Experts Warn: Consider All Details Before Signing Natural Gas Lease

Carolyn N. Moyer
Northern Pa. Correspondent

WELLSBORO, Pa. — Higher fuel costs combined with new technology have re-ignited an interest in recovering natural gas that has been locked deep beneath the surface of the earth for millions of years.

Today, access to that rich resource has become a significant source of income for landowners in the northeastern U.S., with recent lease values well over $200 per acre, over five years, in Northeastern Pennsylvania. Landmen, or drilling company agents, have been eager to lease the gas rights for properties and have been aggressively pushing landowners to sign on the dotted line. But, Earle Robbins, extension director for Penn State’s Cooperative Extension Service in Tioga County, warns landowners not to agree to the terms of the lease too quickly.

“The lease is a legal document,” said Robbins. “Before you sign anything, understand everything.”

Since 2001, Penn State Extension has been helping landowners make better decisions when it comes to signing gas leases by sponsoring informational workshops. To date, their program has reached more than 5,000 people with more than 350,000 acres.

“We’ve negotiated an estimated $23 million increase in value with better leases for participants,” said Robbins.

Jackie Root, a Tioga County landowner, has been working to unite property owners to secure better deals as a landowner gas lease consultant. She also speaks at informational meetings sponsored by Penn State extension.

When first approached by the landmen in the year 2000, Root decided not to sign, but to do as much research as possible. The first offer given to them was $2 per acre. In 2005, she led a group of 35 landowners in negotiating a lease worth $175 per acre for a five-year term.

From her experience and research, Root has found that the biggest single thing that landowners can do when approached by the landmen is to contact the neighbors and share the information.

“The real important thing is your negotiating power when you work together with other landowners,” said Root.

In areas where there is interest from gas companies, Root has found that if contiguous acres are included in a group and then that group is bid out to several companies, significant gains can be made in both the value of the lease and the terms of the lease.

The difficulty is that the issue is often about money which can be a very private matter.

“You don’t have anything to lose by putting your land together,” said Root. “If you don’t talk to your neighbor, the landmen have all the information and you have none.”

The majority of the leases that are being negotiated today are for five-year terms. If the company decides to drill for natural gas during that time, all lease terms apply. At the end of the five-year term, the company can approach landowners to renew the lease, re-negotiate the lease, or, if the area has no pockets of natural gas, to allow the lease to expire. If natural gas is found, landowners in the production unit will receive a royalty payment for as long as the well is productive. Typical royalty payments, according to extension information, are 12.5 percent of the value of the harvested gas.

Landowners have the right to lease the property, or to hold out for a better deal. Often, when the first landmen arrive in an area, the dollar per acre value of a lease is low. As more interest is generated, the values typically increase.

But there is a limit to the value of the lease and if landowners wait too long, they may be left out completely.

“The bottom line,” according to Root, “is to negotiate the best possible terms for the lease. Then if they drill, we’re protected. It’s also important to get all the money possible out of the lease because if they don’t drill, that’s all the money you’re going to get. The end game is signing a lease, not negotiating forever.”

Items like pipeline placement and storage areas are often overlooked when a property owner reviews a lease, but these items are important to consider.

“If you’re not collecting royalties from the gas, don’t allow them to put a pipeline across your property,” said Root. “A standard lease typically allows the placement of a pipeline. If you’ve signed a standard lease, then you don’t have a choice.”

Robbins says the process of leasing gas rights is much like selling timber. You have the resource, but you also have to consider the other benefits of owning the land and the surface rights.

“You should consider the intended use of the land,” said Robbins.

Items included in a lease can range from water quality protection, to placement of drilling rigs to road placement.

In some areas, such as with water quality, state law provides specific rules, but those terms can also be spelled out in individual leases.

When hammering out lease details, both Root and Robbins caution that you need to protect your property, but also to be careful not to make the lease too restrictive.

“Clauses like, ‘you can’t do anything during hunting season,’ or leases with specific clauses for individual landowners won’t fly,” said Root.

In the end, the lease must be beneficial for both the landowner and the drilling company.

Jack Norman, owner and president of Elexco Ltd., works as an agent for many oil and gas companies. After the geophysical and geological team members from the oil and gas companies determine the area to explore, they will often contact a company like Elexco to negotiate a lease on their behalf.

“The thing that is critical that they (landowners) know is that what we are doing is taking an oil and gas lease on their mineral rights. They are not selling us anything,” said Norman.

Energy companies are following large land formations comprised of Marcellus shale or the Trenton/Black River Carbonates geological formation which runs through the Allegheny Mountain chain.

Wells drilled in the Steuben County, New York, are currently in production with one producing 42 million cubic feet of natural gas per day.

Because the natural gas exists in deep troughs, wells are drilled first vertically and then the pipe is slowly bent to drill horizontally. Well-sites can require anywhere from ¾ of an acre to four acres, depending on the depth of the well. Drilling depths can reach 14,000 feet in total length, according to Norman.

“To drill a 10,000-foot well is not new technology. The technology to drill horizontal wells is relatively new technology and it’s all based on engineers’ understanding of sensors and what you have to do to make pipe bend slowly,” said Norman. “They try to drill across the trough which gives them a better chance of success.”

As more and more areas are being leased in the Southern Tier of New York and Northeastern Pennsylvania, landmen are moving south in attempt to lease as much land as possible. According to Robbins, there are few areas in the Pennsylvania where there is no natural gas leasing or exploration.

“There is a resource down there,” said Root. “We just don’t know where it is.”

All experts agree that if you are approached to lease mineral rights on your property, be sure to consider all the factors before signing anything.

“I think, for the most part, when landowners bought their land, they didn’t buy it for the purpose of mineral rights that they own underneath. They have come into a windfall situation and have the opportunity to benefit from something that they really didn’t buy the land for,” said Norman. “At the same time, (landowners) need to understand what the lease is and what the opportunities are and that you should be dealing with reputable companies.”

To help private landowners understand the process of gas exploration and leasing, Penn State Cooperative Extension will offer “Natural Gas Leasing for Landowners,” Jan. 15 from 7 p.m. to 9:30 p.m., at the Tioga County Fairgrounds in Whitneyville.

The meeting will cover what the gas resource is, how and why landowners are likely to be contacted, how a gas lease works, and what to consider when making decisions about gas leasing. A panel of speakers will represent Penn State Cooperative Extension, Pennsylvania DEP, and attorney Les Greevy, Williamsport Pa.. A question-and-answer period will follow the presentations.

For more information concerning gas and oil leasing, visit the Web at http://www.naturalgaslease.pbwiki.com.