successful well were drilled. Royalty income was the money-maker. In other words, the bonus or upfront bids in most cases would be less than ten percent of the total income that could be derived. Now the U.S. is blessed with natural gas shale development, and the royalty rates in these shales have risen for the most part from the traditional 1/8 (12.5%) to a larger number reflecting the competition for the resource and the efficiency with which the natural gas can be produced. Additionally, instead of an annual year payment, the companies have reverted to paying all of the annual payments in one lump sum, for what is termed as a paid-up lease. Usually, the term of the lease is 5-8 years with provisions for extending the lease under certain circumstances. Hypothetically, if the royalty rate were 50%, the amount of the bonus bid would be substantially reduced. It would mean that the company who secured the lease did not have to put up significant cash upfront. That means that underfunded companies or speculators could secure leasing positions with small amounts of upfront cash. It could also reflect that these companies will never drill wells because they don't have the resources to do so. Finally, a high royalty rate contributes to the early termination or abandonment of a potentially still economic well. If the royalty rate were lower, the operator could conceivably still operate the well and make money. In the end, a very high royalty rate could be worthless. On the flip side, a very low royalty rate would necessitate a much higher upfront bid or paid up lease. Companies would not want this situation because it would take significant upfront resources to secure a position, and the company may not recover their investment if they drilled dry holes. The balance between upfront payments and royalty rates is a function of the business risk of a company in drilling and producing wells on the lands under lease. All lands are not created or treated equally. Natural gas companies will focus on lands that they believe hold the highest gas potential given their assessment of risk. Our job is to find the level of risk and reward that will create competition for our lands, and hopefully, result in a fair and equitable distribution of compensation and risk between our landowners and the natural gas companies.
3. The Difference Between a Fair Offer and the Best Offer
Landowners want the best offer they can get. Everyone understands that. But how you define your terms is critical. The best offer does not necessarily mean the highest upfront bid. As discussed above, we need to balance the royalty rate with the upfront bid. The second part of the equation, and the most important, is the protection of the land and the landowners. A one-sided lease benefiting the natural gas company, even with the highest upfront bid, is not acceptable and does not constitute the best offer. Our first priority is to put together a lease that is fully protective of the land and its owners, with adequate safeguards, decision-making, and compensation. In my opinion, a fair offer includes all of the protective provisions above, but shares the economic risk with a responsible natural gas company. We want to protect our interests, but we want to encourage responsible drilling and development on our lands in the hope of being rewarded with royalty revenues. We want to make sure that our landowners have the chance to reap the economic rewards of natural gas drilling and development by working cooperatively with the natural gas companies. In any negotiation like buying a new car, there has to be some incentive for the dealer to make a deal. The dealer needs to make money. What we strive for in buying a new car is a fair deal at that point in time. It is the same with leasing your lands. The gas company needs to make money, too. So in the final analysis, a fair offer may be preferable to the best offer.
4. Why a No Entry Lease is a Good Idea
Landowners need to make their own decisions whether to lease to natural gas companies or not. However, most landowners don’t understand that they have another option: the no entry lease. New York State, when leasing state land, regularly uses a no entry lease in cases where surface occupation would not be an option, like on a protected and valuable wetland. In a no entry lease, the gas company cannot enter onto your property and cannot undertake any surface operations on your property whatsoever. They can directionally or horizontally drill and recover natural gas from beneath your property as part of a drilling and production unit on an adjoining parcel. The benefits of a no entry lease are that you will receive an upfront payment for signing the lease, although understand that it will be less than a comparable lease on your neighbor’s property where the well and pipelines would be located. Additionally, you will receive your royalties for the natural gas recovered under your property just like any other landowner in accordance with the royalty rate in your lease. The natural gas company is happy because they do not have a “donut hole” in their lease acreage meaning that your land is under lease, and another competitor cannot lease your land and create problems for the company. Your neighbors are happy, because they want wells drilled on their properties to recover their gas, and without your lease, the natural gas company may not drill a well there. If you don’t sign a lease, the only option for the company is to request a state hearing to “force” or compulsory unitize your acreage into a unit. A compulsory integration hearing would be held, and the likely result would be that your land would be combined in a production unit with the land on the adjoining property where the well is located. You would be compensated for your royalties at some rate (which could be less than what you would have leased for). You lose control because you didn’t select your operator, and the biggest issue is that you will not receive any upfront payment as you did not sign a lease. There are other complications and benefits to compulsory integration but with very large strings attached. Finally, given the land available in Pennsylvania and New York and the short lease terms, natural gas companies would not spend time and money on compulsory integration proceedings unless the hearings were a last resort. Therefore, if you don’t sign a lease or a no entry lease, you cannot expect to reap any economic gains from natural gas development in the foreseeable future. If you sign a no entry lease, you will receive a lesser upfront payment, may be part of a production unit and share royalty income, and have absolutely no physical disturbance on your land. If that sounds good to you, a no entry lease developed by the Coalition will be offered to you for your consideration.
