Whether you already have a gas lease in Western New York or not, it is possible that the Gas Man may come knocking again looking for opportunities in shale gas as fracking technology improves. Here are some points to consider:
1. Get yourself a lawyer, because they have a team of them, but do NOT do this right away. Save some money by doing some online research yourself , making a list of questions for the Gas Man, and then talk to them to get a list of what they are looking for. Then get a lawyer before you sign any papers. You’ll need help drafting language to protect your interests. Look for a lawyer with experience in the natural gas arena, experience working for the landowner, knowledge of the local situation. See mineralweb.com
Finding a competent and experienced mineral-owner-focused oil and gas attorney is challenging because attorneys know they can’t bill their mineral owner clients like they can the Gas Man and often they attempt to structure deals that cut them in on a percentage of the bonus and/or royalty.
2. Remember: a boilerplate lease is not a negotiated contract and no language is written in stone before you sign the deal. Everything is negotiable. Your power in negotiating is directly proportional to the number of acres you are negotiating about.
3. The threat to pool your neighbors’ property without you (“forced pooling”) is not an empty one. Organize with your neighbors and family; pool your resources (mental, physical and legal) before your natural resources are pooled; and find out who the Gas Man is also talking to in your area. Be careful! Coalitions do make negotiations much longer and more complicated. It is a good idea to stick together to stay informed, but perhaps not to sign a deal.
4. When you already have a lease, understand the language and POLICE your lessee gas company. There may be a chance to end your lease if they are not holding up their end of the bargain (“The lessee failed to develop and operate the property as a reasonably prudent operator.”). For example, if you do not have “no storage allowed” language in your lease, the gas company could keep your lease alive forever by pumping gas into the well space to store for later withdrawal. Look for “shallow” versus “deep” gas language and understand that they are not the same so if your existing lease is only for shallow gas (or “gas from the surface to so many feet beneath the surface”), a new lease must be negotiated for the deep well gas.
5. When/if the subject of fracking comes up, do not assume your existing lease covers it. Require a surface agreement no matter what (properties larger than 10 acres). Strike all surface access language from any lease for property less than 10 acres. If you grant access, make sure you have a suitable surface location first, then include language to give you the right to participate in and approve of the surface location. Make the Gas Man agree, in writing, to negotiate payment for surface damages at the time the Lessee Gas Man decides to drill (your property might be worth more when they finally come around to drilling).
Know the risks to your surface and how long the process could take. Talk to your neighbors and stay informed.
6. Know who you are dealing with: a leasing agent, oil company landman, middle-man. Then research the individual and/or the company on-line and by asking around.
The American Association of Professional Landmen (AAPL) (www.landman.org) : members are bound by a code of ethics and code of conduct. Most lease brokers and E&P companies now require their land agents to be a member of AAPL. NYS lease forms must include a disclosure as to whether the agent representing the Lessee is a member or not. A lessor can confirm membership status by contacting AAPL.
7. Ensure that you have one lease per tax parcel to avoid problems for future owners or generations.
8. Do not “warrant and defend” the chain of title to your mineral estate.
8a. Strike any confidentiality agreement language. You probably want to discuss the details of the negotiations with your family and neighbors.
9. Look for “unrestricted use of fresh water” for the gas well operations and strike that language to negotiate a fee for freshwater at a minimum.
10. The gas company might probably try to put pipelines on your property to collect gas from other properties. Make them pay for it! Separate payments should be made for Pipeline, Water Lines, Electric and Telecom, Access Roads, Limits of Surface Disturbance, Metering Stations, Well Sites, Compressor site, Tie-Ins, etc.
11. Specify that development must take place wtihin so many years; with so much royalty; minimum revenue; so many wells; and/or so much production.
12. Rather shoot for a higher royalty than a higher bonus…on a case-by-case basis. It’s important for the mineral owner to do some research on NYS DEC web site, where they track all production by County and Town. If a mineral owner is in a county that has no established production, or very low production, the bonus may be more important than the royalty.
13. Without development within so many years, do not give a Right of First Refusal without another royalty payment to be paid by the gas company.
14. Finally, if you have concerns about how your gas operator is handling your property, it is better to call the Department of Environmental Conservation twice in vain, than to call them after damage has been done. Document everything. Take photos, talk to the field crew, engineers and sub-contractors. Get to know the folks you “partnered” with on a personal level. Most mineral owners would be surprised to learn how accessible these people are and how willing they are to make sure things are done right and problems are addressed and corrected.
15. Lease Term: Usually 5 years. A Lessee might be willing to reduce this if drilling is imminent. Otherwise, 5 years is a short period of time. Shoot for 4 or 3 year primary term. However, be prepared for the Lessee to offer less upfront bonus for a shorter term (and possibly more for longer than 5 years).
16. Option to extend: There was a period of time in the mid-2000s where Gas Men were willing to strike the Option to Extend language in a lease. NY’s moratorium has adversely impacted the striking of this provision and most companies now try hard to include it. Attempt to strike the language so they’ll have to revisit the lease at the end of the primary term.
17. Surface Access: Granting unfettered surface access can be a cause for concern. You can place certain logical restrictions on surface access (no closer than 400’ to an inhabited structure, no drilling during hunting season, no transportation of foreign gas, surface access only if XXX portion of the property is included in a spacing/production unit, etc.). In NY, the drilling location does not have to be inside the unit boundary so in essence, a company can lease your property – gaining surface access rights – and located a drill pad without including any portion of your property in a production unit.
18. Very few leases include strong enough liability language and even fewer include indemnification against environmental liability.
19. It is quite common to be paid “double stumpage” for timber damages; that is, the Gas Man pays for loss of timber and the surface owner gets to keep or sell said timber and retain the profits.
20. Free gas: In the past the Gas Man would allow the Lessor (if the Lessor’s surface was drilled) to hook into the oil and/or gas line to use for home heating. With modern high pressure, high volume wells, this has quickly become an additional liability the Gas Man does not want. In lieu of “free gas” they will agree to make payment based on XXX cubic feet of natural gas. This is highly negotiable.
21. Clarify which events constitute Force Majeure. Pay close attention to this provision as it could serve to toll the term of the lease indefinitely without compensation to the mineral owner of any kind.
22. If your property is subject to a mineral severance, typically that mineral reservation language grants the mineral owner “executive rights” to use the surface for the purpose of exploring for and extracting oil, gas and minerals. Closely review the OGM reservation document to determine if the language prohibits or restricts surface disturbance.
Thanks to Dave P for his contributions to this post.
An informative article from Pennsylvania that sheds light on gas lease disputes:
http://www.post-gazette.com/stories/local/neighborhoods-west/court-allows-gas-driller-to-cut-trees-in-beaver-county-629180/
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