Oil and Gas Leasing
Published on Tuesday, 26 July 2011 03:44 Written by Lawrence D. Brudy & Associates, Inc
The Marcellus Shale Formation underlying most of Western Pennsylvania is the hottest gas exploration and development area in North America. Located within the Appalachian Basin which includes parts of Tennessee, Kentucky, Virginia, Ohio, Maryland, Pennsylvania, New York and West Virginia, the Marcellus Shale Formation is hundreds of thousands of years old and has been estimated to be able to provide enough natural gas to supply the entire country for a decade.
The Marcellus Shale Formation is a mile or more below the surface making it one of the most costly drilling efforts for recovery. In most recent times, gas companies have employed a method called horizontal drilling to penetrate more fractures or joints in the Marcellus Shale Formation producing wells capable of yielding millions of cubic feet of gas per day. The financial impact of the Marcellus Shale Formation resulted in the Pennsylvania Association of Realtors creating an oil, gas and mineral rights addendum to the “PAR” form, which now provides to buyers and sellers the opportunity to “examine” the land for oil, gas and mineral rights, to “except” the oil, gas and mineral rights from the sale and purchase as the seller may not own the rights or “reserve” the oil, gas and mineral rights as the seller would be conveying title to the property however not transferring the rights or leases.
Property owners have been solicited by gas companies through a representative called a Landman. A Landman is a person who secures leases and handles damages for oil and gas companies drilling wells and laying pipelines.
Leases, most often provided to property owners, are defined as “drillable” and “non-drillable”. In addition, landowners may also be asked to sign a “right of way” agreement for the purpose of laying transmission lines and transporting gas over the property owners land. Leases and right of way agreements presented by the Landman are generally standard boilerplate documents which unbeknownst to the property owner, are fully negotiable, with right of way agreements being modified on their face and leases most often being modified by “addendum” with a “memorandum” of the document recorded in the county courthouse where the property is located providing for public notice.
Royalties in Pennsylvania are governed by statute. The minimum amount of royalty is 12.5%. In more recent times, the royalty amounts have been negotiated upwards of 18% in certain areas. In addition, most leases provide for a paid up clause whereby the property owner will receive a certain amount of money per acre for the lease time which can be anywhere from two or ten years or for longer periods of time if the well(s) are producing in paying quantities. When purchasing or selling property today, especially large tracts of land, emphasis should be on determining what the seller is selling and what the buyer is purchasing. If the seller is conveying the rights to the oil, gas and minerals, it should be provided for in the agreement of sale. If the seller is unclear as to their ownership of said rights, the new PAR form oil and gas addendum provides an examination of the property to determine who owns the mineral rights. These mineral rights searches are extensive whereby the land is researched back to the early 1800’s and a certificate of title is produced by the attorney providing an opinion to the marketability of the mineral rights. This is not inexpensive and generally takes from thirty to sixty days for a determination. If the seller is excepting those oil, gas and mineral rights, there could possibly be an existing lease or leases on the property which can and may be conveyed with the surface rights. Lastly, the seller may be reserving the mineral rights in which case the seller will continue to receive all the royalties or have the power to negotiate the surface lease. Keep in mind as a buyer of land, where the seller is reserving the right to the lease minerals, the standard boilerplate leases provide for access to the surface by the gas company. I would advise all buyers and sellers to review those leases in place prior to executing the agreement of sale.
Leasing should involve only the oil, gas and mineral rights that the seller wishes to lease under the proposed area and not for the property itself. Generally, marital property can be leased without the joinder of the spouse, if the spouse is not on title. If the spouse is on title, it would require the joinder of both husband and wife. If the seller (principal) has granted a power of attorney to his (agent) the power of attorney should specifically provide for the power to lease the oil, gas and mineral rights under the principal’s property. The same holds true for a lease granted by an executor that has express power or a court order to provide for the leasing. An individual under the age of eighteen cannot execute a lease and if they do so, it can be termed invalid or voidable and a trustee of a trust can lease property if it is specifically provided for in the trust documents but not for longer than the trust document duration. Cemeteries, churches and non-profits can probably lease but they would need to review the structure of the entities that own the property and operating agreement of the non-profit in tandem with the laws of Pennsylvania.
The lease negotiations for the protection of the surface rights is by far the most important area for the landowner. Of significant importance are getting a leasing clause for land specifically owned by the property owner; a provision for a spudding or drilling fee for each deep well drilled; and a removal from the lease for separating and/or stripping plant and storage facilities. Because most large parcels of land are in rural areas, water testing, both for quality and quantity, can be a major issue, as well as improvements (i.e., roads, on the land, gating of the property and the restoring of the land to its original contour prior to the well drilling; unitization of acreage not included in the pool or non contiguous lands; the practicality of free gas – a Pennsylvania phenomenon and most importantly the release of surface rights to permit the property owner to develop the property at some point in the future. All of these items and more, are and should be negotiated with the Landman representing the gas exploration company. Property owners should have representation for the sale and purchase of land involving mineral rights. Our firm, comprised of attorneys, certified public accountants, paralegals and title insurance agents have provided certificates of title of the marketability of the oil, gas and mineral, estates, and have represented clients in surface and subsurface lease negotiations.
Contact any of the firm's attorneys at (724) 935-1400 for more information