5. Outlook for Marcellus Development in Pennsylvania and New York – December 2009
Part of our responsibilities to our landowners is to monitor events occurring not only in Pennsylvania and New York, but also nationally and internationally. Literally every day we review numerous articles, news, investment reports, state initiatives – anything we can get our hands on that will give us a clearer picture of how Marcellus development will unfold and continue here. We endeavor to take the pulse of the oil and natural gas industry to put our landowners in the best possible position when we move ahead with a lease. Like any investment in a stock, it is impossible to pick the very bottom to buy and the very top to sell. And it is the same thing with leasing your land.
The Marcellus development is uncharted territory for the Nation, and nothing like what we have ever seen in the Northeast. When I was the Director of the Division of Mineral Resources at NYS Department of Environmental Conservation (NYSDEC), I would always preface remarks about the oil and natural gas industry in New York by saying “we will never be a producing state like Texas or Louisiana.” Now that may not be totally true. Pennsylvania is producing an amazing amount of natural gas with more to come. North Dakota is the fourth largest oil producing state in the US because of oil production from the Bakken Shale. Times are changing, and huge oil and gas investments are being made in PA and hopefully in NY.
We cannot give you individual advice on whether to take an offer now or wait for what’s behind the curtain. You need to make up your own mind; we don’t know your economic situation. Will offers get better in the future or have they peaked? We can’t answer that question. We would never tell you that we could get you a better offer. What we can say is that there is strength in numbers and that we will do the very best to get you a fair and reasonable offer. Remember that our principals are landowners first.
Having tempered your enthusiasm and your expectations for a big payday, I would be less than candid if I didn’t say that I have become extremely bullish on Marcellus development over the past few months, and that is one of the primary reasons why the Coalition was established.
In the past six months, there were two events that seemed to crystallize my thinking about the Marcellus (although I am no expert on investing; I still hold Enron stock):
1. Schlumberger is the largest well service company in the world, and they decided to invest over $30 million in NY to service both NY and PA. No international company is going to invest that kind of money in a facility and bring professional workers to the area unless they are here to stay. That says to me that the Marcellus is here for the long haul – at least 50 years. The other important aspect is that they located in NY instead of PA. That tells me that Schlumberger has confidence in the NY Marcellus as being comparable to the successes in PA.
2. When natural gas was selling at a little over $3 per MCF a few months ago, there was no backing off in activity in PA. While the companies have publicly stated in their investment presentations that they need $5, $6, and $7 to be profitable in the Marcellus, they continued at a breakneck pace. That told me that they were so fully invested in the Marcellus that they couldn’t abandon the region. Competition was fierce for land, workers, and services such that they could not leave and return easily. Marcellus was a “go” at $3 and change, and the prospects for natural gas price increases must have been imminent (and they were).
At that point in time, I became more and more convinced that the Marcellus was going to be really big and life-changing, and I advised one of my industrial clients to accelerate its marketing efforts to the gas industry. In my October 2009 presentation to The Business Council of New York (which is posted on this website), I finalized my remarks by saying that the Marcellus in NY “May be the greatest economic development opportunity in depressed areas of the state that we will see in our generation” and that “NY landowners deserve to share in the wealth, particularly in the depressed areas.” Nothing since has changed my mind; recent events have reinforced that statement.
This past week, we had three even more significant events that have contributed and solidified my belief in the Marcellus:
1. The acquisition of XTO Energy by Exxon Mobil is like bringing the 800 pound gorilla in the room. Exxon Mobil is the premier oil and gas company in the world and the largest. They don’t fool around. I have been hearing rumors about their entrance into the Marcellus, but for whatever reason, I did not consider the most obvious way – an acquisition. Exxon Mobil will get whatever it wants whenever it wants. You can rest assured that there will be no price tag that is unreachable with Exxon Mobil in the game. We will only see more acquisitions in the future, so the players will definitely change and hopefully, the money will increase at least until Exxon Mobil controls the field.
2. Range Resources reported outstanding production in the Marcellus in PA and exhibited great confidence in the future (see press release in News on this website). So here we have a “local” producer (actually Range acquired Great Lakes Energy Partners from Ohio a few years ago) having substantial success in the Marcellus in PA. That means to me that there will continue to be drilling and production success here or, more correctly, there doesn’t appear to be any diminution of confidence in the Marcellus in PA. More than 1,000 Marcellus wells have been drilled this year in PA!
3. In NY, Governor Paterson announced the final 2009 State Energy Plan which included the following strategy:
“Support private interest and investment in drilling in the Marcellus Shale natural gas reserves and natural gas pipeline expansions to improve supply and deliverability of natural gas to markets in New York in an environmentally acceptable manner.”
This strategy is an acknowledgment by the Administration that Marcellus development will move forward, subject to environmental constraints imposed in the NYSDEC process.
New York still has to finalize its Supplemental Generic Environmental Impact Statement (SGEIS) which comment period is closing on December 31, 2009. You may know that I was the signatory to the original 1992 Generic Environmental Impact Statement. I have full and complete confidence in the professionals at the Division of Mineral Resources (DMN) that oversee and monitor the industry in NY. Their production of both the scope and SGEIS document has been outstanding, professional work. They are the smallest division in the NYSDEC, yet they produced these comprehensive documents in unrealistic time frames to meet the deadlines imposed by the Executive. There is no better professional organization within the NYSDEC. I have been more than unhappy with some derogatory comments made about this staff during the public hearing process, and the characterizations of environmental problems in NY with regard to the oil and gas industry. The environmental problems are non-existent. No well drilled in NY since the early 1980’s, after the adoption of casing and cementing guidelines, has ever caused a groundwater problem. To my knowledge, no well that has been hydrofraced in NY has ever caused a problem either. I am surprised at the politicians and others who have not read the SGEIS and who continue to argue about non-existent environmental problems.
The good news is that the comment period is coming to a close, and the professionals at DMN will review and respond to the thousands of comments and will issue a findings statement in support of Marcellus development. I am confident that there was no new issue that surfaced during the comment period that was not already discussed. Therefore, I believe that Marcellus development will go forward in late spring or early summer in NY.
Without even mentioning the burdens of the tax deficits in PA and NY as reasons why Marcellus development should be supported, it should be obvious why we are now so bullish on Marcellus development: significant drilling and production success in PA; large investments in service infrastructure being made; major players moving in; government support of clean, indigenous energy; and the finalization of the regulatory process in NY. All of these factors contribute to our view of better economic times for the future without sacrificing our environment.
We take our responsibilities to our customers very seriously. We want our landowners to participate in the wealth, and we will do our very best to represent your interests. GHS
6. The Hydrofracture Debate – How Did It Get This Far?
Here we are in January of 2010, some 60 years after hydrofracing was first employed in an oil and gas well. Millions of wells have been drilled and hydrofraced since that time with no evidence of any systemic environmental impact if any at all. Yet the benefits of this technique have improved our ability economically to recover natural gas and oil that heretofore would have been left in the ground. We won’t even discuss the revenue ramifications for governments and landowners.
The innovative technological advancement by our U.S. companies, the backbone of Marcellus shale development – hydrofracing – is being questioned all the way to the White House and the Congress. What is going on here? Where has science and reason gone?
Let me first say that everyone has a right to his or her opinion. We live in a democracy and we have the right to say what we want. My problem here is that we are not talking about a theoretical technique never before tested and employed. We have empirical evidence that the technique works without any significant harm to the environment. We have scientific data for over one million “experiments.” Now, do the public and our elected officials have the inalienable right to change the laws of nature? How can water, salt water, and less than one percent chemicals rise vertically against gravity in a fissure a mile below the surface of the earth - capped by different strata of rock creating barriers to any artesian condition - reach the fresh water aquifer at less than 500 feet from the surface? I would like to say that it could never happen, but I’ll opt for the safer “extremely unlikely” because I am not a geologist or hydrogeologist. I am a professional engineer (dormant), so I am not without any credentials and common sense.
As many of you know, I served as the Director of the Division of Mineral Resources at the NYS Department of Environmental Conservation for over 22 years before retiring from state service. I then worked for a consulting group for another seven and started my own company for the last two years. Throughout this more than 30-year period, I served on national advisory committees and as the Governor’s representative to state and interstate commissions. During this entire time period, there was not one instance that I can remember where any of the state or federal officials raised any environmental concern for hydrofracing. There was never any suspicion that hydrofracing could in any way harm the environment. And there was certainly no discussion about hydrofracing reaching the fresh waters when the target formation was below the fresh water aquifer.
The State of NY developed stringent casing and cementing guidelines with industry in the early 1980’s. Since that time, I cannot recall any significant instance where a drilled gas or oil well impacted the fresh waters of the state. When I mentioned this fact to my successor, he reminded me of an occurrence in 1996 where a poor cement job resulted in impacts to a landowner well. I vaguely recalled the incident, but the response from the Division was so swift and complete, that in my mind, I didn’t even remember it. I did remember receiving a letter from the emergency response of the town thanking my regional staff for their work and commitment to resolving the problem.
Today, the State of Pennsylvania has opened its arms to the drilling industry and is reaping the rewards. New York has its own lab rat and a big one: it is called “Pennsylvania.” We do not hear horror stories about the environmental impacts of the “evil” hydrofracing. We have heard the stories of what a spill can do on the surface at Dimock, but that has nothing to do with hydrofracing. The environmental review process that NY is going through has nothing to do with the technique of hydrofracing other than to assess its impact for the magnitude of water supply and wastewater disposal.
Yet, here we are debating with people who do not understand the technical and geologic process, its impact on the environment, who ignore the history of the use of the technique, and who likely have not read the excellent CHAPTER 5 NATURAL GAS DEVELOPMENT ACTIVITIES AND HIGH‐VOLUME HYDRAULIC FRACTURING of the NYS Supplemental Generic Environmental Impact Statement (SGEIS).
Here is my less than complete, motley list of reasons why some of the public and our elected officials have chosen to oppose hydrofracing in general and Marcellus development in principle:
Nobody likes the oil and gas industry
It is fashionable and “green” to oppose the oil and gas industry
The oil and gas industry has done a poor job of educating the public and building trust on their technological advancements and stellar environmental record
The oil and gas industry is now developing resources in areas of the country where it has never been
The oil and gas industry and governmental officials are repeating explanations and discussing issues that have long been resolved, except that all decisions are being questioned again by the “new” publics
Anyone can say anything they want on the internet, and the public generally believes what they read
Newspapers are losing readership, cutting back on reporters, and most importantly, not doing their due diligence and own investigative research on issues
Newspapers blindly accept press releases and issue papers that require no work on their part and prominently highlight these stories implying to the public that they are the truth
News and media outlets want controversy without questioning the veracity of statements and checking other sources
Politicians blindly follow the news and environmental groups without reaching out to industry or governmental officials for the other side of the story before formulating a position
Elected officials and politicians oppose watershed Marcellus development in inverse proportion to their proximity to NYC and environmental groups
Environmental groups who have some very intelligent people are not doing their due diligence and looking at the facts
Obama and Chu have made less than direct overtures to the virtues of natural gas and job creation, but have not fully embraced the clean-burning, domestic fuel of the future vital to our national security
EPA is waiting in the wings for a call to mobilize, but does not have oil and gas geologists or petroleum engineers that understand the processes, and if they did, they would recognize that they have no role in either the process or the collective states’ business
The public just doesn’t understand or want to understand basic principles of geology, physics, and gravity
Landowners who stand to gain from Marcellus development are opposed by those who have no financial interest
As a nation, we have spent much too much time on this issue. Let’s try to keep the ball moving forward on real issues of public concern that are in the critical path of Marcellus development. Hydrofracing is here to stay. GHS
7. Pennsylvania Landowners Need Legislative Help Now!
The Marcellus Shale, and other unconventional gas plays, continues to generate both excitement and controversy. As interest increases, many economic, environmental and social questions have been raised regarding the opportunities and risks associated with development of this significant natural gas play. In this new and unique environment, the interests of landowners, gas companies, and government are merging to meet the challenge of providing a safe and secure energy future for our country.
Leasing land in Pennsylvania under current state law is an immediate challenge. The Twin Tiers Landowners Coalition has continually advised landowners that it will not and should not advise landowners on individual situations. Landowners have to make up their own mind, based on their own circumstances, to accept offers from gas companies or join a coalition. We have counseled landowners to choose coalitions carefully, and we are no exception. We welcome the scrutiny. Compare and contrast the consultants behind the coalitions, and check out the real costs to you. If you feel comfortable with us, then join. If you prefer another coalition, that is okay. If you want to negotiate on your own, we hope you do well. Understand that we want you and all the coalitions to succeed because that will mean higher bids for everyone.
But we all have a problem. As noted above, it will take a concerted effort by all parties to capture the economic benefits of Marcellus Shale development to prevent waste of resources. It is difficult to imagine how the orderly Marcellus development will proceed without a strong state statute designed to protect the interests of landowners while at the same time, enhancing the exploration and development of the state’s nonrenewable natural resources. An estimated 5,200 Marcellus permits will be issued in 2010 without necessary protections for landowners in state law.
What is clear is this: the current state law does not protect the mineral and property rights of landowners and gives unlimited advantages to the gas companies. These companies are not doing anything illegal; they are just taking advantage of the current situation. But the result is that gas may be drained from beneath landowners with no compensation, landowners are being forced to sign leases on gas company terms, leases are being extended unreasonably, land is being stranded because of the lack of compulsory integration, and large properties can be held by production indefinitely by shallow wells waiting for future drilling that may never occur.
Here is a partial list of what needs to be done in state law immediately: spacing and setbacks for Marcellus development for vertical and horizontal wells, maximum unit sizes, a correlative rights statute to protect landowners, and compulsory integration to make sure that all lands are put into appropriate units which will lead to a greater recovery of the resource. A good start would be the NYS Oil, Gas and Solution Mining Law, which I implemented for twenty-two years, as a model.
Some gas companies have recognized the value of a strong state statute and have discussed changes to the law along the lines of what I identified above. But other companies have resisted these efforts, and consensus among the companies will be difficult. Government – legislators and the executive -needs to step to the plate and work with all the stakeholders on a long-term solution, including the considerations of the landowners.
Unfortunately, landowners in Tioga County and Pennsylvania in general are slowly beginning to realize that the current laws do not protect their interests. So we are back to the original premise: sign with the gas company on their terms or join a coalition. Some landowners really have no choice, and we have made it clear to them to do what is in their best interests. If you join a coalition, the best thing you can do to increase the value of your property is to enlist your neighbors to join for two reasons: (1) the value of your property is enhanced if the coalition can amass a significant amount of acreage to promote competition and to encourage new operators to enter the geographic area, and (2) because of the current state law, land that is contiguous is much more valuable than scattered parcels.
Our approach and our lease will be comprehensive. If the law doesn’t deal with spacing and setbacks, then our lease will. If the law doesn’t specify size of units for individual wells, then our lease will. If the law doesn’t protect the landowner from the payment of damages, then our lease will. Twin Tiers will only put together a lease that is protective of the landowners’ interests. It will also allow for the orderly exploration and production of the land with reasonable conditions in a partnership with the gas companies. If our lease results in lesser bids because of the protections, then so be it. We will never be accused of intentionally doing anything that may ultimately hurt our landowners, whether in the first instance or in the long run.
Twin Tiers Landowners Coalition is not a political entity. Landowners need to call and write their legislators and the Governor to tell them that they need changes made now. Hopefully, the gas companies, the industry associations, and the industry coalitions will see the wisdom of a strong and fair statute and will come to a consensus on the need for changes that will ultimately mean greater recovery of the Marcellus gas resources and appropriate and just compensation to the landowners. Unfortunately, it may be too late for those landowners who signed because they had no choice.
Pennsylvania landowners need legislative help now!